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International trade and internet commerce - why are their effects viewed differently?

Sun, 22 Apr 2018 19:55:00 +0000

The Economist has an article on the troubles of post offices as they compete with technology and new business models which threaten to upend their own business,Their struggles are also due to delivery startups. Investors are pouring money into gig-economy couriers that use cheaper, self-employed drivers. BCG reckons that investment in such firms grew from $200m to nearly $4bn in 2014-16. Post offices, weighed down by strident unions, high labour costs and costly networks of sorting centres, struggle to compete... E-commerce giants may prove a greater threat... Amazon has already hit Britain’s Royal Mail hard by starting its own door-to-door deliveries. In California it has launched a grocery-delivery service as a way of gaining greater scale to deliver its own e-commerce parcels itself. The biggest threat of all may come from Amazon’s Chinese rival, Alibaba, which is injecting $15bn into its own delivery arm, Cainiao, and aims to expand beyond China. By doing their own deliveries in cities, where profits are juicier, these firms could leave less money on the table for post offices to cross-subsidise rural services, where costs are higher.e-Commerce and sharing economy firms are doubtless more efficient than their brick and mortar counterparts. But an equal, if not greater, share of their competitiveness arises from regulatory arbitrage. By not adhering to the standards and safeguards applicable for brick and mortar companies, they let society bear the attendant negative social externalities. This applies across sectors, and post offices and delivery startups are no different.This is a teachable moment in the way our worldviews inform our values.Consider the example of two entities, A and B, who compete with each other for selling widgets. A claims that B is undercutting it by lax widget making standards in the widget factories which allows it to sell cheaper than B.Now consider two scenarios. In the first, replace A with United States, B with India, widgets with cars, and widget making standards with labour and environmental benchmarks and safeguards in car industry. In general, the distinction would apply to developed and developing economies and the entire manufacturing sector. The latter gets a competitive advantage by their less onerous standards and lower wages, and the former demands a level playing field for their companies. In the second, replace A with a national Post Office, B with gig-economy couriers, widgets with delivering courier services, and widget making standards with labour protections. This would apply to a wide cross-section of sectors and their real economy and gig economy counterparts.Why is it that the same commentators who loudly advocate global harmonisation of labour and environmental standards without batting an eyelid, stoutly oppose or at the least hesitate to endorse any regulation of the sharing economy firms?Ironically, the same commentators were in the early nineties dismissing concerns of developing countries that the sudden global trade liberalisation and the arrival of deep-pocketed and massive multinational corporations and its products were destroying their domestic industries. Forget the commentators, my guess is that even normal people would have the same contrasting appreciation of the two scenarios, despite their near exact similarities. Conventional wisdom would have had it that the cold economic logic dictated the thinking and commentary and opinions on such issues. But in the real world, our values and cognitive biases come to distort the way we view them.Are we confusing the internet economy with efficiency, itself often perceived as an almost absolute superior attribute, and are blind to its diffuse and slowly evolving negative externalities? Are we biased towards the problems in our backyards than those of people distant to us (why should we even be asking this question, isn't it obvious!)?[...]

Weekend reading links

Sat, 21 Apr 2018 11:04:00 +0000

1. The agriculture distress cycle threatens to repeat again. Sample this latest status on farm prices in Maharashtra (unlikely to be much different elsewhere),Barring soyabean, not a single commodity is trading at government-specified Minimum Support Price (MSP). In the case of perishables like fruits and vegetables, the situation is worse. Rabi tomato, which sells at the rate of Rs 10 a kg, is now trading at Rs 1-2 per kg at the markets of Narayangaon and Junnar. Onions, which till recently were fetching Rs 20 a kg at wholesale markets, are now priced at Rs 6 a kg... A crop like tur, which has reported lower sowing than last year, is also trading over Rs 1,200 per quintal below its MSP... Last year, the government had increased the procurement price of milk from Rs 24 to Rs 27 per litre. Dairies are, however, barely able to pay Rs 20 per litre to farmers owing to a glut of milk powder in the market. Sugar prices are on a steady fall which has made mills default in their payment. There are over Rs 2,200 crore in dues by the mills to cane farmers.The result has been that farmers are staring at another debt trap. With no immediate relief in sight, the farmers find themselves with no option but to start a fresh stir. Their demands are no different from the last time — assured returns and a full loan waiver.2. What explains economic growth? Free Exchange highlights the limitations of economic theories, An economist might explain China’s rapid growth in the 1980s by saying that it began to deploy more capital per worker and to adopt foreign technologies. Yet it was very clearly the result of a political decision to loosen state control over economic activity. It would similarly be accurate to say that China’s future growth will depend on how well it develops and deploys new technologies. But that depends on decisions about economic governance taken by its leaders, which will in turn be influenced by social and geopolitical forces that economists scarcely understand and generally ignore... a formula for growth that takes no account of social and political complexities is no formula at all... The economics of growth should therefore be central to the discipline, even though the questions it poses are objectively hard, and the answers rest more in history and politics than in elegant mathematics. Until they can give better answers in this area, economists should speak with greater humility about how this structural reform or that tax change might affect long-term growth. They have not earned the right to confidence.3. India's state capacity problem in law and order management is acute even by the standards of the G-20 economies. 4. Thomas Piketty uses evidence from France, Britain, and US for the 1948-2017 period to explore the long-run evolution of political cleavages and the rise of populist parties in recent times,In the 1950s-1960s, the vote for left-wing (socialist-labour- democratic) parties was associated with lower education and lower income voters. It has gradually become associated with higher education voters, giving rise to a “multiple-elite” party system in the 2000s-2010s: high-education elites now vote for the “left”, while high-income/high-wealth elites still vote for the “right” (though less and less so). I have argued that this can contribute to explain rising inequality and the lack of democratic response to it, as well as the rise of “populism”. In effect, globalization and educational expansion have created new dimensions of inequality and conflict, leading to the weakening of previous class-based redistributive coalitions and the gradual development of new cleavages...Two main lessons emerge. First, with multi-dimensional inequality, multiple political equilibria and bifurcations can occur. Next, without a strong egalitarian-internationalist platform, it is difficult to unite low- education, low-income voters from all origins within the same party.5. Tadit Kundu in Livemint explores the North-South taxation. I am not sympathetic to going down [...]

The protectionist debate in perspective

Tue, 17 Apr 2018 21:34:00 +0000

As trade wars loom large (or is it one more example of this), it is worth remembering that everyone is equally to blame. Further, the historical trajectory of development of every country is filled with policies that have helped level the playing field for their local industries.In fact, to the extent that development is a form of arbitrage play, whereby countries seek to exploit their advantages to squeeze their competitiveness compared to competitors, protectionism in some form or other has been always around the corner.Times has a nice article which captures some of the protectionist policies that China and the US have resorted to. What has China been doing?To stay in business in China, Apple has had to set up a data center there to store Chinese customers’ personal information. Amazon recently had to sell equipment to its Chinese cloud services partner to comply with new Chinese rules. Facebook and Twitter are blocked in the country; newer American players, such as Snap, are not even trying to enter anymore... China could require that foreign tech companies undergo costly additional tests for new products, or simply make it more difficult to operate in the country... It could also devise new regulatory hoops for foreign companies to jump through. China’s Ministry of Commerce has not yet approved Qualcomm’s proposed, $44 billion purchase of NXP Semiconductors, a Dutch chip maker. The deal, more than a year in the making, needs a signoff from Chinese antitrust authorities because the two companies count a large number of electronics makers in China as customers... A Communist Party-linked newsmagazine singled out the American companies that it said had penetrated most deeply into China’s information infrastructure. The “Eight Guardian Warriors,” as they were called — Apple, Cisco, Google, IBM, Intel, Microsoft, Oracle and Qualcomm — had been able to “drive right into China,” the article said, whereas Huawei and another Chinese equipment maker, ZTE, had been kept out of the United States... Beijing banned government offices from installing the most recent version of Microsoft Windows, and antitrust investigators raided Microsoft’s offices. Cisco, Apple and Intel products were removed from state lists that officials use as guides when buying equipment. Qualcomm got slapped with a $975 million fine for anticompetitive behavior... Cisco partnered with a Chinese firm to sell networking systems. Microsoft, in conjunction with a state company closely tied to the Chinese military, developed a version of Windows more suitable for China’s government. Advanced Micro Devices, Intel and Qualcomm began working with Chinese organizations in microchips, which China imports in huge quantities to put into smartphones, computers and other electronics.What has the US been doing?In the United States, regulators have repeatedly thwarted attempts by Chinese tech groups to acquire American firms. And espionage concerns have for years kept Huawei — one of the world’s biggest suppliers of telecom gear, and a powerhouse of China’s tech scene — largely out of the American market... Mr. Trump recently blocked a hostile bid by Broadcom to buy Qualcomm. He did so not because the bidder was Chinese — Broadcom is headquartered in Singapore — but because the administration said the deal would weaken Qualcomm, leaving Huawei with a stronger hand to shape 5G, or fifth-generation mobile technology... Chinese attempts to scoop up foreign chip makers mostly have not worked out. State-owned Tsinghua Unigroup tried to buy Micron Technology, a memory chip maker based in Idaho, for $23 billion in 2015, but regulatory worries scuttled the deal. The Trump administration last year blocked a China-backed investor from buying Lattice Semiconductor, an Oregon-based manufacturer. And regulatory concerns scotched a Chinese investment group’s plan to buy Xcerra, even though the Massachusetts-based company makes chip-testing equipment and not chips themselves.These restricti[...]

