Weekend reading links

1. A Brookings paper draws attention to studies which show that the World Bank's greater success in influencing country governments consistently and permanently came from its advisory and analytical products/services than its development lending. Annually, the former is $200 mn and the latter $30 bn.

2. Reliance Industries is reported to be planning to spend $1.6 bn globally to buy up tech firms and invest in start-ups. This is on the back of the spectacular series of small tranches of equity sales to some of the leading names in the private equity and sovereign wealth fund worlds. So far, in just over six weeks, Reliance Jio has sold 19.9% of its stake and raked in Rs 1.05 trillion from Facebook, Silver Lake, Vista Equity Partners, General Atlantic, KKR, and Mubadala. And apparently more from Saudia Arabia's PIF and Abu Dhabi's ADIA is on the works. 

3. Shyam Saran has a very good oped that describes China's border policy, in the context of the stand-off between India and China at Galwan Valley in Eastern Ladakh,

China would be content if, after altering the facts on the ground, the stand-off is defused, say by a limited disengagement of a few metres between the troops, leaving most of the encroached territory in Chinese hands. China may agree to vacate the occupied area but expect concessions in return... The bottom line — facts on the ground remain altered to China’s advantage although India’s action forestalled further ingress. Therefore, unless India is able to find an effective counter-strategy to this pattern of Chinese behaviour, incidents of the kind we have seen at many points on LAC are not only likely to continue but to intensify.

There is another feature to the Chinese playbook. This is evident at the India-China border and in other theatres such as the South China Sea, the Taiwan Straits and the Yellow Sea. Each Chinese action, taken in isolation, may not be regarded as threatening enough to require a strong and countervailing military riposte. Over a period of time, however, a string of such “isolated” incidents add up cumulatively to a significant change in the balance of power on the ground. China’s dominance of the South China Sea, its occupation and militarisation of several offshore islands, have reached a point where only a major military offensive, perhaps even war, may be necessary to reverse Beijing’s advantage. As is apparent, such risky actions are unlikely. At the most, one may expect the now alerted major powers, to prevent any further gains by China. So this is another important part of the playbook — incremental advances short of the threshold of a likely military response from adversaries, but resulting over time in a more favourable balance of power...

There is a third element in the Chinese playbook that needs attention. China calibrates its posture towards any country based on a careful assessment of the balance of economic and military capabilities. This may sometimes go wrong because Chinese leaders are relatively insular and self-centred in their outlook. There is a cultural predilection towards tactical agility, even deception, in interState relations and little patience with notions of statesmanship. After the 1962 war, China’s default position on the border was the so-called package proposal, essentially formalising the prevailing status quo. In 1985-86, after the Wandung incident in the eastern sector, the package proposal was reinterpreted to mean that a settlement required India to make “meaningful concessions” in the east, the area of largest dispute, for which China would make appropriate-though-undefined-concessions in the western sector. Subsequently, it was conveyed that in any settlement, Tawang would have to be “returned” to China. What we now see is a further moving of the goalposts, with China’s behaviour suggesting that the ambiguity over the precise alignment of LAC gives it the opportunity to trigger incidents at points of choice in order to make both local, tactical gains but to also convey a larger message that it has a stronger hand when dealing with India.

One proposed response to this strategy,

We have seen this at the India-China border over the years. There has been constant nibbling activity which the Indian side confronts, but it is unable or unwilling to go on a military offensive to reverse Chinese gains. We have to understand these salami-slicing tactics and develop an effective counter-strategy. This may require the ability to use the ambiguity of LAC to make asymmetric gains in zones where we have a tactical advantage. Only then will there be some bargaining chips available with us to restore the status quo.

4. On India-Nepal relations, C Rajamohan questions the policy of basing the relationship on historic, cultural, and other sentiments and argues for grounding it on shared interests. He writes,

It makes no sense for Delhi to hanker after a “special relationship” that a large section of Kathmandu does not want. If Delhi wants a normal and good neighbourly relationship with Kathmandu, it should put all major bilateral issues on the table for renegotiation — including the 1950 treaty, national treatment to Nepali citizens in India, trade and transit arrangements, the open border and visa-free travel. Delhi should make it a priority to begin talks with Nepal on revising, replacing, or simply discarding the 1950 treaty. It should negotiate a new set of mutually satisfactory arrangements. India had conducted a similar exercise with Bhutan to replace the 1949 treaty during 2006-07. The issues and political context are certainly more complicated in the case of Nepal... Rather than object to Kathmandu’s China ties, Delhi must focus on how to advance India’s relations with Nepal. It should bet that the logic of Nepal’s economic geography, its pursuit of enlightened self-interest, and Kathmandu’s natural balancing politics, will continue to provide a strong framework for India’s future engagement with Nepal.

5. Very good articulation of the sophisticated nature of racial exploitation in the US by Pratap Bhanu Mehta,

American history is a profound collision between two exceptionalisms. The first is the exceptionalism of self-image: A country providentially endowed with liberty, equality, rule of law, democracy and capitalism. But the second exceptionalism just requires putting “race” in front of these ideals. The story flips easily. The story of liberty turns out to be a story of one of the largest, racially structured mass incarcerations of any society in the world. The story of equality turns out to be a story of racial hierarchy, especially for African Americans. The story of rule of law goes hand in hand with a deeply violent society that uses law as an instrument to subjugate particular communities. The story of democracy turns out to be a story of repeated attempts at democratic disenfranchisement. And capitalism turns out to racially tinged: Who can or cannot participate in the market order, in urban spaces, has been profoundly shaped by race... It is a cliché about American democracy that its original sin, “race”, shows up the pathology of each one of its ideals and its policies: Everything from gun control, voting procedures, federalism, and the politics of welfare is coloured by the shadow of race.

6. Very good profile of India's largest online stockbroking firm, Zerodha. 

As of April 2020, the platform had 1,598,948 active clients and a market share of over 14 per cent – up from less than one per cent market share, and just 30,000-odd active users in 2015... The tipping point for Zerodha was introducing the “zero brokerage model” in December 2015. This meant that equity investments on the platform now had no upfront fees, no minimum volume, or any hidden clauses. Though they were still charging a discount fee-based brokerage for F&O and intraday trades, this was less than what peers charged.

The company charges a Rs 20 per trade as brokerage. 

This makes Zerodha distinctive in the world of VC-financed startups,

The company remains bootstrapped to this day. Kamath admits that not taking external investment was the only choice left after Zerodha was rejected by almost all big Venture Capitals (VCs)... “The year 2010 was probably the worst year to start a broking firm. After the 2008 collapse, the activity in the market had dropped, and there were no trading volumes. It was a risky bet then and no investor was keen to back us,” Kamath says. Zerodha had the option to grow at a faster pace by acquiring smaller players, and consolidating. Yet, the company chose to grow organically without diluting equity or accumulating debt on its books. Now that the company has scaled, the business is generating cash for itself, and there is no need for external funds...

