The Mumbai terrorist attacks, and recent Delhi and Assam bomb blasts, like the greatly increased number of other recent incidents of urban terrorism, have coalseced and strengthened the collective anger and hatred being felt across the country against terrorism and militancy. The Mumbai attack, in particular, appears to have jolted the Government into action for setting up an institutional architecture that would work towards preventing such incidents.
In a different context, rural terrorism, in the form of naxalite attacks in remote and interior areas of many states, has been going on for many years. Major incidents of naxalite attacks are becoming increasingly commonplace, taking the lives of large numbers of innocent and poor villagers, and policemen on duty.
However, naxalite activities have never caught the imagination of the national public consciousness as urban terrorism, and has therefore not been the focus of any sustained and co-ordinated actions of the state and central governments. This despite the fact that the former has been a much older problem, claimed many times more lives, and has been more debilitating in ao far as it has contributed substantially to these areas being perpetually trapped in poverty and under-development.
To the extent that terrorism is part of an effort by its perpetrators to focus the attention of the state and its citizens to the cause espoused by them, from the perspective of its perpetrators urban terrorism has surely been much more successful than rural terrorism. It is also understandable that this should be so, given the fact that the majority of our opinion makers (media, academia, commentators, bureaucrats, and political class) and their targets (upper and middle class) live in cities and towns. There is therefore an immediacy and closeness to terrorist incidents in their backyards, which they can easily identify with. In contrast, the naxalite incidents take place in the back-of-beyond, isolated from the consciousness of these opinion makers and the middle class.
Without any intention to incite naxalite terrorism in cities, this difference in responses in the public consciousness does raise a few interesting questions of academic interest. Does it mean that naxalite planners should re-think their strategies? Would a naxalite group which focuses on urban terrorism be more successful? What effect will a shift in strategy have on their rural support base, since they rely on such incidents to re-affirm their strength and hence support among rural poor? Will this change also isolate the naxalite movement from its roots and prevent them from claiming moral legitimacy? Will a shift to urban terrorism, force governments to give more attention to the long pending problems of these areas?
However, the aforementoned shift can also be counterproductive for naxalites, given the possibility of increased attention generating more aggressive counter insurgency response by the government, thereby sowing the seeds for the end of such naxalite activites.
Monday, December 29, 2008
Sunday, December 28, 2008
Stimulating corporate India?
There is a striking difference between the fiscal stimulus debates in India and in the US (and most other countries). In the US and elsewhere, the stated objective of a fiscal stimulus is to manage the demand side by bringing unemployed resources back to work and by increasing the disposable incomes of people who are more likely to spend (Within this there are differences about which strategies - tax cuts or government spending - is the more effective option). In contrast, in India the stimulus measures appears to be aimed at managing the supply side, and consists of direct benefits and incentives to the producers and suppliers.
Econ 101 tells us that a fiscal stimulus works by leaving more money in the hands of people to spend, whose spending sets in motion a multiplier effect that in turn increases aggregate demand and the virtuous cycle gets initiated and sustained. There are two ways of managing this aggregate demand. The more direct way is to transfer money to consumers by way of tax cuts or tax credits, increase welfare support through enhanced unemployment insurance and food vouchers, and sustain and even increase employment by bringing the unemployed (or to be laid-off) resources to work. The indirect strategy is to cut duties and taxes so as to incentivize businesses to lower prices and maintain investments. This indirect strategy is a version of the trickle down economic policy making, so entrenched in India.
The stimulus measures announced by the Government of India, except some decisions on the real estate side (and here too the benefits are aimed more at builders than home buyers), have been mostly by way of cuts in duties and taxes aimed at either lowering the prices or propping up corporate bottom-lines. This strategy works on the premise that during a slowdown, lower prices will sustain demand and corporate tax benefits will incentivize businesses to continue their investments and keep capacity fully utilized.
