The economic stimulus measures consist of two parts - credit and monetary policy related financial efforts (bank injections, buying assets, loan guarantees etc) and fiscal efforts aimed at consumers and firms (public spending on goods and services, tax cuts, spending etc). Dani Rodrik points to nice summation of the stimulus packages announced by 30 major economies of the world here and here.
The Indian fiscal stimulus figure of $4 bn (or Rs 20,000 Cr ) is not correct, as it does not include the massive doses of duty reliefs given, estimated at anywhere between Rs 50,000 Cr and Rs 80,000 Cr (or $10-16 bn). Even with this, as a proportion of the GDP, this is one of the smallerst among the bigger economies. The Europeans have been parsimonious with their stimulus measures, understandable given their problems with the EMU Stability Pact and the feeling that their financial markets are not as exposed as the American markets. However, among the fiscally strong East Asians, except for South Korea, Indonesia and Malaysia, the others have loosened their purse strings considerably.
Thursday, March 5, 2009
RBI cuts rates finally...
... but, nearly two months too late. And even this may not be enough. If this was to have been done anyway, it could as well have been done much earlier, and given the economy much needed breathing time when the downturn was building up.
The critical need of the hour, even more than the substance of stimulus measures, is the need to restore the badly shaken confidence in the markets. The clear indications of the economic downturn and the fast declining inflation should have been enough for the RBI to aggressively cut rates.
The critical need of the hour, even more than the substance of stimulus measures, is the need to restore the badly shaken confidence in the markets. The clear indications of the economic downturn and the fast declining inflation should have been enough for the RBI to aggressively cut rates.
Wednesday, March 4, 2009
Project Management Consultancies in government works
It has now become mandatory for Government programs and projects, of both Centre and States, to insist that implementing agencies monitor the works being executed under these programs using project management softwares or consultants. An impression has gained ground that the magic wand of "project management consultancy" (PMC) will help us overcome the perennial problem of execution delays and attendant cost over-runs. However, I am inclined to believe that such "best practice" approaches which see PMCs as a magic shot to expediting project works are destined to fail.
PMCs, as the name suggests, are for managing projects and programs. But most regular government programs consists of numerous works, scattered in different locations, often bundled into a single tender package. For example, a water supply scheme (say, part of the Accelerated Rural Water Supply Scheme) consists of pipeline networks in different locations and storage reservoirs; an electrification project (like the RGGVY) would involve laying lines, erecting transformers and sertting up sub-stations; a slum development project (like JNNURM) would consist of roads, drains, water and sewerage lines; a rural housing project (like IAY) will include constructing small house units at different locations; a minor irrigation project will consist of small check dams, field channels, and dug-out ponds at different locations; a primary school infrastructure project (like SSA) will consist of small school buildings, toilets, and mid-day meal kitchens at many locations.
Each of these projects will consist of tens of small works, often costing no more than a few lakhs, spread over a large geographical area. Monitoring these works using the conventional PERT, CPM and GANTT charts is cumbersome to the point of being bureaucratese. The transaction costs involved in using these monitoring systems are too huge to make them almost irrelevant and even detrimental for such projects. Peddlers of such monitoring techniques most often mistake these projects for big roads, irrigation structures, power generating stations, water and sewerage treatment plants which are amenable to such monitoring.
Smart quantitative monitoring techniques will always come up short when measuring the progress of such works. They require more qualitative approaches that seek to alert the decision makers to deficiencies and omissions that are likely to come in the way of speedy executing of these individual works. And there are critical tasks for each of these small works, whose expedition dictates the pace of their completion. Qualitative approaches also pre-supposes the field presence of more capable and qualified personnel, as opposed to the regular data collectors used by PMCs.
The utility of PMCs, especially in such works, arises from the fact it serves as an independent mechanism for collecting information about the physical progress of these works. Given the nature of these works, beyond monitoring the mobilization of material and labour and quantifying the work done, PMC's role in identifying the critical paths and in proper sequencing of these works are of secondary importance. Of importance are also issues like whether statutory readings have been done, check measurements taken, bills processed and payments done.
PMCs, as the name suggests, are for managing projects and programs. But most regular government programs consists of numerous works, scattered in different locations, often bundled into a single tender package. For example, a water supply scheme (say, part of the Accelerated Rural Water Supply Scheme) consists of pipeline networks in different locations and storage reservoirs; an electrification project (like the RGGVY) would involve laying lines, erecting transformers and sertting up sub-stations; a slum development project (like JNNURM) would consist of roads, drains, water and sewerage lines; a rural housing project (like IAY) will include constructing small house units at different locations; a minor irrigation project will consist of small check dams, field channels, and dug-out ponds at different locations; a primary school infrastructure project (like SSA) will consist of small school buildings, toilets, and mid-day meal kitchens at many locations.