Zerodha runs its consolidated operations as a partnership firm, and, going by its statements, the company posted a net profit of Rs 400 crore on a total revenue of over Rs 850 crore last year. With no easy money at its disposal, Zerodha never had the chance to burn capital for customer acquisition. Kamath explains: “We have not spent a single rupee on advertisement, which is the biggest cost in running a business these days.” According to a report on Indian brokerage industry released in 2019 by ICICI Securities, Zerodha’s total operational expenses as a percentage of its total revenue was 36 per cent, lower than all its peers. HDFC Securities is the only player close to Zerodha, at 37 per cent. For others, this metric falls in the range of 60-80 per cent. The report estimates total expenses for Zerodha during 2018-19 at around Rs 320 crore... According to Kamath, “The game was never about pricing. It was about product proposition.” He believes that whoever offers a better product experience to the customer wins the race. “Between Google and Yahoo, users prefer using Google because they like the experience.”

As a counterpoint, I struggle to see even a single VC-financed startup story which has grown this way to become a market leader in any segment. And Zerodha's growth raises questions about the so-called VC-financed growth narrative, and highlights the value of hunkered down execution to refine and demonstrate value proposition, get the unit economics right, and grow at a pace that you can sustain. 

7. TN Ninan points to a reason for the central government's fiscal hole,

Back in 2013-14, the states got 28 per cent of the Centre’s gross tax revenue. By 2017-18, this share had gone up to 35 per cent. Since then, the Centre has found various ways of clawing back some of the lost ground; last year, the states’ share was 31 per cent. Central transfers as a share of the states’ own revenue have climbed from 45 per cent 2013-14 to 62 per cent (Budget estimates for 2019-20). The Centre’s net tax revenue has grown 102 per cent, while its tax transfers to the states have gone up by as much as 168 per cent. The states’ total revenue (tax and non-tax) has grown 132 per cent over the six years, compared to 93 per cent for the Centre. And the states-to-Centre ratio of total government receipts has pivoted from 56:44 to 65:35. For every rupee that the Centre now spends, the states spend almost two.

8.  More on China. The US foreign policy with China was for long premised on the belief that a policy of engaging with China and integrating it with the multilateral system and the international order will help soften the authoritarian regime and liberalise the economy and society and lead to a mutually beneficial relationship. But, that, as we now know has proved to be an unsuccessful endeavour.

The former US National Security Advisor, HR McMaster is only the latest voice echoing the failure and calling for a revised paradigm. He describes the Chinese policy as one of "co-option, coercion, and concealment". He writes,

The party’s leaders believe they have a narrow window of strategic opportunity to strengthen their rule and revise the international order in their favor—before China’s economy sours, before the population grows old, before other countries realize that the party is pursuing national rejuvenation at their expense, and before unanticipated events such as the coronavirus pandemic expose the vulnerabilities the party created in the race to surpass the United States and realize the China dream. The party has no intention of playing by the rules associated with international law, trade, or commerce. China’s overall strategy relies on co-option and coercion at home and abroad, as well as on concealing the nature of China’s true intentions. What makes this strategy potent and dangerous is the integrated nature of the party’s efforts across government, industry, academia, and the military. And, on balance, the Chinese Communist Party’s goals run counter to American ideals and American interests...

The Chinese Communist Party is not going to liberalize its economy or its form of government. It is not going to play by commonly accepted international rules—rather, it will attempt to undermine and eventually replace them with rules more sympathetic to China’s interests. China will continue to combine its form of economic aggression, including unfair trade practices, with a sustained campaign of industrial espionage. In terms of projecting power, China will continue to seek control of strategic geographic locations and establish exclusionary areas of primacy. Any strategy to reduce the threat of China’s aggressive policies must be based on a realistic appraisal of how much leverage the United States and other outside powers have on the internal evolution of China. The influence of those outside powers has structural limits, because the party will not abandon practices it deems crucial to maintaining control.

Like many others, he urges the need to take a historical perspective when engaging with China and understanding its motivations. His experiences point to an entrenched conviction within the Chinese rulers about a longing for world dominance, a tianxia—over “everything beneath heaven" and therefore pursuing a "great rejuvenation of the Chinese nation".

9. The pile of evidence on the value of hydroxychloroquine (HCQ) grows with each passing day. Ananth has a very good article which links to several articles in this regard.

A meta-study published by Oxford University Press, on behalf of the Johns Hopkins Bloomberg School of Public Health, and authored by Harvey Risch of Yale University, calls for HCQ and azithromycin to be made widely available and promoted immediately for physicians. He says,

“For the earliest trial, between now and September, assuming a flat epidemic curve of 10,000 deaths per week, I estimate that approximately 180,000 more deaths will occur in the US before the trial results are known... In this context, we cannot afford the luxury of perfect knowledge and must evaluate, now and on an ongoing basis, the evidence for benefit and risk of these medications... the FDA, NIH and cardiology society warnings about cardiac arrhythmia adverse events, while appropriate for theoretical and physiological considerations about use of these medications, are not borne out in mortality in real-world usage of them.”

This comes amidst the drama surrounding a controversial study drawing on data from a little known healthcare data analytics company Surgisphere published in Lancet which found significant higher risk of death due to the use of HCQ, which forced the WHO into issuing an advisory suspending the use of the drug on Covid 19 patients, which in turn triggered a strong response from the Indian government and ICMR and 180 scientists globally. The full story here. The outrage forced Lancet to formally retract the study and even issue an Expression of Concern.

The Surgisphere data, which claimed to have been acquired from 671 hospitals in six continents, also highlights the limitations of application of big data techniques to analyse such issues,

The concerns, which have built over the past several days on social media, highlight larger issues with using big databases to draw conclusions about medicines, an approach that has been gaining rigor in the era of big data. Experts warn that conducting such studies properly is far more difficult than it appears.

Interestingly, as this Guardian investigation shows, Surgisphere appears to be virtually a shell company with no expertise and track record which has supplied its data to several Covid 19 studies without explanations about its data and methodology. Experts have dubbed the company's database a scam. This has the trappings of being the Theranos of Covid 19, albeit without the valuations.

In the years ahead, this will be held up as one more example in the long list of  failings of the excessive trust on datacracy.

Who's apologising to President Trump?

10. As Covid 19 endures, tales of chronic poverty from across India.

Boiled rice with milk: about half a litre of milk for the six-member family, including four children. A rice gruel with more water than milk, and salt added to taste... Just providing rice and wheat at a highly subsidised price of ₹2-3 per kg may not be enough when day jobs are scant and families have no cash in hand. Is it possible to survive on just boiled rice and rotis? But most families are doing exactly that: consuming boiled rice and salt or wheat flatbread with chilly paste. Even potatoes are unaffordable. During a three-day visit to Bundelkhand last week, this reporter witnessed signs of pervasive hunger and undernourishment. Entire families, including children are skipping meals; families out of the food security scheme are on the brink of starvation... In Musanagar, a tiny hamlet in Atarra town in Banda, women struggling to cook and feed their children were on the edge. Most here start their day before sunrise to unload sacks of groceries at the local market. They receive between 50 paise to a rupee for a bag, but there is too much of a rush nowadays... At least a third of the families in Musanagar do not have ration cards under the National Food Security Act (NFSA), 2013, which guarantees 5kg of grains per person per month.

And this sad tale of a migrant journey.

