PPPs for social protection?

Killing off bad ideas is important. Uncharacteristically Ejaz Ghani gets this on the relevance of PPPs in social protection for India wrong big time.

The article's premise is just so plain wrong (empirically),

Targeted credit, livelihood interventions, crop insurance, new healthcare facilities, education, and low-income targeted public housing are examples where social protection can be scaled up through increased PPP.

This blog has several posts exploring each of these and showing why they would require public provisioning. This is perhaps one of the best illustrations of how narratives and reality diverge big time, 

The PPP model transfers operational risks from the state body to the private partner and forces the private sector to take a long-term social view of the project... There is a huge potential for maximising finance for social protection through increased public and private partnerships (PPPs), as it broadens the pool of potential financing to maximise social protection.

Really! Whether we like it or not, you cannot escape the reality of hard fiscal requirements and hoping that private sector can bear the burden is not supported by any evidence. In fact, the latter is equivalent to transferring certain basic welfare services, education and healthcare, and social safety nets to the citizens themselves. 

How many developed countries of today have any of these done through PPPs, much less successfully at that, during their early stage of development or even today? 

In fact, on social safety nets, I think the present government has done a decent job. The JDY and the three pension/insurance programs, Pradhan Mantri Shram Yogi Maandhan pension scheme for unorganized sector workers, Ayushman Bharat scheme, PMFBY etc are all very good steps in the direction of laying the foundations of a robust social safety net. Going forward the administration of these programs should be more integrated (using Aadhaar etc) and perhaps try to capture the set of benefits each household is drawing on education scholarships, health insurance, pensions, life insurance, NREGS, other DBT cash transfers etc. That would be the starting point for rationalising  these individual programs and making the social safety net more targeted and effective.

The Rise of Finance - publication

More promotionals of my co-authored book with V Ananthanageswaran, The Rise of Finance : Causes, Consequences, and Cures.

This is the publisher, Cambridge University Press's page. This is the Amazon page. This is the publisher's twitter link. The book's flyer is here.

How much growth is enough?

How much economic growth is sufficient? Do we need to grow as fast as being suggested? Should 3-4% economic growth in developed economies be the norm which should guide policy making? 

Ruchir Sharma makes the point which has been made in this blog a few times earlier,

Even during the Industrial Revolution, in the 19th century, the world economy rarely grew faster than 2.5 percent a year, until the post-World War II baby boom began to rapidly expand the labor force. After 1950, the combination of more workers and more output per worker lifted the pace of global growth to 4 percent. Economists came to think 4 percent was “normal.” Yet by last decade, the baby boom had faded out from Europe to Japan and China. Even in the United States, younger and faster-growing than most developed countries, growth in the working-age population slowed to a mere 0.2 percent last year from 1.2 percent in the early 2000s. Because fewer workers correlates directly with slower growth, that decrease implied a 1-point drop in economic growth.

Roughly, economists should have expected that United States economic growth would slow to 2 percent from 3 percent — and it has. This is the new normal for the American economy. Stimulus measures like the Trump tax cuts can lift growth above this path, but at best temporarily, at the risk of higher deficits and debt.

For political leaders, the new age of slow growth is not a problem to solve; it’s a reality they need to accept and explain to the public. Because it’s just not that bad.

When populations are growing slowly, the economy doesn’t need to grow as fast to keep incomes high. Thus in the United States this decade, growth in gross domestic product per capita has slowed much more gradually than the overall economy, by half a point, to an average of 1.4 percent... In a rich country, that is fast enough to satisfy most people: Indeed, surveys show that Americans have rarely been more confident about the economy...

