The gatekeepers of the tech economy - some observations on competition and innovation

In line with the East Asian trend, SuperApps, or an umbrella platform/App that consolidates and allows access to several kinds of individual service Apps (including that of others), are becoming the flavour in India. Reliance, Tata, and PayTm are all pursuing their respective superApps. 

While the SuperApps of Reliance and Tatas are aimed at consolidating their portfolio of Apps, PayTm is consolidating third party Apps to leverage its payments service. As the article writes, there are both pros and cons with superApps and it remains to be seen which prevails in the months and years ahead, and whether India too will have its WeChat or Grab equivalents. 

In the context of the rise of SuperApps, a few observations:

1. The digital marketplace is rife with risks of emergent gatekeepers. 

Consider three potential gatekeepers. One could control access for the software. SuperApps belong to this category. A second could limit access by controlling payment mechanisms. They include Appstore and GooglePay. The third could restrict access by owning the hardware. Apple's iPhone is an example.   

We are already seeing the problems on anti-competitive practices with the second and third. In fact, Apple is perhaps a case of market abuse on two dimensions. It restricts all iPhone users to Appstore, and then all App users on iPhone to use only Appstore. 

Similarly, while a SuperApp which would bundle all Apps under one giant App would undoubtedly help the individual Apps piggyback to access the marketplace created by the SuperApp, it also confers a disproportionate power on the SuperApp owner, a power which, if precedent tells anything, is most likely to be  abused in future.

2. Why should the digital market place be substantively different from the physical marketplace? 

As a parallel with other general purpose technologies, consider the following. Assume if the founder of electricity was given gatekeeping powers which would allow them to charge royalties on all equipment which used electricity.  Or for vehicle or railway carriage manufacturers to share their profits with road and railway line owners. Or if a newspaper says it has not gatekeeping responsibility for its published content.

In these cases where such risks emerged, they have been mitigated by active regulation. The distinction between common carrier and content is maintained in all physical markets - roads and vehicles, railway carriage and rolling stock, pipeline and oil/gas/electricity supply and so on - and regulatory architecture built accordingly. Digital markets are no less immune from the problems that necessitated this regulation and should therefore be subject to the same regulatory design principles. 

A hardware, payment mechanism, or operating system/platform is, most often, as much a common carrier as roads or pipelines. If this insight is not evident due the emerging nature of these innovations, it's only a matter of time before they become egregiously so. But a lot of avoidable damage in terms of limiting innovation, reducing output and consumer surplus, and rent-seeking would have happened by then. 

There is no compelling argument to suggest that digital marketplaces should be allowed any preferential treatment vis-a-vis the physical marketplaces. While it may have been true that digital marketplaces required some preferential treatment in the early stages of their evolution, as indicated by the now infamous Section 230 of the US Communications Decency Act, there is no reason to continue providing the same preferential treatment. This only creates an unfair regulatory arbitrage advantage for the digital marketplaces, which as we have seen leads to socialisation of costs and privatisation of gains. 

3. Gatekeepers are pervasive across digital marketplaces and market abuse becomes inevitable.  

Consider the case of video streaming services. The emergence of Netflix as a dominant player is already creating tensions between it and various content makers. The plight of Uber drivers and Airbnb hosts in several cities across the world have been well-documented. Much the same is happening across several other digital markets. 

But this can be mitigated with the presence of multiple digital marketplaces. Consider the example of ride-hailing in London. Currently there are several Apps competing for dominance - Uber, Ola, and Bolt are just three examples - which gives drivers the genuine choice of shifting across platforms with little or exit/entry barriers. 

4. Once a gatekeeper, there exists the tendency to tighten the grip by moving into associated markets in the larger marketplace. 

Take the example of Apple. It has been and still remains a hardware company. But now, realising the plateauing of its hardware market, it is moving into the software market. The Appstore is its leverage in this second phase journey. Or take the example of Netflix, which started out as a streaming service, but is now getting into content production. In both cases, the downstream gatekeeping allows the companies to target capturing the upstream market too. 

All such transitions only tighten the grip of the provider over the entire market. In fact, as with the case of Apple (hardware and payment gateway), often such movements ends up adding another layer of gatekeeping power over the market. 

5. The possibility of SuperApps also underlines the importance of open access in promoting innovation. 

In the context of East Asia or India, a digital marketplace without any hardware or payment gateway gatekeepers meant that any prospective SuperApp provider did not face any entry barrier. It is also an important reason why SuperApps have not come to the scene in developed markets. How are we to say that a US digital marketplace with a prominent role for Apple and its AppStore is more efficient than a counterfactual of one with a couple of SuperApps? 

Or how do we refute the argument that Google's purchase of YouTube and Facebook's purchase of Instagram have constrained innovation in the videos and images marketplaces? How do we refute the argument that left to their own, these two dominant platforms on the video and image sides would not have spawned innovative and distinct consumer-surplus enhancing platforms on either sides? In fact, there is a strong case that these purchases have not only constrained innovation in these two specific markets but have also significantly enhanced the market power of Google and Facebook over their existing primary markets. 

6. The emerging structure of the digital marketplace in many segments is still uncertain and is likely to vary across countries. 

It is impossible to today predict the trajectory of evolution of the Indian digital marketplace in retail e-commerce. There are several uncertain elements. Whether the market will look like US or China will depend on a lot of factors. A few winners would have emerged in each major market. That emergence would depend on the initial conditions, emergent dynamics of the marketplace itself, and the nature of the prevailing regulatory systems. 

7. As a consequence of the above, lady luck has an out-sized role in the emergence of winners in digital marketplaces, more so than in the conventional physical markets. 

A typical product or service company responding to a felt-need only faces commercial risks. The marketplace structure remains largely invariant. In contrast, a digital company also faces completely unpredictable market evolution, which is beyond its control. Besides, even with the most enterprising spirit, the dynamics of the market evolution largely means that who emerges winner is a matter of luck. 

More on business concentration in the US

As I have blogged on several occasions, there are too many signatures of modern capitalism that point to an innate dynamics of business concentration and inefficiencies. A new paper by US Federal Reserve economists Isabel Cairo and Jae Sim reiterate the points.

They point to six secular trends from the US economy from the last four decades.

First, real wage growth has stagnated behind productivity growth over the last four decades and, as a result, the labor income share has steadily declined. If the real wage growth is the best measure of improvement in living standards, the decline of labor share can be considered an undesirable trend for the welfare of the majority of households. Second, the before-tax profit share of U.S. corporations has shown a dramatic increase in the last few decades. If the rise of the profit share is due to a growing concentration of U.S. industries and the rise of prices over production costs, it can also be considered detrimental to the welfare of consumers. The profit share is negatively correlated with labor share, and the degree of correlation is strong: -0.91 over the 1980–2018 period. This correlation suggests that the rise of the profit share and the fall of the labor share may have been driven by a common cause. 

Third, income inequality has been exacerbated over the last four decades. In particular, the income share of the top 5 percent households has been steadily rising from 21 percent in early 1980s to more than 34 percent on the eve of the Global Financial Crisis (GFC) in 2008. The rise in income inequality over the last decades may be closely related with the first two trends. To the extent that the major income source of wealthy households is the profits of the firms and the major income source of the working class is labor income, the first two trends explain the trend in income inequality. This suggests that income inequality, too, may have been driven by the same factor behind the decline of the labor share and the rise of the profit share.