11. A summary of all the different assessment of informal sector job losses due to Covid 19 in India by Bharat Bhushan.

The resilience and efficiency trade-off in public policy

I blogged yesterday about the pursuit of efficiency in modern economic systems which has marginalised all other factors. But John Mauldin points out, Covid 19 has highlighted the importance of resilience as an equally important decision-making factor in public and private sectors,

“Resiliency” is suddenly a buzz word. We are seeing how ultra-optimized global supply chains are actually quite fragile when unexpected events occur. We pushed too far in trying to save the last penny. Now we’ll have to not just rebuild, but rebuild differently, and it’s the opposite of everything known to generations of engineers and consultants.

In recent decades, efficiency had come to occupy the primary factor in corporate decision-making, marginalising other considerations. But Covid 19 has exposed the limitations of this primacy of the pursuit of efficiency. Two earlier posts here and here in the context of internet companies pointed to how the relentless quest for efficiency to the exclusion of all else has exposed Amazon when faced with Covid 19.

Sample this from a recent article in The Economist that highlighted the importance of resilience with manufacturing supply chains which are now excessively concentrated on China,

That companies have been aflurry over their supply chains is not in doubt. From January to May supply-chain disruption was mentioned nearly 30,000 times in the earnings calls of the world’s 2,000 biggest listed firms, up from 23,000 in the same period last year. Mentions of “efficiency” declined from 8,100 to 6,700. Managers know that supply chains are good conduits of economic pain.

The fetish with efficiency is confined not just to businesses. Never mind its realisation being questionable, efficiency has emerged as a pre-eminent consideration in public policy.

The Thatcher-Reagan ideological turn of the eighties mainstreamed the New Public Management approach of using private sector practices in managing the public sector. A central feature of this approach was the elevation of efficiency as the primary consideration in public management over all other factors like fairness, equity, safety, workers rights, inclusiveness, access barriers, and, not to speak of, resilience. A complementary factor which assumed great significance was that of harmonisation or standardisation. 

Take the example of cash transfers or UBI and the contrast with in-kind transfers like food grains through India's public distribution system (PDS). The former is efficient and easy to administer. The latter is inefficient, prone to leakages, and challenging to administer.

But the Covid 19 has been a very good wake up call on the importance of other factors that must determine public policy on issues like food security in a continental sized country with recurrent episodes of natural and man-made disasters and vast numbers of ultra-poor. Sample this from a Dalberg Survey,

BPL Households that report they could access and use their respective benefits easily: Ration: 46%: Cash: 25%, Buying supplies: 41%. BPL Households that report difficulties: Ration: 17%: Cash: 36%, Buying supplies: 58%... 55% of households with BPL/AAY cards received free rations; 28% of households with JDY account received the Rs 500 cash transfer.

A Yale University study finds that 53% of poor women (below $2.50 per capita PPP per day) (176 million) did not have JDY account, and 21% (70 million) lacked even a ration card. It writes,

In order to reach the most vulnerable, universal distribution of food rations through systems such as PDS shops and community kitchens could be expanded in all states with the release of additional grain. 

A Chicago University study points to dire statistics and writes,

These figures suggest that the rapid distribution of in-kind or cash transfers is needed to prevent a sharp increase in malnutrition and severe deprivation. Such transfers will also likely promote a more robust recovery as the country is able to reopen. 

An LSE blog had this to say,

In India’s current crisis, the Public Distribution System (PDS) – the programme of distribution of subsidised goods that constitute the main food security net in the country – is of fundamental importance for the poor households that access it. Still operational during lockdown, the PDS ration shops will supply essential food items to households that, while already in poverty, will be bearing the severe economic impact of lockdown. The PDS provides subsidised goods to below-poverty-line (BPL) households throughout the country, as well as those classified as Antiyodaya Anna Yojana (AAY) – the poorest of the poor – who access enhanced rations. In the serious economic downturn of the lockdown, it is key that the national food security network works at its best capacity... The ongoing crisis requires a reshuffling of priorities: with the lockdown and its serious impact on the poor, the PDS has become an even more fundamental resource for subsistence.

It is safe to say that without the PDS, India would have witnessed starvation deaths now. Quite apart from citizens accessing the food grain benefits, local governments would have struggled to operate community kitchens. See this on PDS and NREGS.

A similar comparison exists between digital money and physical cash, and the unqualified embrace of  the former. It is important to keep in mind factors like exclusions and access barriers that bedevil digital money channels, a problem which people like Jean Dreze have demonstrated repeatedly over the years.

What about the respective reliability of NREGA and JDY payments? There have been significant issues (e.g. delayed, rejected, blocked or diverted payments) with NREGA payments, often related to Aadhaar. But then, numerous “direct benefit transfer” schemes (social security pensions, scholarships, maternity benefits, among others) have faced similar problems, also reflected in official transaction data. Both the Aadhaar Payment Bridge System(APBS) and the Aadhaar-enabled Payment system (AePS) are shot through with technical glitches, possibly exacerbated by the recent surge in transactions, and especially unkind to the powerless. Transfers to women’s JDY accounts are unlikely to be more reliable than transfers to job-card holders. 

In fact, as far as effective payment is concerned, there is a further argument in favour of the NREGA job-cards list: unlike JDY accounts, it lends itself to the “cash-in-hand” method (on-the-spot payment in cash, instead of bank payments) as a possible fallback. The reason is that the job-cards list is a transparent, recursive household list with village and gram panchayat identifiers, while the list of JDY accounts is an opaque list of individual bank accounts. Cash-in-hand may seem like the antithesis of JAM, but this option may become important in the near future if the banking system comes under further stress.

I blogged here highlighting the limitations of digital technologies in addressing problems of financial inclusion and targeting of social program beneficiaries.

Much the same logic applies to the debate on privatisation of services compared to public provisioning. Again the underlying theme is simple - efficiency over all other factors - and like with cash transfers, Covid 19 has exposed the limitations of the private sector focused approach.

In the context of shortages of PPE like face masks, Gillian Tett mused the unthinkable,

... a much bigger question for a country such as the US: how far should it rely on the free market to supply basic goods? And how far should it tolerate (or encourage) state intervention in a time of crisis?

... When coronavirus hit, America was tragically ill-prepared... at the start of the pandemic, the Department of Health and Human Services only had 42 million masks in its stockpile, of which 30 million were medical masks and a mere 12 million were the prized N95. That was a scant 1 per cent of what the department itself calculated would be needed in a bad pandemic. Worse still, it did not have any way to quickly produce more, since about 80 per cent of mask production has occurred in China in recent years and key materials in the supply chain, such as the gauze inside N95 masks, are made in countries such as Germany. All this has created a massive gap in the market. The result has been a wave of price gouging and quasi-piracy as institutions have scrambled to get hold of scarce supplies. That has left countless front-line workers dying needlessly because they have lacked proper PPE.

The Covid 19 pandemic has once again highlighted the importance of public systems.

A strong bipartisan consensus has emerged in the US around active industrial policy, especially to combat the threat from China,

And yet, with a wary eye on China and public nervousness about stretched global and domestic supply chains for food and medical products, Republicans are starting to join Democrats in advocating for a stronger government hand in directing America’s industrial resources. Republicans who just a few years ago regularly scorned any idea of Big Government’s intervening in business and picking “winners and losers” are now happily calling for a national strategy to identify key sectors to protect and promote. In both Congress and the White House they’re discussing tax incentives and other ways to spur businesses to bring manufacturing home from China. Progressives, centrists, and right-wing economic nationalists alike are threatening government strictures on a corporate America that’s spent decades building sprawling “just in time” supply chains around the world in the name of economic efficiency and expansion into new markets.

