It frustrates me when people talk about the success or failure of reforms based on their simplified assessments of whether an ideal desired outcome has been achieved or not. Accordingly, education reforms are deemed to have failed unless learning outcomes have improved dramatically. Or structural reforms have failed if fiscal deficit is not eliminated or inflation not brought below 3-4 percent. Or social safety net reforms have failed if they have not succeeded in eliminating leakages. All these betray a cognitive bias that anchors any discussion about reforms into neatly defined solutions in our mental space.
This world-view of reforms is based on two important assumptions. One, the reforms' outcome matrix is binary - either success or failure. Two, it is possible to achieve success through a complementary set of initiatives that constitute the reforms. I believe both these assumptions are flawed and reveal a failure to appreciate the difficulty of achieving change in complex systems.
Here is an alternative narrative, which can be applied to analyzing many transformations. Consider any reform as consisting of the dynamic interaction of two changes - technical and systemic/behavioural - in an evolutionary mode. The former involves deploying specific inputs, technology, and processes to prepare the ground for alignment of incentives with desired outcomes. I believe that though we cannot ex-ante identify all the ideally required elements of the technical change, it is possible to short-list a broad set of elements. The latter involves the response of interacting stakeholders to these technical changes. In complex social systems, this evolution happens in a highly context-specific, protracted, and non-linear manner, punctuated with multiple equilibrium, and through an iterative process of changes. As they say, two steps forward, one step backward, and another sideward!
A more relevant framework for evaluating the success of any such change maybe incremental and probabilistic than binary and definitive. In particular, I can think of three touchstones for any such reform process. One, do the components of the technical change contain the basic requirements necessary to achieve such transformations? Two, does the first iteration of reforms improve outcomes from business as usual? Three, are the elements of the transformation project cost-effective, compared to other alternatives?
Let me illustrate with the case of education. Consider a program to improve student learning outcomes. A basic requirement to achieve this objective is the presence of an adequate number of schools (to enable access) and teachers, minimum physical infrastructure, reasonably regular attendance of teachers and students, availability of adequate learning materials, a mechanism to measure student-wise learning outcomes embedded in an institutional framework that would optimize incentives of all stakeholders. To this extent, any reform program that seeks to establish schools, appoint teachers, build physical infrastructure, give text-books, nudges and forces teachers and students into attending school, use computers to capture student learning levels data and run a monitoring system (however flawed), is not only an improvement from business as usual but also form essential elements in any effort to improve learning outcomes.
How stakeholders respond to these technical changes has social and political dimensions, which are not readily amenable to the desired trajectory of change. Therefore, for example, if the prevailing political dynamics rule out the adoption of the evidently more cost-effective and incentive compatible arrangement of contract teachers instead of regular teachers, then we should go ahead with the latter, irrespective of the nature of systemic distortions. In fact, the dynamics of systemic/behavioral changes most often push the system into sub-optimal outcomes in such transformations. Fortunately, we can avoid systems remaining entrapped in these sub-optimal outcomes for long if they can embrace an iterative approach to such transformations.
An institutionalized iterative process would provide feedback from the emergent behavioral and systemic failures. This feedback could be used to re-engineer processes so as to re-align incentives and even modify the nature of technical change, wherever required and feasible. The principle behind this iterative process should be that the proposed change would increase the likelihood of movement in the direction of the ultimate objective. I believe that this whole evolutionary process can be best managed through a collaborative process of deep-dive problem solving and experimental research within public systems.
Tuesday, January 29, 2013
Friday, January 25, 2013
The case for NGDP Targeting examined
As I blogged earlier, Inflation Targeting (IT), which underpinned the monetary policy consensus since the nineties, looks set to be another casualty of the global financial crisis. Nominal Gross Domestic Product (NGDP) targeting has become the most discussed alternative to IT.
As the name suggests, NGDP targeting seeks to fix a trend nominal GDP growth rate as the nominal anchor for setting interest rates and other monetary policy actions. This target is more effective than a pure inflation target at boosting output, especially when the economy is facing the zero-lower bound (ZLB) in interest rate. As Simon Wren-Lewis explains, an NGDP target works by relaxing monetary policy tomorrow in order to raise tomorrow's output and inflation. Assuming rational expectations, this response in turn immediately raises inflation today (since today's inflation depends on expected inflation tomorrow) and therefore reduces real interest rates today, which in turn raises output today and again inflation today. A simple inflation target cannot generate this effect on output today or tomorrow when the economy is facing ZLB.