Fourth, wealth inequality has also been exacerbated during the last four decades. According to the Survey of Consumer Finances, the net worth of the top 5 percent households has increased about 186 percent between 1983 and 2016. The rise in wealth inequality is not simply the result of rising income inequality–though related, since a bulk of the rise is due to capital gains. If most of capital gains are related to increased stock market value, the surge in wealth inequality may have been driven by the same cause that explains the aforementioned three secular trends.

Fifth, the rise of income inequality has happened concurrently with the rise of household sector leverage ratio. The household sector credit-to-GDP ratio was 45 percent at the beginning of 1980s. Since then, the ratio steadily increased and reached almost 100 percent on the eve of GFC. This suggests that a growing share of national income has been allocated to income groups with low marginal propensities to consume (MPC). If there is a negative correlation between income level and MPC... even this secular trend may have the same cause that generates the rising income inequality. Finally, the rising household sector leverage has been coupled with rising financial instability... The probability of financial crisis in the United States, computed using the estimates of the multi-country logit model of financial crisis by Schularick and Taylor (2012), has steadily risen from 2.1 percent in 1980 to a level close to 3.5 percent on the eve of GFC. The secular rise of financial instability is clearly linked to credit expansion over the last few decades.

Their findings from their economic model bears striking similarities with the actual trends,

We develop a real business cycle model and show that the rise of market power of the firms in both product and labor markets over the last four decades can generate all of these secular trends.

Their recommendation,

Since the GFC, most of the focus of macroprudential policies has been on building the resilience of financial intermediaries by bolstering their capital positions, restricting their risk exposures, and restraining excessive interconnectedness among them. These policies are useful in maintaining financial stability. How- ever, these policies might not address a much more fundamental issue: Why is there so much income “to be intermediated” to begin with? In our framework, the root cause of financial instability is the income inequality driven by changes in market structure and institutional changes that reward the groups at the top of the income distribution. Our experiment suggests that if an important goal for public policy is to limit the probability of a tail event, such as a financial crisis, a powerful macroprudential policy may be a redistribution policy that moderates the rise in income inequality.

Weekend reading links

1. Aswath Damodaran (HT: Ananth) has a scathing takedown of the idea of ESG investing. 

There is a weak link between ESG and operating performance (growth and profitability), and while some firms benefit from being good, many do not. Telling firms that being socially responsible will deliver higher growth, profits and value is false advertising. The evidence is stronger that bad firms get punished, either with higher funding costs or with a greater incidence of disasters and shocks. ESG advocates are on much stronger ground telling companies not to be bad, than telling companies to be good... Based on the evidence, it appears to me that just as likely that successful firms adopt the ESG mantle, as it is that adopting the ESG mantle makes firms successful... The ESG bandwagon may be gathering speed and getting companies and investors on board, but when all is said and done, a lot of money will have been spent, a few people (consultants, ESG experts, ESG measurers) will have benefitted, but companies will not be any more socially responsible than they were before ESG entered the business lexicon.

Staying on the issue, Dani Rodrik writes,

This calls for a different mode of regulatory governance, according to which broad economic, social, and environmental objectives are set by public authorities, but refined (and occasionally revised) in a continuous process of iterative collaboration with firms. While getting the private-public balance right is difficult, there are successful examples of such collaboration in technology promotion, food safety, and water-quality regulation. Ultimately, though, the only real solution to the conundrum is to make business itself more democratic. That means giving employees and local communities a direct say in the way firms are governed. Firms can become a reliable partner for the social good only when they speak with the voices of those whose lives they shape.

Last year, nearly 200 large US companies, grouped under a Business Roundtable declaration, pledged their commitment to stakeholder capitalism. Their balance sheet when faced with Covid 19, according to a study by Tyler Wry of Wharton,

As COVID-19 spread in March and April, did signers give less of their capital to shareholders (via dividends and stock buybacks)? No. On average, signers actually paid out 20 percent more of their capital than similar companies that did not sign the statement. Then, as the coronavirus swept the country, did they lay off fewer workers? On the contrary, in the first four weeks of the crisis, Wry found, signers were almost 20 percent more prone to announce layoffs or furloughs. Signers were less likely to donate to relief efforts, less likely to offer customer discounts, and less likely to shift production to pandemic-related goods.

Gillian Tett has a summary of the challenges associated with a common ESG accounting standard to help compare across firms. The arguments of the likes of Dani Rodrik and the results of commitment-based approaches points to the need for an active role for governments in the definition of such standards. Industry-driven approaches, especially by the likes of World Economic Forum, are always vulnerable to being greenwashing. 

2. The Covid 19 pandemic has led to massive erosion of equity capital across businesses. This leaves us with the scenario of businesses which while having promising prospects are unable to borrow more or even sustain the same level of borrowing due to depleted equity. These businesses will not be able to capitalise on the various monetary stimulus infusions by governments and central banks across developed economies. Ricardo Hausmann raises these challenges in this article.

3. Ashok Gulati is optimistic on the agriculture sector, post-reforms,

My reading is that in the next three to five years, hundreds and thousands of companies will be encouraged to build efficient supply lines somewhat on the lines of milk, as a result of these changes in farm laws. These supply lines — be it with farmers producer organisations (FPOs) or through aggregators — will, of course, be created in states where these companies find the right investment climate. Some will fail, but many will succeed. These companies will help raise productivity, similar to what has happened in the poultry sector.

While not being as pessimistic as Yogendra Yadav in this critique, such optimism (3-5 years) has little basis with field realities. 

4. Development Impact Bonds (DIBs), and that too in education, should count as among the dumbest of several naive inane ideas that inhabit the space of international development. That the World Bank is funding some is one more reason to argue why development of developing countries should be left to insiders. There are too many people from the global North, who promote such fads, for whom development is a very attractive and accountability-free career option which inflict considerable harm in developing countries.

It beggars belief how such claims (by Ronald Cohen) pass muster and find its way into an FT article,

“I wouldn’t be surprised if paying for success raises $1tn. The idea can spread much more widely and it will grow because it delivers much better results per pound spent.”

Or perhaps, it's a reflection of how disconnected and clubby vast parts of international development is. 

This, this, and this are my earlier posts which highlight the problems with pure outcomes-based approaches to solving complex development problems.

5. The Economist points to a new research by Justin Sandefur and Dev Patel which uses a statistical technique to compare the performance of students across 80 countries on a benchmark international test, Trends in Mathematics and Science Study (TIMSS). 

The research finds that children in rich countries do far better than children from similar income households in poor countries.

Unsurprisingly, in almost every country, richer kids post higher test scores. But what is less obvious is that at a given level of household per capita income in PPP dollars, kids from wealthier countries score much better than kids in poor countries. It’s not just your own socio-economic status that matters, but the wealth of the country you live in that determines your educational outcomes. In terms of test scores, it’s better to be (relatively) poor in America than (relatively) rich in Honduras. The strength of those country effects is huge. Controlling for a household income as flexibly as possible, we still find that country fixed effects explain over half of the pupil-level variation in reading scores, and about two-thirds of the variation in math scores.

6. Apple is fast becoming an also ran in the Chinese smartphone market. 

Sample this,

In 2017, Apple dominated the premium $600-and-up smartphone market with an 86% share, versus Huawei’s 5%, according to Canalys. But in the first half of 2020, Huawei controlled almost half the market, while Apple had fallen to 42%.