Growth in the economy is driven by growth in the number of workers and in output per worker, or productivity. But since the postwar surges of 1950s and 60s, productivity growth has slowed, also defying government efforts to lift it. For a time, the global economy kept motoring along anyway, fueled by a surge in debt. In the 1980s, central banks began winning the war on inflation, which allowed them to drop interest rates sharply. Lower borrowing costs unleashed a worldwide binge that saw debt surging from 100 percent of global gross domestic product in the late 1980s to 300 percent by 2008. Then the global financial crisis hit, ruining many private borrowers and lenders, many of whom are still wary of taking on new debt. After growing faster than the economy for three decades, debt growth in many countries, including the United States, has fallen back in line with economic growth... So the postwar miracle is over... Yet because economists continue to base forecasts on miracle rates of growth — 4 percent for the world, 3 percent for the United States — policymakers keep fighting to hit these targets. 

The problem lies with the interests that have captured policy making within both the Government and the Fed in the US. Slower growth and rising rates are simply unacceptable because of their adverse impact on the confidence fairy and stock markets thereon.

Thanks to excessive financialisation, we are in the world where Wall Street's welfare is driving fiscal and monetary policies.

Postscript 1 (12.04.2019)

Bloomberg has this very good essay on how Japan, despite three decades of low growth (rates which would be considered catastrophic in the US) has managed to remain a place of remarkable economic, social, and political stability.

Besides it has managed some of the most difficult challenges - ageing and related demographic shifts, low inflation bordering on deflation, large debts, and weak demand - with remarkable success. So much so, the country is perhaps the fastest growing developed economy in per capita terms. And it has managed to realise paradigm shifts like increasing the share of working women, immigration, robots etc with little of the disruption that such changes carry with them in case of other developed economies.

More thoughts on privatisation of public goods

FT appears to have thrown in the towel on privatisation or outsourcing of prison services,

In prisons, the government needs to shake off a single-minded focus on cost savings and unyielding faith in private sector efficiency... Proponents of prison privatisation argue that competition keeps costs down, introduces innovation and brings market discipline through strict performance targets. Since there is only a handful of providers, however, competition is limited. Innovation is also difficult given the tight rules the government sets for prisons. Cost savings have not always been delivered, or have come at a price... The government should also accept that there are limits to the innovation and efficiency gains alternative providers can bring to prisons. Some of the same issues affecting the sector will persist whether facilities are run by the public or private sector. The UK’s prisons are overcrowded and underfunded. Running them will severely test any operator.

A more concise summary of the failings of privatisation of prisons could not have been possible. 

But even as these things play itself out across the world, the folks at Marginal Revolution are not convinced, drawing attention to "private" roads in some parts of Scandinavia. This is fascinating and a great example of the value of community management.

Two-thirds of roads in Sweden are privately operated and managed by local Private Road Associations (PRAs). These road associations are composed of homeowners who live along private roads. An estimated 140,000 kilometers (about 87,000 miles) of roads are the responsibility of 60,000 PRAs. While most Swedish private roads do not experience a high level of traffic, the delegation of roads to the private sector helps the government offset costs. Government works in conjunction with road owners and associations to subsidize the costs of repair and maintenance. Around 24,000 PRAs receive government subsidies. The costs of upkeep are divided among members of the association. PRAs that do not accept government subsidies can prohibit traffic at their discretion. Those that receive subsidies must allow all vehicles to travel on their roads. Regardless of whether they receive funding, however, the associations may not ban horses, bicycles, and pedestrians from using the roads. Private ownership by PRAs has proven to be a cost-effective measure for operating roads according to the the Swedish government. In 2001, a government-commissioned evaluation found PRAs could run their roads at about half the cost as for the national.

Finland employs a similar system. Many private roads are managed by local cooperatives. Finland has 78,000 kilometers (about 48,500 miles) of public roads and 280,000 kilometers (about 174,000 miles) of private roads. Of the 5 million people who live in Finland, around 700,000 of them reside near a private road. Like Swedish PRAs, Finnish cooperatives are made up of homeowners who live proximate to private roads. These homeowners collectively maintain their local roads and are eligible to receive subsidies from the federal government to cover a portion of their expenses. The Finnish government determines the subsidy amount based on the amount of traffic that a road bears and the number of houses it serves. The geographic location and average income of the area also figure into its consideration. The shift in road management to the community ensures that roads are taken care of on a regular basis. This makes for a more efficient and democratic system of road maintenance because community members, unlike government officials from far away, are distinctly aware of the needs of their roads.

