Weekend reading links

1. It's estimated that there are some 30 Cr (or 300 million) smart meter tenders under various stages across the discoms in India. In fact, the four UP discoms have tenders for 25 million with a combined bid value of Rs 25000 Cr. The Ministry of Power is aggressively promoting the installation of smart meters, going to the extent of even defining consumer meters in the Metering Guidelines 2019 as smart meters. 

The questions that needs to be raised are the following. How likely is that smart meters will help achieve the objective of distribution loss reduction? Do we need to replace all consumer meters with smart meters or just those of high consumption connections? Can we not prioritise smart meter installation based on some value for money assessment? Does the country have the supply side to meet this flush of demand? What's the experience in the country with its limited smart meter installations? Will regulators allow the higher cost of smart meters to be capitalised into the tariffs? Or will the discoms/governments have to bear the cost (the GoI subsidy under the RDSS scheme is limited to Rs 900-1500 per meter, whereas the cost will be in the Rs 8000-10000 range)? Do the discoms have the financial strength and states have the fiscal space to assume more obligations in addition to their already onerous power sector debt burdens? Will the several risks from the emerging Totex model of smart meter installation be acceptable to market participants? Is it a good model for intermediaries to be the smart meter contractors instead of the original equipment makers? 

2. The FT reports that the European Parliament is set to approve in late March a deforestation law that would ban imports of products linked to deforestation, including cattle, cocoa, coffee, palm oil, soya, wood, and rubber. The law requires importers to collect and share precise geographical information on the location of production and certify that their goods have not been produced on land deforested after end of 2020. This has generated strong rebuke from the world's largest oil palm makers, Indonesia and Malaysia, who feel that this would target their exports into EU.

This decision by EU has to be seen in the backdrop of EU decision to take Indonesia to the WTO's defunct Dispute Settlement Board (DSB) on the latter's nickel ore export ban. It also comes just after the EU introduced the world's first carbon border tax.

Now this is clearly a non-tariff barrier whose fairness is questionable. How fair is for wealthy European countries, whose stock and flow of green house gas emissions, to prohibit genuine and long-standing economic activities by countries whose stock and flow from these activities are much smaller than those from several other mainstream economic activities of the same European countries? Would the US tolerate similar non-tariff barriers by others on exports of shale gas, or Europe on exports of a new found deposits of rare earths? In general, how fair is it for a country to insist on others internalising all costs of their economic activities, while turning a blind eye to its own legacy of massive stock and flow of social costs from its economic activities?

The legislation appears even more unfair given the considerable progress made by both countries in recent times in controlling deforestation.

In Indonesia, the amount of forest converted to oil palm plantations in 2020 was more than 90 per cent lower than the peak in 2012 but production volumes have jumped 72 per cent, according to Helen Bellfield, deputy director of supply chain transparency group Trase. Compared to the soyabean and beef industries in Latin America, “the Indonesian palm oil sector is much more transparent and at a high level of commitment”, she said.

3. AK Bhattacharya makes an important point about the declining share of PSU's own resources in their annual capital outlays

Of the Rs 10 trillion of capital expenditure proposed in 2023-24, more than half is channelled through them by way of the Centre’s budgetary support to their equity and a tiny portion through loans... Unfortunately, this has led to a corresponding decline in the share of the PSUs’ own contribution to their total capital outlay on projects. In 2021-22, PSUs would contribute about 64 per cent of their total capital outlay with resources mobilised by them through internal generation of funds or borrowing. But this share plummeted to 52 per cent in 2022-23 and will now go down further to 49 per cent in 2023-24. In other words, PSUs are increasingly becoming more dependent on the Centre to meet their capital expenditure requirements. This is not a healthy sign...

In 2023-24, Indian Railways would be helped by Rs 2.4 trillion of capital support from the Centre, but its overall capital expenditure is just about Rs 2.93 trillion, which means that its own contribution to its capital projects will decline to 18 per cent, down from 38 per cent in each of the previous two years. Not surprisingly, the Indian Railways’ operating ratio, a benchmark of its financial efficiency, is languishing at 98 and the extra budgetary resources it raises would decline from Rs 82,000 crore in 2022-23 to just about Rs 17,000 crore in 2023-24... But the larger point is that the healthy rise in the Centre’s capital expenditure should not hide the worrying decline in the public sector’s own contribution to its capital outlay and, therefore, its lack of accountability in ensuring a decent return on such investment.

In recent years two important sources of central government capital expenditures, NHAI and Railways, has been assumed by the government directly. In other words, the financing of these entities have been assumed on the Budget. So it's only natural that the funds mobilisation and expenditures of these entities be considered when comparing the earlier and current Budget expenditures on Capex. What are the trends of capital expenditure of the Union Government, NHAI, and Railways over the last ten years? 

Given that while capital expenditure has risen from an average of 1.7% of GDP in 2008-09 to 2019-20 to 3.3% of GDP in 2023-24, taxes as a share of GDP has remained in the 10-11% range, it's evident that any increase in share of Capex comes at the cost of revenue expenditure. While the shift in quality of Capex is good, it's also important to ensure that the shift happens due to shift away from the wrong types of revenue expenditures. 

4. On the La Affaire Adani, given the volume of evidence floating around it's hard not to believe that the Mauritian entities are related parties and therefore the float of effective non-promoter shares is much smaller than 25%. It then stands to reason that the likelihood of stock manipulation is very high. The evidence is so overwhelming as to raise the question as to why we are even debating this. 

This in the WSJ, this and this in the Forbes, and this in FT are good articles exposing the related party nature of the off-shore entities. The evidence is clinching. Aswath Damodaran has a detailed post.

This FT article looks at the Group's exposure sectors. This graphic captures the locations of its infrastructure assets with value greater than Rs 1 bn ($12 million).

Three observations. One, do we need any more evidence that this House was built on debt? Interestingly, all the storied Wall Street investment banks may have done more than their Indian public sector counterparts in propping up this House of Debt? Where did their due diligence and risk management divisions go when these entities helped the Group companies raise over $10 bn in foreign bond offerings and $10.5 bn capital to buyout Holcim? Two,, why did it require a little-known entity like Hindenberg to do the ground-work required to expose this widely suspected thing? Where are the investigative journalists in India? One John Hyatt in the Forbes seems to have done more investigative work than all the Indian journalists put together. Three, what are regulators going to do about the issue of detecting related parties in off-shore shareholdings of Indian companies, many of which have limited float?

This is an interesting snippet, one more reason to doubt the veracity of EGS investing

Wall Street only began to really warm up to Adanis when he sought financing for Adani Green Energy, the conglomerate’s renewable energy subsidiary, according to Tim Buckley, a former investment banker at Citigroup and director at Australia-based Climate Energy Finance, who has been studying the Adani Group for over a decade. Money raised by Adani Green Energy or Adani Ports may “just get transferred to Adani Power and Adani Enterprises, and then goes towards building more coal fired power plants or more coal mines,” Buckley says.