7. Emmanuel Saez and Gabriel Zucman have a detailed rebuttal of a few papers critiquing their US inequality findings. The summary, nothing much changes at all - inequality in the US is shockingly high and rising, and prevailing policies are contributing to it. 

8. Some disturbing news about the infrastructure pipeline, as reflected in the newly inaugurated India Investment Grid portal. This Livemint article points to less than a fifth of the 1000 largest projects, which form 80% of the value of the National Investment Pipeline, to be "even remotely close to being tendered".

This article points to the growing pile of delayed projects and increasing delays. 

9. Unintended consequences of tax law changes,

The dividend distribution tax, which had to be paid by the company, has been abolished. All companies now have to pay a tax on “income distributed” by the medium of buybacks, whereas only unlisted companies were liable to pay the “buyback tax” earlier. From 2020-21, the shareholder also has to pay income tax on dividends received. On the other hand, the shareholder, who accepts a buyback offer, is no longer liable to pay capital gains tax on the associated profits. Consequent to these changes, buybacks have become a more attractive way for promoters to reward themselves and other large shareholders, compared to paying dividends. The impact is already apparent. The tally so far this financial year stands at over Rs 28,000 crore, including the recent buybacks announced by TCS and Wipro. This exceeds the buyback quantum for 2019-20, by a massive 42 per cent, with almost six months still to go in the current fiscal.

Interesting point about dividends, 

A company may deliver far higher returns by ploughing profits back into generating growth. This will be reflected in rising share-prices. Amazon (listed in 1997) has never paid dividends; Microsoft issued its first-ever dividend in 2003, some 22 years after listing; and Apple did not pay dividends between 1995 and 2012.

10. Edward Luce has a very good long read on America in the backdrop of the elections. He foresees a slow-burn constitutional crisis arising from among other things, changing constitution of the Supreme Court and demographics. The starting point of deep polarisation makes it very plausible. 

11. Nice article about Fast Retailing which promotes Uniqlo brand and Tadashi Yanai in NAR. This three-way race at the top of apparel market is interesting and Uniqlo is fast catching up with the big two.

The article talks about what perhaps differentiates Uniqlo,

Since its beginnings, Fast Retailing's strength has always been to nail reasonable pricing for basic items, said Takahiro Kazahaya, a retail analyst at Credit Suisse Securities. Yanai has "set a clear mission for the company to provide cheaper and more functional clothing for everyone of all ages, and has been doing what it needs to achieve that." The secret of Uniqlo's pricing power is partly due to the large volumes of orders it places with the textile industry. That allows it to work with textile makers more closely, to mass-produce exclusive materials for low prices. "Most apparel makers just tell us to do things at low cost," a Japanese textile company told Nikkei. "But Yanai-san asks us what we need in order to do things he wants us to do." Other partnerships include one with knitting machine maker Shima Seiki Mfg. for a seamless "3D Knit" collection, and it has successfully raised design quality by releasing regular collections with top designers including Christophe Lemaire and Ines de la Fressange... Uniqlo casts a wide net, targeting customers of all ages and lifestyles, which means the "long-term potential market is bigger for Uniqlo [than Zara]," said Takahiro Saito, CEO of fashion retail consulting firm Demand Works and author of the book "Uniqlo vs. Zara."

Btw, interesting question to ponder - who's the Tadashi Yanai equivalent in India? An intriguing thing about Indian manufacturing is this. Despite the very large and captive domestic market, why have we not seen large domestic brands emerge in clothing, footwear, kitchenware, electronic appliances, office stationary, sporting goods etc, capable of out-competing foreign brands on quality and price in the domestic market, and with some becoming reasonably large enough to start expanding outside? 

12. Is Taiwan Straits the hottest geo-political landmass in the world today?

But former top U.S. officials have painted a worst-case scenario in which China takes advantage of chaos following a contested U.S. election to invade the island. Glaser said China's next provocative move might be to fly an aircraft directly over the island. Taiwan would have the right to down the plane as a defensive measure, potentially sparking a larger conflict. But ignoring the act would allow Beijing to continue aggressions with greater impunity.

From the Chinese perspective, even with it getting stronger and more globally influential, the window for a forcible takeover of Taiwan may be closing. So the compulsion to think as act now or never could be high.

13. One of the casualties of the 2000s bubble was value investing. There is a reprise happening now, as investors chase growth stocks. In simple terms, the markets have stayed high longer than value investors can stay invested. Sample the latest to bite the dust - AJO Partners.

14. Indonesia follows India with radical labour market reforms.

15. Bloomberg article on how Dharavi kept out Covid 19.

16. Real estate is the largest destination for PE investments in India. Sample this about Blackstone, which is apparently considering purchasing Prestige Estates Projects' commercial properties for $2 bn,

Blackstone is the largest owner of commercial real estate in India with a total investment of around $7.8 billion as of March 2020. It has built its portfolio over more than a decade, buying up more properties as India’s economy slowed in recent years. Two real estate investment trusts backed by Blackstone have also been listed on India’s public markets. Prestige Estate is one of the largest developers in southern India. It has about 45 ongoing projects spanning 52 million square feet, with another 57 million square feet under construction.

17. Finally, Scott Galloway thinks AirBnB's IPO next year could make its stock the Tesla of 2020. 

India's curious export performance story of the last three decades

Excellent paper by Arvind Subramanian and Shoumitro Chatterjee pointing to the important role played by exports in India's growth performance over the last three decades, the rising protectionist trends since 2014, and how this could harm India's economic growth prospects. 

This is perhaps one of the more relevant macro research papers on the Indian economy of recent times, not because it is presenting something completely new but it dissects one of the most important contributors to India's growth and presents some very important insights. An example of first rate research. 

They highlight the paradox of the country being the third best export performer over the last three decades but also being a abysmal failure in massive under-exploitation of its most abundant factor of production, unskilled labour. They show how India's growth since 1990s has been no less export-led than those of East Asian neighbours, and that India's export performance has been driven by high-skill goods and not low-skill goods (textiles, apparel, footwear etc) as would have been predicted.

India produces roughly $34 billion in textiles and clothing. If it were to produce in line with its labor force, the size of its domestic textile and clothing sector should be $174 billion. In other words, India’s missing production in the key low-skill textiles and clothing sector amounts to $140 billion, which is about 5 percent of India’s GDP... India’s underperformance in low-skill manufacturing is a longstanding structural problem that goes back decades... Bangladesh and Vietnam export roughly in line with their endowments and have been doing so at least since 1995. China started as a normal exporting country, exporting in line with endowments; it then became a massive outlier on the positive side, exporting much more than its endowments. India, in contrast, has been a steady, consistent, and massive under-performer throughout the last 25 years, exporting about 15 percentage points less than what would be implied by its abundance of unskilled labor... Between 1995 and 2018, the share of low-skill intensive exports declined from about 34 percent to 20 percent. In contrast, skill-based exports have risen from 42 percent in 1995 to 65 percent in 2018.  

Reflecting the export composition, the authors find that the skill-intensity of aggregate exports (obtained by weighting the skill intensity index for each sector by it export share) is highest for India.

What is striking about the chart is both the level and change in this low- skill intensity export index. For its level of income, India’s index is well above that of China, Bangladesh, and Vietnam, and over time, India’s index rises and remains well above that of other countries whose exports have grown more rapidly. Therefore, in terms of is level and change, India’s skilled export intensity is too high.

