Thursday, April 20, 2017

State capacity and resource constraints

State capacity weakness in developing countries is a favourite topic of this blog. An important, but less discussed, dimension of weak state capacity is that public systems run on very thin human, physical and financial resources. The scale of disproportionality would become evident if we match the time-task-effort to the available resources. And once we have such deficiencies, the other dimensions of state capacity weakness (corruption, incompetence, apathy etc) invariably follow. 

And this is no less true in developed countries. From a Times story on the hell-hole that is the over-crowded St Clair Correctional Facility, one of the six maximum security facilities in Alabama,
Mr. Dunn, the corrections commissioner, points to this as support for his conviction that the root problems at St. Clair and in the Alabama prison system lie in the numbers. “I still believe that the fundamental, systemic problem is a combination of lack of staff and overcrowding,” he said... The construction of modern prisons, he said, is the important first step to making changes that will last, allowing for safer facilities and more rehabilitative programming.
Whether it is fundamental or not, I cannot disagree with the Commissioner. And he echoes correctional officials in many developing countries. 

St Clair is acutely under-resourced - physical infrastructure, correctional man power etc. But St Clair is an exception to the norm of well-resourced correctional facilities in developed countries. 

Instead, St Clair is the norm in many developing countries. In fact, St Clair (at least from the photos) would even be considered one of the better endowed ones in many of these countries. And despite acute resource scarcity, most often far greater than St Clair, many correctional facilities in countries like India are run no worse than St Clair. 

This scenario of resource deficiency would repeat with building inspectors, bill collectors, surveyors, citizen charter counter operators, teachers, doctors, extension officers, police constables, clerks, and so on, and at all levels. 

In fact, I will not hesitate to argue that under the same same resource conditions and challenges, the State in developed countries would fare far worse than those in many developing countries. 

Wednesday, April 19, 2017

The problem with targeting outcomes in development

Outcomes-based payments has been a trend in international development for more than a decade-and-half, though with limited results to show. In fact, except for the deforestation programs, there may be no example of a pure outcomes project. Even the totemic examples skirt around outcomes and end up focusing, at best, on poorly specified outputs. In short outcomes-based financing itself has shown little evidence of outcomes. 

The fundamental premise with outcomes based approach to addressing development problems is the assumption that a financial incentive, adequate and appropriately structured, can force systems to get their acts together and achieve outcomes. The financial structure, it is believed, can help vault past inputs, processes, and outputs, to realize outcomes. 

Here is a listing of three important failings with this approach (assuming the focus being on outcomes and not outputs)

1. The assumption that a financial incentive is sufficient to overcome antecedent deficiencies and achieve outcomes betrays a very high degree of ignorance. In simple terms, the assumption is that financial incentive can ensure that processes are put in place, processes get adhered to, complementary inputs can be and are brought to bear, and execution is reasonably assured. And all this happens in scale. Take a break!

While it may be logical to target outcomes, in practice, the financial incentives alignment alone may not be sufficient to help leapfrog the process compliances that may be necessary to help achieve the objective. In most environments (places and sectors), just process compliance requirements (simple things like teacher attendance or individual student learning tracking, which are critical to achieving the objective) can be daunting enough, even if they are targeted directly. Now achieving them as an incidental benefit from an outcomes-based contract, may be expecting too much. 

2. The other assumption is that governments can afford to pay for outcomes. This, in turn, assumes that the same set of resources can be redeployed more efficiently to achieve the desired outcomes. 

But what if the real cost of achieving outcomes is much greater than the current expenditures? And what if the principles of government budgeting conflict with the requirements of outcomes-based budgeting? 

Answers to these can be found in the way government budgets are made. Logic would have it that allocations be made based on an objective assessment of the cost required to achieve the goals. But in the real world, allocations are made with another consideration as the foremost priority – balance and equity (in the coverage of geographies, sectors, and populations). 

The result is extensive skimping on the allocations, especially on maintenance, consumables, procedural compliances, newer types of activities, discretionary spending, and new investments. Nothing is sacrosanct except the salaries of employees and long-term contractual obligations. Spreading the limited fiscal butter thin, often to the point of being imperceptible (or seriously detracting from the objectives), becomes inevitable. 

Now imagine an outcomes-based project where procedural compliances, maintenance schedules, quality of engagement, rigour of monitoring, and so on are critical to its success. All this inflates the price tag for the actual achievement of outcomes. Governments will find the increment fiscally unsustainable. The option of a phased expansion, apart from raising several practical problems, would also be politically unacceptable. 