Each of these projects will consist of tens of small works, often costing no more than a few lakhs, spread over a large geographical area. Monitoring these works using the conventional PERT, CPM and GANTT charts is cumbersome to the point of being bureaucratese. The transaction costs involved in using these monitoring systems are too huge to make them almost irrelevant and even detrimental for such projects. Peddlers of such monitoring techniques most often mistake these projects for big roads, irrigation structures, power generating stations, water and sewerage treatment plants which are amenable to such monitoring.
Smart quantitative monitoring techniques will always come up short when measuring the progress of such works. They require more qualitative approaches that seek to alert the decision makers to deficiencies and omissions that are likely to come in the way of speedy executing of these individual works. And there are critical tasks for each of these small works, whose expedition dictates the pace of their completion. Qualitative approaches also pre-supposes the field presence of more capable and qualified personnel, as opposed to the regular data collectors used by PMCs.
The utility of PMCs, especially in such works, arises from the fact it serves as an independent mechanism for collecting information about the physical progress of these works. Given the nature of these works, beyond monitoring the mobilization of material and labour and quantifying the work done, PMC's role in identifying the critical paths and in proper sequencing of these works are of secondary importance. Of importance are also issues like whether statutory readings have been done, check measurements taken, bills processed and payments done.
Tuesday, March 3, 2009
More analysis of the credit crisis
Two recent NBER working papers examined the reasons that led to the sub-prime bubble and its bursting and the resultant credit crunch and the spill-over of the financial market crisis into the economy, and offers conjectures to overcome and prevent such crises.
Markus K. Brunnermeier claims that the the extent of securitization, which led to an opaque web of interconnected obligations, and leverage, which magnified the losses, have bene characterisitc of the present financial market crisis. He identifies four different amplification mechanisms magnified losses in the mortgage market into large dislocations and turmoil in financial markets, starting with increase in mortgage delinquencies due to a nationwide decline in housing prices.
Raghuram Rajan and Douglas Diamond find three proximate causes - the US financial sector mis-allocated resources to real estate, financed through the issuance of exotic new financial instruments; a significant portion of these instruments found their way, directly or indirectly, into commercial and investment bank balance sheets(originate-to-securitize); and these investments were largely financed with short-term debt.
Recognizing the critical challenge as that of enabling the removal of all the illiquid assets from the balance sheets of both banks and non-banks, they offer three possible suggestions. First, "the authorities can offer to buy illiquid assets through auctions and house them in a federal entity, much as was envisaged in the original TARP". Second, "the recapitalization of entities that have a realistic possibility of survival, and the merger or closure of those that do not. This would mean moving illiquid assets, of those entities closed down, into a holding entity that will dispose them off slowly over time."
The "third approach is some mix of the first two, where the authorities buy illiquid assets, even while cleaning up the regulated financial sector, focusing particularly on resolving entities that are likely to become distressed".
The problem with the approaches adopted by the Obama administration is that they treat the issue in parts, thereby leaving other parts of the crisis-ridden market un-repaired. The fundamental issue is that till all the toxic assets are cleansed out of the system and the market apprehensions about counter-party risks cleared, there is little chance that banks will lend and investors will invest. In other words, any approach to come out of the credit crunch has to be a comprehensive solution, covering all financial instruments and all institutions/agents (including the "shadow banking" system), and which removes all traces of illiquid assets overhang.
Unfortunately none of the approaches, including the third suggested by Rajan and Diamond, may help achieve the desired objective of restoring confidence and normalcy back. The extent and depth of the crisis is such that the only solution appears to be to subject all balance sheets to some evaluatory "stress tests", declare those insolvent and seize them, clean out stockholders, remove or shuffle its top management, pay off some of the debt, inject some equity, and re-privatize the entity. Siphon off the worst assets into a so-called bad bank (like the RTC) — pooling them with toxic assets from other nationalized banks, and hope they have some value after the crisis blows over. Call it "bankruptcy-receivership" or "nationalization", the substance of the aforementioned may be unavoidable!
(HT: Freakonomics)
Markus K. Brunnermeier claims that the the extent of securitization, which led to an opaque web of interconnected obligations, and leverage, which magnified the losses, have bene characterisitc of the present financial market crisis. He identifies four different amplification mechanisms magnified losses in the mortgage market into large dislocations and turmoil in financial markets, starting with increase in mortgage delinquencies due to a nationwide decline in housing prices.
