Saturday, December 10, 2016

Weekend reading links

1. Martin Wolf captures Europe's lost decade starting first quarter of 2008,
In the third quarter of 2016, the eurozone’s aggregate real GDP was a mere 1.8 per cent higher than in the first quarter of 2008. Remarkably, real domestic demand in the eurozone was 1.1 per cent lower in the second quarter of 2016 than it had been in the first quarter of 2008... In the second quarter of 2016, eurozone nominal demand was only 6.9 per cent higher than in the first quarter of 2008. So what should it have been? Assume the trend rate of real growth is 1 per cent, while the inflation target is close to 2 per cent. Then nominal demand ought to grow at about 3 per cent a year. If policymakers had achieved that, nominal demand would have risen by about 28 per cent between the first quarter of 2008 and the second quarter of 2016... According to the Conference Board, a research group, between 2007 and 2016 real GDP per head at purchasing power parity rose 11 per cent in Germany, barely changed in France, and fell 8 per cent in Spain and 11 per cent in Italy... In the third quarter of 2016, Italy’s aggregate real domestic demand was 10 per cent lower than in the first quarter of 2008, while Spain’s was still close to 11 per cent lower, as it recovered from its post-crisis fall of nearly 19 per cent. Germany’s real demand has risen by 8 per cent over the same period. But its current account surplus has risen from 7 per cent of GDP in 2007 to a forecast of just under 9 per cent in 2016.
2. Latest work of Thomas Piketty, Emanuel Saez, and Gabriel Zucman finds that since the seventies, even as the US economy doubled and despite more than $5 trillion in annual transfers, the net incomes of those in the lower half have hardly grown. Their findings,
Since 1980, the share of total income going to the top 1 percent of earners has doubled, while the bottom half’s share has narrowed. Stagnant wages for many Americans are a major culprit. In three and a half decades, their incomes have barely changed while those at the top have tripled. The source of that income gain has also shifted at the top; more is coming from returns on investments rather than wages. That makes it harder for the bottom half, with much less capital, to catch up. 

The three graphics below capture the declining shares of pre-tax incomes of the bottom half, trends in real average pre-tax income, and the share of the income of the top 1% coming from wages and capital. The last one in particular underlines the importance of low capital gains taxes and how it disproportionately benefits the richest. 

3. Fascinating analysis by Upshot folks on Donald Trump's twitter activity. 
Their analysis of over 14000 tweets over the past two years finds that one in nine was an insult of some kind. They point to a two-pronged strategy. The primary focus is on identification of one or two main targets and vilifying them till they are no longer threatening enough. The second prong is a series of background attacks directed at a wider range of subjects.

4. Kritarchy in India is continues its disturbing march. The latest to attract the scarce time of an overburdened Supreme Court, the Chief Justice no less, is the government's demonetisation scheme. The government has rightly resisted the Supreme Court's over-reach claiming that fiscal policy is beyond judicial review. These queries and comments of the bench headed by the Chief Justice are, by any yardstick, hardly justiciable,
Can you put what you had estimated when you took the decision to scrap Rs 500 and Rs 1,000 notes? Did you make any estimation at all? Was there a plan? Or, did you take the decision just like that? If you had thought notes worth Rs 10 lakh crore would come back to the banks, did you take steps to urgently put in that much of new currency+ back in circulation? Can you produce the Cabinet note before the decision was taken... When you fixed the cap at Rs 24,000 per week on your own, you must have checked if the system can take that burden, haven’t you. See if you can fix a limit below, which the bank manager can’t send you away or ration currency. 
5. Niranjan makes an interesting point about the very low number of Indians who pay taxes and its consequence for India's democracy.
Around 48 million people file income tax returns in India; the actual number of people who pay tax is lower because of those who report zero tax liabilities. The number of people who were eligible to vote in the 2014 national election was 815 million. In other words, India has one direct tax payer for every 16 voters. The imbalance between the number of people who pay income tax on the one hand and the number of people who can vote on the other hand has profound implications for the Indian social contract. It creates political incentives for successive governments to borrow money to buy votes rather than build an effective tax system that will spur economic growth. Citizens are also less likely to put pressure on governments to spend wisely on public goods. 
Interesting given that democratic politics is intimately related to taxation. While liberals may decry this, the positive incentive effects of being part of a tax base and perverse incentives from not being part of the same should not be under-estimated.

6. Finally, even as the debate rages on the merits of demonetization, oblivious to the difficulty of making credible judgements on such complex issues, the only thing definitive may be that it may have redefined the narrative surrounding black money. It has drawn attention to the role of black money and informal economy and their close intersection, benefits of financial inclusion, the potential of digital cash, and the need to stem the generation of future black money. And it has definitely provided a massive impetus in potentially ushering in a structural shift in the economy, in moving towards a less cash economy and shrinking the informal economy.