5. John Gapper on "drip pricing" or the gradual addition of one little item after another at a price which is not big enough to make us ditch the deal altogether. 

Concert ticket prices are less transparent in the US, where Ticketmaster and other concert sites often conceal the fees, which can add 30 per cent to face value, until fans make it to the online checkout... Similarly, it is clearly irritating for consumers to book a US hotel at one price and find its mandatory “resort fee” tacked on to the checkout bill, but it is a worthwhile gambit for the hotels themselves. 

One study found that customers lowered their online ratings by only a small percentage when stiffed in this manner: too little to make hotels change their ways... The ticket platform StubHub experimented in 2015 with both all-in pricing and delaying fees until checkout, and found that its revenues were 20 per cent higher with the latter. Virtue does not pay unless the other competitors in an industry are equally virtuous.

6. FT on the outsized influence Russia wields in Africa using a combination of propaganda (including involving the Orthodox Church), arms sales and supply of mercenaries to fight rebels (led by the Wagner Group of oligarch Yevgeny Prigozhin), and mining activities. This low-cost strategy has yielded very big results - in March 2022, 25 African countries either abstained or refrained from voting in a UN resolution to condemn Russia's Ukraine invasion. The article points to the its fullest form in Central African Republic in particular, where the Wagner Group even owns and operates gold mines, and in the Sahel area in general where jihadist insurgencies and coups are commonplace.

7. The problem of rolling power blackouts in South Africa is the latest example of relying on government monopolies in power generation. The scandals and inefficiencies ravaged generation monopoly Eskom has had to impose cuts of upto 10 hours everyday to prevent collapse of the grid due to ageing coal plants. The government is now scrambling to open up the sector to private participation, which will naturally take time to bear fruits. 

8. Barcelona is facing a problem of corporate exits in the aftermath of its 2017 referendum to leave Spain. 

Since the referendum, which was ultimately declared illegal by Spain’s top court, more than 8,200 companies have shifted their head offices from Catalonia to other parts of Spain. Half of them set up in Barcelona’s great rival Madrid. In the tumultuous days immediately after the vote those rushing to depart included CaixaBank and Sabadell, two of Spain’s four biggest lenders; Naturgy, one of the country’s three biggest utilities; Cellnex, Europe’s biggest owner of mobile phone towers; and Grupo Planeta, one of Europe’s biggest book publishers... Apple and Microsoft AI centres, Amazon and Google offices, Siemens and Bayer innovation centres, PepsiCo and SAP digital hubs. Cisco intends to set up a chip design centre and Intel plans to open a joint lab with the Barcelona Supercomputing Center. Total foreign investment figures, however, put things in a different light. Although Catalonia has attracted €6bn-€9bn of outside capital in each of the past few years, those figures are down sharply from more than €16bn in 2016, according to industry ministry data. The Madrid region, by contrast, notched up an investment record of €98bn in 2018.

The city has been facing a feeling of relative decline in recent years after its spectacular rise since the 1992 Olympics,

Many residents who want to love the city lament that something is going wrong, whether they detect it in street robberies, litter-strewn avenues and clogged traffic, or a lack of new infrastructure and cultural attractions. In a survey published by the city government in December, two-thirds of residents said Barcelona’s condition had worsened in the past year. They identified its biggest problem as insecurity... That does not mean Barcelona has lost its inbuilt advantages: it has a Mediterranean climate, sandy beaches and skiable mountains nearby; it is blessed by the architecture of rugged medieval palaces and Antoni Gaudí’s idiosyncratic modernisme; its heritage of mouthwatering Catalan cuisine and surrealist art lives on. But by its own standards it is flagging.

The city has been grappling the challenge of balancing between being a tourist haven and the requirements of its local residents,

The city’s present mayor, Ada Colau, a leftwing former activist running for re-election this year, had by then been in office for six years. Her vision was of a greener and more inclusive city, which meant reining in the “chaos” of mass tourism and property speculation. But to business people she had cemented a reputation as an enemy of enterprise and growth... For Colau, the Barcelona on the wrong track was the one she inherited when she became mayor. One of her key achievements, she says, has been the taming of “capitalism run amok” under her predecessor, Xavier Trias. “We are no longer in a city that is only betting on real estate speculation, full of cars and pollution, with tourism out of control,” she says. “We’ve restored order and are betting on economic diversification.” Colau sees tech as a way to reduce dependence on tourism... 

She has curbed Airbnb-style apartments and prioritised the construction of public housing, citing the use of recycled shipping containers to create a building of 42 “top quality” homes. But real estate investors loath her requirement that 30 per cent of any new private residential projects be public housing too, saying it’s a blunt tool that deters private capital. Her emblematic environmental initiative is the creation of “superblocks” — pedestrianised islands of greenery and seating at the heart of once-busy intersections, where through traffic is deterred if not banned. Residents love the resulting tranquility, but there is fierce debate over whether the congestion has simply been shifted to neighbouring streets.

Big Tech hypocrisy - Apple edition

Big Tech is no stranger to Big Hypocrisy. Finally, has Apple (Tim Cook) replaced Facebook/Meta (Zuckerberg/Sandberg) as the leader of Big Tech hypocrites? The WSJ has a very good article about Tim Cook and Apple's hypocrisy on freedom of expression.

It was a telling moment when Tim Cook responded with a long stony eyes-down silence to a volley of searching questions by a Fox News reporter on Apple's response to China's brutal crackdown on Covid lockdown protestors at its largest iPhone factory in Zhengzhou and its collusion with Chinese authorities in suppressing free speech through tweaks to software on Apple devices. 

This is what Apple has been upto in recent days in China,

In April... the senior Republican on the Federal Communications Commission, Brendan Carr, wrote a letter questioning Apple’s decision to drop the Voice of America mobile app in China...But the issue attracting the most attention now has to do with AirDrop, an Apple file-sharing tool that many Chinese had been using to coordinate demonstrations beyond the reach of Beijing’s internet censors. AirDrop works by letting iPhone users who are within 30 feet of each other exchange photos and documents without going online. On Nov. 9, Apple released a software update only in China that limits to 10 minutes the amount of time files can be shared among iPhone users who are not in each others’ list of contacts. This robs Chinese iPhone users of a tool they had been using to organize protests.

In stark contrast, this is Apple's moralistic posturing at home,

In 2015 a couple inspired by Islamic State opened fire at a San Bernardino, Calif., office, killing 14 people. Though gunman Syed Rizwan Farook was killed in a shootout with police, authorities recovered his iPhone 5c at the scene. Trouble was, it was locked, and the iPhone was programmed to delete all its data after 10 failed attempts to log in. The Federal Bureau of Investigation asked Apple to help the government get into the phone, but Mr. Cook refused, saying the company couldn’t possibly participate in something that “threatens the security of our customers.” 