Closer home in India, take the example of private health care. An editorial in Indian Express highlighted the private sector's abdication of their role in the fight against the pandemic,

Private enterprise owns almost three out of every four hospital beds in India, and almost eight out of 10 ventilators, but they are handling less that 10 per cent of those critically ill with novel coronavirus. States like Bihar, where private capital owns about twice as many beds as government hospitals, have seen the private sector in complete rout. The reluctance to engage is so great that they have been turning away coronavirus patients and other patients in need of aid. In Delhi and Maharashtra, the state government has had to issue orders so that they do not turn any more away.

As a series of reports in this newspaper showed, numerous factors have been at play in this failure — pay cuts, employee reluctance, the fear of sealing, the future consequences to brand value of hospitals identified with the pandemic, the lack of established protocols and protective gear, and bureaucratic instructions, like those issued in Telangana, to refer viral patients to government facilities. Underlying all this is the economic reality of falling revenues and footfalls, accompanied by new expenses and risk. While the central and state governments should offer to underwrite the risk, the fact remains that a sector which has benefited hugely from government concessions and encouragements, and which has tried to take over healthcare in India, has abdicated its public responsibility and remains isolated from the national effort.

Instead, much neglected public health functionaries like ANMs, community health workers like ASHAs have been the saviours. Sample this,

The nearly 26,000 ASHAs across the state have... become the eyes and ears of the government on the ground, constantly flitting through their jurisdictional areas like a detective, scouring for people with infections and keeping a stern vigil on their quarantine. If someone coughs or sneezes, hers is the phone that rings first. If someone entered the ward after travelling from another district, she would be the first to know... Kerala’s health department is essentially banking on such interpersonal connections between ASHAs and the communities around them to help cast its surveillance net and keep close track of those who can potentially get infected with the coronavirus.

Similarly critical have been the roles of panchayat and local government institutions in combating the pandemic. In fact, as P Sainath says, several foot soldiers of the economy in general,

We have always had one standard for the poor, and one for others. Even though, when you list essential services, you are finding out that it is only the poor people who are essential, apart from doctors. Many of the nurses are not well-off. Besides them, there are sanitation workers, ASHA workers, aanganwadi workers, electricity workers, power sector workers, and factory workers. Suddenly you are finding how inessential the elite are to this country. 

The large scale transportation of internal migrants and Indians stranded abroad would not have been possible without Indian Railways and Air India. This is not to argue against private participation in these sectors nor even their privatisation. It is only to point out that these factors need to be kept in consideration alongside efficiency when we debate issues like privatisation in the context of a country like India.  

In the UK, it will turn out to be one of the biggest ironies that the Prime Minister who began his term with the intention of squeezing the NHS further will now end up being the leader who started the revival of NHS.

Update 1 (30.06.2020)

The impact of NREGA,

Person days of jobs provided under MGNREGA had reached an all-time high of 568 million in May 2020. This was 54 per cent higher than the level of May 2019. Data for June 2020 accessed on June 29 from the official site of the scheme at 348 million was 66 per cent higher than it was for the month exactly a week ago. This either implies a sharp increase during the week or substantial revisions for the month. Either ways it implies a continued increase in MGNREGA spending into June. Person days of jobs in June 2020 were already 8.4 per cent higher than they were a year ago. Kharif sowing till June 26 was more than twice it was a year ago. There is no overlap between MGNREGA work and sowing work. The two together therefore have evidently powered the rural employment surge in June.

Update 2 (03.09.2020)

On how NREGA's automatic stabilising role,

Around 24.2 million households have demanded work under the scheme in August 2020 as per MGNREGA website accessed on September 2 which is a staggering 66 per cent more than the same month in 2019 and the highest in last seven years for August.

Update 3 (06.09.2020)

Sunita Narain writes on NREGA,

In these darkest days of Covid-19 — when jobs and economies have collapsed — 56 million households got work in the past three months and these jobs provided relief. This was under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), which perhaps is the largest social net scheme in the world. Down To Earth reporters, who travelled to different regions of the country, found there was a surge in employment and in many places, the most skilled and educated turned to this programme. It effectively put a floor to poverty — people got jobs, though unskilled and manual — but the jobs gave them money, albeit only a daily wage, and the money provided them the ability to buy food to feed their families... Between April and August, when Covid-19 had driven economies to the ground, under the MGNREGA 15.5 million individual works were done. This included everything — from making cattle-sheds and farm ponds to even fencing on lands. Poor people improved their ability to secure their futures and they were paid for this labour — which, in turn, gave them that critical safety net.

Update 4 (12.09.2020)

Good article on how NREGS and PDS saved India from hunger and starvation during the pandemic. More stats on the demand for the NREGS,

From April to August, over 83 lakh additional households or 1.6 crore persons joined the NREGA labour force by getting job cards, taking the number of families under the scheme to an all-time high of 14.36 crore... Data show 5.79 crore households availed NREGS between April 1 and September 10 during the current financial year — the highest since the scheme was launched on February 2, 2006.

And this on how PDS performed. 

The limits of pursuit of efficiency at all costs

I have blogged earlier about the problems with the excessive search for efficiency.

The idea of using the least amount of resources, at the lowest cost, quickest time, and with the least redundancies and waste has come to be identified as a prominent feature of progress and development.  

Izabella Kaminska points to a problem driven by the "laissez faire efficiency" maximisation that the Covid 19 pandemic has thrown up, with global supply chains,

For example, the just-in-time supply chain system can be viewed as the real economy’s version of a fractional reserve system, with reserves substitutable for inventories. Meanwhile, the real economy’s presumption that additional inventories can be sourced from third party wholesale suppliers at adjustable prices as and when demand dictates, is equivalent to the banking sector’s presumption that liquidity can always be sourced from wholesale markets. Though there is obviously one important difference. Unlike the banking sector, the real economy has no lender of last resort that can magically conjure up more intensive care beds or toilet paper at the stroke of a keyboard when runs on such resources manifest unexpectedly.

She argues that there are two responses to address short-term supply shortages, as is happening now with Covid 19's demands on the health care system. Either immediate investment to build up new supply capacity, or temporary re-allocation of existing resources to new production purposes. But the former is expensive and inefficient, apart from being difficult to develop in quick time. This leaves us with the latter as the only practical response to "surge-demand related crises like pandemic flu". She points to some illustrative examples, comparing with the financial markets,

On liquidity: yes, greater adaptability could be factored into the system. A certain percentage of event space could be mandated to have the adaptable capacity to turn into pop-up hospitals at short notice. Private hospitals could get tax breaks if they added critical care functionality to more of their general beds. A territorial reserve of volunteer emergency health workers could be trained up to deal with surge scenarios. A territorial reserve of volunteer supply-chain workers could also be put on standby. Ventilators, meanwhile, could be designed from scratch to cater to multiple patients not just individual ones. And manufacturers of non-essential goods could introduce capabilities to shift production into essential goods when needed.