3. Finally, in case of private production, the assumption that the supply side is large enough to support outcomes based contracting in scale is most likely to be unrealistic. Forget education or health, try calling tenders for outcomes based water treatment facilities and, in most developing countries, within only a handful of tenders the no-response bids start to bind.

So, the argument would go that the markets take time to mature. We only need to catalyse it and will develop. But, as the far simpler and easier to contract market for infrastructure services has shown, such markets are more likely to remain elusive for a very long time. And, even plain simple outcomes contracts like long-term road concessions are rife with renegotiations and attendant moral hazard which distort contractual obligations. 

So, is it futile to target outcomes in development? It is realistic to target outcomes in at least two areas. One, logistics based activities, especially infrastructure services, are amenable to outcomes targeting. This is largely because, there is little difference between outputs and outcomes. Two, where there is private production and public provisioning of services, and where outcomes can be quantified without any of the standard challenges, it should be possible to hold private providers accountable and demand outcomes. Skill trainings linked to placement is an example.

Yet with even these limited areas, the aforementioned three problems will bind to varying degrees, hampering the achievement of outcomes. 

Similarly, it is unrealistic to target outcomes in cases of public production involving engagement intensive activities. I would define engagement intensive activities as those where outcomes depend intimately on the quality of engagement. Education and learning outcomes is the best example. In all such cases, especially when done in scale in developing countries, state capacity becomes the binding constraint.

Monday, April 17, 2017

How should we manage urbanisation?

Far too often debates on urbanisation has focused on supply-side measures that encourage growth of cities. Accordingly, we have policies to expand city boundaries, incentivise businesses and skilled migrants to locate to cities, and so on. 

But as Edward Glaeser and Wengtao Xiong write, we may be focusing on the wrong set of policy instruments,
If urbanization can play an important role in abetting economic growth, then one question is whether public policies should do more to increase city size. There are many reasons to be wary of explicit spatial policies that encourage migration to one region or another. Most obviously, it is unclear whether encouraging urbanization would enhance welfare overall. On average, workers in cities earn more, but they also pay more for housing and suffer other costs. The standard economic model of migration assumes a spatial equilibrium, so that the marginal migrant is indifferent between the city and the rural hinterland, which implies that there is no direct welfare benefit from encouraging migration. Certainly, there may exist externalities from moving to cities, but these can be both positive and negative and we currently cannot tell whether those external benefits on net favor cities.
Moreover, accepting a role for spatial bias in policies sets an uncomfortable precedent. Spatially biased policies may well be used to favor politically powerful regions, rather than regions that should be subsidized. Loud voices will clamor for support for poorer regions, even if economic development suggests that people should leave such areas. A principle of spatial neutrality would seem to be the safest course, which would force regions to compete for capital and workers rather than relying on largesse from the national government.
A more sensible policy alternative is to focus on reducing artificial barriers to urban growth and improving the quality of urban life. If cities have benevolent economic effects, then it can be quite costly to impose land use regulations that stymie urban construction, such as the stringent floor-area requirements that Mumbai has had for most of the past 50 years. In some cases, including Mumbai, these land use controls were imposed to limit the growth of the city. Often, they have only prevented legal, safe housing and left a back door for the growth of sprawling slums.
City governments can also bring urban growth by becoming more effective at improving urban quality of life. Most of the downsides of density, such as contagious disease and congestion, are negative externalities that become magnified when people live close to one another. By reducing these externalities, developing-world cities can attract immigrant entrepreneurs and allow more people to enjoy the added productivity in cities...
First, growing cities need infrastructure, but to get infrastructure right, we need to get institutions right. Second, incentives must accompany infrastructure. Third, property titling and the protection of private property are extremely valuable in urban contexts. Fourth, infrastructure, incentives and institutions must be adapted to local conditions.
This is a very profound insight, very easily missed. In simple terms, ease the demand-side constraints to urban growth and let cities grow on their own, rather than directly targeting urban expansion. Address the regular deficiencies - restrictive regulations, inadequate infrastructure, and poor governance - and allow cities to grow organically.

Far too often governments, at all levels, end up favouring the more immanent and tangible supply-side policies and ignore the more diffuse and deep-rooted demand-side ones. For sure, there are compelling political economy and administrative reasons for such distortions. But the result is the choking and sprawling cities that characterise much of the developing world.