That isn’t the only public stand Apple has taken to underscore that it’s a moral lodestar, not just another grubby business seeking profits. When Georgia last year passed new reforms to ensure the integrity of its voting system, Mr. Cook happily joined a chorus of corporate leaders who condemned the state for supposedly engaging in an effort to suppress the vote of African-Americans and other racial minorities. In 2015, when Indiana passed protections for religious freedom, he called it an effort to “rationalize injustice.” After George Floyd’s killing in 2020, he decried “deeply rooted discrimination” and noted how iPhones, with their built-in cameras suitable for filming police malfeasance, were a force for advancing social progress.

The WSJ article nails the dilemma

CEOs can always justify their operations by pointing to the economic benefits their companies bring to the communities in which they operate. Or CEOs can go the progressive route, presenting their companies as moral paragons. But they can’t have it both ways: holding themselves up as courageous in places where the risk from speaking out is low while keeping quiet about real oppression in places where speaking out can really hurt the bottom line.

If one were to go by standard theories on marketing and media management, the interview episode should have been enough to seriously dent the brand and its business. And Tim Cook's future as CEO.

What does it tell about our assessment of business leaders when we elevate as the lodestar of visionary business leadership someone who has single-handedly and single-mindedly in pursuit of efficiency and profit maximisation irretrievably yoked Apple to China thereby ignoring every principle of risk management and diversification, and continues to consistently brush aside all the numerous unmissable signatures of bellicosity by Xi Jinping's regime and deteriorating relations between China and the West? 

The very socially conscious consumers of iPhones (the overwhelming majority of whom are well-off, and most likely subscribing to the liberal ideology) should have been boycotting Apple products and Tim Cook should have become the butt of jokes and criticisms in social media. But none of these have happened because, contrary to theories, there's an even bigger hypocrisy at play. 

There has been no viral #BoycottApple campaigns on social media, like the loud campaigns against Russia after its invasion of Ukraine or Qatar for its abusive labour practices and views on LGBT issues. If one were to take a poll of the most passionate human rights advocates and those strongly sympathetic to such causes in the US, I'm confident that the vast majority of them would be staunch Apple users. Very few of them appears to have dumped their iPhones, Air Pods, and MacBooks, and dislodged Tim Cook from his pedestal as a visionary leader. There is a psychic cost associated with dumping your favourite products and icons. 

This is in contrast with the psychic cost-free protests and boycotts that liberals regularly stage on countless issues where they have little or no stakes or which are distant secondary concerns for their personal selves. On a related note, I blogged sometime back about the reductive seduction of solving other people's problems. 

Like with corporates such as Apple chasing efficiency and profits, when forced to make a choice between their primary material tastes and their moral values, consumers prefer to overlook the latter. It's personal conveniences and comforts first and only then moral values. Or better still, morality for all others and personal comforts for us!

Update 1 (11.02.2023)

Another example of Apple hypocrisy is the working conditions in its iPhone factories even as it makes a song and dance about its design and woke appeal. This from an iPhone 14 Pro assembly line at a Foxconn factory,

His task was to pick up an iPhone’s rear cover and a tiny cable that charges the battery, scan their QR codes, peel off adhesive tape backing, and join the two parts by tightening two screws. He’d then put the unfinished phone onto a conveyor belt that carried it to the next station. Hunter had to complete this task once every minute. During a normal 10-hour shift, his target was to attach 600 cables to 600 cases, using 1,200 screws. Every day, 600 more unassembled iPhones awaited him. Apart from a strictly timed hour-long lunch break, he spent his days inside a windowless workshop that smelled of chlorine, wearing an antistatic gown and a face mask. If he needed to take a toilet break, he had to make up for lost time. Behind the assembly line, supervisors — known as xianzhang, or “line leaders” — monitored workers’ progress on a computer and frequently admonished those who fell behind.

The long read is a very good one, covering several aspects of Apple's China-centred manufacturing strategy. This about the perils with efficiency maximisation at the cost of all else,

Foxconn’s compound in Zhengzhou makes about half of the world’s iPhones. Nicknamed “iPhone City,” it covers an area of 5.6 square kilometers — about one-tenth the size of Manhattan — and at full capacity employs some 200,000 workers. Apple relies on just-in-time manufacturing, meaning it doesn’t build up a large inventory of products but has iPhones made as consumers order them... As global demand for new phones surges, Foxconn offers pay and bonuses that are much higher than those of other blue-collar jobs to make sure its assembly lines can run at full speed. Workers, including rural migrants and college students, take on heavy workloads, skip holidays, and follow a tight schedule in order to qualify for their bonus at the end of the month... Covid-19 outbreaks that disrupted production lines and a labor protest that pitted workers against riot police caused the factory to fall behind on its iPhone 14 Pro orders. Dan Ives, a tech analyst at U.S.-based financial services company Wedbush Securities, estimated that, during the crisis, Apple was losing out on $1 billion per week in iPhone sales.

The role of seasonal manufacturing contracts,

The seasonal nature of iPhone sales means most workers are only needed during certain times of the year. The company now keeps its basic monthly salary at about 2,200 yuan ($324), which workers told Rest of World is barely enough to cover rent and food costs. To attract recruits during production peaks, it lures them with overtime hours that pay up to double the minimum hourly wages and lucrative end-of-month bonuses. When iPhone orders decline, the company cuts overtime and terminates bonuses as a way to shrink its workforce, according to labor researchers. Yige Dong, a sociology professor with the State University of New York at Buffalo, calls such short, seasonal factory work “gig manufacturing.” Manufacturers retain a core group of skilled employees, while the rest of the workforce is brought in for a few weeks at a time.

More on India's structural transformation

The previous post was on India's structural transformation challenge. An important part of structural transformation is the progress of industrialisation and urbanisation and the interaction between the two. 

Douglas Gollin, Remi Jedwab, and Dietrich Vollrath have an excellent paper which examines the relationship between urbanisation and industrialisation in 116 resource exporting and non-exporting countries for the 1960-2010 period. They find that resource exports cause a significant increase in urbanisation rates, and there is no link between urbanisation and industrialisation. 

The patterns of urbanisation observed in the developing world in the last few decades have diverged significantly from historical trends. For Europe and the Neo-Europes, significant urbanisation was associated with industrialisation; with the cities came the factories. Today, however, many developing countries, though highly urbanised, lack large industrial sectors. Nigeria, for example, has the same percentage of its population living in cities as China... we find that the historically tight relationship between urbanisation and industrialisation breaks down for much of the developing world. In particular, this divergence is reflected in the large number of natural resource exporters that have urbanised without industrialising... Several resource-exporters reach 80% urbanisation rates, despite having only 20% of their GDP come from manufacturing and services.