The Xi Jinping turn in Chinese policies

Sun, 15 Apr 2018 20:10:00 +0000

The Economist gets to the heart of US-China trade dispute,At the heart of the disagreement is China’s industrial policy. The Americans suspect the Chinese government of enticing their firms with the promise of a vast consumer market, only to use regulatory pressure to strip them of their bargaining power and expose them to the theft of intellectual property by forcing them into joint ventures. They spy a plot to undercut and eventually surpass American industry... Upon joining the WTO (and a further eight times since 2010) China’s government pledged not to make handing over technology a condition for market access. But the Americans say Chinese officials continue to pressure firms to do so. Such a claim is hard to prove—all the more so, given the opacity of China’s regulatory processes. And experience suggests that any deal would be devilishly difficult to enforce. The Chinese authorities can say that contracts involving technology transfer were signed voluntarily. They can make life hard for any foreign company that dares say otherwise.Depending on which side you are on, it is hard not to be impressed by the Chinese playbook. I am surprised why India does not do the same with say, at least its strategic and large procurements - airlines, defence, metro rail, power etc? Or does India not yet have the economic leverage to play this hardball? Or is it that India does not have the stomach to play this game? Or is it not desirable at all?But all that is beside the main point and to be discussed another time. Staying on the same topic, Chris Balding shines light at the creeping nationalisation of Chinese tech sector and how it could exacerbate trade tensions with the US. Consider this,Communist Party committees have been installed at many tech firms, reviewing everything from operations to compliance with national goals. Regulators have been discussing taking a 1 percent stake in some giants, including Alibaba and Tencent, along with a board seat. Tech companies have been widely encouraged to invest in state-owned firms, in the hopes of making them more productive. The common denominator of all these efforts is that the government wants more control... One recent report found that 60 percent of Chinese unicorns have either direct or indirect investment from the Baidu Alibaba Tencent (BATs). China's venture-capital sector is dominated not by traditional tech dealmakers but by the state: There are more than 1,000 government-owned VC firms in China, controlling more than $750 billion.The US is not the only aggrieved partner. Consider the situation as perceived by Germany, China's largest European trade partner. Not only has the opening of China shifted into reverse under President Xi Jinping, but Chinese firms have moved up the value chain far faster than many in Germany expected... In private, some executives liken the situation of German industry in China to the proverbial frog in a pot of slowly heating water which ends up boiling to death because it won’t or can’t jump out. Germany’s ambassador to China, Michael Clauss, warned at a meeting with industry chiefs in Berlin last month of “tectonic changes” in the relationship, according to participants... Bauer AG, which employs 11,000 workers in 70 countries, built its first production facilities in China in the mid-1990s. At the time, not a single Chinese firm could make the sophisticated drilling machines it produces – towering yellow structures used to build the foundations for skyscrapers, power stations and airports. By 2013 Bauer counted 36 Chinese competitors able to make such machines, a shift the CEO says was accelerated by European suppliers selling co-designed parts to the Chinese...Today, what Bauer and other German firms say they are most worried about is the role of the Chinese state in the economy. Last year, China introduced a cyber security law which tightened state control over internet services,[...]

Weekend reading links

Sat, 14 Apr 2018 17:19:00 +0000

1. My graph of the week, a fascinating one which nicely captures arguably the biggest challenge faced by our urban engines of growth, affordable housing, and its reason, restrictions on housing stock expansion due to restrictive regulations and other limits to growth (like spatial expansion).2. As protectionist rhetoric dominates, a reminder about the benefits of trade and openness to foreign investment comes from Vietnam. The Economist explores how Foreign Direct Investment (FDI), especially from South Korea, has transformed the country. On the importance of Samsung, Samsung Electronics’ factories in Vietnam produce almost a third of the firm’s global output. The company has invested a cumulative $17bn in the country. But Samsung is as important to Vietnam as Vietnam is to it. Its local subsidiary’s $58bn in revenue last year made it the biggest company in Vietnam, pipping PetroVietnam, the state oil company. It employs more than 100,000 people. It has helped to make Vietnam the second-biggest exporter of smartphones in the world, after China. Samsung alone accounted for almost a quarter of Vietnam’s total exports of $214bn last year... The number of local firms listed as important suppliers to Samsung has increased sevenfold in the past three years.And on FDI, especially from S Korea,Of the $108bn of foreign direct investment (FDI) Vietnam has received since it joined the World Trade Organisation (WTO) in 2007, a third originated in South Korea... Vietnam received FDI worth 8% of GDP last year—more than double the rate that went to comparable economies in the region. Foreign-owned firms now account for nearly 20% of the country’s output. They have grown more than twice as fast as state-owned enterprises over the past decade, despite the country’s nominally communist government. 3. SCMP reports on the latest big-bang reform from China - the announcement during Xi Jinping's visit there that Hainan, a 35000 sqkm island populated by 9.3 million people, and home to China's largest Special Economic Zone, will be the country's 12th and largest free-trade port. And it is not just an announcement, there is a clear vision and even a plan,Xi said... that it was an important step in China’s opening up to the world and advancing economic globalisation. He urged the island authorities to speed up reforms in urban-rural integration, human resources management, fiscal policy and finance, income disposal and state-owned enterprises. Exchanges in international energy, shipping, commodities and carbon trading will also be established. Xi said Hainan would build a modern economy and develop information technology in fields such as big data, satellite navigation and artificial intelligence. The island will also focus on developing modern service industries such as tourism, the internet, health care, finance and hosting conferences and exhibitions. Direct international flights to the island will be increased and duty-free shopping will be expanded beyond the city of Sanya to the whole island. Authorities on the island will also be encouraged to pilot a scheme to attract foreign talent and technology experts. This will include measures to make it easier for people from overseas to find work and acquire permanent residency. Also, foreign students who have obtained master’s degrees will be allowed to start their own companies.The thing about Chinese economic growth is that they seem to have this unending supply of big growth boosters, which are not just unveiled but is also executed in quick time. Of course, there is no doubt that the financing strategy and capital use efficiency is questionable. So even if we think the entire Chinese growth today is a giant Ponzi scheme, moving from one booster to another, we have the world's BIGGEST ever Ponzi scheme at work. Something to be looking at with awe, if only when the party is on...How long will this last? Or will the dynamics of su[...]