Further, its supporters claim that by directly targeting the level of output growth, it avoids getting entangled with the intermediate objective of inflation, and focuses on the ultimate objective of stable economic growth. Central Bankers too are loath to give up their hard-won inflation fighting credibility which has helped firmly anchor inflation expectations for nearly two decades. Also, as Scott Sumner points out, it is politically easier to mobilize support since it re-frames the debate around output and avoids the contentious topic of inflation.
At a time when the developed economies are facing deflation and liquidity trap, a generous dose of inflation can be helpful in generating growth. But popular and ideological opposition to the idea of stoking inflation, borne out of a generation of inflation targeting, comes in the way of any attempt to promote growth, even by generating inflation consistent with the defined inflation target. Furthermore, monetary policy, in particular expansionary policy, has come to be intimately associated with inflation. NGDP targeting would replace inflation with output as the nominal anchor.
This distinction is a bit of sophistry, but enough to get political traction for expansionary monetary policy. Fundamentally, the effect of monetary and fiscal policies get distributed between output and price level changes - expansion causes both growth and inflation, while contraction lowers both. In other words, inflation and growth are two sides of the same monetary policy coin, though their relative magnitudes is determined by the nature of supply-side shocks and cannot be influenced directly through monetary policy.
So my concerns with the alleged superiority of NGDP over IT is as follows
1. It may be possible that in general NGDP cycles till now have been more closely correlated with asset inflation cycles than inflation cycles have been with asset prices. But there is limited theoretical basis for claiming that business cycles correlate strongly with asset price cycles, any more so than inflation cycles. Or do we, as before, avoid addressing asset prices, and deal with them through micro- and macro-prudential regulations?
2. Given that an NGDP anchor is the sum of potential output and optimal inflation target, any volatility in potential output is likely to introduce uncertainties into an NGDP targeting framework. If the potential output is itself not stable, then NGDP targeting becomes inconsistent with IT.
3. Further, a reliable assessment of output gap is critical to setting an NGDP anchor. In conditions of zero-lower bound, accuracy of the output gap is less important since even if the central bank over-estimates its magnitude, it can very easily raise rates to correct the situation. But if it under-estimates the gap, there is no possibility of going down in the opposite direction with interest rates. But this does not hold once we are faced with different economic conditions, like an overheating economy facing inflationary pressures.
4. This brings us to the most important flaw with NGDP targeting. A simple NGDP target would reveal little about the distribution of NGDP between real output and inflation. Consider two scenarios. In the first, high inflation caused by a supply-constrained and over-heating economy keeps real output growth low and NGDP below the target. In the second, deflation co-exists with demand-constrained economic conditions and keeps NGDP below the target. The policy prescriptions for the two conditions are different. Expansionary monetary policy would be inflationary in the former while growth stimulating in the second case.
The NGDP level per se would not provide enough information to guide us on the right policy. In fact, in the former case, we can reach the target NGDP level by monetary expansion which would only raise inflation further without creating jobs or boosting real output. But in a deflationary demand-constrained economy, monetary expansion is more likely to increase NGDP by boosting real output, by skirting around the issue of inflation. Since this is exactly the problem facing developed economies today, it is natural that any policy which is likely to promote recovery attract attention.
Fortunately, we now have real world examples of these two conditions being played out simultaneously. Even as many developed economies are struggling with deflationary recessions, India is grappling with a supply-constrained inflationary economic slowdown. In fact, just as NGDP targeting, by skirting around inflation, offers a politically feasible cover for monetary expansion in developed economies, inflation targeting, by focusing directly on persistent high inflation, provides a politically convenient excuse for the Reserve Bank of India (RBI) in not relaxing its monetary tightening.
The contrast between the two conditions is striking and representative of the difficulty of having a uniform policy suitable for all conditions. One practical approach would be to stick with IT, but use nominal GDP as an anchor to help restore growth in economies facing deflationary recessions and the ZLB in interest rate. In this context, the strategy suggested by Jeffrey Frankel for central banks to shape expectations by introducing a long-run NGDP target and then dynamic short-run targets till growth is restored, without junking the long-run inflation target, looks appropriate.