In a classic case of transplanting best-practices, they suggest implementing the Scandinavian model in the US. Several issues here. For a start, there is a world of difference between "community" roads and (so-called) "private" roads. The incentives and other factors that drive "community management" are far superior (in realising desired outcomes) to the incentive incompatibilities that are rife with the conventional PPPs. Second, management of community assets by co-operative associations has a long history and is widely followed in several parts of the world. Most of them are sui generis, having emerged over a long period due to their unique circumstances. Third, therefore the replication of these models which draw on social capital and community co-operation have rarely been successful. In fact, highly individualised rural communities in the US are as far as it can get culturally and politically from the cohesive and collectivist communities of rural Scandinavia.

The challenge with policy implementation - the case of urban development

Formulating policy is hard, but perhaps easier when compared to implementing initiatives flowing from the policy. The problem is that so much can be lost in translation between the intent of the policy and the version that is actually implemented. This also highlights the folly of resting on the laurels of a good policy. As the example discussed below shows, good policy can be implemented in a manner that makes no dent on the problem.

The Government of India has promulgated policies on metro railways, transit-oriented development (TOD), and land value capture (LVC). A handful of state governments have in turn formulated their own policies and issued certain regulations thereon, especially on TOD and LVC. Karnataka is apparently a pioneer in the implementation of integrated metro rail, TOD, and LVC policies. But a new study of the regulations issued by the State government draws attention to several implementation failings. 

In particular, I can think of four broad categories of deficiencies that prevent effective implementation of policies.

1. Policy design failing - The details are very important in any policy. For example, consider the sale price of FAR or the magnitude of the cess/development charge. Typically the development authorities are inclined to err on the side of revenues maximisation and discount the primary objective of increasing the stock of supply or built-up space in the notified areas. In fact, in case of Bangalore and Mumbai too, there are reasons to believe that the introduction of the concept of base FAR and premium purchasable FAR may have actually lowered the free FAR available since the earlier available free FAR was much higher. It does not help that generalist bureaucrats who take decisions on such matters have shorter time horizons and their resource maximisation preferences dominate over long-term planning considerations. This in turn defeats the very purpose of the intervention. Furthermore, it ends up causing unintended effects like gentrification with its long-term distortions. There may be a Laffer curve type relationship between revenue extraction and FAR rates. 

Or consider the small amount of purchasable FAR (4 and 150 m around stations) or the restrictions/difficulties around availing the additional FAR (minimum plot-size, road width etc). There were just 260 properties around Indira Nagar station, the busiest metro station in Bangalore, which could avail the additional FAR, with half of them being less than 250 sqm. Given restrictions on road width, the actual number of eligible plots may be even lower. Further the FAR of 4 within 150 m of the station will cover only about 1% of the Bangalore city area. Further the CBD and central areas of city remain off-limits for higher FAR and TOD. In simple terms, even the proposed FAR and TOD implementation, leave aside those already implemented, covers a negligible area of the city as to have only a very marginal effect. 

2. Implementation failing - Many policies while in place take inordinate time for operationalisation by way of appropriate rules for its implementation. For example, in Karnataka, the actual operationalisation of the TOD, Metrorail, and LVC policies (compared to the full potential) have been limited. Enabling regulations on set backs, height, parking, open space, road width etc are not promulgated even where additional FAR is allowed, thereby leaving implementation still-born. Often even exact delineation and notification of the ToD areas are not done. It is as though everyone relaxes after a policy is announced, not realising that a policy without enabling regulations is meaningless. 

3. Administrative failing - LVC/TOD policies are often viewed in terms of promulgate-and-forget. But in reality, effective implementation of LVC/TOD requires dynamic engagement to address emergent bottlenecks and revise/refine enabling regulations. And there are likely to be several and unanticipated emergent challenges. For example, the issue of Premium FAR depressing the demand for TDRs is an issue which may require some tweaks to the existing regulations. Or emergent gentrification concerns, always likely, have to be met with appropriate responses. 