First, as asset prices dropped, the massive bad loan write-downs on borrowers’ balance sheets caused two "liquidity spirals" - financial institutions' capital declined and had a harder time borrowing because of tightened lending standards. The two spirals forced a massive chain of deleveraging. This led to fire sales, lower prices, and even tighter funding, amplifying the crisis beyond the mortgage market.
Second, lending channels dried up when banks, concerned about their future access to capital markets, hoarded funds from borrowers regardless of credit-worthiness. Third, runs on financial institutions, as occurred at Bear Stearns, Lehman Brothers, and others following the mortgage crisis, can and did suddenly erode bank capital.
Fourth, the mortgage crisis was amplified and became systemic through network effects, which can arise when financial institutions are lenders and borrowers at the same time. Because each party has to hold additional funds out of concern about counterparties’ credit, liquidity gridlock can result.
Raghuram Rajan and Douglas Diamond find three proximate causes - the US financial sector mis-allocated resources to real estate, financed through the issuance of exotic new financial instruments; a significant portion of these instruments found their way, directly or indirectly, into commercial and investment bank balance sheets(originate-to-securitize); and these investments were largely financed with short-term debt.
Recognizing the critical challenge as that of enabling the removal of all the illiquid assets from the balance sheets of both banks and non-banks, they offer three possible suggestions. First, "the authorities can offer to buy illiquid assets through auctions and house them in a federal entity, much as was envisaged in the original TARP". Second, "the recapitalization of entities that have a realistic possibility of survival, and the merger or closure of those that do not. This would mean moving illiquid assets, of those entities closed down, into a holding entity that will dispose them off slowly over time."
The "third approach is some mix of the first two, where the authorities buy illiquid assets, even while cleaning up the regulated financial sector, focusing particularly on resolving entities that are likely to become distressed".
The problem with the approaches adopted by the Obama administration is that they treat the issue in parts, thereby leaving other parts of the crisis-ridden market un-repaired. The fundamental issue is that till all the toxic assets are cleansed out of the system and the market apprehensions about counter-party risks cleared, there is little chance that banks will lend and investors will invest. In other words, any approach to come out of the credit crunch has to be a comprehensive solution, covering all financial instruments and all institutions/agents (including the "shadow banking" system), and which removes all traces of illiquid assets overhang.
Unfortunately none of the approaches, including the third suggested by Rajan and Diamond, may help achieve the desired objective of restoring confidence and normalcy back. The extent and depth of the crisis is such that the only solution appears to be to subject all balance sheets to some evaluatory "stress tests", declare those insolvent and seize them, clean out stockholders, remove or shuffle its top management, pay off some of the debt, inject some equity, and re-privatize the entity. Siphon off the worst assets into a so-called bad bank (like the RTC) — pooling them with toxic assets from other nationalized banks, and hope they have some value after the crisis blows over. Call it "bankruptcy-receivership" or "nationalization", the substance of the aforementioned may be unavoidable!
(HT: Freakonomics)
Bosnia unravels?
An editorial in NYT indicates that the Dayton Accord of 1995 that brokered peace and a de-centralized governance structure in the multi-ethnic Bosnia between Muslim Bosnians, Eastern Orthodox Serbs and Croat minority, may be about to unravel. It feels that the peace deal had "entrenched rather than eradicated deep divisions, and Bosnia’s political leaders continue to prey on their countrymen’s ethnic prejudices and insecurities".
In the aftermath of the collapse of Soviet Union and the end of Cold War, the American diplomats had embarked on a crusade to spread democracy and democratic values around the world, especially in failing and civil war prone countries. It was premised on the almost evangelical belief which suffused the entire foreign policy establishment at Foggy Bottom, that such neo-converts will stand by America and help promote American core interests and values.
The United Nations and other local multi-lateral agencies were used as instruments of this policy, to put up peace-keeping forces; engage the antagonists or comabatants in long drawn out talks; then broker peace deals, by a mixture of arm-twisting and aid sweetners, most of which never materialized; frame a constitution based on the hallowed universal principles of freedom, equality and justice, and outlining the power sharing agreements; hastily conduct multi-party elections to give a seal of democratic authority; and then instal a multi-ethnic coalition as agreed in the peace deal. This experiment was done in many countries across Africa, Eastern Europe and parts of Latin America.