Further underlining this point, they find that India's performance in low-skill manufacturing and especially in the four important ones (textiles, apparel, leather, and footwear) to be the poorest. 

The authors argue that the sectoral composition trends of India's exports point to two vulnerabilities, 

The first vulnerability is India’s inability to emulate the performance of China, Vietnam, and Bangladesh to become a powerhouse exporter of goods from relatively low-skill manufacturing sectors such as clothing and footwear. India’s second vulnerability lies in its over-reliance on skill-based exports—the underlying supply of skilled labor is limited, which makes reliance unsustainable over the medium term.

Besides, they also point to the possibility of scarcity of skilled labour becoming a constraint to the growth of skilled services exports.  

In light of this, as the authors argue in this oped, the recent trends of rising protectionism should count as a matter of deep concern.

Between 1991 and 2014, average tariffs declined from 125 per cent to 13 per cent. However, since 2014, there have been tariff increases in 3,200 out of 5,300 product categories, affecting about $300 billion or 70 per cent of total imports. The average tariff increased from 13 per cent in 2014 to nearly 18 per cent. The largest increases occurred in 2018 when tariffs for nearly 2,500 product categories were increased, amounting to nearly 4 percentage points. Tariff increases have been greatest in low-skill manufactured imports and cell-phone assembly, amounting to 10-15 percentage points... In each of the three decades since the 1990s, exports contributed about one-third of overall growth. As a result, India’s export-GDP ratio is currently 20 per cent, more than twice as high as in the early 1990s, despite the post-global financial crisis (GFC) slowdown. Thus, an export slowdown today is likely to have a more consequential impact on the overall economy. Every 5 per cent of the export growth foregone will shave off 1 per cent in overall GDP growth.

In a companion paper they seek to dispel some myths about the rationale behind the Atmanirbharata campaign,

The first is that India’s domestic market is large and buoyant. In fact, the domestic market is still quite small, and likely to remain small over the medium-term, since domestic demand will be weighed down by heavy debts across the economic horizon—in firms, households, and the government. The second myth is that India’s growth has been driven by domestic demand, not by exports, and definitely not manufacturing exports. Our evidence illustrates the opposite, namely that for three decades a stellar export performance has played a critical role in India’s overall growth. The third myth is that India’s exports prospects are dim. We show to the contrary, that India has considerable room to increase exports by increasing its market share. India has been gaining market share for several decades now, even during the difficult global conditions of the past decade. Moreover, India’s past under-performance on low-skill exports creates a significant opportunity at a time when China is vacating export space in such products.

Given these conditions, we argue that an inward turn could doom India to a trajectory of mediocrity. A strategy of abandoning exports to focus on the domestic market will give up a valuable—perhaps the most valuable—opportunity for growth.

I am strongly inclined to agree with all these. They show that India's gain from the rebalancing of global trade away from China in the aftermath of the global financial crisis of 2008 has been limited.

This paper, while being very valuable in dispelling the myths, is disappointing flawed misleading in its conclusions. The one big problem with the paper is with its central conceptual foundation which leads it to make this unqualified advocacy of trade liberalisation,

To the contrary, the big export opportunity for India—low-skill manufacturing—can only be exploited through less protection and more outward orientation because this industry is import-intensive, as China and the other successful low-skill exporters have shown.

This is pure ideology. It is problematic at multiple levels and there is nothing in the paper by way of evidence which warrants any such gung-ho advocacy of tariff liberalisation. There are several problems with the above claim.

One, as several researchers, from Dani Rodrik to Ha Joon Chang, have conclusively demonstrated, "China and other successful low-skill exporters" grew their export industries behind the walls of high tariff and non-tariff barriers. In fact, such infant industry protection has been a feature of the historical development trajectory of all developed countries. However, as Joe Studwell has shown, such protection has to be  calibrated towards productivity improvements through the likes of export competition and not become opportunities for crony capitalism or protection of vested interests. 

Two, such blanket advocacy for tariff liberalisation overlooks the significant heterogeneity in global market conditions and stage of domestic industrial development for different sectors. In fact, if India had pursued this strategy on a blanket basis, it would not have been able to reap perhaps its only manufacturing success of the last five years, the apparent success of the mobile phones industry, where tariffs on assembly of mobile phones increased by 20 percentage points in the 2014-20 period. It would negate the policy of dynamic calibration of tariffs on inputs to facilitate movement along the value-chain.  

Three, even at a conceptual level, the comparison with China and others runs into problems. For example, as Dani Rodrik again has argued, it is one thing to liberalise when tariffs are very high and an altogether different thing to continue doing so when tariffs have fallen to reasonable or even low levels. In fact, as Rodrik has written, this may end up creating more problems. Extending the same logic, one could argue that India's gains from the post-liberalisation success with exports owes more to the starting point of liberalisation than an ideological case that tariff liberalisation is always good. 

Four, the bold and unqualified recommendation to "eliminate all tariffs on inputs" in clothing, based on India's foreign import share of clothing and leather exports being just 16% to China and Vietnam's 40% share, can be argued to be a case of confusing correlation to causation. India's general integration with the global value chain is and has always been far less than that of China or Vietnam. The recommendation assumes that input tariff liberalisation and not establishment of scale manufacturing eco-systems followed by movement up the clothing and textiles value-chain is what led to this condition of high import share of exports. I am inclined to the latter.  

In fact, further tariff liberalisation, without accompanying measures to relax the as yet unknown constraints to scale manufacturing in all these sectors, is most likely to weaken and further immiserate the local manufacturing base in these low-skill sectors. 

So, instead, I would suggest this non-ideological and cautious conclusion,

To the contrary, the big export opportunity for India—low-skill manufacturing—can only be exploited by maintaining the general outward orientation, even deepening it where required, but also carefully deploying tariffs and other industrial policy levers in a calibrated and incentive compatible manner, as China and the other successful low-skill exporters have shown.

It is one thing to criticise the government for raising tariffs across the board, it's an altogether different thing to go beyond that and advocate further tariff liberalisation, and that too in an unqualified and across the board manner. It does no good to substitute one bad (a reversal of openness) with another bad (further blanket tariff liberalisation).

Some other observations:

1. The clear stratification of export segments and their associated labour markets points to a dual-nature of the larger Indian economy itself - the co-existence of a modern and productive economy with a pre-modern and unproductive economy. Given the country's overall size, despite the former being small in relative terms, it is a significant presence and therefore its volume of exports is understandable. This stratification cascades all through the different parts of the economy and society. 

It is not inaccurate to say that the Indian economy is broadly an ocean of mediocrity with islands of productive excellence.

2. India's consumer market too reflects this stratification. The vast majority of the Indian middle class are most likely to be the skilled workforce that inhabit the high-skill manufacturing segment. While the paper does not point to, the reality is that the employment share of high-skill manufacturing is tiny. Therefore, like with the relatively small size of the high-skilled labour force, the Indian middle class too is expectedly tiny. 

The corollary being that without low-skill manufacturing becoming productive and prospering, broad-based economic growth will remain elusive.

3. Any attempt to address the weaknesses with low-skill manufacturing will have to overcome the headwinds of automation which are likely stronger in these sectors. 

4. Finally, while the paper has outlined the problem, the challenge of boosting productivity and production in the low-skill manufacturing sectors remains an elusive quest. Over the years, multiple governments have tried every thing possible to address this problem. While they are important reforms, it is hard to believe that the recent labour market reforms by themselves can contribute much to overcoming the problem. As I have blogged illustrating the case of footwear, the constraints bind at several levels. 

