Sunday, January 25, 2015

US interest in "India" visualized

NYT has this superb tool that searches its archives dating from 1860s and visualizes language usage in its news coverage throughout its history. The graphic below shows the sharp increase in news articles covering India since the turn of the century, with a pronounced spike last year.
To the extent that New York Times news coverage is a reflection of US interest, the graphic points to heightened interest in India.

Talking about visualization, this article by Seth Stephens-Davidowitz on preferences about sex among males and females revealed from analyzing Google search database makes fascinating reading. 

Unintended consequences of development - bednets edition

Scholars supporting Randomized Control Trials (RCTs) have long advocated the use of bed-nets to keep out mosquitoes as a cost-effective way to fight malaria. They have invoked meta-studies on the use of bed-nets and its effectiveness in different environments to claim sufficient external validity to scale up the intervention.

In this context, the New York Times has an interesting story about the unexpected use to which anti-malaria bed-nets are being put in parts of Africa. It writes,
Nets... are widely considered a magic bullet against malaria — one of the cheapest and most effective ways to stop a disease that kills at least half a million Africans each year. But Mr. Ndefi and countless others are not using their mosquito nets as global health experts have intended. Nobody in his hut, including his seven children, sleeps under a net at night. Instead, Mr. Ndefi has taken his family’s supply of anti-malaria nets and sewn them together into a gigantic sieve that he uses to drag the bottom of the swamp ponds, sweeping up all sorts of life: baby catfish, banded tilapia, tiny mouthbrooders, orange fish eggs, water bugs and the occasional green frog... 
Across Africa, from the mud flats of Nigeria to the coral reefs off Mozambique, mosquito-net fishing is a growing problem, an unintended consequence of one of the biggest and most celebrated public health campaigns in recent years. The nets have helped save millions of lives, but scientists worry about the collateral damage: Africa’s fish. Part of the concern is the scale. Mosquito nets are now a billion-dollar industry, with hundreds of millions of insecticide-treated nets passed out in recent years, and many more on their way. They arrive by the truckload in poor, waterside communities where people have been trying to scrape by with substandard fishing gear for as long as anyone can remember. All of a sudden, there are light, soft, surprisingly strong nets — for free. Many people said it would be foolish not to use them for fishing...
The people don't use the mosquito nets for mosquitoes. They use them to fish... But the unsparing mesh, with holes smaller than mosquitoes, traps much more life than traditional fishing nets do. Scientists say that could imperil already stressed fish populations, a critical food source for millions of the world’s poorest people... Many of these insecticide-treated nets are dragged through the same lakes and rivers people drink from, raising concerns about toxins.
None of this is to down-play the undoubted utility of bed-nets in combating malaria. In fact, this was well-known to health experts for long and did not need to be established by spending millions of dollars on expensive and time-consuming field experiments. The more substantive benefit of RCTs and related research on bed-nets (and others like de-worming) may have been not so much on establishing its benefits but in drawing billions of dollars from philanthropic foundations and non-profits into financing bed-net campaigns. The RCTs have provided the objective basis for donors searching for cheap and high-impact development interventions, of which there are very few, to funnel their resources.

But the example from Africa illustrates the complex challenges associated with all such interventions. The unintended consequences of development interventions, and there are always some with any intervention, are revealed only when it is scaled up and over time. No amount of field studies, regression controls, and validation can help us prepare for such "unknown unknowns" of development. So before we advocate the use of bednets or deworming or toilets or multi-grade teaching to the level or safe water storage or mobile phone-based reminders or something else as superior to their competing alternatives, we would be well-advised to pause and be cautioned about its unintended consequences. 

Friday, January 23, 2015

Airline industry fact of the day

From the Times,
The total backlog of unfilled orders for Boeing and Airbus stands at more than 12,000 aircraft, valued at close to $2 trillion and enough to keep their assembly lines humming for more than eight years.
But Boeing and Airbus, which each control nearly half the market for planes with more than 100 seats, are struggling to keep their order pipelines flowing as falling oil prices makes it increasingly profitable for airlines to continue with their fuel-guzzling older planes and defer replacements. 

Thursday, January 22, 2015

Finance Commission and optimal currency areas

The Thirteenth Finance Commission's recommendations may have set the cat amongst the pigeons by sharply hiking the states share of the central taxes by ten percentage points from 32% to 42%. Coming on the back of the scrapping of the Planning Commission, this effectively means the end of many centrally sponsored schemes (CSS).