As far as I see there could potentially be three important debates about the scheme. Could the same benefits have been achieved without a demonetization? Could the post-announcement planning and actions have been swifter and better co-ordinated? Finally, will the government follow up with the complementary measures to limit the future flow of black money? Unfortunately, none of the three have received the amount of attention and interest that they deserve.

Wednesday, December 7, 2016

The informality story has a demand side

I have blogged earlier about the challenges associated with shrinking informality. I therefore find this assessment, which is surprisingly commonplace, baffling,
Many units in the informal sector survive because they do not pay taxes. They conduct most of their business in cash. This is true not just for small repair shops and kirana stores but also for larger enterprises, including many small-scale manufacturing establishments. This cost advantage also helps these units compete effectively against their larger and more efficient counterparts in the organized sector, who not only pay taxes but have to comply with a plethora of rules and regulations. In fact, many brokerage reports have pointed out that the introduction of the Goods and Services Tax will be a big help to companies in the formal sector, as they will be able to take away market share from the unorganized sectorThe demonetisation impact will be felt most acutely in the informal economy, which relies more on cash payments. This short-run impact, however, will be overshadowed by the long-run effect, which will see its share of the economy shrink rapidly, as the state rams through its vision of a cashless economy and forces them to pay taxes. Many units in the informal sector are likely to fail as a result. The hope is that the process will lay the base for the growth of a modern, capitalist state, instead of the ramshackle Third World petty production-cum-islands of modern industry model we see now. It will speed up the process of accumulation and will ensure the state has more resources at its command. 
It completely misses the demand side of the story. It assumes a seamless and fairly rapid substitution by the buyers of the goods and services produced in the informal sector with those from the formal sector, despite their significantly higher cost of production. In other words, national incomes have to rise rapidly. Since proportionate productivity improvements could not have been achieved on an economy-wide scale within a short time span, and since inputs (capital and labor) increase at the normal rate, it is not clear what would drive the income growth.  

Apart from deeply under-estimating the nature and scale of the informal economy, such optimists also fail to appreciate its role in a country's development trajectory. Informality is just a natural phase in an economy's development. 

None of this is to encourage, leave aside celebrate, informality. It is only a caution against raising excessive expectations, that leave governments fighting impossible battles. 

Saturday, December 3, 2016

Kritarchy again?

Livemint reports that the Supreme Court of India has issued a slew of directions on a Public Interest Litigation (PIL) on when the national anthem should be played,
The court has directed all movie halls and theatres to play the national anthem before the start of a play, movie or any other programme. The court ordered that those present in the auditoriums must pay respect to the national anthem, according to Prevention of Insults to National Honour Act, 1971. The national anthem cannot be commercially expropriated. The full version has to be played and not any abridged version. The national anthem cannot be used in any commercial activity like in an entertainment venture. The national anthem cannot be printed on any ‘undesirable object’ where its dignity can be compromised. The apex court also asked the states and union territories to implement the order within a week.
I am not sure as to what was the constitutional imperative that required the Supreme Court to admit this PIL and go beyond the Prevention of Insults to National Honour Act 1971 to create law. Not to mention several executive directions that cover most of these issues. If there were issues not covered under the law, it was the responsibility of the Parliament and the Central Government to clarify on the deficiencies. At best, the Supreme Court could have issued directions to the government to address them as best thought fit, either as amendments to the Act or revised executive instructions. 

I don't understand the constitutional imperative in directing that the national anthem be played before the start of a movie instead of its end. What if the movie's plot demands that the national anthem be played at the end? Similarly about the diktat that the national anthem cannot be used in any commercial activity - what if it is used in a film? I find it difficult to see beyond the very narrow prejudices of two individual judges, rather than any legal, leave aside constitutional, concerns. How would the society be affected or the constitutional provisions be infringed if the national anthem were played first or last in a movie hall?

About implementing the order within a week, the Honourable Court may be over-estimating the capacity of States and Union Territories to execute such decisions!

See also this by Nitin Pai who expresses concern at its cavalier dismissal of individual liberty in this context.