The Indian manufacturing sector appears to be stuck in a very bad equilibrium, which becomes galling and frustrating when we compare with the progress being made by the likes of Bangladesh. The question then is how/why did we get there. And is the answer then only to try out everything and hope that the dynamics of growth will gradually relax these numerous constraints!

Policy making in times of technocracy

There are two imprimaturs of sophistication and professionalism in our times - the objectivity of quantitative methods, and the wisdom of experts. Together they form the application of the scientific method to problems faced by humanity. Their counterpoints are the subjectivity of anecdotes and judgements based on experiences, and the unsophisticated bureaucracies and popular commentary.

These two imprimaturs constitutes a set of twin tyrannies of our times.

So a public policy idea requires evidence. Evidence means its demonstration, and that too to the standards of physical sciences. And the techniques of science are quantitative. So the primacy of quantitative assessments and data analytics. Even those, like the management gurus, who cannot describe their worlds in neat quantitative terms have their serious syntax to signal gravitas - analytical frameworks, n X n tables, scorecards, diagrams and flow-charts, and so on. Leave aside anecdotes and experiences, even ethnographies and other non-quantitative analyses become faulty and riddled with subjectivity. Evidence is about demonstrable facts. And it is not about experiential judgements.

Business leaders, entrepreneurs, academicians, researchers, and consultants apply their technical expertise to engage with an issue or a problem. They are the experts. Their ideas and engagement have been certified as credible and wise. Their tools and practices are the mark of applying expertise. Accordingly, for example, practices followed by businesses should be applied to the realm of public policy.

Every public decision should be seen as an exercise in technocracy. Central banks are technocracies, and fiscal policy too should be a technocratic exercise. Covid 19 response is about technocratic distillation of evidence drawn from models and testing to define protocols for socially distanced lives and livelihoods. Taken to its logical conclusion, experts should be entrusted the responsibility of everything. Even politicians should be technocrats. At the least, Ministries like Finance and Infrastructure should be headed by technocrats.  

This interpretation is claimed as being democratic in nature. It levels the playing field. It does not confine making policies on public issues to the bureaucrats and politicians. It does not discriminate against the inexperienced or the young, nor against the outsider. Smart young professionals are considered just as competent (if not more) to advise on public policy as experienced practitioners. Economists and epidemiologists are considered better placed than bureaucrats to engage (or undertake plumbing) on public policy.

After all they are experts. Provided they have acquired (preferably through a degree from an Ivy League University) the technical competency, anyone can engage with any problem in the world. Like with the caste system, here too a heirarchy of expertise operates, based on where you sit and preach. The incumbents of a big Wall Street financial institution or Fortune 50 company or an Ivy League US University or a Washington think tank or the World Bank or International Monetary Fund are the brahmins of this caste system.

It can be a deeply empowering situation for outsiders who are attracted by the glamour of engaging on complex public issues without any responsibility whatsoever on the consequences of their actions.

In international development, it has spawned a self-serving class of self-declared experts consisting of academic researchers, consultants, advisors, opinion makers, and influence peddlers. Think tanks and global development tourism seminars and workshops are the best places to find them.

It overlooks the reality that public issues involve social choices, an issue in the realm of politics. It involves values that go beyond efficiency and technical expertise. It is more importantly about fairness and dignified lives and livelihoods, adherence to societal-cultural norms, sustenance of the social contract, redistribution to those impacted for no fault of theirs, and so on. 

The space available for these considerations have shrunk even as that for logical reasoning, quantitative assessments of evidence, and technical expertise has expanded to take its place. The elevation of technocracy to the status of wisdom, and the marginalisation of all else, in policy making is an unfortunate reality. Its consequences are being felt. 

Narratives revisited - professional Vs family owned businesses

The conventional wisdom on management elevates managerial capitalism as being superior to family-owned businesses. How does this narrative stack up against reality? 

This report points to a Credit Suisse study which uses its data of over 1000 publicly listed family owned companies (where family controls at least 20% of the company) finds that such businesses have performed better than non-family owned ones since 2006 by an annual average of 370 basis points.

Family-owned companies, the Credit Suisse findings suggest, tend to be more profitable. Since 2006, revenue growth generated by such companies has been over 200 bps higher than that of non-family-owned companies for both smaller and larger companies. That apart, they, on average, tend to have slightly better ESG scores than non-family-owned companies... Despite the impact on revenue growth this year, family-owned companies surveyed viewed Covid-19 as slightly less of a concern to their firm’s future prospects with 21 per cent of such companies saying the pandemic had either not had a significant impact on their business or had even been a net positive. “Family-owned companies have also resorted less to furloughing their staff than non-family-owned companies (46 per cent versus 55 per cent),” the Credit Suisse report said. Among regions, performance has been strongest for family-owned companies in Europe (470bps) and Asia (over 500bps) per annum since 2006. North America, on the other hand, family-owned companies showed a more moderate outperformance of around 260 bps per annum. The report covered 12 markets in APAC, including Japan, which continue to dominate and represent a 51 per cent share of the universe, with a total of 540 companies and a market capitalisation of over $5.56 trillion.

This post is not about making the case for family owned businesses. Instead it seeks to question some of the assumptions that have stigmatised family ownership and elevated public ownership (and the associated managerial model).

Managerial capitalism has become an article of faith administered with ideological fervour at business schools. Accordingly, the desired form of a business should be an arms length relationship between shareholders, and that public and diverse shareholders, and professional managers. Professional managers are experts, who know better than owners.

Any other form of business organisation is scorned upon, deemed undesirable, and discredited. It is therefore a commonly accepted narrative that professionally managed firms are more efficient and effective than family owned and managed businesses.

The default position is to look with suspicion at Japanese, Chinese, Korean, and Indian business management, and urge them to abandon the model of family control and had over control to professional managers.  Even the European variants of conservative and prudent management is not favourably looked upon as the American managerial variant. And when the recurrent sins of managerial businesses in the US crops up with alarming regularity, the response is to urge reform at the margins.

What is the logic behind this narrative?

The idea behind managerial capitalism is this. Owners want to maximise returns on their investments. External managers bring professional expertise and can concentrate on the long-term. Accordingly, they can mobilise and deploy resources efficiently and manage it effectively to maximise life-cycle returns to owners.

In the public markets, the owners are shareholders, and shares are traded in the market. The share prices are a proxy for the firm's performance. So what's more incentive compatible than linking executive compensation to share prices?

Problem is with the underlying assumptions, which distorts the principal-agent relationship. The dispersed and liquid nature of shareholders means managers have complete autonomy and shareholders are interested only in the short-term. To paraphrase Machiavelli, dispersed share ownership comes with "uncertain commitment of the powerless majority". In liquid public markets, the shareholders are not even interested in the company, but just the share price. And these, and the ongoing market boom is but just one example, are two different things. So managers help themselves with exorbitant salaries and bonuses, while keeping shareholders happy with engineered share price bubbles through the likes of share buybacks.

As to the long-term, in its real-world interpretation, it's only as far as you remain in a position (plus a bit more for the lock-in periods). But bubbles can be kept inflated for much longer, especially when it's in the interests of the entire establishment. Look no further than quantitative easing and the primacy of stock markets in monetary policy.