Some reflections on the Facebook data leakage

Sat, 07 Apr 2018 14:15:00 +0000

The Facebook problems over personal data leaks is yet another reminder that left to their own devices, businesses will always skimp on areas which are perceived as secondary concerns and socialise the externality costs. Regulation is therefore necessary. 1. It is difficult to not believe that for Facebook, the biggest priority was to increase the value of its platform for users, content providers, and advertisers. Data protection, while important, cannot have ever been a proximate and direct commercial (bottom-line) concern. From all the news stories, it is clear that even certain basic minimum safeguards were not provided in the Application Programming Interface (API) that allowed third party content providers access to the platform and its data.While such protection is important in the long-term for the firm's credibility, firms like individuals suffer from hyperbolic discounting and value the immediate much much more than something far later in time.  In the absence of any strong enough regulation on data protection standards and its enforcement, what incentive did Facebook have to police it with intensity? Why would Facebook exercise self-restraint and err on the side of caution to disallow access to important platform features in the name of personal information safety to an external app which has the potential to bring in significant revenues? How many times over the past three years would the top 2-3 executives have personally reviewed data protection standards as they would have platform content, advertisement revenues etc? In fact, we need to go even further and investigate whether Facebook deliberately and with full-knowledge of the consequences (bypassing internal control cautions) decided to allow access to certain types of content and advertisers. I would not be surprised if there were instances. The stakes were simply too high.  2. Some of the comments by the Facebook leadership were stunningly insensitive,Mr Zuckerberg spoke about the power of Facebook to reconnect families, help couples meet, and marry and organise social movements and marches. Ms Sandberg described a taco maker in Houston who teamed up with a competitor during Hurricane Harvey last year and found hungry people to feed because they were sharing their location on Facebook.We all know how much of these things happen and they need to be placed in their true perspective, given the costs associated - wholesale transfer of personal data to unknown parties and all the attendant risks (and benefits). Such comments are classic red herrings. They can detract attention from the central incentive compatibility challenge that exclusive data companies like Facebook and Google face. How much restraint should they exercise when faced with opportunities for commercial exploitation of the data they posses? Given the commercial stakes and returns-seeking investors involved, how much restraint can the company actually exercise? Worse still, wouldn't it be very natural for a profit maximising entity to err on the side of commercial returns and compromise on data protection and privacy concerns?  3. The case for regulation of such market failures could not be stronger. As I blogged earlier, the entire sharing and e-commerce economy, including iconic firms, is built on a massive regulatory arbitrage, where such market failures are building up everyday and is waiting to implode one day as the Cambridge Analytics-Facebook episode. The European General Data Protection Regulation (GDPR) even with its compliance costs is well worth the trouble. If this is the state of data protection at Facebook, what about Google and Amazon? In the aftermath of the global financial crisis, bank balance sheets were repeatedly stress-tested by regulators. Why is nobody calling for an independent stress-test of the data protection and use standards of all the major tech firms whose business model relies exclusively [...]

Are intermediaries as big a problem as earlier everywhere?

Wed, 04 Apr 2018 20:53:00 +0000

Quite often some narratives endure, even when evidence is much more nuanced. The PDS in India is bedevilled by leakages and corruption. Teachers absenteeism is rampant across the country. All engineering works are of very poor quality. And so on.

And since these are big problems, prioritise addressing them by earmarking the scarce bandwidth of weak public systems into solutions that span the spectrum from digital technologies to outsourcing and cash transfers. And do them as one-size-fits-all nation-wide initiatives.

But we now know that while these are still true, the extent of these problems have reduced, have even been significantly addressed in many areas. They still remain critical challenges in some areas. But the clock has moved. 

Another popular narrative is that of farmers being squeezed by brokers and middlemen. In fact middlemen everywhere are considered a scourge to be eradicated on priority. But consider this, received from a friend,
The evidence at least from the US – home to chains like Walmart, Kroger, Supervalue and Safeway – is that the share of farmers for every food dollar spent by consumers has fallen from 40.9 cents in 1950 to 16.8 cents in 2012. This, I am quoting, from the US Department of Agriculture’s own data. In other words, the supply chain for milk in India is far more ‘compressed’ than in so-called advanced economies. There, much of the value between the farm and the fork is captured by expenses incurred not just in handling, processing, packaging, warehousing, refrigeration and transport, but also financing, insurance, marketing, brand promotion, labelling and shelf display.

As far as milk specifically is concerned, the average dairy farmer in 2012 received just $ 1.81 for every gallon of fat-free milk that retailed at $ 4.19. That amounts to a 43 per cent share. By contrast, our farmers here easily get more than 70 per cent of the price the consumers pay for milk, with some dairies managing to give even up to 75 per cent.
I am not for a moment suggesting that we have solved the problem of middlemen in agriculture and dairying. There are undoubtedly big problems. But is the problem still in the same generalised scale as a decade or earlier back? I am inclined to be more cautious and optimistic. 

In any case, independent of specific cases and their contexts, should we not be constantly testing these settled wisdoms? Development is a faith based activity. And these perceptions have over years become entrenched and now are part of the scriptures. They need to be stress-tested and, if things have indeed changed, we need to unsettle them and spin new narratives. At the least be more cautious with entrenched public policy priorities. Is very relevant in India in the context of the most cost-effective use cases for Aadhaar and digital technologies.

More explanation for divergence

Tue, 03 Apr 2018 22:08:00 +0000

The causes for the counter-intuitive income divergence between rich and poor countries has been a subject matter for a lot of research for decades.Valerie Cerra and Sweta Saxena of the IMF add one more to the list. Their fundamental insight is to refute the conventional wisdom that after recessions economies quickly recover back to their pre-recession growth trend. Instead, they use data from 190 countries over the 1974-2012 to show that "all types of recessions - including those arising from external shocks and small domestic macroeconomic mistakes - lead to permanent losses in output and welfare". It would also explain the relatively sluggish post-crisis growth in the world economy. They find, On average, the magnitude of the persistent loss in output is about 5 percent for balance of payments crises, 10 percent for banking crises, and 15 percent for twin crises... our evidence suggests that a recovery consists only of a return of growth to its long-term expansion rate—without a high-growth rebound back to the initial trend. In other words, recessions can cause permanent economic scarring.Since poorer countries suffer deeper and more frequent crises and recessions, with attendant permanent output losses, they continue to keep falling behind the richer countries. This assumes significance also in the calculation of output gaps that serve as decision-support to both determine pre-crisis overheating and post-crisis slack. We need to use the new trend output rate in both cases to be able to generate credible decision-support. PostscriptAnanth has a column which examines their paper in great detail. He writes,Their simple thesis is that crises alone do not lead to permanent output loss. Even garden-variety recessions have that effect. And it is not because economic growth was unsustainably high before crises. They find that more often than not, signs of financial excess do not show up in economic growth. Second, contrary to what many think, they find that post-crisis growth always tends to belie the optimism of a swift reversal to trend. It’s not because crises result in sudden stops in technological progress or productivity improvements, for it is hard to explain why financial crises should result in such an abrupt reversal in technology and productivity-related developments. But they find that the rise in unemployment and fall in prices, after a crisis or recession, eventually leads to a cumulative shortfall in economic output that never catches up with the pre-crisis trend. In short, and in economics jargon, “demand shocks” eventually morph into “supply shocks” that permanently lower the trend rate of growth... they suggest that fiscal dynamics, post-crisis, should take into account the fact that output would never return to the pre-crisis trend, and, hence, accept that pre-crisis trends in tax revenue would be unlikely to be met... In particular, they are in favour of “more financial regulation, financial stability to be included as a consideration for monetary policy, building a larger war chest of foreign reserves, and maintaining a conservative fiscal stance during booms”... the authors bravely assert that monetary policy actions might be needed to supplement regulation and supervision. Prudential regulations may not be effective as, in practice, they can be sidestepped by misclassifying loans, for example. Further, in a world of international capital flows and shadow banking, there are questions over the full effectiveness of prudential regulations in isolation. For example, asset management companies and hedge funds provide credit through specially structured products that circumvent banking regulations.[...]