They use a framework to compare between cities of resource exporters and non-exporters 

We characterise resource-exporting urban centres as “consumption cities", where a larger fraction of workers are employed in non-tradable services such as commerce and transportation or personal and government services. In contrast, urban centres in China or other historical cities are best characterised as “production cities”, where a larger fraction of workers are engaged in manufacturing or in tradable services, such as finance. This does not imply that resource-exporting cities are necessarily poorer.

Unconditionally, natural resource exporters have lower poverty rates and slum shares than non-exporters. If we control for income levels and urbanisation rates, however, resource exporters appear to have higher poverty rates and slum shares. The results of our comparison suggest that the effect of income on living standards is lower for resource exporters. Consumption cities arise from an increase in natural resource revenues flowing into a country. Greater income from resources does not translate directly to improvements to living standards. Production cities are by contrast the result of productivity improvements... 

They make the distinction between urbanisation driven by income shocks due to resource incomes and industrial productivity improvements,  

The basic logic is that urbanisation is driven by income effects. Any income shock - whether caused by industrial productivity or resource revenues - will cause a shift away from economic activities in rural areas and encourage the movement of production and people into urban areas. The source of the shock, though, does matter for which sector the new urban workers will be employed in, through substitution effects. With a resource shock, there is a Dutch Disease outcome. Workers substitute away from the tradable goods sector and into non-tradeable. Hence the cities grow into “consumption cities", dominated by non-tradable employment. In contrast, a productivity shock in the tradable sector pulls workers into that sector, and away from rural areas, leading to urbanisation in “production cities" dominated by tradable production. Resource-exporting countries thus urbanise without acquiring the industrial sectors that we typically associate with development.

Now replace "countries" with "regions" and "resource exporters" with "remittance incomes", and the findings may explain economic trends in rural India. The remittance incomes lead to the development of "consumption cities". Like the resource exporting countries, rural areas which experience income shocks from remittance incomes, tend to experience a crowding out of tradables.

It would not be correct to characterise it as a form of Dutch Disease. In this case, it's a low level productivity-cum-poverty trap. The poor find it worth to migrate for unskilled and semi-skilled labour which brings back subsistence remittances which, along with low productive farming and without any productive industrial activities, in turn keeps the economy going. 

A good example of something closer to a Dutch Disease is Kerala and the effect of much larger , some very big, remittances from the Gulf. As I have blogged here, the flush of remittances going into villages ended up in large houses and non-traceable sectors. These investments and expenditures crowded out investments in productive activities like manufacturing or services. It also led to higher services sector wages, thereby further displacing investments from manufacturing.

So what do we takeaway from these two papers? The first paper informs that it was not migration to larger cities, not even daily commutes to the nearest urban centres, but the creation of new urban localities centred on manufacturing that helps to achieve structural transformations. The second paper points to the link between urbanisation and industrialisation, with many developing countries experiencing the former without the latter. 

Taken together and given the structure of India's economy and its growth trends, it can be argued that the concentration of industrialisation around a few urban centres and the acute problem of lack of a broad-base of economic growth may be interlinked. In simple terms, to get broad-based economic growth India needs to take industrialisation to its hinterlands. It needs to ensure urbanisation is accompanied with industrialisation.  

The typical Indian district is a relatively large entity. However, a large number of them do not have any underlying productive economic activity apart from low productivity activities, government, and general services (including construction) that support any population centre. The problem is compounded by the poor quality of human resource development, in major part due to weak state capacity and lack of political demand for good quality provisioning of these services. This results in poor quality of labour entering the workforce. 

In the circumstances, people migrate to urban centres and other places in search of less-skilled and lower-paying service and construction sector jobs which provide slightly higher (than farm labour) but still largely subsistence incomes. This does not this improve household incomes or economic output in any meaningful manner. A low-level poverty-cum-productivity trap gets perpetuated. 

Is the idea of one-district one-product which the government is currently promoting, whereby each district identifies one economic product it has a comparative advantage and focuses on its development, the right response to this problem? While I'm generally sceptical of one-size-fits-all approaches, it can be argued that taking industrialisation to districts should be the broad direction of thinking.

The country needs to geographically spread out its industrial base to ensure broad-based economic growth. This requires industrial policies that promotes large anchor industries which can provide the basis for knowledge spill-overs and eco-system development; labour intensive manufacturing sectors like textiles, footwear, toys etc; agriculture secondary and tertiary processing etc. Equally, if not more importantly, it needs to address the poor quality of its public services especially in health and education. 

Thoughts on India's structural transformation path

A new NBER working paper (here) looks at the nature of industrialisation in the US between 1880 and 1940, when the country transformed from a largely agrarian to an industrialised country.   

This short paper studies the co-movement of workers across sectors and space during a pivotal period of the US economy: its second wave of industrialization between 1880 and 1940. We show that industrialization was primarily a local phenomenon, with most sectoral reallocation happening not through long-distance moves towards industrial hubs but within counties. Moreover, within counties, the most significant sectoral shifts did not occur via the expansion of incumbent cities but rather through the birth of new cities and towns in the rural hinterland. Interestingly, the new urban structures had a much higher employment share in manufacturing than incumbent cities, which specialized more in providing non-tradable services. In other words, “factory towns” sprouting across Rural America were central to both US industrialization and urbanization.

The paper contrasts the contributions of spatial reallocation of workers from rural to industrialised counties with local transformation or the sectoral shifts due to within-county changes in industrial structure. 

In Panel B, we implement this decomposition for each decade between 1880 and 1940. Structural change was mainly about the transformation of local economies: the “Within” component, shown in orange, explains between 45%-85% of the decline in agricultural employment in each decade and 63% over the entire period. The “Across” component could reflect moves within the local labor market or long-distance migration across states. To quantify the importance of these different types of reallocations, we further decompose the across-county component into reallocations across counties within commuting zones, across commuting zones within states, and across states.

Panel B shows this decomposition of the across-county component in various hues of blue. Long-distance, cross-state moves from remote rural locations towards large industrial centers such as Cook County (Chicago) or New York County (Manhattan) played a minor role in the aggregate structural change. The within-state component accounts for at least 80% of aggregate structural change every year. Interestingly, the era of the Great Migration toward Northern States between 1910 and 1920 is the only decade for which cross-state migration accounts for a non-trivial part of sectoral reallocation...