Both these are questionable assumptions. I have blogged extensively (here and here) about the difficulty in passing on the benefits of such duty and tax cuts to the final consumers. Even recent examples do not give much faith for optimism. This is especially so in developing markets like in India where the prices are stickier and the price signal transmission belt is not very efficient and has many distortions. Second, as examples of Japan in the nineties and US recently shows, tax concessions to incentivize corporate investments will come up against the "rational expectations" on depressed economy which would induce businesses to postpone investments. In simple terms, these supply side measures end up stabilizing the profitability of corporate India, which claims to be have been badly affected by the downturn.
I am inclined to believe that one of the reasons why this strategy has assumed dominance (in the public realm and among policy makers) arises from the imperfections in the manner in which economic and financial market information is disseminated in India. The financial media (especially the electronic variants) and corporate opinion makers have been purveying this line of thought, to the near total exclusion of all else, because it benefits all of them directly. In fact this is a logical extension of the increasing belief among corporate India that the Government should directly intervene in their favour in the markets when faced with adverse economic headwinds (like currency appreciation, equity market declines, export drops, or other cyclical global economic trends), so as to bailout the industry.
Econ 101 tells us that a fiscal stimulus works by leaving more money in the hands of people to spend, whose spending sets in motion a multiplier effect that in turn increases aggregate demand and the virtuous cycle gets initiated and sustained. There are two ways of managing this aggregate demand. The more direct way is to transfer money to consumers by way of tax cuts or tax credits, increase welfare support through enhanced unemployment insurance and food vouchers, and sustain and even increase employment by bringing the unemployed (or to be laid-off) resources to work. The indirect strategy is to cut duties and taxes so as to incentivize businesses to lower prices and maintain investments. This indirect strategy is a version of the trickle down economic policy making, so entrenched in India.
The stimulus measures announced by the Government of India, except some decisions on the real estate side (and here too the benefits are aimed more at builders than home buyers), have been mostly by way of cuts in duties and taxes aimed at either lowering the prices or propping up corporate bottom-lines. This strategy works on the premise that during a slowdown, lower prices will sustain demand and corporate tax benefits will incentivize businesses to continue their investments and keep capacity fully utilized.
Both these are questionable assumptions. I have blogged extensively (here and here) about the difficulty in passing on the benefits of such duty and tax cuts to the final consumers. Even recent examples do not give much faith for optimism. This is especially so in developing markets like in India where the prices are stickier and the price signal transmission belt is not very efficient and has many distortions. Second, as examples of Japan in the nineties and US recently shows, tax concessions to incentivize corporate investments will come up against the "rational expectations" on depressed economy which would induce businesses to postpone investments. In simple terms, these supply side measures end up stabilizing the profitability of corporate India, which claims to be have been badly affected by the downturn.
I am inclined to believe that one of the reasons why this strategy has assumed dominance (in the public realm and among policy makers) arises from the imperfections in the manner in which economic and financial market information is disseminated in India. The financial media (especially the electronic variants) and corporate opinion makers have been purveying this line of thought, to the near total exclusion of all else, because it benefits all of them directly. In fact this is a logical extension of the increasing belief among corporate India that the Government should directly intervene in their favour in the markets when faced with adverse economic headwinds (like currency appreciation, equity market declines, export drops, or other cyclical global economic trends), so as to bailout the industry.
Saturday, December 27, 2008
Friday, December 26, 2008
Chinese reserves and US savings
The story goes like this ... Attracted by the cheap Chinese imports, which in turn keeps US inflation down, US consumers throw caution to the winds and go on a consumption binge. Chinese trade surplus soars and the forex reserves build up spectacularly. Preferring the safety and liquidity of the US Treasury assets, the People's Bank of China channels the reserves into these assets (China owns $1 of every $10 of America’s public debt). The easy money keeps US interest rates down. This, coupled with the wealth effect from the real estate bubble (itself magnified by the inflows from China and other emerging economies), makes the American consumers borrow even more. Household savings trip into negative territory. The figures below captures the same sequence of events graphically
The populist rhetoric amongst the American conservatives now blames the Chinese for maintaining the renminbi under-valued and thereby keeping the American economy drugged on an unsustainable, high testosterone growth. This is something akin to blaming the drug peddler for my addiction or the prostitute for my licentiousness!