The evolution of the ball tampering scandal

Sun, 01 Apr 2018 20:58:00 +0000

Had to post something on the great cricket ball tampering incident. One thing that has struck me has been the rapid evolution of indignation at the incident. We've seen a continuous shifting of the moral frame of reference as the situation evolved. Consider the following stages of evolutionStage I - In the press conference after the day's cricket, Smith defiantly said that he would not step down. He said it was done at the behest of a "leadership group". James Sutherland of CA implicitly endorsed it. Commentators were talking about the penalties in strictly technical terms - level 2 offence.Stage II - The Australian PM then intervened, and then Smith's position as Captain became untenable. But still punishment considered (or loudly voiced about) was in the terms of demerit points and one or two match suspensions. Stage III - The global lack of sympathy and outrage, motivated by the track record of the Australian team and the numerous tweets etc pointing to earlier instances of Aussie behaviours, and the stigmatisation of Australia as a country of cheats, hardened the national mood there. News articles joined in with condemnation. Now CA responded to the emerging situation by temporarily suspending the players and withdrawing them from the series. But Lehman is found still acceptable - Sutherland says he will stay on. Lehman too does not own up. Stage IV - Slowly trickled out news of internal dissensions, the role played by Warner, the forcing down on Bancroft etc, thereby generating more domestic outrage in Australia. Now CA responds with the one-year ban. Everyone understands the decision. The gravity of the situation is appreciated. Stage V - Questions mount over the role of Lehman in fostering the culture in Aussie cricket. Lehman still holds on. CA reiterates the clean chit.Stage VI - Smith returns and holds a press conference. He owns up responsibility. He cries. The tide suddenly turns. The Players Association of Australia says that the punishment is harsh. Others join in. Lehman now resigns alluding to the Smith presser. The situation could have moved in several directions depending on how things evolved. What if the camera shots were inconclusive? What if the PM had not intervened? What if there was no Twitter? What if the Australian cricket team was not as unloved as it is? What if the reactions were more restrained? What if Australia was not sufficiently stigmatised as to be provoked? What if Australian domestic outrage was not stoked? What if it was decided to hang Warner after internal consensus within CA? What if Smith had not cried? This story may have more legs. It is possible that the voices in sympathy will mount, and Smith and Co may appeal. As memory fades, the ban could get curtailed. Or Warner may squeal on other team mates - after all it is difficult to believe that none of the fast bowlers did not notice the changes in the condition of the ball they were using. Right now nobody is talking about others complicity, though it very hard not to believe that others did not know. All it requires for that tide to turn is one confession and one or two hard-hitting tweets or articles. Another thing of note has been the lack of sympathy for David Warner. This about David Warner from Mark Nicholas is interesting,Warner is the attack dog. It is a position that lights the fire in his stomach, fuels the engine of his batting, and determines the confrontation of his day. Can we not say the same of Kohli? And Anderson? When the going is good, they get disproportionate praise and adulation, and when the tide turns (as can happen with something like this), the opprobrium can be equally disproportionate on the other side. In terms of behaviour, riling up opponents, Kohli (and Anderson) is especially bad. I will argue that minus his on-field exploits, Kohli co[...]

Markets in bail bonds - the limitations of market solutions

Sat, 31 Mar 2018 17:35:00 +0000

The Times carries a very good story on bail bond agents in the US. The $2 bn industry has its business to deliver their clients to court, by charging them with non-refundable fees for the service of guaranteeing their bond and securing bail. The Times writes, The bond agent takes a fee in exchange for guaranteeing the amount of the bail on the defendant’s behalf. But the fee — or premium — usually about 10 percent, is too high for many defendants, the vast majority of whom are poor. So they arrange a payment plan. The debt, paid over weeks or months of installments, can outlast the criminal case. The arrangement can include steep late fees or require signing over collateral worth many times what is owed. And while defendants, or the family members and friends who often shoulder the costs, typically pay no interest as long as their payments are on time, if they go into default they can trigger annual interest rates as high as 30 percent...The system has worked well for the industry, even attracting private equity investors. Mom-and-pop bail companies are backed by large surety companies, which guarantee the full amount of the bond in exchange for a portion of the premium. Together, the surety companies and the bail bond agents collect about $2 billion a year in revenue...As commercial bail has grown, bond agents have become the payday lenders of the criminal justice world, offering quick relief to desperate customers at high prices. When clients... cannot afford to pay the bond company’s fee to get them out, bond agents simply loan them the money, allowing them to go on a payment plan. But bondsmen have extraordinary powers that most lenders do not. They are supposed to return their clients to jail if they skip court or do something illegal. But some states give them broad latitude to arrest their clients for any reason — or none at all. A credit card company cannot jail someone for missing a payment. A bondsman, in many instances, can. Using that leverage, bond agents can charge steep fees, some of which are illegal, with impunity, according to interviews and a review of court records and complaint data. They can also go far beyond the demands of other creditors by requiring their clients to check in regularly, keep a curfew, allow searches of their car or home at any time, and open their medical, Social Security and phone records to inspection. They keep a close eye on their clients, but in many places, no one is keeping a close eye on them.Such services typically operate in regulatory vacuums,Bond companies fall into a sort of regulatory gulf between criminal courts and state insurance departments, which are supposed to regulate them but seldom impose sanctions. With rare exception, defense lawyers and prosecutors are too busy with their caseloads to keep bond companies in line. Further complicating things, it is often unclear whether consumer protection laws apply, and insurance departments say they lack the resources to investigate complaints.And even where the law is clear, enforcement failures is typical of markets which service predominantly the poor, Though California law appears to be quite clear about what bond agents can charge, a review of more than 100 bail contracts and legal documents by the criminal justice reform clinic at the University of California, Los Angeles, School of Law found that such protections were routinely ignored. The contracts included all manner of additional costs, including late fees, interest on delinquent balances and “renewal premiums” that required the defendant to pay again to stay out of jail if the case was not resolved within a year.In the final analysis, the logic of market efficiency is elusive,The entire premise on which the commercial bail system is built — that when defendants skip bail, someone must[...]

Shareholder capitalism - JP Morgan Edition?

Tue, 27 Mar 2018 18:46:00 +0000

Consider this story of a large financial institution located in the country considered the flag-bearer for rule of law and free-market capitalism. The firm is charged with misleading clients, selling dodgy securities, deceiving and mis-selling to customers, rigging bids and interest rates, foreclosure abuses and mortgage misrepresentations, market manipulation, predatory sales, fraud cover-ups, and so on. In sum, the full spectrum of white collar crimes, many with outright criminal liabilities. And those at the receiving end included both retail customers, regular investors and high-net worth ones, and institutional investors, including public pension funds. Enough one would have thought for the knives to be out - dismissal of the CEO, replacement of the Board, imprisonment of several employees including maybe even the CEO, radical restructuring of the firm, and so on. And also the country being the paragon of strong institutions and free-press, one would have thought of vociferous outrage if the regulators back-pedalled on any of these. So some questions. What happened to the CEO and the Board? What happened to those found responsible for these individual charges? What happened to the firm? Answer. None of the expected scenarios. In fact, exactly the opposite. The Chairman became the most influential and admired Bank CEO in the world. The firm became one the largest and most powerful banks in the world. Not one employee at any serious enough levels, leave aside executives, went to jail. The executives got promoted and were paid out fat bonuses. What's more, the CEO became the highest paid Bank CEO in the world, making the median employee's salary in just one day! For the record, this is no banana republic and any ordinary small financial institution. This is the United States, home to the Wall Street, corporate governance standards, beacon on shareholder capitalism and so on. These crimes belong to the long list of achievements of JP Morgan under Jaime Dimon that Zero Hedge has listed out. In the aftermath of the global financial crisis and spooked by some high-profile bank failures, the remaining few large banks like JP Morgan benefited from state support that helped them through the crisis not just unscathed but bigger and with a larger share of the market. As to Dimon himself, he enriched himself with $28 m in salary for 2017. He is feted everywhere as the face of the new Wall Street. He even sits on the New York Federal Reserve, influencing sabotaging any financial market reform proposal that seriously hurts Wall Street's interests, and advises the President of the United States on national economic policies by sitting on the President's Business Advisory Council. JP Morgan settled all these cases with a host of US regulatory agencies - SEC, DOJ, CFPB, FHFA, OCC, and even the FERC - and paid a small amount of over $35 bn in just over 3 years. And these fines came not from the salaries and bonuses of Jaime Dimon and other executives, but from the profits accruable to its shareholders. Not one person at the leadership level has been held accountable for the $35 bn in fines, leave aside all the frauds and crimes. It is almost as if those fines and long list of charges were respectively the cost and legitimate actions to boost the firm's share price and profits. In simple terms, Dimon and Co bet the Bank and lost, brought the entire financial markets to the brink and the economy to its knees, and came out rewarded with more adulation and much higher salaries![...]