4. Co-ordination failures - Finally, with most complex issues, co-ordination among different entities, mainly (in this case) the metro rail corporations, municipality and the Urban Development Authority (UDA) is critical. For example, infrastructure investments should start as soon as TOD/FAR/LVC regulations are put in place. Typically it takes several years before infrastructure investments start - eg. betterment levies being collected for several years after the regulations are in place and LVC is collected. In general, the municipality (and the UDA too) often has the least proximate stake (at least for its officials and councillors) in the metro rail and its sustainability - they don't feel the need to show urgency with utilising their share of funds devolving from the LVC policy. In practice, the money gets diverted to other more pressing concerns.

In many ways these are all to be expected given the priorities of municipal commissioners/mayors, weak state capacity at municipal level, narrow and old-fashioned views of planners, revenues maximisation bias of LVC policy etc. In simple terms, the failing is not with the concept of LVC and TOD, but the manner of its implementation. And I am inclined to think that it will be the same with other states and cities too.

Weekend reading links

1. Bloomberg has this on the ratio of out-bound to in-bound foreign capital in developing countries,

On China and Thailand, this is important,

When political institutions fail to act as pressure valves, capital wants to escape before it gets trapped.

2. Bloomberg has a very good article on how Narayana Hrudalaya is trying to drive down surgery costs, and Modicare may be a contributing factor. Sample this on cost-cutting without compromising anything on safety,

Shetty’s philosophy of thrift is everywhere. The surgical gowns are procured from a local company for about a third of the cost of international suppliers. The tubes that carry blood to heart-and-lung machines are sterilized and reused after each surgery; in the West, they’re thrown away. The machines themselves, along with devices such as CT and MRI scanners, are used well past their warranties, kept running by a team of in-house mechanics. The operating rooms, pieces of real estate so expensive that many hospitals bill for their use by the minute, are also part of the assembly line. Whereas preparing a U.S. surgical theater for the next patient can take 30 minutes or more, Narayana has gotten the process down to less than 15, in part by keeping turnaround teams with fresh instruments, drapes, and other supplies on immediate standby, ready to roll the moment a room is available. Even patients’ families are part of the upskilling model. Narayana trains them to bathe patients and change bandages in the hospital, as they’ll do when they get home. This allows paid staff to focus on more challenging work. Through all these methods and more, Narayana has been able to get the retail cost of a heart bypass, its most common operation, down to $2,000, about 98 percent less than the U.S. average.

3. A third Bloomberg article points to the declining current account surplus of China, and the prospect of the country competing with other emerging economies for cross-border capital inflows.

Sample this,

Contrary to President Donald Trump’s perception, China is no longer a frugal nation that sells a lot abroad and buys little in return. The country’s middle class is now traveling and swiping plastic overseas. Last year, more than 160 million Chinese visited foreign countries, spending $237 billion on everything from rice cookers in Japan to Gucci loafers in Italy. As a result, China’s current account surplus has collapsed. Edging dangerously close to twin deficits – both fiscal and current account – Beijing is now keen to attract foreign portfolio inflows to balance its external accounts. That’s why, all of a sudden, China is opening its financial-services industry, allowing global investment banks to take majority control of their local brokerage joint ventures.

4. Nice article in Indian Express on how Indore managed to become India's cleanest city for three years in a row. The investments in personnel, bins, equipments, vehicles, infrastructure etc to cover the entire city is impressive in itself. A testament to the government's commitment to the issue, and attendant willingness to commit resources, and the Corporation's ability to execute these initiatives in finite time. But the bigger achievement is with the behaviour change, essential for sustainability. Or is the story over-stating what has been achieved?