On capital ratios: yes, governments could mandate makers of non-perishable emergency goods (such as medicines, toilet paper, face masks, hand sanitiser) to always keep two-weeks’ worth of additional supply on hand. And companies could also be mandated to maintain some share of total supply chain production capability entirely domestically, making them more resilient to globalised shocks.

On bail-inable capital: kind of, more private sector health care investment could be encouraged by loosening the rules governing NHS patients’ ability to top up with private care if they can afford to (something that is currently restricted). In exchange private hospitals could be contracted into interruptible-style agreements that formally release their resources to the national health service in times of emergency. Manufacturers could be given tax breaks for running adaptable production lines that easily switch from non-essential to essential goods in emergency times. (Doing so would protect their balance sheets in crisis times and prop up their share prices.)

Amazon, widely touted as the epitome of efficiency, too has been found out in the crisis, with its delivery systems failing and performing only slightly better than competitors. Sample this,

But the crisis is laying bare the cracks in Amazon’s ability to be there for its customers when they need it most, much less to “delight” them, as Chief Executive Jeff Bezos once urged his employees to do. Those cracks include times when up to half the workers in some of the company’s facilities haven’t shown up, with some saying it was due to their fear they wouldn’t be adequately protected from coronavirus. It’s also due to Amazon’s just-in-time supply chain, reliance on third-party sellers and largely automated systems of buying and selling that were never designed to handle such a crisis... the promise to ship anything to our doorstep in a day or two that has gained it the trust of an astonishing 112 million Prime members in the U.S. (a nation of 129 million households) has evaporated nearly overnight...

In the mid-2010s, Amazon initiated a program called “hands off the wheel,” which replaced many of the functions of Amazon’s white-collar retail workers—those responsible for managing inventory and negotiating with sellers—with AI and automated systems, says Alex Kantrowitz, who wrote the book “Always Day One,” about Amazon’s management strategies. This means Amazon’s systems respond more quickly to increases in demand than humans could, but it also leads to breakdowns when they encounter unexpected shocks—e.g., a global pandemic. In this case, when products became suddenly scarce, price gouging naturally occurred.

The quest for efficiency trades-off with another attribute resilience, captured in the three examples above, which will be the subject of the next post.

Update 1 (21.06.2020)

Rana Faroohar points to the issue of some of the pursuits of efficiency in food industry which has come at the cost of resilience,

There are also two entirely separate supply chains — one supporting supermarkets, the other restaurants and institutions such as schools and hospitals. When demand in the second supply chain collapsed thanks to pandemic-related shutdowns, grocery prices in the first supply chain surged on higher demand, even as farmers destroyed crops that could not be easily funnelled from restaurants to retail outlets. That is the downside of efficiency and specialisation. Efficiency is also responsible for iceberg lettuce, one of the most ubiquitous (and tasteless) vegetables ever created. I cannot believe that anybody really wants to eat it, except as a vehicle for scooping up blue cheese in a wedge salad. But it has been a major cash crop in America for most of the last 50 years because the lettuce heads travel well and survive in long supply chains for months. Yet iceberg is mostly water and has few nutrients. That underscores the fact that while productivity has increased, US farmers are encouraged to plant commodity crops rather than fruits and vegetables needed for the country to have a healthy diet — the kind that provides better immunity from diseases such as Covid-19. Instead, Americans waste fuel shipping items like iceberg lettuce all over the country... Basically, we need to find a middle ground between 19th-century agriculture and modern industrial farming — between efficient and resilient.

Update 2 (19.10.2020)

A very good interview of author Roger Martin who has a new book on the problems with America's obsessive pursuit of economic efficiency. This obsession is captured by the interviewer Sarah Green,

Companies and policy makers have become consumed with the idea that the economy can be “made ever more perfect by pursuing increasing levels of efficiency” — things like shorter customer call times, fewer retail employees per square foot, the cheapest possible procurement costs, or mergers and corporate consolidation.

Martin uses the metaphor of complex adaptive systems to describe economy, society etc,

I think the best metaphor is a complex adaptive system. We’ve set up the economy for Amazon, and we should set it up for the Amazon. Amazon is a big machine, the Amazon is a complex adaptive system. First, it’s a system, so the pieces of the puzzle connect and influence one another. It’s complex in that it’s really hard to tell in advance what exactly affects what. And lastly, and maybe most importantly, it’s adaptive. So whatever state it’s in, it optimizes to that state. Think about the jungle — if there’s a little tree growing behind a big tree, it’s going to grow sideways to get out from the out from the shadow of the big tree. Or if there are predators in this part of the rain forest, you will go scurrying over to that part. 

So what does that mean? It means that if you’re if you’re a Nobel economist, you can say, “Well, if we increased money supply by 2.8%, we’ll get this much GDP growth.” Chances are, you’re just going to be wrong. Because you don’t actually know what’s going to happen. The other implication is that adaptivity has got every chance of overwhelming whatever you tried. People will say, “Ah, I know how to exploit that. And I’m going to start behaving differently.” So we have all these machinists pulling levers and hoping that things will happen the way they want, but it doesn’t happen the way they want. People just adapt to it and game the system for their own purposes, and that has all contributed to having outcomes that that almost nobody wants... I don't say that efficiency is bad. I say the obsessive pursuit of it, with no attention to resilience, is going to kill you. Just keep that in mind that there's a certain amount of resilience that that you need. And if your top line has dropped by half, right, it’s not actually pursuit of efficiency to lay off half your staff. You're no more efficient than you were when your business was 2x, right? That's not increased efficiency. That's just being non-stupid.

Update 3 (15.05.2021)

John Dizard points to another example of the problems with too much complexity is supply chains in international trade. Bouyed by containerisation, advances in ICT, trade liberation, and the general trend of globalisation, global manufacturing has become extremely efficient on the back of creation of global supply chains. 

“Paddy” Padmanabhan, of the Insead Emerging Market Institute in Singapore, who co-wrote an influential 1997 paper on “information distortion in supply chains”, he says: “Twenty or 30 years back you had three or maybe four layers in supply chains. We have so many more layers that it is not clear we are adding to viability. We could have more bottlenecks and more chaos than before.” At the moment, people across the globe are experiencing many more idiosyncratic shortages, from oxygen in Indian hospitals to gasoline on the US East Coast to automobile semiconductors pretty much everywhere. Geopolitical tensions such as US-China military manoeuvring over Taiwan, the Ruhr Valley of advanced semiconductor manufacturing, have added to worries on supply chain vulnerability. Specific supply shortfalls will be solved. The question is whether they are part of a general trend of intensifying cycles of shortages, followed by recovery and overstocking, which lead in turn to speculative binges and then to deeper recessions spurred by inventory liquidation. That is part of what concerns Padmanabhan. Recessions would be amplified by these shocks (such as Covid) that impact the global supply chain. He cites shipping. Some 90 per cent of the world’s goods trade is transported by ship, according to the OECD. Padmanabhan points out many crews are from India. So a lack of Covid vaccine distribution and oxygen supply in India affects much more than the country’s own exports and imports. 

The point is this - how much supply chain integration is too much. 