This is an undoubtedly welcome move in so far as it paves the way for more effective utilization of development spending. The increased transfers and cut backs in CSS will endow states with the resources and flexibility to design and implement state-specific sectoral programs. However, while the curtailment of the one-size-fits-all CSS programs is to be welcomed, a sharp and substantial erosion of the central government's fiscal space may be a matter of concern. In particular, the extent to which it will limit the central government's fiscal space for macroeconomic stabilization.

Consider the impact of the global financial crisis and the resultant recession. In the 2008-10 period, the central government indulged in additional fiscal spending, which helped mitigate the adverse effects of the global economic weakness and stabilize the Indian economy. This allowed state governments to tide over the crisis with their balance sheets in tact. In fact, even as the central government today faces a 4.1% fiscal deficit, the state governments have a consolidated fiscal surplus, and just three face deficits. It is a different matter that the resources could have been better spent on productive infrastructure creation than on populist subsidies.

Given that many Indian states are atleast as large as Eurozone countries, the responses of the respective governments to the great recession are instructive. In contrast to the central government in India, the European Commission has advocated sharp spending cuts and refrained from additional fiscal transfers to the worst affected peripheral economies. As the credit markets froze, peripheral economies struggled to raise resources, some even lost market access, and the human and economic costs of the absence of fiscal transfers has been substantial.

This is in keeping with the literature on Optimal Currency Areas (OCAs). A strong fiscal authority is an important ingredient in the success of any OCA. Apart from its role in macroeconomic stabilization when members (states in India or countries in Eurozone) have varying business cycles,   such fiscal transfers help stabilize the economy in times of more uniform economic weakness when members may lose market access or may struggle to raise resources for demand management policies. In fact, the availability of this fiscal cushion is critical to effective fiscal federalism. 

Monday, January 19, 2015

Make for India Vs Make in India

The debate triggered by the remarks of the Governor of Reserve Bank of India, Raghuram Rajan, on the central government's high-profile "Make in India" campaign missed an important insight about the strategy that should be adopted to encourage manufacturing. The Governor had cautioned about excessive focus of the campaign on both manufacturing and external markets and suggested "Make for India". So, how are 'Make in India' and 'Make for India' different?

Both are anchored around the East Asian manufacturing-led rapid economic growth strategy. The success of the East Asian model depended on both domestic and external demand. Proactive government policies encouraged manufacturers who produced export quality goods for both domestic consumption and exports. In all these cases, the domestic demand was supported by a wide enough consumer base for good quality products and the domestic market in turn provided the platform for manufacturers to develop and refine those products to world-class standards.

In contrast, manufacturers in India may struggle with domestic demand. The headline numbers that proclaim large declines in those living 'below the poverty line' (BPL) does not mean that the new entrants into the 'above the poverty line' (APL) are ready for middle-class consumption. In fact, as a MGI report from last year shows, atleast 56% of the country's population do not have the resources for their basic needs. Further, nearly 95% of the households make less than Rs 1.5 lakh a year.

It is fair to argue that these consumers are likely to be deeply price sensitive and less concerned about quality beyond some basic considerations and durability. Only a tiny sliver of the market is likely to be demanding on quality. A manufacturer making automobiles, clothing, or consumer durables is therefore encouraged to keep costs down, thereby discounting for quality. Margins are also minimal in this side of the market, thereby limiting their ability to expand or move up the quality escalator. Needless to say, none of these products can be exported. Export quality manufacturers are constrained by the limited domestic market base to refine their products through a "learning by doing" approach.
In the circumstances, India's manufacturers have two choices - 'Make for India' or 'Make in India' for export markets. As illustrated, they are qualitatively different choices. The former leaves them entrapped in a low-level equilibrium, exit from which is very difficult. Its market dynamics makes it difficult for these manufacturers to re-orient their production to also meet export markets. Further, manufacturers in this end of the market face stiff competition from cheap imports from competitors in China and elsewhere who have moved up the quality chain and can therefore produce the same quality at far competitive prices. Therefore any campaign to 'make in India' by 'making for India' is unlikely to achieve intended results, atleast in the medium-run.

The latter choice - 'make in India' for external markets - requires technological and professional expertise, which only a handful possess, and an enabling infrastructure and policy environment, which is sorely deficient. Here, India has sought to emulate the latest entrants into the "flying geese" model like China and Vietnam where public policy encouraged greater external-market focus through the establishment of export-only Special Economic Zones. But in order to make an impact, this strategy requires massive investments on infrastructure in these zones and its surrounding areas as well as equipping public systems there with much greater state capability. Further, it also assumes the presence of a receptive external market. The reliability of these assumptions are, at best, questionable. 