The challenge of marrying experiential and evidentiary knowledge

Sun, 25 Mar 2018 23:30:00 +0000

Manu Joseph has this very nice article which distinguishes between the arrival of an idea and its justification, their relative merits and importance, and the way in which society perceives each,An idea comes to some minds as an intuition, to many in the form of faith or imitation, or a convenient corroboration of a bias. An idea always arrives as a realization, spreads as a belief. The arrival of an idea is a religious moment. But its legitimacy is proved in public and private through the fabrication of rational substantiation. An argument then is reverse engineering of a religious moment. Here I am not referring to collegiate people who can debate either way, or are paid to debate for a cause in television studios. I am only referring to people who have ideas, or at least convictions. Even when they practise it, is debate as intellectually robust and pure as we are trained to assume? Isn’t it true that all debates emerge from the scripture of personal faith? Is the pre-eminence of debate then overrated? In the hierarchy of intellectual activities, why is this method of transmission of an idea more respected than the very force that creates ideas—intuition? An intuition is not a supernatural force—it emerges from dormant or subterranean knowledge. Even so, science celebrates intuition only after it has been proven to be right. Can it be that across the ages, superior thinkers have been subdued by lesser minds who were and are merely good debaters? Is the transmission of truth now entirely in the hands of the articulate, who are better at transmission than truth?...When we debate, argue, or even write a column, we build a case, we substantiate our argument and consider opposing views. There is one thing we do not say at all—how we actually got the idea. Usually, an idea does not come to us after an argument with ourselves, or after a deep investigation into the facts. This is not how ideas usually arrive, or form. The argument does not create the idea, the idea creates the argument.... But the imitation of scientific debate in politics, economics, culture, even literature and other aspects of the subjective arts, is outrageous. In television studios and around dinner tables, people are forced to dress up their intuition or beliefs through the masquerade of logic and evidence. That is a wasteful decorum of modern intellectual life.This has resonance with the ongoing obsession with argument in the form of evidence generation among development cosmopolitans (not practitioners) residing outside the development context. I have a plausible explanation for this in the case of international development. All of the doing in international development is done by the practitioners from inside, especially the government officials, for-profit social enterprises, and non-profits working in the field. A lot of the thinking about and funding of international development is done by outsiders or foreigners. There is a vast difference between how the two parties process information. Both sides are equipped with the analytical framework and evidence, the latter much more so than the former, though sufficient for the former to make informed enough comparative and objective judgements. Let us call this the evidentiary knowledge. Then there is experiential knowledge, which comes from a deep understanding of the context and its nuances, informed by a rich and diverse set of experiences accumulated over a long period of living and working in those contexts. By the very nature of their respective nativities and careers, the former internalise this deeply, whereas the latter are sorely deficient. Whether we like it or not, that's the way the world is and we need to accept it. Accor[...]

Weekend reading links

Sat, 24 Mar 2018 00:00:00 +0000

1. The persistence of the belief in the use of Public Private Partnerships (PPPs) to address acute problems in health and education, despite overwhelming evidence to the contrary universally from across the world, is an example of why development is a faith-based activity. This is the latest attempt to use PPPs to solve deep structural deficiencies in health care. The problem with PPPs in Indian context, apart from the inherent challenges associated with contracting and contract management in these sectors, is that of supply-side constraints with the market itself. PPPs are not going to attract specialist doctors into small town district hospitals. There are unlikely to be more than just a few providers across the country with the attitude and expertise to deliver faithfully and effectively on such contracts. The belief that the likes of Apollos and Fortises will step forward to deliver healthcare while also keeping the social equity objectives in mind is misplaced. Forget doing PPPs, these corporate chains do not seem to have the resources and management capacity to even expand by much in their own urban terrains and are now having to fight off foreign takeover attempts. 2. Livemint points to disturbing signs from India's labour-intensive industries. Since the introduction of GST, exports have been declining, imports rising, production falling, and rural wage growth slowing when compared to the capital intensive industries. 3. A Livemint analysis of a sample from the Prowess database of over 27000 listed and unlisted firms from both industrial and services sectors provides empirical evidence that the heavy lifting with respect to job creation is done by the small firms. As the graphic shows, the smallest quartile of firms in terms of sales revenues have consistently created more jobs than those in the biggest quartile. Further, the largest firms were net job destroyers in recent years. This is in accordance with trends in the developed countries and elsewhere.4. More labour market news, as Livemint reports of a steep increase in the share of contract labour in organised manufacturing. The graphic shows the share of contract labour from ASI dataTo put this in perspective,In the 17 years between 1997-98 and 2014-15, the compound annual growth rate (CAGR) of directly employed workers was a piffling 0.55%. In stark contrast, the CAGR of contract workers over the same period was 6.79%... In the manufacture of motor vehicles, for example, workers employed as contract labour are now 45.9% of total workers employed. In 1997-98, contract labour was 10.9% of total workers directly employed.This trend is likely to accelerate as the government has just issued revised rules expanding fixed tenure of contract labour across all industries. 5. Fascinating comparison of the fates of Martin Shkreli and Elizabeth Holmes, two people who rose to prominence as pharmaceutical entrepreneurs and who have been convicted/admitted of white collar crimes to defraud their investors.The former gained notoriety for acquiring the rights to generic drugs for rare diseases before jacking up their prices, was convicted for fraud involving $10 million (though he did finally repay the investors, all of whom were wealthy people) for his activities at two hedge funds he ran. The latter becoming a darling of the VC world - appearing on the cover of Forbes, becoming a member of the Board of Fellows of Harvard Medical School, and receiving the Horatio Alger Prize - before being documented to have lied copiously to boost the valuation of her blood-testing start-up Theranos and thereby defraud investors, including public pension funds, to the tune of $700 million. While the former was convicted and jail[...]

Public policy in the context of India's bankruptcy code

Thu, 22 Mar 2018 16:37:00 +0000

Public policy implementation is hard. Regulations have to trade-off between being too restrictive and too accommodative. The former stifles genuine activities whereas the latter opens up opportunities for subversion. Given the entrenched, and well-founded, concerns about Indian corporate governance standards, bureaucrats tend to err on the side of caution and choose to be more restrictive than they ought to be.  The implementation of the Insolvency and Bankruptcy Code (IBC) is a good example. With good intent, the original regulations allowed considerable flexibility on who could participate in the bids for resolved assets. But in the very first case itself it became evident that promoters had exploited the flexibility to game the process and gain control over their firm with the added benefit of having knocked off the debt-holders at negligible cost. Stung by allegations of supporting crony capitalism, the government responded by amending the regulations to bar defaulting promoters, loan defaulters, people convicted of offences, barred by regulators etc and their related entities from participating in IBC bids. This is a very wide list of exclusions and given that at least some of these are the norm, most of the country's largest industrial groups get covered. And this is what is happening,It has become a fertile ground for litigation as bidders come out with reasons to show competitors are ineligible.Consider this,The high profile case here is Essar Steel Ltd where lenders are hoping to claw back as much as $6 billion. The eligibility of both its bidders is under a cloud because of their perceived connections with defaulters. NuMetal Ltd has bid in a consortium that includes an entity controlled by a trust that has Rewant Ruia, son of Ravi Ruia, as a beneficiary. VTB, the largest shareholder in NuMetal, has said that is willing to drop the Ruia trust and would go to court if its bid was disqualified. It has also said that cases and judgements in other jurisdictions related to VTB won’t disqualify its bids. Similarly, ArcelorMittal had a 29% stake in Uttam Galva, another defaulter, while its chairman L.N. Mittal held a 33% indirect stake in another defaulter entity KSS Petron. Both these stakes had been sold off before the steel giant bid for Essar, which ArcelorMittal believes is sufficient to ensure its eligibility... In the case of Electrosteel Steels Ltd, Abhishek Dalmia led Renaissance Steel has appealed to the tribunal questioning the eligibility of Tata Steel and Vedanta. Renaissance has alleged that some overseas subsidiaries (or officials) of these firms were convicted.Could some of these have been anticipated with better framing of regulations?In its current avatar, the law does not specify whether past associations are relevant for deciding eligibility, but this could very well be grounds for litigation depending on how the committee of creditors, that takes the final call on bids, chooses to view this... the code should clearly specify whether past associations with disqualified entities are relevant and for how long. Another could be to clearly specify what kinds of relationships are relevant instead of an all-encompassing definition of related parties and connected parties.I'm not inclined to be sympathetic to a Ministry which made regulations without paying attention to such basic details - hard to not have foreseen the problems with not defining the kinds of association with disqualified entities and its duration and leaving them so open-ended. This is just as unprofessional as the original regulation did not anticipate and have some basic safeguards to ensure that promoters do not game the process by capturing the Committee of Credit[...]