The industrialization of Rural America (the union of counties with the highest agricultural employment shares that collectively accounted for 50% of total employment in 1880) occurred in two ways. First, workers moved to its industrialized cities... Second, within the hinterland, the importance of the agricultural sector also declined swiftly. In an accounting sense, the second channel is much more important for the industrialization of Rural America than the first since the hinterland accounted for a much larger share of Rural America’s population... In 1880, Rural America had only four incorporated cities identified in the US Census. By 1940, there were almost 250 cities, and their populationshare had risen by a factor of 50 from 0.3% in 1880 to 16.8%. Crucially, the entirety of this increase is accounted for by new cities sprouting in the hinterland: the incumbent “old” cities that already existed in 1880 only accounted for 0.5% of Rural America’s population in 1940... the gradual transformation of parts of the hinterland into towns and, from there, into incorporated cities... 

The newly founded cities were heavily specialized in manufacturing and corresponded precisely to the textbook idea of factory towns. While the manufacturing share also grew in old cities, by 1940, it was only half as large as in the new cities. Old cities continued to rely more on (consumer) services. However, despite the formation of new cities, the hinterland still accounted for more than 80% of the population in Rural America and contributed substantially to the fall in agricultural employment... Even outside the proliferating cities, Rural America urbanized: the hinterland’s share of urban workers increased from 4.9% to 17.6% between 1880 and 1940. Moreover, the rise in the hinterland’s manufacturing employment share was particularly pronounced among urban workers, highlighting the general trend of “densification” in Rural America: workers came together in and around factory towns long before their incorporation as cities.

Interestingly, this kind of sectoral shifts due to within-county/region changes has been the major driver of industrialisation in developing countries too. 

Changes in the local employment structure accounted for between 86-94% of the decline in agricultural employment shares in Brazil, Indonesia, India, and China. Interestingly, spatial reallocation plays the most negligible role in China, known for its stringent migration restrictions (e.g., “Hukou system”). 

The data above does not disaggregate the types and quality of non-agriculture within-county employment. More specifically, it does not make the distinction between rural non-farm informal employment and productive urban manufacturing and formal services employment. 

In other words, it was not migration to larger cities and towns, not even daily commutes to the nearest urban centres, but the creation of new urban localities centred on manufacturing that helped achieve the structural transformation in the US. 

This has important learnings for India, especially since it means taking jobs closer to the majority of population instead of making the majority of population migrate to where there are jobs. This assumes significance since one of the most important labour market frictions in India is the distance between labour  and jobs locations, and labour's higher marginal wage expectations for moving outside their commute zones. 

I believe that the biggest challenge for India in the years ahead is to manage the quality of its economic growth and create jobs to absorb its youthful population. On the former, I've blogged here and here about the need to ensure that economic growth is broad-based. It's on jobs that the structural transformation pathway is important. Specifically the nature and quality of the structural transformation. 

I'll describe this in terms of long and short routes to change. 

Notwithstanding India's 1987-2009 numbers in the table above, I'm inclined to argue that India's structural transformation and socio-economic mobility has followed what I will call the long longest route to change. Though farm productivity growth has lagged, thanks to a combination of horticulture and animal husbandry activities and migration, farm incomes have increased gradually. In the typical poor rural household (and they form the vast majority), the male migrates for work seasonally or all-year to the nearest metropolis or large city or another part of the country. They do mostly unskilled and semi-skilled jobs, especially in the construction or in urban informal services sectors, and mostly earn just slightly more than would have in the village. 

This kind of structural transformation and socio-economic mobility has its limits. Bar the tiny few who get into professional courses (this too may no longer apply to an Engineering degree from the local college) definitively exit poverty and those lucky fewer do well by entrepreneurship, the vast majority of rural poor migrant households remain stuck there. In any case, it does not create the broad base of consumption class required to sustain high growth rates for long periods. It's only in the degrees of poverty that their lives change.

A good measure of structural transformation and social mobility would be to get the trends on the proportion of rural poor who are qualitatively better off than their parents. Or that on those who have migrated into the lower middle class status. What's the trend on intergenerational mobility at different income quintiles? 

Instead the short route to change which the East Asian countries followed combined high intensity small-holder agriculture which sharply increased farm productivity and incomes, with exports-led manufacturing factories which created millions of jobs nearer the hinterlands. In these cases, rural incomes increased sharply resulting in the emergence of large rural consumption class, who provided the market for the emergence of new towns which in turn attracted manufacturing and other industries. These in turn further increased incomes, and the virtuous cycle went on. Local transformation trumped spatial reallocation. 

India needs to adopt something similar as its structural transformation pathway. It needs to spread industrialisation and productive economic activity beyond the current few urban cores to cover the hinterland areas. At least some of its currently numerous sub-optimally productive urban centres (largely parasitic economies dependent on government activities, like many state capital cities are) should embrace productive industrial activities, especially of the labour intensive kind.

I do not recollect coming across a study examining these trends in the Indian context. It would be good to have someone dive deep into this issue in the Indian context. It would require layering the trends in urbanisation with economic growth. What are the identifiable markers of local transformation? How many new towns/cities have emerged in the last two decades? What's the profile of jobs which have emerged in these new towns/cities and in the hinterland? How has inter-generational mobility changed, and to what extent?

In this context, I'll also draw attention to the much hyped point about India's entrepreneurship. As I have co-written here, most of the entrepreneurship that we associate with the poor in India is of the non-productive subsistence kind which arises out of their compulsion to earn something to survive. It's not the productive dynamic kind which arises out of an interest in creating something new and which builds companies and generates productive jobs. In an ideal world, such subsistence entrepreneurship should be replaced with wage earning jobs.  

The political leadership needs to formulate a narrative that prioritises local transformation and the bureaucracy needs to provide the policy enablers and instruments to catalyse and promote such growth. For this to happen, the academics, opinion makers and commentators should catalyse a credible and actionable discourse, trigger public debates, and influence important stakeholders to embrace this theory of change. 

Weekend reading links

1. Livemint has a story that questions the conventional wisdom on IIT admissions being a pathway to large starting salaries.

While the crore-plus salaries paid by investment banks, high frequency trading (HFT) firms and quant firms are highlighted in the achievement letters of the institutes—Mint reported last month that proprietary trading company Jane Street Capital offered a salary package of ₹4 crore plus to an IIT Kanpur student—there are many who end up in jobs that pay less than ₹10 lakh annually. Even those from the established IITs... students from the computer science batch are wooed by many suitors, followed by those from electronics, electrical and the like. Civil engineering isn’t too hot. According to a placement officer in one of the newer IITs, chemical engineering isn’t either... Experts and IIT alumni say the wide variance in salaries is simply a reflection of the market and the demand for certain skills.

2. Some facts about unicorns in the US

Of the 639 US startup firms that achieved $1 billion or more in valuations between 2000 and the third quarter of 2021, 427 remain active unicorns and 212 have exited. Among the exits, 137 went public, 110 through IPOs, 18 through special purpose acquisition companies, and 9 via direct listings. An additional 44 unicorns exited through mergers and acquisitions. Only 21 of the firms that reached unicorn status during the study period failed, either filing for bankruptcy or agreeing to a merger at a value below 25 percent of their unicorn round valuation.