Update 1 (03.12.2016)

Pratap Bhanu Mehta, as always, is brilliant. This is at the heart of the matter,
Even if you happen to think that respecting the national anthem is a good thing, requiring that it be respected undermines the possibility of respect. For an act to be an act of genuine respect rests on the possibility that you could choose not to respect; if that choice is taken away what you are eliciting is an external performance, not respect. In short, the judges have, once again, displayed a minimal grasp of moral psychology that underlies respect and value. In fact, one reason you want not to make “respect” compulsory is because then you denude society from being able to distinguish genuine respect from the mere performance of it under the threat of coercion.
Do we see this as an example of a decision that crowds out pro-social behaviour like these

Thursday, December 1, 2016

Management as Technology and SME productivity

I am increasingly convinced about the public policy relevance of the work of Nick Bloom and co which focuses on marginal improvements in management practices of small enterprises to enhance their productivity. Their World Management Surveys have found that "about a quarter of cross-country and within-country TFP gaps can be accounted for by management practices". 

In particular, they find that focus on three simple issues - monitoring, targets, and incentives - can yield significant benefits. They find that these management practices are associated with higher productivity in manufacturing enterprises, and even increased learning and patient outcomes in schools and hospitals respectively.
They have sought to examine the role of management practices as akin to technology in the production function. An examination of the management practices from over 11,000 firms in 34 countries finds that "differences in management practices account for about 30% of cross-country TFP differences with the US". 
Consider this. It is now well acknowledged, through industrial statistics from across developed and developing countries, that the predominant source of job creation are firms which start small and formal and grow into medium scale enterprises. But the evidence from developing countries is that firm size distribution is bimodal, characterised by a "missing middle". It has been found that the vast majority of enterprises start small and informal and remain so. This has been so despite the vast amount of resources spent on the promotion of small and medium enterprises (SMEs) in all large developing countries. 

The conventional wisdom on promotion of such SMEs has largely revolved around fiscal concessions and subsidised credit and inputs. However, such incentives, by their very nature, exclude the overwhelmingly vast majority of enterprises which are small and informal. In other words, the current small industries promotion policies are designed to exclude the most eligible and maximise inclusion errors. The net result is that despite decades of pursuing such industrial policy, the business landscape in countries like India remain dominated by tens of millions of small and informal enterprises with abysmal levels of productivity. Even the small innovations away from fiscal measures have been confined to establishment of incubators and accelerators, which too perpetuate the same exclusions. 

It is in this context that focusing on improving management practices assume significance. If it were to become possible to deliver commoditised management practices support that becomes accessible to all small enterprises, then the potential benefits can be significant. Such support can range from resource persons offering guidance to geographically concentrated groups of enterprises to easily customisable smart phones based inventory, procurement, performance and human resource management softwares. Apart from public production, these services can also be offered commercially through models like freemium services with the basic versions being subsidised, to start with.

For example, it would be reasonable to expect non-trivial cost savings from a simple inventory management application that provides stocking decision support for even a mom-and-pop grocery (kirana) store. Its basic version can be offered as a public good, and more value added services offered on a fee per service basis. With appropriate levels of public support, entrepreneurs can be encouraged to embrace this business model and offer such services, both as software and extension service.  

It may therefore be useful for some governments, starting at sub-national levels, to repurpose a small share of their small enterprise promotion budget away from fiscal measures to the provision of such management support services as essential industrial public goods. The outcomes should be rigorously evaluated, the management support services refined to improve effectiveness, and the program gradually scaled up.  

Wednesday, November 30, 2016

Decision making on complex public policy challenges

The demonetisation and its aftermath has raised questions about the haste associated with it and the lack of adequate planning to meet the contingencies. A friend asked whether it was possible at all to carry out such decisions in a planned and pre-announced manner. 

I would believe that there are broadly two ways of bringing about deep-seated changes involving decisions which are politically sensitive and have complex operational details (like shrink the informal sector, reform critical regulatory institutions, reshape urban governance structures, change primary health care systems, administrative reforms, electoral finance etc). 

1. Carry out extensive stakeholder consultations, mobilise support among them, prepare a comprehensive plan covering all dimensions, elaborate operational issues to the last detail, and then roll-out the changes in a predictable environment.

2. Identify an important element of the reform process (based on political and administrative expediencies) and bite the bullet. Hope that it would generate the momentum for change (create conditions or ripen the moment for wholesale change). In due course of time, intervene strategically and opportunistically with all the other elements of the comprehensive plan. 

The first is a neat, linear and logical approach, whereas the second is by definition messy, ad-hoc, and iterative. I am increasingly inclined to the view that, especially on deep-seated changes, the former would most likely overwhelm the political and bureaucratic systems (albeit for different but very compelling reasons) and lead to decision paralysis. It's just that there are too many bells and whistles associated with such comprehensive plans that they are most likely to run into the constraints of political acceptability, financial and other resources, administrative capacity, and mobilisation of entrenched interests. 