It is amply clear that this form of capitalism is broken everywhere. Its signatures abound. This is a very good critique of shareholder capitalism by Sam Long.

Consider other forms of business organisation - worker co-operatives, patriarch owned and managed businesses, smaller family owned and operated businesses, and so on. All these businesses employ professional managers, but control is with the owners. Managers execute what is decided by the owners.

There are different variants of capitalism. There are the German mittlestand's and typical continental European businesses which are both owned and managed by families. There are the East Asian conglomerates with a presiding patriarch and several subsidiaries owned and managed by children and grand children. Then there is the American shareholder and private equity variants of business ownership and management.

Look at this impressive list of East Asian family owned and controlled businesses - Hong Kong's Li Ka Shing's Cheung Kong Holdings, Macau's Stanley Ho founded STDM Group, Thailand's Charoen Popkhand (CP), Malaysia's Robert Kuok empire which owns the likes of Shangri-La hotels, Indonesia's Lippo Group founded by Mochtar Riady family and Salim Group founded by Liem Sioe Leong, Philippines' SM Group owned by the Sy clan, South Korea's Chung Ju-Yung founded Hyundai Group and Lee Byung-chul founded Samsung Group. A similar list could be made about India's own family owned businesses or continental European family businesses.

These are real businesses which played a significant role in building their respective national economies. Most of them are world-class, some global leaders in their industry, and have survived the test of time and look likely to remain so for the foreseeable future. They are the most aspirational career options for the best and the brightest in all these very globalised economies.

How many companies can claim this?

In 2019 Macau’s $30bn in annual casino revenue was five times Vegas’s. Despite a slump in turnover this year as covid-19 emptied parlours, Macau’s rise looks poised to resume. It owes much to Stanley Ho, the charming scion of an illustrious Hong Kong clan. Thanks to the monopoly gambling licence he secured from Macau’s former Portuguese administrators in 1961 and held until 2002, STDM, his family’s main holding company, grew into Asia’s largest gambling empire.

It is one thing to get a license. It takes something altogether different to then do what Stanley Ho did. Granted, he was at the right place at the right time in a small country. But, over the decades, so were many others in many other countries in other sectors, without anything remotely like this effect.

See also this story of Samsung. Countless similar stories could be listed about the continental European companies. 

This is not to say that they don't suffer from serious corporate governance problems. But then so do the public companies. Further, many of these benefited from close ties with governments and associated crony capitalism. But how is that any more repugnant than the business practices and intense lobbying that tech giants in the US do to stifle competition and maximise profits? 

In fact, the general global evidence on family owned businesses and scaling point to a strong negative correlation. The literature points to “lower risk approach to debt leverage and company growth” and “low innovation and slow adaptation” compared to non-family businesses. Further, firms with larger family ownership (say, founders with more children), a feature of Indian businesses, are associated with even smaller growth. Other studies have found that firms with greater family ownership are prone to below-potential rates of economic growth, given their internal financing resources” or that “small family businesses have a propensity to deliberately limit their growth”. Further, such businesses have lower market value as investors fear opportunism and opacity.

The point here is not that family-owned businesses are superior. Instead there is a more nuanced picture. One, managerial capitalism is broken and need to be fixed. Two, family owned businesses have achieved remarkable successes in many developing countries. Three, as a general idea of business organisation, family owned businesses are no more or no less efficient than managerial forms, and their appropriateness depends on several factors. There is nothing inherently and absolutely superior about managerial capitalism as a form of business organisation. At least the form it has assumed in our times. Four, the context, stage, and sector matters in the nature of ownership and control and its impact on business growth. And this, in turn, leads to several related questions. 

Are family owned businesses better suited to economies at certain stages of national economic development? Are family owned businesses more likely to be effective in certain sectors? Are family owned businesses better positioned to grow into large companies in developing countries, and in these contexts are large companies better served by family ownership?

The larger point is that a more nuanced interpretation of business organisation is required. At least from what is taught in US business schools and is part of mainstream management thinking. Like with all else in the world, there is no one superior form of business organisation. Each have their pros and cons.

Weekend reading links

1. Pranab Bardhan has a very good exposition of social democracy - capitalist means of production but with "substantial reform in the governance of the firm and in the fiscal power of the democratic state to raise taxes to fund a significant expansion of redistributive and infrastructure programs". He argues that social democracy, appropriately designed, can leave in tact capitalism's important mechanisms of productivity growth and innovation.

2. N Jayakumar presents a very interesting idea which can potentially be used to unlock value from public sector units without disinvesting them.

The idea essentially is to issue bonus debentures, similar to the rights issuance of stocks, to meet the government's disinvestment targets,

What’s being proposed is a massive dividend recap of PSUs, through issuance of bonus debentures in a clutch of entities as shown in the table below. Using a sample list of about 13 entities, an amount of about Rs 2.5 trillion can be raised through these entities, for all shareholders combined, with the Government of India getting about Rs 1.45 trillion. The government stands to get an additional Rs 26,300 crore as tax collection, on the non-government portion of bonus debentures... So, without putting further pressure on an already beleaguered PSU space, without disturbing the cash position of some of these companies, without any dilution of government stake at absurdly low levels, the government becomes the recipient of a large basket of diversified, triple A, PSU debentures. That can then be wrapped in a Bharat Bond ETF structure and sold down to everyone from retail individuals to mutual funds, Employees’ Provident Fund Organisation and hugely cash-surplus banks, sitting on about Rs 8 trillion of liquidity parked with the Reserve Bank of India (RBI) at around 3.4 per cent. This PSU basket, carrying a coupon of 6 per cent, should massively galvanise the corporate debt market, a stated objective of the government and the RBI, since the late 1980s!

Bonus debentures capitalises reserves on a balance sheet by issuing debentures for free instead of equity shares. It becomes more appropriate also given the low debt:equity ratios of many large PSUs.

There are so many counts on which this is flawed. All that can be said is that this is only the latest example of financial market interests suggesting attractive short-term solutions without any concern for the long-term consequences. I struggle to understand how this is any different from the government resorting to  asset stripping of the private equity kind. 

What's the objective of bonus debenture issuance? If it is to help government mobilise capital from public sector units, then is this superior to alternatives like disinvestment, dividend payout, bonus issues etc? If so how? If the objective is to capitalise reserves on the balance sheet, then, how is this superior to something like dividend payouts or even share buybacks (especially if privatisation is on the anvil)? If the objective is to increase the depth of corporate bond markets, what is the likely incremental effect of such an infusion? Would the infusion translate into liquidity of secondary markets? How would this impact the financials of the PSUs in the coming years? Would they be able to generate the cash-flow required to finance the additional repayment burdens? Do they have productive investment opportunities and how confident are we about their ability to realise them? What would be its impact on a future disinvestment of the same PSUs? 

Amidst all these uncertainties and deeply questionable benefits, the one certainty is that a lot of financial market intermediaries would have made a lot of money! In these economically depressed times, it would be a stimulus to them.

3. One more to the long list of auditor culpability in corporate scandals is E&Y's role in the case of Wirecard, which crashed into insolvency after admitting that €1.9 bn in cash was missing. It emerges that one of E&Y's own employees flagged potential fraud at Wirecard four years back. E&Y had signed off the company's accounts without reservations for more than a decade.

4. In a very good example of investigative journalism, NYT showed that President Trump paid meagre amounts as income taxes. The issue has naturally become an important matter in election debates. The investigation is laudable and the tax evasion a matter to be condemned. It is one more negative on President Trump's personal balance sheet.