3. City of London factoids,

In 1631 the population of the City of London was estimated at 130,163. In 1901 it was 26,923. Today it is about 8,600. It is hardly a thriving 24-hour metropolis.

And concerns from recent trends,

Reimagined from the 19th century as a core of finance, it was rebuilt as a place of pure business. Ten proposed new office towers (peaking with the 63-storey 55 Bishopsgate) will continue to reshape its spiky skyline. Yet the City was never entirely a monoculture. It had markets and hospitals, housing estates, churches, restaurants, a proliferation of pubs and a huge newspaper industry (those latter two largely inseparable). This complex ecosystem emerged from centuries of an intense concentration of trade. New housing (with a few exceptions, notably the Barbican) was excluded. The last thing the postwar City wanted was residents complaining about a new office tower blocking their light or, heaven forbid, more voters. 

But east London’s skyline has since shifted from offices and council blocks to kitschy new residential towers aimed at foreign investors. Housing’s allure has sharpened, particularly after the pandemic shock looked likely to undermine the workplace. With residential developments now the mainstay of construction at London’s other financial centre, Canary Wharf, apartments are sneaking in along the City’s riverside and north and east fringes. Housing (so much easier to finance due to presales) is encroaching on the Square Mile in very visible towers like One Bishopsgate Plaza and serviced apartments at The Moorgate. The problem, according to former City planner Peter Rees, is not the properties themselves but their emptiness. Already 26 per cent of City residencies are classified as second homes (the national average is 1 per cent). Others are investments for children who might study here, or are occupied only a couple of nights a week. This poor use of scarce land adds little to street life. The cautionary tale is the City’s transatlantic twin, Wall Street. Trading floors have gone, business has moved midtown and bank towers are now luxury residences. The once-buzzing street and myriad small businesses are clearly dying, while empty apartments atrophy.

4. Pandemic and indebtedness in developing countries,

The public debt of developing countries, excluding China, reached $11.5tn in 2021. By some accounts, serious debt problems are largely confined to a small share of this figure, owed by highly vulnerable low-income countries such as Chad, Zambia or Ethiopia... During the pandemic, government debt ballooned by almost $2tn in more than 100 developing countries (excluding China), as social spending went up while incomes froze due to lockdowns. Now, central banks are raising interest rates, which exacerbates the problem. Rising rates have meant capital flight and currency depreciation in developing economies, as well as increasing borrowing costs. These factors have pushed countries such as Ghana or Sri Lanka into debt distress. In 2021, developing countries paid $400bn in debt service, more than twice the amount they received in official development aid. Meanwhile, their international reserves declined by over $600bn last year, almost three times what they received in emergency support through the IMF Special Drawing Rights allocation. Foreign debts are therefore eating an ever-larger piece of an ever-shrinking national resources pie.

5. Richard Bernstein writes about the Maytag Repairman effect and the US Federal Reserve,

The Maytag Repairman was a fictional washing machine mechanic who was lonely because no one ever needed to repair a reliable Maytag appliance. Instead of tools, he carried a book of crossword puzzles and cards to play solitaire to combat his boredom. For many years, the US Federal Reserve played the role of the Maytag Repairman with respect to inflation. With the expansion of globalisation and the resulting secular disinflation, there wasn’t much for it to do to fight inflation. Rather, it could generously ease monetary policy during periods of financial market volatility without much concern that its efforts to save investors might spur inflation. The repeated efforts to curtail financial market volatility led to the term the Fed “put”. Investors viewed the Fed’s behaviour as though the central bank were consistently writing a protective put option to limit investors’ downside risk. With perceived guaranteed downside protection, investors rationally took excessive risks because the Fed repeatedly quelled financial market volatility with significantly lower interest rates. Risk-taking often got extreme. There were three significant financial bubbles in the past 25 years — the dotcom boom, the housing market, and the surge in tech companies/growth stocks/cryptocurrencies before recent sharp corrections.

I have blogged on multiple occasions about the Fed's (and in general central banks') undeserved appropriation of credit for monetary stability in the last quarter century.

6. Martin Sandbu points to the downward revising global economic growth rates from the blog of IMF Chief Economist Pierre Olivier Gourinchas. 

7. John Mueller has an excellent analysis of Manchester City's Norwegian forward Erling Haaland. This about Haaland's less than impressive impact on the Club despite he himself scoring 25 goals in just 20 matches,

Even as their superstar striker collects hat-tricks (four so far) for fun, City as a team are scoring at almost exactly the same rate as last season, back when they didn’t have Haaland or often any striker at all. At the other end of the pitch, they’re conceding 40 per cent more goals than before. You do the maths on how this is going. City’s rate of points per game is down from 2.45 last season to 2.25 so far in this campaign. Their expected goal difference has plunged from +1.86 to +1.29 per game. Their team strength rating in FiveThirtyEight’s SPI model has dipped from 93.5 to 90.8, the lowest it’s been since Guardiola’s second season in charge. For the first time at any point since 2019-20, City aren’t favourites to win the Premier League.

This is a stunning graphic that shows the change in where City's centre-forwards received passes last season compared to where Haaland has received the ball this season. 

Last season’s rotating cast of striker-poets functioned as a free-floating spare attacker, popping up in midfield or out wide as often as they did in the box. This season that fluidity is gone. Erling Haaland doesn’t care about your build-up. Erling Haaland cares about goals. Instead of drifting away from the centre-backs, Haaland stays in the width of the six-yard box, receiving most of his passes around a dense, red-hot core just to the left of the penalty spot — which, not coincidentally, is also his favourite place to put his laces through a left-footed shot. Think of it as the Haaland Zone... Since Haaland doesn’t pull out wide to overload the edges of the opponent’s back line, his team-mates have to find other ways to create the three-v-two advantages that help them break through the channels and create high-value shots.

Besides, as Mueller explains nicely, the focus on Haaland leaves City's defence vulnerable to counter-attacks. 

The cost of Haaland’s goals is one fewer passer and a less flexible formation, forcing City to push the attacking tempo and take fewer touches almost everywhere in the opposing half except the centre of the box. Instead of shoving the ball down their opponents’ throats, they’re getting pressured into passing the ball around their own third. They’re less compact and less controlled — in a word, less Guardiola-ish.

A case of the world's leading striker leaving the team less well off?