As the name suggests, NGDP targeting seeks to fix a trend nominal GDP growth rate as the nominal anchor for setting interest rates and other monetary policy actions. This target is more effective than a pure inflation target at boosting output, especially when the economy is facing the zero-lower bound (ZLB) in interest rate. As Simon Wren-Lewis explains, an NGDP target works by relaxing monetary policy tomorrow in order to raise tomorrow's output and inflation. Assuming rational expectations, this response in turn immediately raises inflation today (since today's inflation depends on expected inflation tomorrow) and therefore reduces real interest rates today, which in turn raises output today and again inflation today. A simple inflation target cannot generate this effect on output today or tomorrow when the economy is facing ZLB.
Further, its supporters claim that by directly targeting the level of output growth, it avoids getting entangled with the intermediate objective of inflation, and focuses on the ultimate objective of stable economic growth. Central Bankers too are loath to give up their hard-won inflation fighting credibility which has helped firmly anchor inflation expectations for nearly two decades. Also, as Scott Sumner points out, it is politically easier to mobilize support since it re-frames the debate around output and avoids the contentious topic of inflation.
At a time when the developed economies are facing deflation and liquidity trap, a generous dose of inflation can be helpful in generating growth. But popular and ideological opposition to the idea of stoking inflation, borne out of a generation of inflation targeting, comes in the way of any attempt to promote growth, even by generating inflation consistent with the defined inflation target. Furthermore, monetary policy, in particular expansionary policy, has come to be intimately associated with inflation. NGDP targeting would replace inflation with output as the nominal anchor.
This distinction is a bit of sophistry, but enough to get political traction for expansionary monetary policy. Fundamentally, the effect of monetary and fiscal policies get distributed between output and price level changes - expansion causes both growth and inflation, while contraction lowers both. In other words, inflation and growth are two sides of the same monetary policy coin, though their relative magnitudes is determined by the nature of supply-side shocks and cannot be influenced directly through monetary policy.
So my concerns with the alleged superiority of NGDP over IT is as follows
1. It may be possible that in general NGDP cycles till now have been more closely correlated with asset inflation cycles than inflation cycles have been with asset prices. But there is limited theoretical basis for claiming that business cycles correlate strongly with asset price cycles, any more so than inflation cycles. Or do we, as before, avoid addressing asset prices, and deal with them through micro- and macro-prudential regulations?
2. Given that an NGDP anchor is the sum of potential output and optimal inflation target, any volatility in potential output is likely to introduce uncertainties into an NGDP targeting framework. If the potential output is itself not stable, then NGDP targeting becomes inconsistent with IT.
3. Further, a reliable assessment of output gap is critical to setting an NGDP anchor. In conditions of zero-lower bound, accuracy of the output gap is less important since even if the central bank over-estimates its magnitude, it can very easily raise rates to correct the situation. But if it under-estimates the gap, there is no possibility of going down in the opposite direction with interest rates. But this does not hold once we are faced with different economic conditions, like an overheating economy facing inflationary pressures.
4. This brings us to the most important flaw with NGDP targeting. A simple NGDP target would reveal little about the distribution of NGDP between real output and inflation. Consider two scenarios. In the first, high inflation caused by a supply-constrained and over-heating economy keeps real output growth low and NGDP below the target. In the second, deflation co-exists with demand-constrained economic conditions and keeps NGDP below the target. The policy prescriptions for the two conditions are different. Expansionary monetary policy would be inflationary in the former while growth stimulating in the second case.
The NGDP level per se would not provide enough information to guide us on the right policy. In fact, in the former case, we can reach the target NGDP level by monetary expansion which would only raise inflation further without creating jobs or boosting real output. But in a deflationary demand-constrained economy, monetary expansion is more likely to increase NGDP by boosting real output, by skirting around the issue of inflation. Since this is exactly the problem facing developed economies today, it is natural that any policy which is likely to promote recovery attract attention.
Fortunately, we now have real world examples of these two conditions being played out simultaneously. Even as many developed economies are struggling with deflationary recessions, India is grappling with a supply-constrained inflationary economic slowdown. In fact, just as NGDP targeting, by skirting around inflation, offers a politically feasible cover for monetary expansion in developed economies, inflation targeting, by focusing directly on persistent high inflation, provides a politically convenient excuse for the Reserve Bank of India (RBI) in not relaxing its monetary tightening.
The contrast between the two conditions is striking and representative of the difficulty of having a uniform policy suitable for all conditions. One practical approach would be to stick with IT, but use nominal GDP as an anchor to help restore growth in economies facing deflationary recessions and the ZLB in interest rate. In this context, the strategy suggested by Jeffrey Frankel for central banks to shape expectations by introducing a long-run NGDP target and then dynamic short-run targets till growth is restored, without junking the long-run inflation target, looks appropriate.