MSMEs in Covid 19

As the pandemic endures, all the fears about the impact of lockdown on SMEs and the problems for recovery appear to be turning true. 

Here are the findings of a survey by industry associations of 46,525 MSMEs, self-employed, corporate CEOs, and employees conducted online between May 24-30,

While 35 per cent of Micro, Small and Medium Enterprises (MSMEs) and 37 per cent of the self-employed respondents said their enterprises were beyond recovery, 32 per cent of MSMEs said recovery would take six months. Just 12 per cent expected a recovery in less than three months... The AIMO survey also showed that only 3 per cent of MSMEs, 6 per cent of corporates, and 11 per cent of the self-employed respondents stated they will stay unaffected and will continue to do well, primarily since they were engaged in supply of essential services during the lockdown.

And highlighting the gravity of the situation, industry leaders point to never having witnessed such a situation since the independence. 

Good series in Business Standard on the problems faced by MSMEs. 

1. This about Meerut, one of the largest industrial hubs, with 17000 industrial units. Quarantine allows only a third of workers in factories with more than 50 workers. Meerut is the largest export hub for sports goods and the second largest sports good manufacturer (after Jalandhar) with 3000 units employing more than 25000 workers. 

Earlier this week, the Meerut Industrial Development Forum suggested to the MSME Ministry that the GST refundable from the government or recoverable from sales billing should be financed by the banks while instalments of term loans payable next year should not be classified as a current liability.

Yet more reason to fast-track the implementation of TReDS!

This about a firm in the Kainchi industry,

Away from the industrial din, in the narrow alleys where it has flourished for 350 years, one of Meerut’s most resilient exports – the metal scissors industry of Kainchi Bazaar - may quietly die. It has weathered many a challenge over the years, from a lack of trained hands to tight price competition by Chinese firms. But the lockdown has pushed many to the edge of the precipice. “Many don’t even have enough funds to repair the rudimentary instruments that we use for sharpening and welding. I haven’t got a single payment in the past five months,” said Mohammed Rais, a scissor maker who employed 15 people till February. All but three have left. Rais is the third generation in his family to practise the craft. It looks as though it will end with him.

2. This about Surat's textiles and diamond industries. 

The textile industry is hobbled by disruptions along the value chain which has clogged up cash flow, and the flight of skilled migrant labour. In the diamond industry with 6000 polishing units employing over 700,000 workers with annual turnover of Rs 1.8 trillion, less than 100 have reopened.

3. This about Kundli industrial area in Delhi-Sonipat border which employs nearly 200,000 people in stainless steel industry. 

On practical difficulties with social distanced work,

“Look at my factory floor. Do you think my 175 workers can work together and still maintain one meter distance,” asks the owner of a factory that makes packaging for medicines and is working with about 50 people now. “The demand is tepid now, so we can manage with less production and people. But when demand improves, it will be difficult to adhere to social distancing guidelines. It is easy for policymakers to ask us to have shifts and rotation of employees, but these rules are difficult to execute,” he says.

This goes to the heart of the matter,

Subhash Gupta, chairman of the Kundli Industrial Area, says it is contradictory on the part of the government to send labour back home while asking industries to restart operations. “The government is offering us loans. We do not need loans. We need infrastructure — better roads and electricity at reasonable costs,” says Gupta, adding that the loan scheme is to help the “big guys, not smaller industries.” The call for “Vocal for Local” and indigenous products would be possible only when industry is supported through low-cost infrastructure, he adds.

With good physical infrastructure, skilled manpower, and ease of doing business, the problem of competitiveness largely declines to the margins, and therefore also the need for subsidies and other government dole. 

4. This about Wagle industrial area in Thane, with nearly 200 manufacturing units in engineering and electronics, pharmaceuticals, and textiles, and large factories of several big brands. The area is struggling to reopen on the back of labour shortage and also face cash-flow crunch.

This is a good caricature of India's declining manufacturing fortunes,

Over the years, the 58-year-old estate that once was home to 800 manufacturing units, has lost its charm to high real estate costs, traffic snarls and a dearth of blue collared workers.

This about the design problems with the Government's MSME package,

Sandeep Parikh, vice-president, Chamber of Small Industries Association (COSIA) goes on to say that instead of a moratorium on loan repayment, which will increase the overall cost of funding for ailing industries, steps like interest subvention and part payment of salaries by the government would have been of help. Others agree. Says Akolawala: “The government package is all about loans, so it won’t benefit us in any way.” Instead, a GST reduction would have been of greater help as it would have given the units some liquidity to meet other fixed and operational costs, he adds. Experts, too, feel that the government package for the MSMEs is a damp squib as none of measures are direct or aimed at reviving demand at the user industry level.

5. This about Ambattur Industrial area near Chennai, which house numerous MSMEs servicing large engineering companies, is struggling with skilled labour shortage and problems due to supply-chain disruptions.

A uniform theme from everywhere, dissatisfaction with the government's MSME package, in particular at the lack of fiscal support which would share some of the costs inflicted by the pandemic lockdown.

The former Finance Secretary, Mr Subhash Garg makes the case for a Rs 3 trillion fiscal support for SMEs to cover the permanent losses suffered, including wage subsidy for 2-3 months for Rs 2 trillion and business (non-wage) fixed cost support for Rs 1 trillion to the 80 million estimated non-farm agricultural, industrial, and services MSMEs He also explains why the proposals on credit guarantee has limited relevance for the sector as a whole - just 16% of the Rs 69.3 trillion MSME credit demand was met by formal financial channels.

However, his solution to provide grant support to MSMEs in return for them to incorporate formally and start filing annual returns (of any kind) is unlikely to work. In fact, as this blog has consistently pointed out, it is counter-productive (neither possible nor desirable) to force or nudge informal businesses to become formal. They are informal for a reason which cannot be regulated or subsidised away. It is the reality of the stage of economic development of any country.

Update 1 (07.06.2020)

Problems start to surface for MSMEs trying to access the Rs 3 trillion government guarantee loans to 4.5 m units.

Story of three MSMEs who repurposed activities to respond to Covid 19.t

Debt, inflation, and public expenditures

Facts demand revision of priors. But with economic orthodoxy, those facts are confined to happenings in developed economies.

Accordingly, when developing countries face an external shock induced economic downturn, it calls for austerity and fiscal consolidation. However, when developed economies face crises, conventional wisdoms which are preached with the greatest ideological fervour to developing economies slowly get shelved and priors get revised. The ideologues lead the chorus by starting to sing a new tune.

Just one example is this turn of events,

A decade after the last global downturn, the economics establishment’s U-turn on austerity is complete. In 2010 the IMF praised Britain’s tough deficit-reduction plan. Now it recommends a big fiscal expansion to cope with the coronavirus pandemic. Politicians were once fond of citing research co-authored by Kenneth Rogoff, an economist, to warn that public debt exceeding 90% of a country’s GDP would crimp growth. Today Mr Rogoff advises spending more.

The global financial crisis and its aftermath has led to a revision of several narratives. Faced with the brunt of savings glut and cross-border capital flows, and its distortions, capital account liberalisation gave way to capital flows management. Faced with liquidity squeezes within the financial markets, central bank balance sheet expansion and direct purchases of even corporate securities have been embraced as quantitative easing. Faced with anaemic nominal growth, a higher inflation band became the new norm. Faced with the Chinese manufacturing onslaught, industrial policy and protectionist barriers became the respectable.