The economic efficiency Vs social stability trade-off

Tue, 20 Mar 2018 00:16:00 +0000

The challenge posed by the rise of robots and resultant automation is well known. This is a nice summary of the evidence, Multiple studies suggest this is just the beginning and that there is more pain that lies ahead. A study by a real estate firm CBRE suggests 50% of occupations today will be gone by 2020. Then there is one by Oxford in 2013 that forecasts 47% of jobs will be automated by 2034. Yet another study has figured that only 13% of manufacturing job losses were due to trade. The rest has happened due to automation. And to make things worse, a McKinsey reckons 45% of knowledge work activity can be automated.It is not a hyperbole to describe automation as the apotheosis of the search for economic efficiency. Robots make no mistakes, are more adaptable, can work 24X7, are much cheaper than labour, pose not threat of unionisation, and so on. Robots are super-efficient.But this pursuit of efficiency in the modern economy sits with another trend - declining productivity in services sectors, those presumably most likely amenable to technological disruption and automation. Many of these services have seen increase in their share of the US labor force. Noah Smith has a very good article which captures the dilemma posed by this apparent weakness of the services sectors,  The U.S. economy is sending more and more people into the sectors where productivity is either growing slowly or even falling... Is the stampede of American workers into unproductive industries really a bad thing?Most economists would answer “yes” -- if construction, health care, education and the rest became more productive, workers would be freed up to go do other, more productive things, perhaps in industries that don’t even exist yet. But it’s also possible that some of these workers would otherwise just choose not to work -- to sit in their parents’ basements and play video games -- or to try to strike it rich in black-market sectors like drug sales. It’s also possible that the economic pressures of automation and trade, combined with the difficulty of retraining for new careers, would be sending some of these workers onto the welfare rolls instead of into new, better jobs.And this conclusion is very sobering but rarely discussed in the mindless pursuit of efficiency,So it’s possible that construction, health care, education and other industries are now functioning partly as giant make-work programs. Instead of giving a few people obviously useless jobs, this make-work system hides little bits of useless work in everybody’s job. That could be preserving the dignity of work for thousands, or even millions, of men and women standing around on construction sites, filling out paperwork in hospitals, or filing briefs for frivolous lawsuits. And that dignity, in turn, could be saving the U.S. from greater social unrest than it’s already experiencing.In the efficiency and evidence maximising world-view that has gripped the worlds of business and academia respectively, the aforementioned would constitute an inefficient and therefore bad equilibrium. But when we step back and take a more comprehensive view, this may actually be a desirable situation. Change, especially by way of technological and social progress, is generally good. But such changes generally have an appropriate pace. Expedite the change and stresses will develop to disrupt the system, especially those with too many moving parts. There is no escape from the law of unintended consequences. Despite all its struggles, an organic evolution without too many mutations is the best response to such situations. The role of public policy should be confined to facilitating the process as w[...]

Weekend reading links

Sun, 18 Mar 2018 03:18:00 +0000

1. The Economist on the decline of publicly listed companies in the US,According to Jay Ritter of the University of Florida, the number of publicly listed companies peaked in 1997 at 8,491 (see chart). By 2017 it had slumped to 4,496... Mr Ritter attributes much of the decline in the number of companies that are listed to the difficulty of being a small public company... listing requirements have become more burdensome over time. For example, he notes that the prospectus for Apple Computer’s public offering in 1980 ran to a mere 47 pages and listed no risk factors, despite its novel product, inexperienced leaders and formidable competitors. The prospectus for Blue Apron, a meal-delivery company that listed last year, weighed in at 219 pages, with 33 devoted to risks, presumably intended to pre-empt litigation. One of those risks was the possibility that Blue Apron would not “cost-effectively acquire new customers”.2. Staying on with the declining of public markets, Craig Doidge, Kathleen M. Kahle, G. Andrew Karolyi, René M. Stulz have a paper which analyses the trends in US equity markets. Their findings are striking,Since reaching a peak in 1997, the number of listed firms in the U.S. has fallen in every year but one. During this same period, public firms have been net purchasers of $3.6 trillion of equity (in 2015 dollars) rather than net issuers. The propensity to be listed is lower across all firm size groups, but more so among firms with less than 5,000 employees. Relative to other countries, the U.S. now has abnormally few listed firms. Because markets have become unattractive to small firms, existing listed firms are larger and older. We argue that the importance of intangible investment has grown but that public markets are not well-suited for young, R&D-intensive companies. Since there is abundant capital available to such firms without going public, they have little incentive to do so until they reach the point in their lifecycle where they focus more on payouts than on raising capital.But, this trend may be unique to the Wall Street capitalist that US follows The challenge posed by intangible assets intersects with both the limitations of prevailing accounting practices as well as the excessive transparency of disclosure requirements, Public markets are better suited for firms with mostly tangible assets than for firms with mostly intangible assets. This is especially true when the usefulness of the intangible assets has yet to be proven on a large scale. Sometimes the market is extremely optimistic about some intangible assets, which confers a window of opportunity on firms with such assets to go public. But otherwise, firms with unproven intangible assets may very well be better off to fund themselves privately. Accounting information conveyed by U.S. GAAP for such firms is of limited use because GAAP treats investments in intangible assets mostly as expenses, so that these assets may very well not show up on firms’ balance sheets. Private funding allows firms to convey information about intangible assets more directly to potential investors who often have specialized knowledge, something that they could not convey publicly... The issue with disclosure of intangible assets is not what firms have to disclose. Rather, it has to do with the nature of the intangible assets they need to disclose. Once an idea is made public it becomes possible for other firms to use it... Investment in intangible assets is highly sensitive to the legal environment in which a firm operates and to the pace of financial development it experiences. A plant is hard to steal. A new idea is not... As intangible [...]

Two graphs on India's credit market

Wed, 14 Mar 2018 22:23:00 +0000

It is true that the share of incremental credit flows to non-financial corporates is nowadays more or less equally split between bank and non-bank sources.

But, even among all its peers, the share of the stock of private non-financial sector credit coming from banks is the highest in India. In fact, just about 5% of it comes from non-bank sources. No other major country has this skewed distribution.

Further, the stock of credit to non-financial sectors from all sectors at market value as a share of GDP has hardly changed in India over the past 16 years and is well below the average for emerging economies.


Do we need evidence on the efficacy of rural roads and electricity?

Tue, 13 Mar 2018 21:26:00 +0000

This paper on rural electrification program in Kenya finds,We do not find meaningful medium-term impacts on economic, health, and educational outcomes nor evidence of spillovers to unconnected households. These results suggest that current efforts to increase residential electrification in rural Kenya may reduce social welfare. This paper on India's rural roads construction program finds,There are no major changes in consumption, assets or agricultural outcomes, and nonfarm employment in the village expands only slightly. Even with better market connections, remote areas may continue to lag in economic opportunities. The fact that we are trying to generate evidence on rural roads and electricity baffles me. What is it that we takeaway from such papers? What is it that the "headline readers" among development professionals would takeaway?Is it that the high upfront investments that are required with any kind of rural infrastructure (since it cannot leverage economies of scale) is social surplus reducing, and therefore undesirable (in econ-speak)? Or is it that grid electrification/BT roads is not cost-effective to comparable alternatives? Or that rural infra works have leakages which make them social surplus reducing or engendering incentive distortions? Or that the measurement approach that the researchers take is limited in that it is not able to capture all the potential general equilibrium effects - after all without electricity and roads you cannot have a life of modernity, which I guess is a salient material objective of development? Or is it even that developing countries should make choices between roads and electricity for their villages and nifty innovations like deworming, nudges, shiny technology Apps, micro-insurance, self-help groups, cash transfers, and so on? Or is it that the short-term benefits of roads and power are small - if so, what about the long-term benefits? Note that neither paper even qualify its findings with such a preface.In fact, a cursory reading of the abstract, as is what happens most often, can easily leave one with the takeaway that rural roads and rural electrification are a bad use of public money. We only need to look at how much damage this one work contributed to misleading the fiscal austerity debate. Clearly, this time is no different. No pun intended.A more appropriate response to such papers and the comes from Lant Pritchett's description of these as "kinky development",What the World Bank chose to highlight in its official publicity about Dr. Jim Kim’s visit (to Somalia) was that it had figured out a way to use mobile phone surveys to track the poverty status of people in Somalia on a quarterly basis. Imagine the joy and celebration among Somalis to know that the World Bank was going to promote Somalia’s national development not with a port upgrade, or a road or electricity or water, or even a school or a clinic, but by being able to track and tell them every quarter just how poor they really are—something I suspect they know quite well already...Perhaps promoting energy source diversification is why President Obama, while touring a power plant in Africa, thought it politically expedient to promote the Soccket ball. For those of you who still have not been introduced to this technological marvel, the Soccket ball is a soccer ball containing a battery that is charged by the kinetic energy of being kicked. This contraption is perhaps one of the best illustrations of the gap between development realities (the average Ethiopian consumes 52 kwh of electricity and the average American 13,246 kwh) and the “so[...]