NGDP Targeting re-frames the Inflation Targeting debate
One of the biggest casualties of the global financial crisis may be the use of Inflation Targeting (IT) as the dominant monetary policy strategy. With IT having failed to avoid the crisis and now not being able to help economies out from the depths of deflation, governments and central banks look set to give IT a honorable burial. As the graphic below shows, prevailing inflation targets provide no guidance for monetary policy for countries seeking help to exit deflation.
Nominal Gross Domestic Product (NGDP) targeting is emerging as one of the strongest alternatives to IT as a monetary policy framework. As the name suggests, it projects the trend growth rate of nominal GDP as the monetary policy anchor. By subsuming inflation within the NGDP target, it avoids getting entangled in the inflation debate.
Scott Sumner has an excellent article where he lays out the defence of NGDP targeting. In making out the case for NGDP, Scott Sumner points to its greater popular and political acceptability, apart from its greater inherent effectiveness. In particular, he points to the difficulty with getting support for policies that explicitly seek out inflation in order to recover from a deep deflationary environment due to the entrenched belief that all inflation is bad. In this context, NGDP targeting provides a nice behavioral psychology sleight of hand by re-framing the debate in terms of raising nominal GDP and job creation instead of generating inflation.
Paradoxically, cognitive biases arising from our aversion to inflation and affinity for output growth, causes us to oppose expansionary policies which cause inflation while supporting those that promote growth, despite both outcomes being two sides of the same monetary policy coin (the effect of expansionary monetary and fiscal policies get distributed between inflation and growth, the relative magnitudes of each being dependent on supply-side factors). This is a classic example of how framing the terms of a debate can increase political acceptability of the same policy instrument. As Scott Sumner writes,
If we stopped talking about inflation targeting and started talking about NGDP targeting, we could greatly simplify the policy debate. Do we want more demand, or not? Most Americans surely think that more demand would be a good thing right now, but very few people want to see more inflation. To the Federal Reserve, these two effects are simply two sides of the same coin. But because the Fed expresses its aims in terms of inflation, its work is understood as a matter of managing inflation, and therefore Fed policies aimed at boosting inflation are politically problematic.
NGDP targeting therefore provides a cover for expansionary monetary policy, which has been stigmatized by its close association with inflation, to play its full role in growth by reducing the focus on inflation. It frames the terms of the debate as between growth and stagnation, not higher and lower inflation.
Thursday, January 24, 2013
The Supreme Court adds a new twist to India's retail liberalization drama!
Srikar points me to this attempt by the Indian Supreme Court to formulate foreign direct investment (FDI) policy. In response to a PIL claiming that the government's retail market liberalization policy violated the fundamental right of small traders, a two judge bench of the Court sought clarification from the government on the safeguards protecting the interests of small traders.
In fact, by raising these issues, the SC has waded into the debate about the dynamics of the free-market, with its inevitable distributional consequences. Since any trade policy measure will have losers and winners, will the judiciary always adjudicate on its distribution of costs and benefits? Is the SC competent, both legally and professionally, to examine such questions? By the same yardstick, it can tomorrow question the government's decision to lower or raise taxes on certain categories of people or regulate some economic activity on grounds of it violating or not promoting certain interests.
Stepping back, I have two observations.
1. This is symptomatic of the difficulty of getting any reform policy through in India. The issue of retail trade liberalization has been dissected in great detail by all and sundry for nearly two years now and, after following the due process, the government of the day has taken a well-considered policy decision which has been approved by the highest body of the country. In any functioning democracy, all debates should have ceased. Instead, we have more uncertainty. Judicial over-reach (sample the large numbers of cases involving land acquisition and environmental clearances that are stuck up in courts) is one of the most important contributors to the environment of uncertainty that characterizes any policy in India.
2. Finally, most importantly, it is amazing that an institution which is so chronically over-burdened and inefficient in the disposal of cases, gets swayed by populist urges and has the time to waste on matters where its locus standi is questionable. In fact, one of the reasons for the large scale pendency of litigation before the SC and other courts is the failure to exercise due diligence in screening cases. When your bandwidth is so severely constrained, it is plain obvious that some form of prioritization is the need of the hour.