In the circumstances, I feel that a more prudent approach may be to identify a totemic element of the implementation plan that can rally the troops, wait for an opportunistic political moment, intervene in a manner that it creates a momentum, have a very committed and nimble team in place to respond swiftly to the emergent problems, and then chip in with all the other elements of the plan. 

The risk with the latter approach is that we identify the wrong elements, intervene at an inappropriate time, and fail to follow up with other elements. The risk with the failure to follow-up is, in particular, very high. If the intervention fails, everyone becomes risk-averse and would anyway be reluctant to follow-up with other elements. If it succeeds, the supporters are likely to be carried away by the success and lose focus on the job ahead. 

The demonetisation may have complied with all the first three parts of this approach, and now awaits  the response team to act swiftly and unveiling of the other elements of the comprehensive plan. Given the rising discontent, it may be necessary to unveil all the other elements without waiting too long.

Tuesday, November 29, 2016

Forget growth to achieve growth

Our final column summaries the arguments in our book on India's growth prospects, including its policy prescriptions and process principles. Get over the fetish with growth and focus on the plumbing! 

Sunday, November 27, 2016

Weekend reading links

1. Adam Minter has a nice article that points to the impossibility of relocating iPhone manufacturing jobs to US.
Low labor costs and minimal regulation were certainly part of China's appeal. But the most important factor was its huge and nimble workforce. The main iPhone facility in Zhengzhou now employs 110,000 workers, with other factories employing hundreds of thousands more. China's 270 million migrant laborers -- most of them ambitious and opportunistic -- have proven indispensable to a business that prizes flexibility. Last summer, Apple contractors reportedly hired 100,000 workers to ramp up production of the iPhone 6s in advance of its fall release. Nothing comparable could ever happen in the U.S., no matter what the president wants. A mass mobilization on that scale, and at that speed, likely hasn't been attempted since World War II. And there's little reason to think it would be successful or desirable today, even if Apple was willing to try. Finding enough skilled labor wouldn't be much easier. 
I would argue that these points apply to the possibility of manufacturers shifting from China to even other developing countries. While some shifts are inevitable, but large scale ones very unlikely for the foreseeable future. It would require cost advantages that are very large to off-set the significant benefits from being part of a large industrial eco-system, as manufacturing facilities in China are. It is no surprise that we find more stories of China leading the drive towards automation as these factories strive to remain competitive in the face of rising wages.

2. Stewart Wood tweets this remarkably prescient extract about a possible "strongman" emerging in the US from Richard Roarty's 1998 book, "Achieving our Country"
The last paragraph is stunning.

The one thing that strikes me is that the protest movements against the likes of widening inequality, stagnant wages, job losses from automation and trade and its concentration in geographical pockets, ballooning college and housing costs, lower capital gains taxation and corporate tax avoidance etc have been so subdued. Given the egregious manifestations of unfairness associated with these trends, it is surprising that these issues have not boiled over into the streets. The "occupy movement", for example, just fizzled out.  

Historically, the leadership for counter-movements against such excesses have originated within among the elites themselves. I do not see the green shoots of any such leadership emerging from within the elites and opinion makers. Even the academic activism against them have been, well, academic. The occasional bursts of protests in the form of books and articles have been staccato and one-off. Into this vacuum, it was inevitable that a demagogue stepped in.

Therefore, the more surprising thing for me is not so much the rise of Trump as the lack of the countervailing elite opinion that would have been the anti-thesis to the prevailing thesis. I think that those who claim to keep the conscience of the liberal order in the US failed badly. 

3. This article in the Economist on Trump's conflicts of interests is baffling in its benign assessment.  The conflicts are enormous, especially given the man's background and the signals of deep engagement of his children, who manage the business, with the US government activities. This article in the Times is an excellent investigation,
Even if Mr. Trump and his family seek no special advantages from foreign governments, officials overseas may feel compelled to help the Trump family by, say, accelerating building permits or pushing more business to one of the new president’s hotels or golf courses... there has been very little division, in the weeks since the election, between Mr. Trump’s business interests and his transition effort, with the president-elect or his family greeting real estate partners from India and the Philippines in his office and Mr. Trump raising concerns about his golf course in Scotland with a prominent British politician. Mr. Trump’s daughter Ivanka, who is in charge of planning and development of the Trump Organization’s global network of hotels, has joined in conversations with at least three world leaders — of Turkey, Argentina and Japan — having access that could help her expand the brand worldwide.
Trump's largest business interests out side the US are in India,
Several of Mr. Trump’s real estate ventures in India — where he has more projects underway than in any location outside North America — are being built through companies with family ties to India’s most important political party. This makes it more likely that Indian government officials will do special favors benefiting Mr. Trump’s projects, including pressuring state-owned banks to extend favorable loans.