(HT: Chinese Pockets Filled as Americans’ Emptied)
The populist rhetoric amongst the American conservatives now blames the Chinese for maintaining the renminbi under-valued and thereby keeping the American economy drugged on an unsustainable, high testosterone growth. This is something akin to blaming the drug peddler for my addiction or the prostitute for my licentiousness!
(HT: Chinese Pockets Filled as Americans’ Emptied)
On learning economics...
On the question of debates on economic issues, Greg Mankiw writes,
"As you come to grips with (these) various points of view, you will be in a better position to judge which you find most cogent. But don't expect to reach unequivocal positions easily. It is best to consider all knowledge as tentative. The best scholars maintain an open-mindedness and humility about even their own core beliefs. Excessive conviction is often a sign of insufficient thought, which in turn may be derived from a certain pig-headedness. Intellectual maturity comes when you can maintain the right balance between informed belief and honest skepticism."
Managing Urban Transit Systems - A Case Study
An excellent case study about public transport systems in New York, especially important in view of the times we are living through.
There is an intense debate raging in New York over the decision by the Metropolitan Transport Authority (MTA) of New York to steeply raise base subway and bus fares, bridge and road tolls, and cut subway, bus and commuter rail services, in the face of increasing operating costs and declining revenues. Further, in the recent past, the metro has been the target of stinging public criticism on its poor maintenance of trains and stations.
In order to limit the fare and toll increases and service cuts, the MTA has appealed to the New York state government for a bailout plan. However, the ongoing recession may have tied Albany's hands on any fiscal hand outs. The MTA has therefore also proposed a modest payroll tax on businesses, unions and governments in the New York city area, and imposition of tolls on a couple of hitherto un-tolled bridges.
To summarize the learnings from this case study, especially relevant for many Indian cities which are moving towards modernizing their urban public transit systems:
1. Public transit systems like metros, being expensive, need some form of government subsidy or cross-subsidy with other transport systems. Forget the huge upfront investment required, even its operation & maintenance (O&M) costs are substantial. In the circumstances, it will have to be financed both by large enough user fees and government support.
2. Crucial decisions on bus and rail fares, tolls, etc have to be de-politicised, and taken on professional considerations. If the government so wishes to keep fares and tolls low, inspite of the need to raise them, it can subsidize the commuters by direct cash transfers (either to the operator or by vouchers to specific categories of commuters). Periodic raises in tolls and fares, atleast for the newer systems, should be a built-in feature when these systems are opened for use.
3. Urban private vehicle users, especially in major cities, have to be made aware of the cost of their convenience of using personal vehicles. Private vehicle road usage has a social cost (in terms of space occupation, reduced travel times, increased probability of accidents etc), which has to be internalized by way of user charges or road tolls. Public transit systems should be cross-subsidized with these user charges and tolls. Private vehicle owners can be weaned away to public transit systems like metros only if they are reliable, well-connected, stations have parking facilities and offer quality services.
4. Local public transport policy decisions have to be made from the systemic perspective, rather than as piece-meal solutions, so commonplace in India. The decisions affecting metro/train and bus fares, road and flyover tolls, restrictions on private vehicle entry (congestion charges), parking fees etc have to be taken keeping in mind an integrated perspective of the local urban public transit system. Most of our cities, despite clear directions of the Government of India, do not even have MTAs. Wherever these MTAs are present, their effectiveness and proficiency is questionable.
5. State and local Governments will continue to have a major role to play in the effective functioning of these systems. Appropriate regulatory interventions apart, financial support too will have to be a near permanent feature of the urban transport landscape. Given this context, the red herring of commercial viability raised by the ridiculous bid for the Hyderabad Metrorail Project, should quickly be set aside.
6. As the example of New York shows, structuring the O&M model for public transit systems is a complex challenge. These decisions have to be taken keeping in mind the specific character of the commuter bases, revenue streams from the different sources, availability of service providers in the local market, and the linkages between the different elements of the particular system and different systems.