It's been four months since this happened. Have you got any investment which you were contemplating or is this just a political gimmick... Reforms is one part but the same should not close the doors of other traders... What are the checks in place to ensure that there is no obstruction to free trade, especially the small ones. Policy is not sacrosanct, we would also analyse it within the judicial parameters. Our exercise is very constitutional and limited to the constitutional principles... It's possible that a giant retailer might reduce the price of a commodity forcing the small retailers to shut shop. Once there is no competition, the retail giant can monopolise.Now, this is clearly way beyond the Supreme Court's mandate and a classic example of judicial transgression into the realm of the legislature. What way is the judiciary concerned with the investments received? What evidence is there to show that retail liberalization will "close the doors of other traders"? What is "constitutional" about the promotion of free trade, especially among small traders? What way does the government's policy to liberalize retail trade infringe on the "basic features" of the constitution? What way are the interests of consumers (who gain by lower prices) inferior to that of the traders?
In fact, by raising these issues, the SC has waded into the debate about the dynamics of the free-market, with its inevitable distributional consequences. Since any trade policy measure will have losers and winners, will the judiciary always adjudicate on its distribution of costs and benefits? Is the SC competent, both legally and professionally, to examine such questions? By the same yardstick, it can tomorrow question the government's decision to lower or raise taxes on certain categories of people or regulate some economic activity on grounds of it violating or not promoting certain interests.
Stepping back, I have two observations.
1. This is symptomatic of the difficulty of getting any reform policy through in India. The issue of retail trade liberalization has been dissected in great detail by all and sundry for nearly two years now and, after following the due process, the government of the day has taken a well-considered policy decision which has been approved by the highest body of the country. In any functioning democracy, all debates should have ceased. Instead, we have more uncertainty. Judicial over-reach (sample the large numbers of cases involving land acquisition and environmental clearances that are stuck up in courts) is one of the most important contributors to the environment of uncertainty that characterizes any policy in India.
2. Finally, most importantly, it is amazing that an institution which is so chronically over-burdened and inefficient in the disposal of cases, gets swayed by populist urges and has the time to waste on matters where its locus standi is questionable. In fact, one of the reasons for the large scale pendency of litigation before the SC and other courts is the failure to exercise due diligence in screening cases. When your bandwidth is so severely constrained, it is plain obvious that some form of prioritization is the need of the hour.
Wednesday, January 23, 2013
Is independent central banking over?
More posting on central banking. A number of articles in FT in recent days have written about the dramatic shift in the role of central banks, including one obituary of independent central banking.
The most decisive signal of the shift in central banks role and erosion of their autonomy has come from Japan. The new Prime Minister Shinzo Abe has come to power on a platform of promising to do whatever it takes to end the country's "lost decades". In particular, he has targeted the Bank of Japan (BoJ) as not having done enough to exit the deflationary trap and reflate the economy. In fact, he has openly demanded that BoJ raise its nominal inflation target to 2%, failing which he will enact a legislation to incorporate it into the bank's mandate. He has also called for more aggressive intervention to stem the appreciation of Yen against the dollar.
Truth to tell, the BoJ has been far more conservative than its counterparts in Europe and US. Despite the even more painful and protracted nature of the country's economic slump, the BoJ has for long refrained from anything remotely similar to what the Fed has ventured out. With debt-to-GDP ratio of more than 200%, the government has limited fiscal room, thereby making central bank's role critical in any meaningful and large enough attempt to prime recovery. This has given the politicians a rightful cause to demand more aggressive actions by the central bank. Shinzo Abe has only ratcheted it up in a manner that clearly threatens the BoJ's autonomy. And there is a clear danger that he may actually end up going too far with monetary expansion.
In simple terms, Masaaki Shirakawa has failed to display the political nous that is necessary to manage monetary policy, especially when the economic circumstances are extraordinary. In contrast, as Peter Tasker wrote, his compatriots Bernanke, Draghi, and Mervyn King, have factored in the political and social context while managing their monetary policy, thereby pre-empting any political assault on their domain. However, on the flip-side, such pre-emptive action may have had the effect of taking the pressure off governments to act immediately and aggressively, besides pushing monetary policy down a dangerous path and also taking .