In many respects, the Dayton accord was a classic throwback to the days of colonialism and on-the-table map-drawing, when imperial powers would construct nation states by carving out territorial jurisdictions based on ethnic and other sub-national considerations. In Bosnia and Herzegovina, the US-brokered Dayton Agreements, similarly carved three separate sub-national political entities - Federation of Bosnia and Herzegovina, Republika Srpska, and Brčko District - in order to appease the three warring groups - Bosnian Bosniak Muslims, Christian Serbs and Christian Croats - respectively. However, as the article highlights, this latest experience only reiterates the impossibility of successfully cobbling together democratic governments in artificially created multi-ethnic states.
In the aftermath of the collapse of Soviet Union and the end of Cold War, the American diplomats had embarked on a crusade to spread democracy and democratic values around the world, especially in failing and civil war prone countries. It was premised on the almost evangelical belief which suffused the entire foreign policy establishment at Foggy Bottom, that such neo-converts will stand by America and help promote American core interests and values.
The United Nations and other local multi-lateral agencies were used as instruments of this policy, to put up peace-keeping forces; engage the antagonists or comabatants in long drawn out talks; then broker peace deals, by a mixture of arm-twisting and aid sweetners, most of which never materialized; frame a constitution based on the hallowed universal principles of freedom, equality and justice, and outlining the power sharing agreements; hastily conduct multi-party elections to give a seal of democratic authority; and then instal a multi-ethnic coalition as agreed in the peace deal. This experiment was done in many countries across Africa, Eastern Europe and parts of Latin America.
In many respects, the Dayton accord was a classic throwback to the days of colonialism and on-the-table map-drawing, when imperial powers would construct nation states by carving out territorial jurisdictions based on ethnic and other sub-national considerations. In Bosnia and Herzegovina, the US-brokered Dayton Agreements, similarly carved three separate sub-national political entities - Federation of Bosnia and Herzegovina, Republika Srpska, and Brčko District - in order to appease the three warring groups - Bosnian Bosniak Muslims, Christian Serbs and Christian Croats - respectively. However, as the article highlights, this latest experience only reiterates the impossibility of successfully cobbling together democratic governments in artificially created multi-ethnic states.
Rising "star" (Indian) politician does us proud by...
... sticking his head in the sand and attracting (negative) publicity! Governor Bobby Jindal has done precisely this by turning down on "principle" the $100 million from the stimulus plan for federal unemployment assistance for Louisiana state.
And the "principle" - "I don't think the best way to do that is for the government to tax and borrow more money. I think the best thing they could've done, for example, was to cut taxes on things like capital gains, the lower tax brackets, to get the private sector spending again... The $100 million we turned down was temporary federal dollars that would require us to change our unemployment laws. That would've actually raised taxes on Louisiana businesses."
Frank Rich, as always, delivers the indictment in style - "The Louisiana governor, alternately smug and jejune, articulated precisely the ideology... that Americans reject: the conviction that government is useless and has no role in an emergency. Given that the most mismanaged federal operation in modern memory was inflicted by a Republican White House on Jindal’s own state, you’d think he’d change the subject altogether... But like all zealots, Jindal is oblivious to how nonzealots see him. Pleading "principle", he has actually turned down some $100 million in stimulus money for Louisiana... and he can’t wait to be judged on "the results" of his heroic frugality... He’s rejecting aid for a state that ranks fourth in children living below the poverty line and 46th in high school graduation rates, while struggling with a projected budget shortfall of more than $1.7 billion."
The only consolation, if that is any, is that Jindal is in illustrious company - Eugene Fama, John Cochrane, Robert Barro...
And the "principle" - "I don't think the best way to do that is for the government to tax and borrow more money. I think the best thing they could've done, for example, was to cut taxes on things like capital gains, the lower tax brackets, to get the private sector spending again... The $100 million we turned down was temporary federal dollars that would require us to change our unemployment laws. That would've actually raised taxes on Louisiana businesses."
Frank Rich, as always, delivers the indictment in style - "The Louisiana governor, alternately smug and jejune, articulated precisely the ideology... that Americans reject: the conviction that government is useless and has no role in an emergency. Given that the most mismanaged federal operation in modern memory was inflicted by a Republican White House on Jindal’s own state, you’d think he’d change the subject altogether... But like all zealots, Jindal is oblivious to how nonzealots see him. Pleading "principle", he has actually turned down some $100 million in stimulus money for Louisiana... and he can’t wait to be judged on "the results" of his heroic frugality... He’s rejecting aid for a state that ranks fourth in children living below the poverty line and 46th in high school graduation rates, while struggling with a projected budget shortfall of more than $1.7 billion."
The only consolation, if that is any, is that Jindal is in illustrious company - Eugene Fama, John Cochrane, Robert Barro...