Wonder why NYT does not undertake similar investigations and expose the tax evasions of companies like Amazon or Apple. This, in a nutshell, is an illustration of why Trump arose in the first place and why he retains his support now.

This is a very good article on why Trump, even after the first debate performance, still retains prospects of winning.

It’s no secret that the ruling class in America despises the country class. If you’re one of those people who don’t live in coastal cities and subscribe to the same worldview as the elite aspirants hoping for a job at a billionaire-backed NGO or an internship that might lead to a job at McKinsey then you’re a deplorable, a CHUD, and definitely racist and whatever bad things are happening to you, your family, and your inland town are your just deserts. One of Trump’s main functions and biggest appeals is that he exposes the occupational elites that are credentialed but not expert in much of anything. Everyone knows it. Imposter syndrome is rampant. And Trump preys on their insecurities which is what provokes such outrageous reactions from his enemies. But a lot of Americans who live in interior America and get unglamorous jobs at slowly declining wages, raise their families want nothing more than to be left alone by the credentialed but unaccomplished strivers who hate them. For those people, Trump is their champion. They probably don’t aspire to be like Trump, but they like the fact that he exposes the bankruptcy of the undeserving ruling class.

5. John Cochrane points to an interesting study by Mitchell Langbert which highlights the overwhelming dominance of liberals (Democrat supporters) within the US academic establishment. The study uses data on the proportion of Democratic party sympathisers and donors within the American Economic Association (AEA). Sample this graphic

Cochrane quotes from Mitchell,

There is no selection in mere membership apart from self-selection. Anyone can join, and some Republican voters do join. The players, however, are elevated in one way or another by the organization. The player categories are officers, editors, authors, book reviewers, and acknowledgees (those thanked in published acknowledgments)....The players are largely devoid of Republicans.

6. Andy Mukherjee peers ahead at the possibility of a Reliance-Tata duopoly in India's e-commerce market. This comes on the back of news that Tata are talking to Walmart to bring them in as a strategic investor. Tata are also in the process of finding resources to buyout Shapoorji Pallonji's 18.4% stake in the holding company.

The 152-year-old Tata Group is talking to Walmart Inc. for a $25 billion investment in a “super-app,” a multipurpose online platform combining fashion, lifestyle and electronics retail, food and grocery, insurance and financial services, as well as digital content and education, the Mint newspaper reported... The conglomerate, which owns Tetley tea and Jaguar Land Rover car brands, has its tentacles in more than 100 businesses, all with their supply chains. If Tata can provide a portal to its vendors to sell their wares, host data and discount bills, expansion into business-to-consumer or consumer-to-consumer websites — like Alibaba’s Tmall or Taobao — shouldn’t be too hard. Besides, if Walmart comes on board, Tata may get access to both the U.S. retailer’s India e-ecommerce website Flipkart, which it bought for $16 billion, as well as PhonePe, a payment service. Tata has a stronger pedigree than Ambani in running consumer businesses, though some of its ventures — like the world’s cheapest car — have flopped.

7. The bid design for the next round of airport privatisation may be an example of a well intentioned policy which can have bad consequences. In response to the possibility of private developers skimming off all the commercially viable airports and leaving the government and AAI with all the unviable ones, the new bid design bundles on commercially viable airport with a non-viable one. Business Standard writes,

... a decision to club one non-viable airport — such as Kushinagar near Ayodhya — with a viable airport — such as Lucknow and bid out the bundle. This may seem to the government like a convenient and easy way to get some non-viable airports off its hands. But it is short-sighted. One of the elementary rules of public finance is that subsidies should be as transparent as possible so they can be properly evaluated by auditors, legislators, and voters. In this case, the subsidy to the non-viable airports will be hidden in the higher costs paid by travellers at the viable airports. This is fundamentally unfair, reminiscent of the policy of lumping north-eastern air routes with the trunk routes. The responsibility for making an airport viable, or for subsidising an unviable one if it is considered vital in the public interest, belongs to the government alone. It requires a comprehensive regional growth plan, not shifting the burden on to the private sector.

8. Ajay Shah makes the case for restructuring through debt write-downs by creditors and equity infusions by shareholders instead of indiscriminate reference to bankruptcy proceedings,

If the incumbent shareholders don’t believe in the company, the IBC is the best answer. If they believe they can make it work, they should prove their commitment by doing a rights issue. The lenders should accept a write-down. The two moves (debt reduction plus equity infusion) will add up to a healthier firm and a fresh start for the company as a going concern. This negotiation avoids the legal complexities of the IBC but it can take place only under its shadow. In some sense, the very purpose of the IBC is to create the threat through which the shareholders are brought to the table for such a negotiation... In a sensible arrangement, most stressed lenders should go into restructuring, and the role of the IBC is to create conditions for the negotiation and to mop up the cases where the negotiation fails.

9. Prosenjit Datta cautions against policies that have excessively unrealistic expectations about the full commercialisation of electric vehicles, which may have the impact of hurting investments in internal combustion engine vehicle industry. The latter forms the core of Indian manufacturing,

In 2018-19, the auto industry constituted 7.1 per cent of the country’s gross domestic product (GDP), 27 per cent of India’s industrial GDP, and 49 per cent of its manufacturing GDP, and provided jobs to 37 million people, directly and indirectly... According to the Automobile Components Manufacturers Association of India, in FY18-19, the industry accounted for 2.3 per cent of India’s GDP and 4 per cent of the country’s exports and employed over five million people.

10. Neelkanth Mishra's assessment of what the economy may require,

Thus, the segments that may need help the most (and we believe the socialisation of whose losses would be in the collective interest of all) are the urban poor, informal sector workers and smaller informal enterprises. In our view, the challenge for policymakers will be in devising schemes that target these segments, as suitable plumbing does not exist yet to direct funds there without leakage or misdirection.

11. Mahesh Vyas points to a disturbing trend with the labour force participation and employment rates, advocates some form of targeting of the employment rate,

The labour participation rate has been falling systematically since 2016-17 when it was 46.1 per cent. In 2017-18, the year that showed the full impact of the November 2016 demonetisation and the July 2018 introduction of GST, the LPR fell by 256 basis points. Then it slid by 77 basis points in 2018-19 and then again by 14 basis points in 2019-20. The two shocks of demonetisation and GST delivered within 8 months of each other had a lasting impact on the LPR. The lockdown, it looks like, could deliver a similar blow to it. The LPR tells us how many of the working age population are willing to be employed... The employment rate has been falling in line with the fall in the labour participation rate. It fell from 42.7 per cent in 2016-17 to 41.6 per cent in 2017-18 and then even more sharply to 40.1 per cent in 2018-19 and then to 39.4 per cent in 2019-20. Between 2016-17 and 2019-20, the employment rate fell by 329 basis points. In September 2020, the employment rate stood at 38 per cent. It was 144 basis points lower than it was in 2019-20.

For reference, according to modelled ILO estimates globally, 57.2 per cent of the working age population is employed. By the same model India’s employment rate was 47 per cent and South Asia was 48 per cent. Pakistan was at 50 per cent, Sri Lanka at 51 per cent and Bangladesh at 57 per cent. India has a long way to go to catch up with global standards and also with its immediate neighbours. China is way ahead at 65 per cent. For long, the debate in India has been around its handsome but jobless growth. India’s GDP kept rising handsomely till recently but its employment did not rise. Real GDP grew at over 6 per cent per annum between 2016-17 and 2019-20. But, employment fell from 407 million in 2016-17 to 403 million in 2019-20. By September 2020, it was down to 398 million.