Another reason for the erosion of independence of central banks is that their recent actions of extended extraordinary monetary accommodation has strong political overtones. Of greatest concern is its distributional implications. Stephen King points to a recent report (pdf here) by the Bank of England which talks about the inter-generational distributional implications of QE,
The most decisive signal of the shift in central banks role and erosion of their autonomy has come from Japan. The new Prime Minister Shinzo Abe has come to power on a platform of promising to do whatever it takes to end the country's "lost decades". In particular, he has targeted the Bank of Japan (BoJ) as not having done enough to exit the deflationary trap and reflate the economy. In fact, he has openly demanded that BoJ raise its nominal inflation target to 2%, failing which he will enact a legislation to incorporate it into the bank's mandate. He has also called for more aggressive intervention to stem the appreciation of Yen against the dollar.
Truth to tell, the BoJ has been far more conservative than its counterparts in Europe and US. Despite the even more painful and protracted nature of the country's economic slump, the BoJ has for long refrained from anything remotely similar to what the Fed has ventured out. With debt-to-GDP ratio of more than 200%, the government has limited fiscal room, thereby making central bank's role critical in any meaningful and large enough attempt to prime recovery. This has given the politicians a rightful cause to demand more aggressive actions by the central bank. Shinzo Abe has only ratcheted it up in a manner that clearly threatens the BoJ's autonomy. And there is a clear danger that he may actually end up going too far with monetary expansion.
In simple terms, Masaaki Shirakawa has failed to display the political nous that is necessary to manage monetary policy, especially when the economic circumstances are extraordinary. In contrast, as Peter Tasker wrote, his compatriots Bernanke, Draghi, and Mervyn King, have factored in the political and social context while managing their monetary policy, thereby pre-empting any political assault on their domain. However, on the flip-side, such pre-emptive action may have had the effect of taking the pressure off governments to act immediately and aggressively, besides pushing monetary policy down a dangerous path and also taking .
Another reason for the erosion of independence of central banks is that their recent actions of extended extraordinary monetary accommodation has strong political overtones. Of greatest concern is its distributional implications. Stephen King points to a recent report (pdf here) by the Bank of England which talks about the inter-generational distributional implications of QE,
by increasing the net present value of pension funds’ future liabilities, it creates problems for those funds already running deficits. That, in turn, means either bigger pension contributions for workers; lower prospective pension benefits; or, in the case of some public sector pensions, tax increases or spending cuts to make the numbers add up. Meanwhile, some of the biggest beneficiaries of QE are those already asset-rich and relatively old who prefer to sit on their windfall gains rather than spend them.Apart from this, there is also the issue of ultra-low interest rates punishing ordinary people who keep a major share of their savings in fixed income securities, whereas it has boosted the incomes of the richest who use leverage to make massive profits by investing in equities and other asset categories. These are ultimately political decisions and central banks cannot wish them away and go about their work as though they have nothing to do with these consequences.
Monday, January 21, 2013
The poverty of corporate leadership in India?
I happened across a recent interview of Deepak Parekh, Chairman of HDFC, who after the exit of Ratan Tata is being projected as the elder statesman of corporate India. Asked about three key things that the government should focus on in 2013 for the economy to look up, he said,
Three key things I would suggest the government to focus on in 2013 are kickstarting investments, reducing the fiscal and current account deficit and putting big projects on the fast track. We need to reignite the investment cycle. India is desperate for fresh capital; we need to start new projects and raise our capital spending. There is a fear of not getting land, approvals and power for any big investment. This climate must change; investors would come out and invest only in a stable environment.
Second, India needs to reduce its fiscal and current account deficits. The budgetary fiscal deficit target was set at 5.3 percent of the GDP, but we are heading to close somewhere around 5.9 percent, with rating agencies already threatening us with junk status. So the government must ensure that sufficient revenues are generated... besides disinvestment, which may bring in another Rs 30,000 crore — an amount the government has also asked PSUs like RCF, Oil India and NTPC to raise in 2013... Third, and a critical step, would be to fast-track existing projects that have been stuck due to shortage of raw materials or lack of environmental and other clearances.While reading the three priorities, I could not but avoid getting the impression that he was talking about the three most important things for corporate India, and not the Indian economy. A straight translation of the three priorities of this corporate leader would come out as - more liberalization, rolling back subsidies, higher infrastructure investments, aggressive disinvestment, lowering interest rates, and expediting land acquisition and environmental clearances.
The poverty, even brazenness, of such an exhortation is stunning, especially from someone who is projected as a highly credible voice from corporate India. There is a difference between acting as a spokesperson of corporate India and being a senior and important statesman, who claims to contribute positively towards shaping the future of India. Sure, many, but not all, of these reforms are critical for economic growth. But all of them are policies that are much more important for corporate India.