8. Finally, Noah Smith writes that the biggest push for reconciliation with China will come from the finance industry,

My instinct is that the strongest calls for a conciliatory U.S. approach toward China will come from the finance industry — especially banks and asset managers... Foreign direct investment in manufacturing defined the Chimerica era, but it’s becoming less important now... U.S. banks and asset managers, hungry to find high returns wherever they can, will be eager to pour capital into China, especially now that Zero Covid is over and the real estate crackdown is being partially reversed. Some of this will go into Chinese stocks, but much of it will probably be handed off to Chinese asset managers, from where it will eventually, inevitably, flow into real estate-related investments —developers, local government financing vehicles, contractors, shadow banks, etc.

9. A less discussed big risk posed by the Adani implosion is on the infrastructure sector, where it could have the same or bigger effect as the collapse of Carillion in UK in early 2020

The Adani Group’s dominance in India’s infrastructure sector is undeniable. It may have earned its stripes as a mine developer and port operator, but the group has expanded its reach to control a significant portion of India’s airports, roads, city-gas distribution, and power generation and distribution. In 2019, it won the bid to operate six airports, and two years later, it bought a majority stake in the Mumbai airport. With this, Adani ended up controlling one-fourth of India’s air-passenger traffic and one-third of its air-cargo traffic.The group has also emerged as one of India’s biggest road developers in recent years, with 18 highway stretches in its portfolio... Once you factor in the group’s presence in city-gas distribution and power generation and distribution, it’s not easy to dismiss concerns over the level of dependency on the conglomerate for infrastructure development.

To this add the several giga watts of solar power plants, Navi Mumbai airport development, the Dharavi slum redevelopment, the several electricity transmission projects, Totex model smart meters etc. The dependence is excessive and it's certain to willy-nilly get re-evaluated.

Yuen Yuen Ang interview

I have blogged here, here, here, and here about Yuen Yuen Ang's work explaining the Chinese political and bureaucratic system.

Ezra Klein has a long interview of Yuen. Yuen's argument has been that the western narrative on China misses several important aspects. 

Far from being painted as an authoritarian state, this about how Deng Xiaoping introduced elements of democracy within the political system,

And these included partial checks on power at the highest level, such as term limits. It included accountability, with targets being assigned to officials where they have to fulfill their jobs, and not simply get promoted because they are toadies or politically correct. He also introduced a tremendous amount of competition into the political system. And very importantly, he also introduced the norms of pragmatism and honest feedback, so that officials within the party wouldn’t be afraid to tell the truth, and there would be a moderate but necessary amount of debate within the party. And so these are what I call democratic qualities or characteristics. They do not add up to make China a liberal democracy. But just by liberalizing the party and society partially, that went a long way to providing a political foundation of stability, pragmatism and good governance that allowed China to prosper for the next 35 years... it was a collective leadership of elites in the Politburo at the highest level. So everyone gets to have a say. Everyone also gets to have a share in the gains of capitalism. 

And these elements of democracy, which have also been safety valves, have now been closed by Xi Jinping through his "personalist dictatorship", thereby creating tensions and engendering political instability.  

On the "boring politics and exciting bureaucracy" in China compared to their reversed opposites in the US,

Well, we can think about politics as fundamentally the system of how politicians and leaders are selected. So the obvious difference is in a democracy, you have elections. In an autocracy, you have no elections. But then below that, you have this big, grand activity called governance. And that’s what the bureaucracy does. It runs the country in multiple ways — the economy, society, social welfare... And so the China case is one in which you have the same Chinese Communist Party in office since 1949. But if you look at the bureaucracy and the governance, it has dramatically transformed up and down over time... in the United States when you have elections, that’s where all the attention goes. And we just take governance for granted. We just take for granted that the government will do whatever it’s supposed to do once the laws are passed. In China, you take the existence of the Chinese Communist Party for granted. You know that it’s the only party and it’s not going away. So the part that is really open to big changes is the bureaucracy. That’s where the action and the change happens...

About profit sharing in the political system, 

So think about profit-sharing as both a literal description as well as a metaphor of the Chinese political system in the reform era. It occurs at all levels of power. At the highest level, it’s not about salaries. But it is about the very top elites essentially privately splitting up the spoils of capitalism. And we get to have a glimpse of their deals when we see corruption scandals... profit-sharing is meant to be a metaphor to capture this whole system in which Deng Xiaoping, in order to get the whole Communist Party to embrace capitalism rather than resisting it, he gave all of them a stake in capitalist success... So everyone gets to share. Whether you are the very top elite in the Politburo, right down to being a rank-and-file bureaucrat in a particular Chinese city, you get to share, in terms of the revenue being made by your agency. So he creates — in institutional economics, we use this term called high-powered incentives. So a commission is an example of a high-powered incentives, where if you bring in sales, we’ll give you 20 percent commission.

So my incentives are very high to perform, because I get a cut of that performance. So he created this profit-sharing system where all of the officials are personally and enthusiastically invested in economic success... It is problematic... And so what happened in China is that in order to create these powerful incentives for capitalist growth, they injected this profit-sharing system, which has both advantages but also severe disadvantages. So we can see all of the consequences play out today in the combination of crazy growth and, at the same time, crazy corruption.

Explaining the different kinds of corruption using the analogy of drugs,

The growth-damaging forms of corruption are like petty bribery, embezzlement, extortion of businesses. And those we can think of as toxic drugs or, at best, as painkillers. But there is a special category of corruption that has always gone hand in hand with capitalism, and I call that access money. So businesses are paying for access, for privileges. And that, I compare them with steroids. So steroids are kind of drug that helps you grow muscles fast. But if you keep consuming steroids, it has very serious side effects that build up over time. And those side effects only explode in the event of a crisis... If we want to go back to American history, in the 19th century alone, America had multiple financial panics linked to corruption, speculation and distortions in the economy. So my argument is... the historical reality that capitalism and access money corruption has actually gone hand in hand, that development is not linear. It is interrupted by financial crises that erupt, due to the corruption and distortions from time to time.

An interesting contrast between US and China,

(T)he focus of American and democratic politics is, we’re going to limit the government, but we are going to give society as much freedom as possible... America is a society where the government is small but society is large... In China, the focus of limits and restrictions is not placed on the government, but on society. And so the party is obsessed with, how do we make sure that the media is limited, that civil society is put under caps. So it is a society where the government is large and empowered and society is relatively small, compared to government... where is the source, the primary engines of policy innovations and adaptability? In America, you see that from society — from civil society, universities, the private sector. Whereas, when you look at China, very often the source of policy adaptability comes from the bureaucracy. It comes from the government itself... And so in that sense, the two societies are flipped images of each other...

Because it is a single-party autocracy, there is no question and no secret that the number one goal of the party is to keep itself in power... from the point of view of the Communist Party, capitalism is the means to an end. It’s not an end. So capitalism is allowed to thrive, to the extent that it allows China to become prosperous. But as soon as those forces have grown to an extent that it threatens the Party’s hold on power, it then needs to crack down on that. Whereas, in the United States, I would say, I think most people might agree with me, that capitalism is an end. Capitalism is an end in itself, along with liberal democracy.