12. Pratik Datta has a good article on the value of asset reconstruction companies (ARCs) in resolving the pile of bad assets with the banks. Given the presence of the IBC,

If ARCs could hold more equity instead of debt in the resolved company, they would also have a stronger incentive to take strategic control to ensure successful turn around. The law should therefore enable ARCs to invest in a distressed company’s equity, whether by infusing fresh capital or by converting debt into equity. Effectively, an ARC should act more like a private equity fund... This in turn would make the market for corporate control under IBC deeper and more liquid, improving ex-ante recovery rates for banks.

To appreciate how this market could work, consider the role played by hedge funds in the American distressed debt market. In the 1980s and early 1990s, market dynamics coupled with deregulation fuelled an active market for trading claims in companies undergoing resolution under Chapter 11 of the US Bankruptcy Code. This market provided better opportunities than equity markets for acquiring control of distressed businesses. Consequently, it attracted hedge funds. Hedge funds hired entrepreneurs with industry expertise who could play a more active role in turning around distressed companies. Over time, these hedge funds had a salutary impact on turnarounds under Chapter 11.

Distressed debt investors could similarly turnaround failing Indian businesses under the aegis of the IBC. Currently, investors could potentially use three kinds of domestic investment vehicles — Alternative Investment Funds, Non-Banking Finance Companies and ARCs — to invest in companies undergoing IBC resolution. While AIFs can invest in debt as well as equity subject to certain limitations, they don’t enjoy enforcement rights under SARFAESI Act, 2002. NBFCs enjoy the enforcement rights but are subject to provisioning norms for NPAs they purchase from banks. None of these limitations applies to ARCs. If only ARCs are allowed to directly participate in IBC resolutions by infusing equity, they could emerge as the most efficient vehicle for turning around distressed Indian businesses.

13. Mariana Mazzucato makes the case for governments to benefit from the bailouts being given to companies as part of Covid 19 by taking equity stakes in return for the bailout. She quotes some European examples,

When Denmark offered to pay 75 percent of firms’ payroll costs at the start of the pandemic, it did so on the condition that firms could not make layoffs for economic reasons. The Danish government also refused to bail out companies that were registered in tax havens and barred the use of relief funds for dividends and share buybacks. In Austria and France, airlines were saved on the condition that they reduce their carbon footprint.

As an illustration, sample this about Pharma,

In the United States, the National Institutes of Health (NIH) invests some $40 billion a year on medical research and has been a key funder of the research and development of COVID-19 treatments and vaccines. But pharmaceutical companies are under no obligation to make the final products affordable to Americans, whose tax money is subsidizing them in the first place. The California-based company Gilead developed its COVID-19 drug, remdesivir, with $70.5 million in support from the federal government. In June, the company announced the price it would charge Americans for a treatment course: $3,120. It was a typical move for Big Pharma. One study looked at the 210 drugs approved by the U.S. Food and Drug Administration from 2010 to 2016 and found that “NIH funding contributed to every one.”

She also makes the very good point about finance financing itself,

Most of the financial sector’s profits are reinvested back into finance—banks, insurance companies, and real estate—rather than put toward productive uses such as infrastructure or innovation. Only ten percent of all British bank lending, for example, supports nonfinancial firms, with the rest going to real estate and financial assets. In advanced economies, real estate lending constituted about 35 percent of all bank lending in 1970; by 2007, it had risen to about 60 percent. The current structure of finance thus fuels a debt-driven system and speculative bubbles, which, when they burst, bring banks and others begging for government bailouts.

More from her here,

The US National Institutes of Health spends more than $40bn a year in health innovation and contributed more than $200bn to research on innovative drugs approved from 2010-2019... Governments and supranational organisations have provided close to $6bn of investment in the R&D and manufacturing of therapeutics, vaccines and diagnostics for Covid-19. At $1.2bn, the UK’s contribution is among the largest. The NIH’s investment in R&D for coronaviruses between 2002, when Sars first emerged, and 2020 led to promising drug candidates including Remdesivir, which was recently prescribed for US President Donald Trump... The 18 listed on the S&P 500 from 2009 to 2018 have spent $335bn on buybacks and $287bn on dividends in that time. Combined, their R&D spend was $544bn over the same period.

14. The US House of Representatives anti-trust Committee has submitted the report of its year long investigations into the big tech firms. The report finds egregious practices of market abuse. Its recommendations include,

First, the subcommittee is calling for the structural separation of business lines by prohibiting any dominant platform from operating in the same market as other competitors dependent on the same platform. Accordingly, it asks for legislation to require either divestment or functional separation inside the companies... Second, the panel wants to implement rules that will prevent preferential or discriminatory treatment on the dominant platforms... The panel calls for restrictions on the use of “superior bargaining power” by the technology companies in dictating terms and negotiating agreements.

15. The production linked incentives scheme to promote investment and exports appears to be paying off in quick time. Early in the week, the government approved the plans of 16 companies to invest Rs 11000 Crore and produce Rs 10.5 trillion worth electronic equipment, including Rs 9 trillion worth mobile phones costing more than Rs 15000, over the coming five years. At least 60% of the production value is expected to come from exports under the scheme, where the companies will receive incentives ranging from 4-6% of their production value if they meet the investment target and the value of phone manufactured target each year. The incentive rate will begin at 6 per cent and go down to 4 per cent over the life of the scheme; the government says it will cost about Rs 41,000 crore over the duration.

16. Gillian Tett writes about the SPAC bubble,

This week it emerged that University of Pennsylvania students have created a so-called “Penn Spac” club to celebrate these new equity vehicles. Known as blank-cheque companies, Spacs raise money from investors, via a public listing, and then merge with a private company, in effect taking it public while avoiding a traditional initial public offering... The current statistics around Spacs are startling: so far this year 133 Spacs have been floated in the US, raising $51.1bn, nearly four times last year’s volume. A further 67 are waiting in the wings, according to Spac Research. The list of Spac managers is swelling so fast that it now includes Billy Beane, the US baseball executive depicted by Brad Pitt in the film Moneyball, and Paul Ryan, former Speaker of the US House of Representatives. Meanwhile, the London Stock Exchange is jumping aboard, as it explores how to lure Spacs to the UK, and a fund that has jokingly been dubbed a “Spac of Spacs” has just emerged. Easterly Alternatives is raising a $100m vehicle to invest in up to 15 other Spacs. Anyone older than a college kid may well hear echoes of the last credit boom. Back then, collateralised debt obligations, backed by tranches of loans, were so hot that financiers started creating CDOs backed by tranches of CDOs, known as CDO squareds.

17. FT writes about the emerging world of two distinct supply chains, one for China which is largely based out of China, and one for the rest of the world which is diversifying away from China. 

According to surveys conducted by the American Chamber of Commerce in China over the past two years, about 40 per cent of US companies in China have moved manufacturing facilities out of the country already or are considering doing so. In the chamber’s latest annual survey, published last month, only 28 per cent of member companies said their investment in China would increase this year — down from 48 per cent in 2019, around 60 per cent in the two preceding years, and 81 per cent in 2016.

This is an interesting graphic about China's growing labour and other costs, which undercuts its competitiveness.