7. In such weak economic times, the revenues of public utilities take a hit, investments in such public goods gets postponed or even cancelled, and the state government's ability to intervene and assist with bailouts become constrained. Therefore one of the more important fiscal stimulus strategies will be to transfer funds to cash-strapped local governments, who will otherwise cut down on their services, postpone investments, or raise user charges, all of which will affect the local economy even more adversely. The benefit transmission belt from assisting local governments is very obvious and delivers full bang for the buck.
There is an intense debate raging in New York over the decision by the Metropolitan Transport Authority (MTA) of New York to steeply raise base subway and bus fares, bridge and road tolls, and cut subway, bus and commuter rail services, in the face of increasing operating costs and declining revenues. Further, in the recent past, the metro has been the target of stinging public criticism on its poor maintenance of trains and stations.
In order to limit the fare and toll increases and service cuts, the MTA has appealed to the New York state government for a bailout plan. However, the ongoing recession may have tied Albany's hands on any fiscal hand outs. The MTA has therefore also proposed a modest payroll tax on businesses, unions and governments in the New York city area, and imposition of tolls on a couple of hitherto un-tolled bridges.
To summarize the learnings from this case study, especially relevant for many Indian cities which are moving towards modernizing their urban public transit systems:
1. Public transit systems like metros, being expensive, need some form of government subsidy or cross-subsidy with other transport systems. Forget the huge upfront investment required, even its operation & maintenance (O&M) costs are substantial. In the circumstances, it will have to be financed both by large enough user fees and government support.
2. Crucial decisions on bus and rail fares, tolls, etc have to be de-politicised, and taken on professional considerations. If the government so wishes to keep fares and tolls low, inspite of the need to raise them, it can subsidize the commuters by direct cash transfers (either to the operator or by vouchers to specific categories of commuters). Periodic raises in tolls and fares, atleast for the newer systems, should be a built-in feature when these systems are opened for use.
3. Urban private vehicle users, especially in major cities, have to be made aware of the cost of their convenience of using personal vehicles. Private vehicle road usage has a social cost (in terms of space occupation, reduced travel times, increased probability of accidents etc), which has to be internalized by way of user charges or road tolls. Public transit systems should be cross-subsidized with these user charges and tolls. Private vehicle owners can be weaned away to public transit systems like metros only if they are reliable, well-connected, stations have parking facilities and offer quality services.
4. Local public transport policy decisions have to be made from the systemic perspective, rather than as piece-meal solutions, so commonplace in India. The decisions affecting metro/train and bus fares, road and flyover tolls, restrictions on private vehicle entry (congestion charges), parking fees etc have to be taken keeping in mind an integrated perspective of the local urban public transit system. Most of our cities, despite clear directions of the Government of India, do not even have MTAs. Wherever these MTAs are present, their effectiveness and proficiency is questionable.
5. State and local Governments will continue to have a major role to play in the effective functioning of these systems. Appropriate regulatory interventions apart, financial support too will have to be a near permanent feature of the urban transport landscape. Given this context, the red herring of commercial viability raised by the ridiculous bid for the Hyderabad Metrorail Project, should quickly be set aside.
6. As the example of New York shows, structuring the O&M model for public transit systems is a complex challenge. These decisions have to be taken keeping in mind the specific character of the commuter bases, revenue streams from the different sources, availability of service providers in the local market, and the linkages between the different elements of the particular system and different systems.
7. In such weak economic times, the revenues of public utilities take a hit, investments in such public goods gets postponed or even cancelled, and the state government's ability to intervene and assist with bailouts become constrained. Therefore one of the more important fiscal stimulus strategies will be to transfer funds to cash-strapped local governments, who will otherwise cut down on their services, postpone investments, or raise user charges, all of which will affect the local economy even more adversely. The benefit transmission belt from assisting local governments is very obvious and delivers full bang for the buck.