This about the challenges inherited by President Xi

There’s another kind of autocracy, which is autocracy with partial liberalization and effective governance. And that was reform China under Deng Xiaoping. But that model that he created had an expiration date. Because despite the successes it brought economically, the Gilded Age was also wired into China’s development DNA. The same economic success brought corruption, inequality, debt risks, environmental pollution — all of the defining problems facing China when Xi Jinping took over.

How has the bureaucratic incentives changed post-Xi Jinping crackdown on corruption?

(P)rior to Xi Jinping, the number one objective and incentive of government officials is economic growth. This is reflected in the targets that are assigned to them. And also, the more economic growth you can create, the more corruption and personal rents an official is able to collect... I think the key difference that Xi has introduced — and this is not a sudden thing. I think it evolved gradually in that direction over a 10-year period, is that now to be successful within the political system, the number one thing to do is to demonstrate personal loyalty to Xi. And that may still involve some economic growth, but not always.

And about the subtle reprioritisation of policies under him

When Xi took over, he began to change the basis of legitimacy of the Communist Party. So under the Deng Xiaoping era, the basis of legitimacy was performance. So that was the 6, 7 percent economic growth you’re talking about — and along with that, generally effective governance... Now when Xi took over power, he began to change that, for a number of reasons. The first reason is a good reason, which is he realized that the stage of development in China has reached the point where if you just continue to produce more 7 percent G.D.P., it’s not going to make people happy. It’s actually going to produce more problems. Because the fundamental problems are structural, things like extreme inequality. The more G.D.P. you produce, you just make the super rich people even richer. So he recognized that there was a need for legitimacy coming from things like equity, from fighting corruption. And so you see that he adjusted his domestic policies with a focus on fighting poverty, fighting corruption... You can think of them from the American lens as progressive goals, in the sense that Progressive Era policies were designed to correct the excesses of the Gilded Age. So you can think about common prosperity as Xi’s style of a progressive reform... 

At the same time, his objectives were mixed. And his desire to structurally reform the Chinese economy was also mixed up with his personal ambitions for consolidating power. And that process of consolidating power necessarily has to involve things like cracking down on the media, exercising more political control, having more surveillance. And all of these actions at the same time are anti-growth. So I would say that there are contradictions, fundamental tensions between his portfolio of multiple objectives, some of which are about himself, some of which are about keeping the Party in power and some of which are about genuinely trying to restructure the Chinese economy.

In other words, Xi's challenge was to move beyond poverty eradication to managing the excesses of capitalism while also ensuring the primacy of the Communist Party. As Xi himself acknowledged in his 2021 speech and which Yuen refers to, the Party does not have the playbook to control corruption, inequality, and environmental pollution at such scale nor manage the flowering of the innovation economy. And he worsened it by thinking that he could manage these excesses through top-down command and control.

One thing worth pointing out is the problem with the equivalence of some kind being made between the US and China (both have their set of problems and challenges etc). Both are big powers and it's only natural that the incumbent power will resit the rising power. It's also natural that the rising power will seek to assert itself. But the problem is with the means adopted by China to assert its emergence - stealing industrial technologies, forcing multinationals into submission, uncouth wolf-warrior diplomacy, and, most importantly, threatening and nibbling at its neighbours. It's the latter which makes it a rogue power, especially so in these times. 

The distortions from tax avoidance and tax arbitrage

Tax avoidance and tax arbitrage by multinational corporations undertaking cross-border trade should be getting much more importance that it deserves. They are a cause for major distortions in the world economy, besides perpetuating illegal business practices and money laundering. 

Brad Setser has two excellent tweet threads (HT: Ananth) highlighting their role in globalisation and distorting services trade. 

Brad Setser points to the role of tax avoidance in questioning the premise of deglobalisation. He argues that world will deglobalise only when...

American pharmaceutical firms stop taking drugs developed, sometimes with support from the NIH, in the US, and then entering into R&D cost shares and other tax arrangements with subsidiaries located in offshore financial centers with favorable tax rates, and then and producing patent protected drugs in Ireland, Switzerland, Singapore and Belgium for sale back to the US. With the majority of their global profits, of course, booked outside the US even though the majority of their sales are in the US...

When the world’s most profitable firm no longer produces the bulk of its consumer products in a few cities in China, using chips produced mostly in Taiwan using intellectual property often licensed from a US firms' tax subsidiary in say Singapore. And then notionally sells its consumer goods to its subsidiary in Ireland before reexporting those goods globally -- and, of course, booking the majority of its global profit outside both the US and China...

Chinese support of global manufactures is no longer at a record level relative to global output – and when China no longer needs to draw a record amount of net demand from the world to sustain its unbalanced economy... And when Ireland is not the United States biggest export market for a range of services – from software to research and development… and when Caribbean tax centers aren't the biggest US export market for financial services ...

This is a definitive graphic

It's hard to not feel that China never deglobalised.

Now to services trade. Let's start with some basics - US software exports.

If there's an award for the biggest distortionary public policy impacting world trade, Ireland's corporate taxation policy should be among the strongest contenders. It's inconceivable that a country of 5 million people consumes a quarter of US software exports.

In order to benefit from its ultra-low corporate tax rates, it has become standard practice for US software businesses to transfer IP to shell entities in Ireland, export software to Ireland, add their royalty margins, have it re-exported to other countries, and (minimise taxes and) maximise profits. 

Now about US software exports to Ireland compared to China,

And to European tax havens and European large economies

Ditto in R&D services, where in contrast to six tax havens, US has a deficit with the rest of the world. Tax havens distort US R&D services, big time. 

In a number of service categories, tax havens make up one-third to two-thirds of US exports

And this is the summary, from a slightly dated, but still very relevant paper by Setser 

This article explains the tax avoidance (through profit shifting) strategies of US pharmaceutical firms. 

1. Identify a valuable drug by testing it in the United States market;

2. Transfer the right to exploit the pharmaceutical product to a subsidiary in a low or no tax jurisdiction like Bermuda;

3. Set up a manufacturing subsidiary in another low tax jurisdiction (Ireland, Singapore, and Switzerland are common—but Puerto Rico also works, as it is outside the scope of U.S. corporate income tax for complex historical reasons);

4. Import the active ingredient into the United States at a high price.

Firms generally prefer to avoid exporting active ingredients from the United States and paying U.S. tax and instead prefer to produce for the European market in Ireland and the Asian market in Singapore and book their “export” profits offshore.

However way you see it, tax avoidance through tax arbitrage is a massive distortion in the world economy.

As an aside, can we imagine a developing country pursuing Ireland's beggar-thy-neighbour policy and getting away?