The implementation validity problem with RCTs

Sun, 11 Mar 2018 21:00:00 +0000

Randomised Control Trials (RCTs) are extensively used in development today. Funding decisions by multilaterals and other donors are swayed by evidence from RCTs. In fact, in certain rarefied confines of international development, RCTs have become the definition of evidence itself. 

A typical RCT is a small experimental pilot with the smallest sample size consistent with statistical requirements done under the supervision of some principal investigators and with the field support of smart and committed research and field assistants. This poses a problem.

How do we separate these two effects?
  1. The immense energies of reputed researchers and their committed and passionate young RAs to protect the integrity/fidelity of the experiment
  2. The effect on Sl No 1 (which would be absent in business as usual implementation) contributing to the experiment's effective implementation. 
In other words, how do we evaluate the treatment (or the innovation being proposed) in the business as usual environment?

An RCT typically establishes the efficacy of the treatment. But it does not tell much about its effectiveness, a measure of both the efficacy and implementation fidelity.

This assumes great significance since the same innovation or treatment is generally implemented through government systems, which are notoriously enfeebled. In fact, given the weak state capacity, trying out innovations whose efficacy has been established through RCTs is akin to pumping all kinds of exotically engineered liquids through pipes which leak everywhere.

It is also the reason why practitioners are lukewarm to many headline RCT findings which generate intense interest among academics and the global development talkshops.

Do we call this the implementation validity problem?

It is surprising that while papers and books have been written about the internal and external validity problems associated with RCTs, this arguably more important challenge, given the weak state capacity in all the implementation environments, hardly gets a mention. 

Weekend reading links

Sat, 10 Mar 2018 08:38:00 +0000

1. Is there a bigger endorsement of the death of PPPs and the return to nationalisation than this,A recent poll by the Legatum Institute found that 83 per cent of respondents favoured renationalising the water industry that Margaret Thatcher, then prime minister, sold in 1989. For energy and the railways, 77 per cent and 76 per cent respectively backed the reversal of their privatisations.Another interesting snippet from the article is that three-quarters of UK's train operating companies in the 20 franchises are foreign state-owned firms.Talk about privatisation of rail in one country to public operators of other countries! Are the most efficient rail operators state-owned?2. Rajan Govil's assessment of Indian economy is not very promising.The government’s expenditure policy does not appear to be conducive to increasing investment or potential GDP in the near or medium term. The central government’s overall capital expenditure declined from 1.9% of GDP to 1.6% of GDP in 2017-18 and is expected to stay at 1.6% in 2018-19 at a time when investment has stagnated. Additionally, not all of the capital expenditures are for investment—some of these are for bank recapitalization. Moreover, expenditure on “social services”, which include education, public health, water supply and sanitation, has been reduced progressively from 0.61% of GDP in 2016-17 to 0.59% of GDP in 2017-18 (revised estimate) and finally to 0.57% of GDP in 2018-19. Current expenditure for the Central government increased in 2017-18 by 0.5% to 11.6% of GDP from 2016-17 and it would be very difficult in an election year for this to be reduced even to 11.4% of GDP in 2018-19 as per budget estimates. At the same time, the government wants to provide a higher subsidy to the farmers as well that might prove to be too costly.3. Underlining the importance of public subsidy for urban mass transit, the FT reports that Transport for London (TfL) - the public body formed in 2000 which oversees Tube, overground trains, and buses - will run an operating deficit of close to £1 billion in 2018-19.4. Lucas Chancel busts three myths of globalisation.Globalisation has increased inequality,The top 1% income share rose from 7% to 22% in India, and 6% to 14% in China between 1980 and 2016... Between 1980 and 2016, inequality between the world’s citizens increased, despite strong growth in emerging markets. Indeed, the share of global income accrued by the richest 1%, grew from 16% in 1980 to 20% by 2016. Meanwhile the income share of the poorest 50% hovered around 9%. The top 1% – individuals earning more than $13,500 per month – globally captured twice as much income growth as the bottom 50% of the world population over this period.Income doesn't trickle down - high growth at the top is necessary to achieve some growth at the bottom,When we compare Europe with the U.S., or China with India, it is clear that countries that experienced a higher rise in inequality were not better at lifting the incomes of their poorest citizens. Indeed, the U.S. is the extreme counterargument to the myth of trickle down: while incomes grew by more than 600% for the top 0.001% of Americans since 1980, the bottom half of the population was actually shut off from economic growth, with a close to zero rise in their yearly income. In Europe, growth among the top 0.001% was five times lower than in the U.S., but the poorest half of the population fared much better, experiencing a 26% growth in their average incomes. Despite having a consistently higher growth rate since 1980[...]

The psychology of the financial markets

Thu, 08 Mar 2018 21:39:00 +0000

Consider this. Someone scares you by inflating the likelihood of an imminent disaster. If the disaster does not materialise, you are relieved and happy. But does the happiness have any real basis?

The same applies to financial markets. They respond favourably to a positive news about the economy. But it is perhaps not incorrect to say that it responds even more positively in relief when an anticipated negative news does not materialise. Consider the following instances
  1. The collapse of global financial markets in the aftermath of the GFC and its impact on the economy in the form of a repeat of Great Depression
  2. Catastrophe in Europe with the Greek and Irish crisis spilling over to Italy and Spain, thereby causing the unravelling of the EU itself
  3. The debt-bomb ticking in China would bring down the entire economy
  4. The end of commodity cycle, global economic slowdown, and imminent collapse of China would herald the end of the emerging market story
  5. The exit from quantitative easing would lead to a rise in rates and devastate debt-laden governments, corporate sector and households
  6. World economy has entered a deflationary loop and negative rates are here to stay
  7. In the aftermath of Brexit, far-right parties will emerge as important players in the political scene across Europe
  8. The Trump Presidency will lead to protectionism and trade-wars, exist from NAFTA, American isolationism, and global economic collapse
It cannot be denied that there was a likelihood of each one of the above. And the consequences could have been bad. But what is debatable is whether they were as grave and imminent as was made out to be by public commentators and academic scholars. I am inclined to believe that their views of these scenarios were painted as doomsday prophecies in the financial press and opinion makers.

These narratives shaped expectations and prayers that they not materialise. In the circumstances, once the likelihood of their incidence declined, markets responded with relief. In fact, once the danger passed over, markets rebounded excessively. 

Over the last few years, each one of these dangers have receded, thereby boosting market confidence and the associated animal spirits. The extended bond and equity market booms owe a lot to animal spirits engendered by the market relief from having avoided these dangers. But do they have any real basis?

The Great Indian Banking Cleanup?