Thursday, December 25, 2008
Lessons from Micro-finance II
This is in continuation from an earlier post and also in response to the issue of microfinance "crowding out" local savings, as raised by Niranjan Rajadhyaksha.
Niranjan quotes Milford Bateman (in response to Tim Harford) and refers to the iron law of microfinance - "...to the extent that local savings are intermediated through microfinance institutions, the more that country or region or locality will be left behind in a state of poverty and underdevelopment". In other words, the microloans "crowds out" credit to the small and medium enterprises and "crowds in" credit to micro-businesses, mostly single employee businesses run by the owner.
However, the crowding out arguement may need to be qualified. Here is an intutive clarification. Most of the customers of micro-loans are the poorest of the poor. In any case, the amounts involved in such loans are very small and to that extent the savings "crowded in" are also likely to be small. More importantly, I am inclined to believe (no studies I could find out, only intutive arguement) that the savings of these people, especially in the context of the poorest in these developing societies, are in any case not (and cannot be) the source of funds for small and medium businesses.
I suppose there must be a form of informal "savings pyramid", which outlines the flow of savings of the different categories of people based on their incomes. The savings of the poorest is invariably too small, the transaction costs too high, and the marginal utility benefits for these poor savers too meagre, for these savings to find their way into the pool of formal lending institutions. It therefore stands to reason that the bottom most rung of the "savings pyramid" that feeds the formal sector are the lower middle class, and not the poor or the poorest.
This strand of analysis may be slightly corroborated by the World Bank study on the sources of credit mobilization across 45 countries. The study finds that the "share of household credit in total credit increases as countries grow richer and financial systems develop". It finds that it is socio-economic trends that determine credit composition. All this sits nicely with the aforementioned "savings pyramid" hypotheis.
By logical extension of the Bateman arguement - the former (small and medium businesses) being in the organized sector and the latter (micro-businesses) part of the informal economy, microfinance ends up promoting the unorganized parallel economy. It may therefore be more relevant to link up the expenditures on these micro-loans to the formal sector. But such arrangmeents, with its attendant bureaucracy and transaction costs, has its own pitfalls.
Niranjan quotes Milford Bateman (in response to Tim Harford) and refers to the iron law of microfinance - "...to the extent that local savings are intermediated through microfinance institutions, the more that country or region or locality will be left behind in a state of poverty and underdevelopment". In other words, the microloans "crowds out" credit to the small and medium enterprises and "crowds in" credit to micro-businesses, mostly single employee businesses run by the owner.
However, the crowding out arguement may need to be qualified. Here is an intutive clarification. Most of the customers of micro-loans are the poorest of the poor. In any case, the amounts involved in such loans are very small and to that extent the savings "crowded in" are also likely to be small. More importantly, I am inclined to believe (no studies I could find out, only intutive arguement) that the savings of these people, especially in the context of the poorest in these developing societies, are in any case not (and cannot be) the source of funds for small and medium businesses.
I suppose there must be a form of informal "savings pyramid", which outlines the flow of savings of the different categories of people based on their incomes. The savings of the poorest is invariably too small, the transaction costs too high, and the marginal utility benefits for these poor savers too meagre, for these savings to find their way into the pool of formal lending institutions. It therefore stands to reason that the bottom most rung of the "savings pyramid" that feeds the formal sector are the lower middle class, and not the poor or the poorest.
This strand of analysis may be slightly corroborated by the World Bank study on the sources of credit mobilization across 45 countries. The study finds that the "share of household credit in total credit increases as countries grow richer and financial systems develop". It finds that it is socio-economic trends that determine credit composition. All this sits nicely with the aforementioned "savings pyramid" hypotheis.
By logical extension of the Bateman arguement - the former (small and medium businesses) being in the organized sector and the latter (micro-businesses) part of the informal economy, microfinance ends up promoting the unorganized parallel economy. It may therefore be more relevant to link up the expenditures on these micro-loans to the formal sector. But such arrangmeents, with its attendant bureaucracy and transaction costs, has its own pitfalls.
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