What about policies that are important for the rest of India? I would believe that these are policies that address more fundamental issues of improving governance, state capability, job creation, social safety net, and so on. In no way am I arguing that one set of policies are more important than the other. But the assumption that what is good for corporate India is also good for the rest of India is clearly untenable. We have enough recent evidence that economic growth and business profitability does not automatically translate into jobs.
But there is nothing surprising about Deepak Parekh's advice. What is surprising is how much opinion space these people occupy in discussions about India's future. When was the last time that a corporate leader called for a universal health insurance system or a national social safety net? Who was the last leader from corporate India who had something sensible to talk about improving India's pathetic state capability? It is no good to repeat ad-nauseam about the distortions caused by NREGS and thereby advocate its scrapping without offering suggestions about what can be done to address the critical underlying challenge of providing some form of employment guarantee to the millions affected by India's latest period of jobless high GDP growth.
The views of corporate India and much of the commentary on reforming subsidies and government welfare systems is condescending and see them as undesirable. In fact, subsidy, of any kind, has become a four-letter word for this part of India. I say this because, if we are genuinely talking about reforming subsidies, about increasing its effectiveness without compromising on objectives (dare I say that there is a reasonable consensus that atleast some of the subsidies should stay), we cannot so flippantly talk about reduction of fiscal deficit without also alluding, atleast in brief, about how to achieve that. Only once we start thinking about these issues will we really begin to eschew making such brazenly partisan remarks.
Merely parroting reduction of fiscal deficit or roll back of subsidy in general terms without making even a passing mention of how to do it (of course, nowadays, everyone has the magic pill - cash transfers!) is a reflection or either ignorance or partisanship or political posturing, all of which are undesirable. In one snapshot Deepak Parekh's comment captures the increasing disconnect between one part of India, obsessed with business confidence and India's investment image abroad, and the majority, who form the rest of India and who struggle to eke out subsistence livelihoods and have social and health indicators that would shame even sub-Saharan African countries.
In purely economic and business sense, this is complete short-sightedness, a desire to maximize short-run returns. Corporate India needs to realize that its long-term success has to be built on the prosperity of the vast majority of Indians. Their deprivation is a recipe for political disorder that will seriously undermine macroeconomic stability. The very climate of business confidence and external investment image will be the casualty.
Just consider this. Amidst all the recent scandals of crony capitalism, the mainstream debates have conveniently overlooked the fact that its responsibility cannot be confined to government and politicians alone. Corporate India, including some of its leading names, played its murky, equally abhorrent, part in these scandals. In a more just world, many of these "captains" should have been languishing in jails. In fact, it could be logically argued that the politicians and officials were only responding to the actions of corporate groups, who realized the massive fortunes to be had by subverting the rules of the game or the prevailing policy frameworks.
It requires no great insight to argue that corporate India should have done the same level of soul-searching and introspection that it was demanding politicians do. Disappointingly, there has been little talk about this. I cannot remember any major corporate leader talking about the need to shine the torch lights within corporate India itself.
I am not surprised since many of modern India's corporate fortunes are built either on the graft-greased props of the earlier license permit raj or the current crony capitalism. Crony capitalism may deliver short term windfalls, but is not sustainable. Similarly, image boosting reform gymnastics cannot make India better than it really is. Corporate India would do well to realize.
Sunday, January 20, 2013
Lessons from Dreamliner's troubles
The blame game for Dreamliner's latest fiasco has started. Outsourcing is the culprit. Has outsourcing gone too far? Predictably, the political machinery that opposes outsourcing see this as the latest evidence of the evils of outsourcing.
The latest trouble to hit Boeing's ambitious Dreamliner 787 project was the ignition and sparking of its Li-ion batteries in two accidents in Boston and Tokyo. The Li-ion batteries, which can be charged quickly, without loss of power, and can pack in a higher energy density (energy per unit weight) and therefore help reduce weight, has always been vulnerable to overheating and igniting. There have been a number of cases of planes catching fire due to problems related with Li-ion batteries. Even with multiple firewalls to ensure that the problem is contained even if the battery ignites, airline firms have not been able to completely reduce the danger. But recent technical advances have made fires, even when the battery fails, an extreme rarity. The plane has been grounded by US, India, and others.
In recent years, riding the global outsourcing wave, Boeing has embraced outsourcing with great gusto. It has transformed itself from being a primary manufacturer to a systems integrator who outsources 80% of its production requirements.
Its components and parts are manufactured across the globe, in four continents.