A pivot towards improving urban governance, encouraging vertical and transit-oriented development,  simplifying the doing business regulations, investments to expand and increase the quality of human capital formation, general initiatives that enhance the quality of urban life, and plugging the deficiencies in infrastructure should be the agenda for city managers as well as provincial and national governments. Cities will then take care of themselves. 

Wednesday, April 12, 2017

Shenzhen and learnings for India

From Economist's fantastic survey on the Pearl River Delta (PRD), consider the trajectory of Shenzhen's emergence as an innovation hub,
Between 1980 and 2016 Shenzhen’s GDP in real terms grew at an average annual rate of 22% and today stands at 2trn yuan. The city’s Nanshan district, home to about 125 listed firms with a combined market value of nearly $400bn, has a higher income per person than Hong Kong... Shenzhen spends over 4% of its GDP on research and development (R&D), double the mainland average; in Nanshan the share is over 6%. Most of the money comes from private firms. Companies in Shenzhen file more international patents (which are mostly high quality, unlike many of the domestic Chinese ones) than those in France or Britain.
Local entrepreneurship, innovating both in products and services as well as their business processes in a closed economy, was critical to this success,
Early reformers pushed ahead with unauthorised investment deals with non-mainland companies and retroactively developed the legal framework needed to protect foreign firms. Time and again, grassroots innovators hit on better ways of doing things, even though strictly speaking they were not permitted. When their risk-taking proved successful, communist leaders typically took the credit... The common perception that China is incapable of innovation needs re-examining... a recent study by Britain’s University of Sussex and others for the European Commission... calculate that the average value China adds to its exports is 76% (the EU’s is 87%). The PRD’s companies, which account for a huge chunk of China’s innovation, have been moving up the value chain... Today, Shenzhen is attracting many entrepreneurs keen to develop new ways of making things. The innovators are transforming the entire delta into an advanced manufacturing cluster. Many multinationals have a listening post in the city to stay close to the latest trends... Shenzhen has become the world capital for hardware and manufacturing entrepreneurs.
The cluster effect has been a powerful force for PRD's success and will also be a reason why even with rising wages, not too many of these firms will relocate especially their more value added activities,
Another way Shenzhen is rewriting the rules is by embracing open innovation. In the West, corporate innovation has generally been a secretive, top-down affair. Many factories in the city started by making clever imitations of Western goods, which led foreigners to dismiss the locals as mere copycats. That was a mistake. David Li of Shenzhen’s Open Innovation Lab argues that the copycats have since morphed into a powerful ecosystem of collaborative, fast-learning suppliers and factories. “Anybody can come to Shenzhen with an idea and get it prototyped, tested, made and put on the market at a decent price,” he says. Silicon Valley is obsessed with rich-world problems, he thinks, but China’s open innovators work on affordable solutions for the masses on everything from health care to pollution to banking... 
One of Shenzhen’s most daring startups, Royole, is expanding its output of an extraordinary product: the world’s thinnest foldable full-colour touchscreen display. Liu Zihong, a mainlander, earned his doctorate in electrical engineering at Stanford University, where he dreamt of radical new ways for machines and humans to interact. When he started Royole, he says, he knew it had to be based in Shenzhen. Getting from early-stage research to manufactured product would require a massive amount of what he calls integrated innovation: “Materials, process, device design, circuit design—all needed to be innovated…if you changed one material, you had to change the process.” His team had to develop entirely new materials and factory tools, including custom-built robots, to make his screens, accumulating over 600 patents along the way. He insists this could not have been done even in Silicon Valley, because California cannot match Shenzhen’s ecosystem of “makers”...
Navi Cohen is the co-founder of Revols, a Canadian startup developing affordable, custom-fitted headphones. His firm raised a fortune on Kickstarter, a crowdfunding site. When it tried to develop its product in Montreal, it found things slow and expensive, so it moved to Shenzhen, where supplies were cheap and factories made prototypes quickly. It is now in production. Another promising startup that moved to Shenzhen is Wazer, an American firm. A conventional metal-cutting machine on a factory floor costs $100,000 or more. Shenzhen’s know-how helped Wazer perfect a way to cut any material precisely with pressurised water. Its desktop cutter costs about $5,000 and will disrupt the industry when it comes to market later this year.
It is surely not appropriate to compare Gurgaon and Shenzhen on many dimensions, especially given the locational advantages enjoyed by the latter. But the roles of government and local entrepreneurship may be worth examining. 