5. The Economist points to the breakdown of traditional safeguards involving regulation, litigation, and competition, which may have been responsible for rise in corporate scandals in the US,

Take regulation first. The system is a strange blend: there are pockets of laissez-faire attitudes here, thickets of rules there and lobbying everywhere. It is variously prone to laxity, capture and incompetence... Second, litigation may no longer be quite the deterrent it once was. Criminal cases leading to jail terms for top executives are as rare as socialists at Goldman Sachs. And civil law has lost its bite. America has long used class-action suits to punish firms and compensate consumers. Tort costs born by firms are equivalent to about 2% of gdp a year, higher than in other countries. Nonetheless, life has got easier for firms. Arbitration clauses, in which customers and staff forfeit the right to pursue class actions, have become more common. Firms are more likely to extend cases to appeal, which can take up to a decade... The final constraint is competition. It can drive firms to cut corners but in the long run should act to discipline careless or badly behaved firms, because customers shun them... But across the economy incumbent firms have got more powerful over the past 20 years, making it harder for customers to switch.

6. Revisiting this illustration of inequality,

Mr Piketty, Emmanuel Saez and Gabriel Zucman found that between 1980 and 2014 the bottom 50% of post-tax incomes in America increased by just 21%, compared with 113% for the top 10%. But the top 1% rose even more—by 194%—while the top 0.001% rose by 617%.

7. Bloomberg article on Chinese engagement in Djibouti. This tiny, but strategically important, country looks a Chinese colony in all but name.

8. Finally, this story about Blue Apron, the ingredient-and-recipe meal kit service, is another cautionary note on the modern start-up ambition and valuations, important as the flow of start-up IPOs planned for 2019 have begun with Lyft. The company's shares are trading 90% below its June 2017 IPO price. In fact the share price halved within just two months of the IPO. Sample this,

The company’s founders and their Wall Street bankers convinced stock investors, a group well represented in coastal cities, that the business was worth $3.2 billion in part based on the idea that they were going to expand operations all across the country. The goal, according to the IPO prospectus, was to eventually be able to sell meals to 99 percent of Americans. “Blue Apron’s mission is to make incredible home cooking accessible to everyone,” it said in the prospectus. But with a two-person meal that requires about 30 minutes of preparation in the kitchen costing about $23 with shipping, it’s not clear how realistic that ever was. As it turns out, the company is even struggling to maintain its current roster of clients on the two coasts... Blue Apron hasn’t posted a single profitable quarter. Neither has Lyft or Uber, which could be valued at as much as $120 billion.

Solving "other people's problems"?

A friend recently pointed to this article where Courtney Martin brilliantly captures the motivations and dynamics of international development,

If you asked a 22-year-old American about gun control in this country, she would probably tell you that it’s a lot more complicated than taking some workshops on social entrepreneurship and starting a non-profit. She might tell her counterpart from Kampala about the intractable nature of our legislative branch, the long history of gun culture in this country and its passionate defenders, the complexity of mental illness and its treatment. She would perhaps mention the added complication of agitating for change as an outsider. But if you ask that same 22-year-old American about some of the most pressing problems in a place like Uganda — rural hunger or girl’s secondary education or homophobia — she might see them as solvable. Maybe even easily solvable. I’ve begun to think about this trend as the reductive seduction of other people’s problems... 

If you’re young, privileged, and interested in creating a life of meaning, of course you’d be attracted to solving problems that seem urgent and readily solvable. Of course you’d want to apply for prestigious fellowships that mark you as an ambitious altruist among your peers. Of course you’d want to fly on planes to exotic locations with, importantly, exotic problems. There is a whole “industry” set up to nurture these desires and delusions — most notably, the 1.5 million nonprofit organizations registered in the U.S., many of them focused on helping people abroad. In other words, the young American ego doesn’t appear in a vacuum. Its hubris is encouraged through job and internship opportunities, conferences galore, and cultural propaganda — encompassed so fully in the patronizing, dangerously simple phrase “save the world.”

This is spot on. It goes to the heart of one of the biggest problems with international development, both on the academic and on the foreign entrepreneurship sides - the complete marginalisation of priors and complementary elevation of logic and technical expertise, and the belief that serious exploration for solutions starts with their own work overlooking all local efforts in that direction.