Monday, March 2, 2009
Changing nature of religious following
One of the more interesting recent developments in our religious landscape has been the sharp increase in the numbers of pilgrims visiting the major temples and other popular religious sites. This has also coincided with a spurt in the popularity of certain festivals like Ganesh Chaturthi, Holi, Dussehra and Diwali, and increased youth participation in these pilgrimages and festivals.
The more popular explanations of these trends claim that Indians have become more religious as they try to find their anchors and spiritual moorings that have been dislocated by the fast pace of modern lifestyles. However, I am inclined to believe that these trends have their explanations in more real world developments happening around us.
The technological and economic developments of recent years have made information and awareness about various things and issues pervasive and transportation much more affordable. Coupled with this has been the spectacular economic progress which has increased people's disposable incomes. The result has been that many times more people find it easier, affordable and imperative to make these pilgrimages. If previously people used to go to Tirupathi once in five years, today they visit once every three to four months! As with other similar modern trends, more people going on pilgrimages begets more people to follow suit!
Similarly, there has been a sharp increase in people undertaking pilgrimages which involve the abstinence and penance for a few days or weeks. Apart from the aforementioned issues, there may be a religious and spiritual dimension to this trend. In a fast moving world, the followers consider the limited period of penance and abstinance mandatory for these pilgrimages as a convenient way to cleanse and absolve themselves of their pent up spiritual and religious guilt.
An approach to religious practice that takes into account the practical realities of everyday lives and focusses on loosely following the more universal of rituals, practices and festivals, as opposed to a strict adherence to the scriptures and religious word, can be defined as "diffuse" religion. An approach that involves strict adherence to rituals and scriptures, and abstinance and penance, typifies "thick" religion. In many ways, the former is more inclusive, while the later more exclusive. Inclusiveness brings along with it the numerous advantages of "network effects", that helps rope in people in increasing numbers.
The "thick" religion is not likely to make much progress in, leave alone winning new recruits, retaining its existing followers. In contrast, a religion (or dimension of the religion) that focusses on the inclusive aspects offers numerous attractions to its followers, besides the flexibility and freedom.
Festivals like Diwali, Holi, and Ganesh Chaturthi have a collective celebration and entertainment dimension that often over-rides the strictly religious and ritualistic dimension. They are classic examples of characteristics of "diffuse religion". The popular symbols associated with these festivals - crackers, colors, and processions - provide an opportunity to have collective fun and enjoyment, obvious attraction to everyone, more so the youth.
The more popular explanations of these trends claim that Indians have become more religious as they try to find their anchors and spiritual moorings that have been dislocated by the fast pace of modern lifestyles. However, I am inclined to believe that these trends have their explanations in more real world developments happening around us.
The technological and economic developments of recent years have made information and awareness about various things and issues pervasive and transportation much more affordable. Coupled with this has been the spectacular economic progress which has increased people's disposable incomes. The result has been that many times more people find it easier, affordable and imperative to make these pilgrimages. If previously people used to go to Tirupathi once in five years, today they visit once every three to four months! As with other similar modern trends, more people going on pilgrimages begets more people to follow suit!
Similarly, there has been a sharp increase in people undertaking pilgrimages which involve the abstinence and penance for a few days or weeks. Apart from the aforementioned issues, there may be a religious and spiritual dimension to this trend. In a fast moving world, the followers consider the limited period of penance and abstinance mandatory for these pilgrimages as a convenient way to cleanse and absolve themselves of their pent up spiritual and religious guilt.
An approach to religious practice that takes into account the practical realities of everyday lives and focusses on loosely following the more universal of rituals, practices and festivals, as opposed to a strict adherence to the scriptures and religious word, can be defined as "diffuse" religion. An approach that involves strict adherence to rituals and scriptures, and abstinance and penance, typifies "thick" religion. In many ways, the former is more inclusive, while the later more exclusive. Inclusiveness brings along with it the numerous advantages of "network effects", that helps rope in people in increasing numbers.
The "thick" religion is not likely to make much progress in, leave alone winning new recruits, retaining its existing followers. In contrast, a religion (or dimension of the religion) that focusses on the inclusive aspects offers numerous attractions to its followers, besides the flexibility and freedom.
Festivals like Diwali, Holi, and Ganesh Chaturthi have a collective celebration and entertainment dimension that often over-rides the strictly religious and ritualistic dimension. They are classic examples of characteristics of "diffuse religion". The popular symbols associated with these festivals - crackers, colors, and processions - provide an opportunity to have collective fun and enjoyment, obvious attraction to everyone, more so the youth.
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