Now, faced with a pandemic which has brought economies to a standstill, forcing governments into extraordinary stimulus programs, questions are being asked about the orthodoxy on debts, deficits, and deficit financing. Even things like nationalisation of private assets (by public equity infusions), as is happening in Germany, or wage subsidies, as is happening across Europe, become part of the toolbox to combat the Covid 19 shock. Nothing becomes off the table to "do whatever it takes".

Even quasi-nationalisation, by way of loans with warrants to take equity stakes, is being proposed - this and this (Larry Kudlow).

The Economist, a flag-bearer of free-market capitalism, leads with a briefing which is atleast ambivalent, even welcoming, about all these things hitherto considered evils.

Even economists with reputations as fiscal hawks tend to support today’s emergency spending, and some want it enlarged.

The infamous Rogoff-Reinhart hypothesis that growth declines below the debt-to-GDP threshold of 90 per cent has now been conveniently cast aside without even a mention. The Economist article now points to the post-war precedent how growth and inflation denuded high debt debt levels,

Many rich-world governments pursued this sort of strategy after the second world war with some success. At its wartime height, America’s public debt was 112% of GDP, Britain’s 259%. By 1980 America’s debt-to-GDP ratio had fallen to 26% and Britain’s to 43%. Achieving those results involved both a high tolerance for inflation and an ability to stop interest rates from following it upwards. The second of these feats was achieved by means of a regulatory system which, by depriving citizens of better investment options, forced them in effect to lend to governments at low interest rates. By the 1970s economists were calling this “financial repression”. In a paper published in 2015, Carmen Reinhart of Harvard University and Belen Sbrancia of the imf calculated that France, Italy, Japan, Britain and America spent at least half of that period in so-called “liquidation” years in which interest rates adjusted for inflation were negative. They estimated that the average annual “liquidation tax” to governments resulting from real interest kept low by inflation and financial repression ranged from 1.9% of GDP in America to 7.2% in Japan. To attempt such repression today, though, would require redeploying tools used by post-war governments—tools such as capital controls, fixed exchange rates, rationed bank lending and caps on interest rates.

The IMF too is approving, highlighting also the current low interest rates,

Vitor Gaspar, a senior official at the IMF, says the fund expects a combination of low rates and rebounding growth to see debt burdens stabilise or decline in the “vast majority” of countries in 2021. And bond-buying by central banks takes much of the worry out of some of the debt.

Sample this trajectory of post-war debt-reduction in UK

In the context of high debt burdens, Stephen Roach writes approvingly for a dose of inflation,

For the indebted US economy, an inflation-driven rise in interest rates would slow growth. Public debt is headed to about 120 per cent of gross domestic product by 2025, up from 79 per cent in 2019 and well above the post-second world war record of 106 per cent. History suggests that inflation may be the only way out. After the second world war, the US escaped from its public debts by reflation. Public debt fell by 0.9 percentage points a year from 1947 to 1957, while nominal gross domestic product, helped by accelerating inflation, rose 7 per cent annually. The ratio of debt to GDP soon plunged to 47 per cent. Today, a comparable debt shrinkage would occur if inflation moved back to 5 per cent. With rock-bottom interest rates, open-ended quantitative easing and a massive debt overhang, inflation may be the only way forward for the US and other indebted western economies.

Noah Smith advocates a higher 4% inflation target for the US to erode the debt burden,

... there’s another way that the government can shrink the mountain of debt weighing down the U.S. economy: inflation. Because most interest payments are fixed in nominal terms, inflation makes existing debt less important in real terms. Raising the long-term inflation target from the current 2% to a still-modest 4% would substantially increase the rate at which debt effectively vanishes.
The U.S. has used inflation this way before.

Economists Joshua Aizenman and Nancy Marion wrote: The average inflation rate over this period [from 1946 to 1955] was 4.2%...inflation reduced the 1946 [federal] debt/GDP ratio by almost 40% within a decade.

A decade of 4% inflation today would do the same for total debt, not just government debt.

In the context of India, Sajjid Chinoy makes the point about the importance of nominal GDP growth rate,

India comes into COVID-19 with a debt/GDP of about 70 per cent, a primary deficit across the Centre and states of about 2.5 per cent of GDP (including the Centre’s extra-budgetary resources) — based on the Revised Estimates for 2019-20 — a weighted average sovereign borrowing cost of about 7.5 per cent (on the stock of debt) and an estimated pre-COVID nominal GDP growth of 7.5 per cent in 2019-20. In other words, the favourable gap between growth and borrowing costs had closed... even under relatively benign scenarios (nominal GDP growth of 4 per cent and a fiscal expansion of 3 per cent of GDP this year) India’s debt/GDP will balloon towards 80 per cent by the end of the year. But India will not be alone. Public debt is expected to balloon all over the world... In turn, the subsequent trajectory depends overwhelmingly on medium-term growth. Consider this: Even if this year’s combined fiscal deficit widens by 6 per cent of GDP (but the primary deficit is then consolidated back to 2 per cent of GDP in 3 years) as long as nominal GDP is 10 per cent in the medium term (which corresponds to real GDP growth of 7 per cent), debt/GDP gets on to a constantly declining path after the third year. This suggests a bigger fiscal intervention is sustainable but only if medium-term growth prospects are lifted in tandem. In contrast, if this year’s deficit widens by “just” 3 per cent of GDP but if medium-term nominal GDP growth settles at 8 per cent (that is, real GDP growth of 5 per cent), debt/GDP rises relentlessly for the next decade towards 90 per cent of GDP. This suggests even a relatively-conservative fiscal response this year becomes unsustainable if medium-term growth prospects are diminished. Small changes in medium-term growth have large implications for fiscal sustainability.

The main takeaway: How much fiscal space India has to respond in the crisis year will depend crucially on what potential growth is likely to be in the coming years. The more that India’s policy response can preserve, protect and boost medium-term growth — both through the nature of the policy intervention this year and the accompanying reforms — the larger the fiscal response India can mount. Put more starkly, the fiscal debate between “need” and “affordability” is endogenous. The medium-term sustainability of any fiscal package this year will depend on the nature of growth-enhancing interventions and reforms that accompany it.

The fundamental idea is simple. It is true that any debt is a borrowing from the future. But it is also true that the life-cycle of capital investments go a long time into the future. Besides, capital investments also strengthens the foundation on which future growth is built. And this is especially so for countries like India which are chronically deficient in capital assets like physical infrastructure. Therefore, if right kind of such investments are made, even by borrowing, the nominal rate of economic growth is most likely to be much higher than the borrowing cost. This is the basis for borrowing to invest in infrastructure. 

In a speech in 2019, Olivier Blanchard struck a contrarian note to argue that debt was alright as long as the nominal growth rates were higher than the interest rates, and this was the historic norm in countries like the US. This new found acceptance of debt in developed economies should be instructive for India as it stands at the margins of 'high' debt.