Mon, 05 Mar 2018 20:54:00 +0000

Tamal Bandyopadhyay has an outstanding chronicle of India's banking sector saga. What stands out is the progressive evolution and tightening of the process of recognition, the banks have been directed to do many things—ranging from integrating the core banking system with SWIFT to checking all bad loans worth Rs50 crore and more for possible frauds to consolidating their foreign operations, among others—to get their house in order... (under) the 12-February midnight directive of RBI... all existing frameworks for addressing stressed assets have been withdrawn and the joint lenders’ forum (JLF), an institutional mechanism that was overseeing them, has been dismantled. Now, the banks have no choice but to classify all large loans worth at least Rs2,000 crore as non-performing assets (NPAs) immediately when they restructure it. The clock started ticking from 1 March 2018. Such an NPA should be resolved within 180 days, failing which the account gets referred to the Insolvency and Bankruptcy Code (IBC) court. Simply put, when a borrower fails to pay a bank loan in time, it becomes a defaulter, unlike in the past when the account was classified as “stressed” – often an excuse for the banks to postpone the inevitable...The war against NPAs started with the so-called asset quality review, or AQR, in the second half of 2015 under which RBI inspectors checked the books of all banks and identified bad assets. Bankers were directed to come clean and provide for all bad assets by March 2017. On top of that, the central bank started forcing banks to disclose the divergence between RBI’s assessment of the loan books and the banks’ recognition of bad assets in the notes to accounts to their annual financial statements to depict “a true and fair view of the financial position” of each bank. An ordinance was promulgated in 2017, amending the Banking Regulation Act, 1949, giving powers to the central bank to push the banks hard to deal with bad assets. It authorized RBI to direct the banks to invoke the IBC against the loan defaulters... Also, from now on, banks need to report all default cases involving at least Rs5 crore every week (at the close of business hours every Friday) to a central repository of information.When you step back and see the banking sector cleanup that is being played out, assisted by the Bankruptcy Code, you cannot but not feel that this is perhaps a paradigm shift in India's banking sector - it beggars my belief as to why the regulator did not even have the basic reporting requirements on the different types of stressed assets till recently. If our banking regulation stood on such shaky foundations, what confidence can we have about the other, arguably less competent and more compromised, regulators being able to effectively regulate the capital and other financial markets?Anyways, this is one massive achievement for this government. Maybe, when the history books are written, this would count as 2-3 of the biggest achievements of the government. It should shout from the roof tops and I would not mind...After all, the muck within the banking system - the ever-greening, gold-plating of loans, the diversion to other purposes, political cronyism in loan advances etc - were well known to insiders for long, and could have been addressed by previous governments too. I believe the regulator would have resisted excessive reporting and disclosures, transparency and intervention (like breaking the distinction between restructuring a[...]

Google and the anti-trust challenge

Mon, 05 Mar 2018 20:54:00 +0000

Charles Duhigg has an excellent longform chronicle in the Times on the rise and rise of Google. And it is a disturbing story, symptomatic of the pervasive trend of regulatory capture and business concentration. This is the anti-trust challenge that is being faced,Standard Oil controlled 64 percent of the market for refined petroleum when the Supreme Court broke it into dozens of pieces. Google and Facebook today control an estimated 60 to 70 percent of the U.S. digital advertising market.Anti-trust lawyer Gary Reback has this comparison about the tactics of Standard Oil and Google,“They don’t need dynamite or Pinkertons to club their competitors anymore. They just need algorithms and data.”Are algorithms and data any less morally and legally reprehensible than dynamites and snooping?The legal problem, especially in the US, is with the narrow definition of what constitutes the requirement for anti-trust action. US courts have been more inclined to interpret anti-trust action in terms of consumer interest than competition - to what extent are consumers, rather than competitors, being harmed by Google? But such narrow framing poses problems,Antitrust has never been just about costs and benefits or fairness. It’s never been about whether we love the monopolist. People loved Standard Oil a century ago, and Microsoft in the 1990s, just as they love Google today. Rather, antitrust has always been about progress. Antitrust prosecutions are part of how technology grows. Antitrust laws ultimately aren’t about justice, as if success were something to be condemned; instead, they are a tool that society uses to help start-ups build on a monopolist’s breakthroughs without, in the process, being crushed by the monopolist. And then, if those start-ups prosper and make discoveries of their own, they eventually become monopolies themselves, and the cycle starts anew... Put differently, if you love technology — if you always buy the latest gadgets and think scientific advances are powerful forces for good — then perhaps you ought to cheer on the antitrust prosecutors. Because there is no better method for keeping the marketplace constructive and creative than a legal system that intervenes whenever a company, no matter how beloved, grows so large as to blot out the sun. If you love Google, you should hope the government sues it for antitrust offenses — and you should hope it happens soon, because who knows what wondrous new creations are waiting patiently in the wings.And this counterfactual is very difficult to establish,If Microsoft had crushed Google two decades ago, no one would have noticed. Today we would happily be using Bing, unaware that a better alternative once existed. Instead, we’re lucky a quixotic antitrust lawsuit helped to stop that from happening. We’re lucky that antitrust lawyers unintentionally guaranteed that Google would thrive.The popular narrative, resonant with the pervasive anti-government and pro-market ideological beliefs, holds that the decade long anti-trust pursuit of Microsoft in the nineties failed to achieve anything beyond token gains, and finally it required a more innovative competitor, Google to keep Microsoft away from dominating the search was companies like Google, rather than government lawyers, that humbled MicrosoftThis narrative is repeated ad nauseum by opponents of regulatory actions to support their arguments in favour of the market mechanism. But a less disc[...]

Liberal hypocrisy and the rise of Trump

Fri, 02 Mar 2018 09:36:00 +0000

At a time when the rise and rise of tech giants has engendered serious and immediate concerns on a host of problems about very proximate issues - privacy, inequality, political capture, stifling of competition, tax avoidance, fake news, social addictions etc - Anne-Marie Slaughter has this article which can even charitably be only described as a cop out.

Ignoring all these pressing and immediate issues, she labours painfully and incoherently on the dehumanising aspects of technology. When contrasted with honourable and insightful articles like this, Ms Slaughter's looks more like an exercise in digression from the real issues. 

And what on earth does this mean?
Going local will also be an important way to recover a belief in truth. With the decline of traditional trusted intermediaries, and the discovery that social media account holders may well be bots, we will crave verifiability. Blockchain technologies can help.
Note that there is not even a disclosure in her signature indicating that Google is a major funder of New America Foundation, of which she is the President, and which was at the centre of this disreputable incident which revealed people's true allegiances and convictions. 

What else can be expected from this poster child of liberalismfeminism and a host of other feel-good isms? 

When you have such people as role models representing the elite, why should we be surprised by the rise of Trump?

Corporate healthcare trends in India

Mon, 26 Feb 2018 20:31:00 +0000

A quiet revolution appears to be happening in India's corporate healthcare market. For long, barring a handful of large hospital chains, the Indian market was characterised by several small and family-owned multi-speciality hospital groups focused around no more than 2-3 cities, mostly the biggest ones. These small hospital groups were started by very credible and reputed physicians, whose diligence and commitment over at least 15-20 years helped their institutions acquire good name. But this landscape is changing fast.    While I could not locate any study or report in this regard, a wave of consolidation may be underway in this market. And driving the consolidation is foreign capital. In particular, the sovereign wealth funds of Singapore and Malaysia as well as some private equity investors have been leading it. While Foreign Direct Investment (FDI) in hospitals had been permitted on automatic route since January 2000, it is only in the recent years that investor interest has spiked.  Malaysia's IHH Healthcare Bhd, Asia's largest hospital operator, and owned by Khazanah, Malaysia's sovereign wealth fund, has invested in multiple hospitals in just one city, Hyderabad. Others like Temasek, GIC, and private equity institutions are also in the fray. In many of the investments, while the new investors have effective management control in light of their majority stake, the promoters have retained their Board positions. The original intent being that the foreign investors would bring in growth capital as well as latest technologies, and the promoters would use their proven experience, connections, and credibility to run the hospitals. But anecdotal evidence suggests that a power struggle is already on between promoters and investors in atleast some places. While there are no good chronicles like this, the new managements in these hospitals are over-ruling the promoters and forcing down efficiency improvements by mandating targets for doctors in terms of procedures and treating different specialities in a hospital as cost-centres competing with each other. I foresee this trend being accentuated going forward. A few observations1. An examination of all the hospital names that have attracted foreign interest shows some features. All of them service the highest end of the market, are equipped with the latest medical technologies, operate predominantly in the largest urban centres, have promoters with very high credibility, and have emerged successful after a long period of struggle and winnowing of the competition. In other words, they represent the cream of private healthcare operators in the world's second largest and rapidly growing health care market. And it is this low risk and juicy assets that foreign capital is snapping up. So, is health care providers the latest addition to the long list of markets where the influence and control of foreign capital grows unabated? What does it reflect about domestic private capital that it does not find investing in some of the juiciest assets in a market which can be expected to grow rapidly over the coming decades unattractive? What does it say about domestic entrepreneurship that its pool has not expanded beyond the same old names Apollo, Fortis, Max, Wockhardt etc?2. What prevents these new investors from recalibrating business plans to attract more foreign medical travellers? Is it in India's interest th[...]