In any case, amidst all the populist rhetoric, we are likely to gloss over critical questions. The debate raises two questions.
1. Like all other such ideas, outsourcing works effectively under certain conditions. The most important requirement is rigorous enough contracting principles and its management. If you can't do that effectively, don't outsource. Or develop strong capability before you move aggressively into contracting. Did Boeing rush headlong into outsourcing contracts, even before it had built adequate company-wide contract management capabilities?
2. Again, as with all other ideas, there is an extent to which we can pursue it. In technologically sophisticated industries like aviation, there may be a case for keeping the overall design and certain core manufacturing activities within the firm. Although, it may be straining credulity to believe that Li-ion batteries may one such core activity. But managing the thin-line between outsourcing and keeping activities within the firm is not easy. Did Boeing slip up here? Or does complex modern manufacturing make these decisions impossible to make with any degree of certainty?
Either ways, one cannot but help feel that Boeing failed to effectively manage its outsourcing processes. The fact that Boeing's problems are with Li-ion batteries which have a history of catching fires in other electronic equipment's lends further credence to the belief that Boeing and its suppliers got it wrong. I am inclined to believe that it is a failure of outsourcing as Boeing did, rather than of outsourcing itself.
Update 1 (30/1/2013)
James Surowiecki has this nice article in New Yorker that examines Boeing's troubles. He writes
The latest trouble to hit Boeing's ambitious Dreamliner 787 project was the ignition and sparking of its Li-ion batteries in two accidents in Boston and Tokyo. The Li-ion batteries, which can be charged quickly, without loss of power, and can pack in a higher energy density (energy per unit weight) and therefore help reduce weight, has always been vulnerable to overheating and igniting. There have been a number of cases of planes catching fire due to problems related with Li-ion batteries. Even with multiple firewalls to ensure that the problem is contained even if the battery ignites, airline firms have not been able to completely reduce the danger. But recent technical advances have made fires, even when the battery fails, an extreme rarity. The plane has been grounded by US, India, and others.
In recent years, riding the global outsourcing wave, Boeing has embraced outsourcing with great gusto. It has transformed itself from being a primary manufacturer to a systems integrator who outsources 80% of its production requirements.
Its components and parts are manufactured across the globe, in four continents.
In any case, amidst all the populist rhetoric, we are likely to gloss over critical questions. The debate raises two questions.
1. Like all other such ideas, outsourcing works effectively under certain conditions. The most important requirement is rigorous enough contracting principles and its management. If you can't do that effectively, don't outsource. Or develop strong capability before you move aggressively into contracting. Did Boeing rush headlong into outsourcing contracts, even before it had built adequate company-wide contract management capabilities?
2. Again, as with all other ideas, there is an extent to which we can pursue it. In technologically sophisticated industries like aviation, there may be a case for keeping the overall design and certain core manufacturing activities within the firm. Although, it may be straining credulity to believe that Li-ion batteries may one such core activity. But managing the thin-line between outsourcing and keeping activities within the firm is not easy. Did Boeing slip up here? Or does complex modern manufacturing make these decisions impossible to make with any degree of certainty?
Either ways, one cannot but help feel that Boeing failed to effectively manage its outsourcing processes. The fact that Boeing's problems are with Li-ion batteries which have a history of catching fires in other electronic equipment's lends further credence to the belief that Boeing and its suppliers got it wrong. I am inclined to believe that it is a failure of outsourcing as Boeing did, rather than of outsourcing itself.
Update 1 (30/1/2013)
James Surowiecki has this nice article in New Yorker that examines Boeing's troubles. He writes
Boeing didn’t outsource just the manufacturing of parts; it turned over the design, the engineering, and the manufacture of entire sections of the plane to some fifty “strategic partners.” Boeing itself ended up building less than forty per cent of the plane... it was a huge headache for the engineers. In a fascinating study of the process, two U.C.L.A. researchers, Christopher Tang and Joshua Zimmerman, show how challenging it was for Boeing to work with fifty different partners. The more complex a supply chain, the more chances there are for something to go wrong, and Boeing had far less control than it would have if more of the operation had been in-house. Delays became endemic, and, instead of costing less, the project went billions over budget... And the missed deadlines created other issues. Determined to get the Dreamliners to customers quickly, Boeing built many of them while still waiting for the F.A.A. to certify the plane to fly; then it had to go back and retrofit the planes in line with the F.A.A.’s requirements.
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