India has several things going for it. It is the second most populous country with a very youthful population and with several other cultural, historical, and political advantages. It has a fairly diversified industrial base. While it faces a daunting human resource development challenge, the sheer size of the country, the low base for growth, and being primarily reliant on domestic consumption for growth, means that with modest efforts India stands on fairly strong footing for sustained real GDP growth rates in the 5% range for the coming few decades. More reforms and better policies, episodes of which will most likely happen, will further boost growth.

In the circumstances, a temporary spike in the flow and stock of debt while a matter of concern should not be seen as a disastrous outcome in itself. In fact, as Sajjid Chinoy writes, if it is necessary to preserve future growth prospects, such a spike is a desirable thing.

The challenge for India is not about announcements or policies. Both can be perfect, and it would count for pretty much nothing without effective implementation is a failure. That, unfortunately, depends on state capacity, an issue which gets limited attention in public debates.

Update 1 (22.06.2020)

Gavyn Davies is sanguine about the rising debt burdens in developed economies.

Even more notable has been the unanimity among macroeconomists that massive fiscal and monetary stimulus is the appropriate response to a “wartime” economic emergency. Almost no one seriously disputes that policy should be doing “whatever it takes” to overcome the shock from the virus. This agreement reflects a key conclusion from public finance theory: that higher government debt is the correct shock absorber for the private sector in the face of unpredictable, temporary economic crises. It avoids the distortions that would follow the big variations in marginal tax rates that would otherwise be needed to finance a surge in public spending over a short period. The chorus of approval from the macroeconomics profession has helped fiscal and monetary policymakers introduce massive stimulus packages almost instantly, in contrast to the much slower response to earlier recessions, including the 2008 financial crisis...

Most New Keynesian economists, including Paul Krugman and Lawrence Summers, believe high debt levels will not in themselves be a problem for advanced economies. They even suggest further rises in debt would be desirable, as that would help reverse the trend towards secular stagnation in Europe and the US. A key reason for their optimism is that the annual cost of servicing the debt will be clearly below the nominal growth rate in the economy and the central banks seem set to keep it there. If the interest rate keeps below the growth rate, the debt/gross domestic product ratio will eventually stabilise, provided governments’ non-interest — or “primary” — budget balance remains stable. Assuming the high public debt strategy succeeds, real bond yields will probably rise gradually towards more normal levels. In addition, equities will respond positively to improved growth prospects as inflation returns to the 2 per cent central banks’ targets. Debt could be managed without a crisis.

Creating a "good jobs economy"?

Dani Rodrik and Charles Sabel have a new paper here on a strategy for a "good jobs economy", the defining political economy issue of our times. 

They point to a dual-economy world - oases of productive and good jobs in an ocean of low income and low productivity poor jobs. Any meaningful job creation strategy would have to address the issue of productivity on both the firm and worker sides, as well as expanding the stock of such productive jobs. They write,

Our approach has three, mutually re-enforcing components: increasing the skill level and productivity of existing jobs, and the competitiveness of firms, for example through provision of extension services to improve management or cooperative programs to advance technology; increasing the number of good jobs by supporting startups, the expansion of existing, local firms or attracting investment by outsiders— what the many state and local programs (of greatly varying quality) currently directed to this last purpose refer to simply as “economic development”; and active labor market policies or workforce development programs to help workers, especially from at-risk groups, master the skills required for good jobs. Redistribution, Keynesian demand management and anti-trust policies can and should be important complements to such interventions; alone or in combination they cannot be a substitute for them. Public-private collaborations are at the heart of this strategy.

It is likely that there is endogeneity through a version of Say’s law here - once the productivity is addressed on the supply-side, the demand for more stock will invariably follow. 

Some observations:

1. The problem with skilling workers is that short-term skilling programs are pretty much blunt, on all but a handful of occupational categories. Re-skilling for good jobs perhaps even harder. We can have short-term finishing schools (making candidates employable enough). As they say, you cannot teach in 3-6 months, what you did not learn in 10 years at school. 

India, for example, has had a massive national skilling efforts for more than a decade now. It is hard to come up with even one example of a positive deviance of the general model in even a district or occupation category or population group of success with skilling interventions. 

The only way out for countries here is to fix the school education system, in terms of quality of learning outcomes. Without fixing it, the productivity race is a non-starter. Skilling is just band-aid on a corpse.

2. On enhancing firm productivity, especially of the SMEs, management extension services are a very promising window. And it is doable even in developing countries. But the problem here is that of chicken and egg. The supply-side just does not exist. We need hundreds of low-cost, on-site, basic operational and financial management consultants across developing countries. India alone needs hundreds of them.

If this becomes available, governments could repurpose 5-10% of their industrial policy budgets, which currently go into fiscal incentives and input subsidies, towards supporting this type of management consulting. Government could empanel a list of consultants to offer a defined set of services, and subsidise 50% of its cost for young firms.

3. Finally, as with any such engagements, there is the lurking problem of weak state capacity. Such interventions demand very high quality state capacity, one which is invariably missing in these countries. It also demands partnerships and coalitions, and a high degree of social capital and trust, all chronically deficient ingredients in most developing countries.

Update 1 (10.12.2020)

Dani Rodrik writes about the need for both supply (workers) and demand (firms) side policies to create good jobs. 

On the skill-building front, so-called “sectoral training programs” have been especially successful. These programs go beyond traditional training: they are tightly coordinated with employers and provide skills customized to the needs of specific industries, such as health care or information technology. Workers enrolled in the programs receive a variety of “wrap-around” services, ranging from childcare to job placement, in addition to training and certification. The best known of these programs is Project QUEST in San Antonio, Texas, which has been in operation since the 1990s... Such sectoral training programs have been shown to increase disadvantaged workers’ earnings by more than 20% on average at a relatively low cost.

Likewise, we have considerable experience on the demand side to guide us... What works much better, as Tim Bartik of the Upjohn Institute has shown, is to provide customized business or infrastructure services – such as management and technology advice, a skilled workforce, or local land development – to local firms. Tailored to the needs of specific firms, assistance of this kind can help them become more productive and expand employment capacity by overcoming the particular constraints they face. These programs require building relationships between local firms and prospective investors who understand their needs, as well as a capacity to respond quickly and effectively.

He also points to the problems with their adoption,

The bad news is that these successful worker and firm-centered initiatives currently operate at very small scale. Sectoral training programs are typically operated by community groups or non-governmental agencies, and limited funding, as well as a lack of interest from state and federal agencies, prevents them from being scaled up. As a result, the workers they serve number in the thousands instead of the millions that need to be reached. Similarly, customized business service programs are severely underfunded. Bartik estimates that firms receive $47 billion annually in state and federal tax incentives for investment. By contrast, total annual spending on customized training and manufacturing extension services, which is far more effective in terms of job creation, amounts to only around $1 billion.

A second problem is that programs that are centered on workers and firms are often not well coordinated. Even though sectoral training programs are built around a “dual-customer” approach that serves employers as well as employees, their ability to influence firms’ employment policies – including technology adoption and human-resources practices – remains limited. And firm-centered policies can overlook local employment needs if they focus too much on other objectives, such as innovation through new technologies and export competitiveness.

This Tim Bartik presentation and brief paper on moving good jobs to places with people (instead of moving people to good jobs) is a good summary.