Sunday, January 18, 2015

Interest rate cuts and lazy banking

The RBI's surprise 25 basis points repo rate cut early this week has been greeted with widespread enthusiasm by India's corporates. With banks expected to lower the rates in response to the central bank's rate cuts, the  belief is that this marks the start of an easy credit cycle. I am not sure whether the rate cuts would readily translate into lower cost of capital for borrowers in the short-term, for atleast two reasons.

1. The more substantial economy-wide impact of the rate cut will be felt when the overwhelming majority of corporate borrowers, the small and medium enterprises, have access to cheaper credit. This is unlikely to happen anytime soon given the circumstances. Hobbled by distressed assets and declining capital adequacy ratios, banks are likely to be averse to assuming riskier loans, leave aside providing them at cheaper rates.

2. There is a strong likelihood that the banks may find the rate cuts as an opportunity to atleast partially ease the burdens from their distressed balance sheets. The temptation to only marginally lower lending rates while proportionately lowering deposit rates would be high given the proclivity for lazy banking among the country's banks. A recent Business Standard article gave an indication of the dominance of risk-free margin (spread between 10 year G-secs and deposit rate) on the banking sector's pre-tax profits.  

Wednesday, January 14, 2015

The challenge with transactional reforms

In about a month, the government in Delhi would be presenting its first full budget. In the seven months, it has had some notable achievements. It has restored macro-economic stability through fiscal prudence - decontrolled diesel price, limited LPG subsidy through introduction of cash transfer, and restrained the increase in Minimum Support Price (MSP) - and by allowing the central bank to pursue an inflation targeting monetary policy. Favorable external factors have doubtless helped.

It has also initiated reforms aimed at improving the ease of doing business, including amendments to the Land Acquisition Act and liberalization of labor markets. It has also accelerated long-delayed reforms like harmonization of indirect taxes and liberalized foreign equity participation in many sectors - insurance, defence, and railways. Encouraging has been its intent on collaborating with state governments and reforming governance standards in public sector banks.

But the expected rapid return to high-growth rates has not materialized. As the economy shows little signs of regaining the momentum of 2003-08, the government's exuberant supporters appear to be losing patience and no day passes without pressure mounting on the government to do more. So what is missing?

Commentators point to the vaguely phrased "second-generation reforms" as the solution. Whatever its constituents, these reforms are unlikely to be big-bang and generate immediate results. Two reasons stand out. One, by nature, most of them are diffuse, incremental, and long-drawn. Two, most of them have to be implemented by state governments.

The first generation of reforms were about changes like elimination of licensing and easing of entry barriers, opening markets and lowering tariffs, and repealing restrictive and distortionary regulations. For most part, these reforms involved one-off regulatory decisions, whose effects were immediately felt. Such reforms were, unsurprisingly, the low-hanging fruits that yielded immediate results. For lack of a better word, let us describe them as decisional reforms. In fact, many of the reforms implemented by this government are, in some sense, the remainders from the first phase of reforms.

In contrast, the second generation of reforms are less about one-off decisions and more about transactional improvements. Consider getting an electricity connection or procuring a property. The former requires the applicant to apply; an estimate to be made; payment to be remitted; tenders called, work contracted, and work executed; and supply to be connected. The latter needs inquiring with multiple agencies to verify the reliability of land title and encumbrances, getting the property registered and mutated, and obtaining land-conversion certificate (if agriculture land). The human interfaces and legacy problems in these transactions cannot be avoided by computerization or automation, or even standardization. Much the same could be said about improving school education, delivering universal health care, and reducing skills-deficit among workforce.

All of them require transactional interventions, often recurring, whose effectiveness is intimately dependent on the quality of human interface. The systemic legacy problems - poor state of records, woefully inadequate infrastructure, untrained and over-burdened personnel etc - are profound and not easily addressed. They are not amenable to one-off decisions and require continuous engagement between the applicants and public systems. It is here that the much-debated state capability problems surface. Even with state-of-art governance frameworks and incentive compatible policies, you still need public officials to transact and translate them into actual outcomes.

Whatever the hype surrounding these reforms, those expecting immediate and big-bang results are likely to remain disappointed. Unfortunately, by raising the expectations through high-profile slogans and media campaigns, the government may be limiting the political space available for it to pursue these reforms.