Like Shenzhen, Gurgaon emerged from nothing, maybe even around the same time. Unlike Gurgaon, Shenzhen flowered to become an innovation hub thanks to its enterpreneurs and governance. Farsighted local politial leadership contributed to the growth by providing world-class infrastructure and logistics facilities and by not interfering with the typical heavy handedness of government bureaucracies. Gurgaon had the exact opposite in both infrastructure provision and government bureaucracies.

Indeed Chinese bureaucrats are not immune from all the traditional failings of governments. In the context of a new plan to build a 2000 sq km greenfield satellite city, Xiongan, south of Beijing, to decongest the capital, the Economist writes,
Over the years China has tried to build numerous new cities, several of which have been costly failures. More than a decade ago the government declared that the Binhai New Area, a vast development in Tianjin, would be north China’s answer to Shenzhen and Pudong. It has never taken off. Another stillborn project was Caofeidian, an “eco-city” in the Bohai Gulf.
But governments cannot be reflexively blamed for everything. Unlike the spectacular success of companies like Foxconn, Huawei, BGI, Mindray and so on highlighted here, India's hardware entrepreneurial eco-system has not produced global champions. Chinese firms are today at the forefront of areas like consumer electronics, renewables, transportation, telecoms, and construction equipments, and are not far away from dominating markets like those for battery storage, electric cars, medical devices, drones, robotics, cloud computing, machine learning, and so on. 

Consider the example of India's software industry. It is difficult to refute the argument that the likes of TCS, Infosys, Wipro, Cognizant etc missed a great opportunity to build on their platform of success to establish themselves as leaders in emerging markets like artificial intelligence and cloud computing. It is even worse that they may have altogether missed the bus on these emerging technologies. 

Instead, there may have been a resource misallocation towards real estate and IT start-ups, in terms of physical and human capital and entrepreneurial talents. Here too while Baidu, Alibaba and Tencent have adapted western models and innovated to develop new features and services which are now becoming hits in developed markets, India's e-commerce firms have remained just copy-cats of well established western counterparts with little or no meaningfully significant innovation to address any of the country's several development challenges.

Tuesday, April 11, 2017

Are batting collapses becoming more common?

From a very good analysis of the surge in batting collapses at a time when batsmen are piling on the runs, these statistics stand out
Test teams are scoring huge totals much more often than they used to. Between 1960 (more or less the start of the current era of covered pitches) and the end of 1999, one in 18 innings would see a team rack up 500 or more. Since the start of 2000, that rate has almost doubled to one in ten. Last year, teams amassed 500 or more on 19 occasions: one in nine... sub-100 totals have also become much more frequent. From 1960 until 1999, the dreaded double-figures dig happened roughly once every 70 innings. Since 2000, that figure has jumped to one in 47... In the 1950s, the average sub-100 innings lasted 293 deliveries. Since then, the carnage has accelerated. In the 1960s, the average rout lasted 255 balls; in the 1990s, 221. Since 2010 it has taken an average of just 184 balls to end the misery. That's a full 18 overs fewer than 60 years ago.
Tim Eaton appears to trace the failing to the technical weaknesses of the No 6 batsmen (bully instead of being a bulwark, as he writes), especially for Australia and South Africa, the two countries surprisingly vulnerable to such collapses. The dominance of seam bowlers in the list of those responsible for such collapses is interesting and highlights the effectiveness of late movement. 

While those may be contributors, I am inclined to the argument that the defensive technique and temperaments of modern batsmen may be responsible. One way to statistically verify it may be to see how many of these wickets fell to defensive and attacking shots respectively over the different periods. My hunch is that getting out attacking the ball would predominate in recent years.

Also, we need to discount the much more number of tests being played in recent years, with more tours and more teams. It is now not uncommon to have players playing 100 tests over a 7-10 year career, something which would have taken twice that many years before the millennium. 

It may also be useful to do an examination of whether batting collapses in general have increased in recent years. If we assume losing 5 wickets for an addition or 10 runs or 8 wickets for an addition of 30 runs as collapses, is there an increasing trend of such collapses?

Monday, April 10, 2017

The failings of the best and the brightest

Behavioural psychologists point to certain cognitive biases that afflict human mind and spares none. Even among the smartest people I have interacted, there is at least one of the following three biases that deeply cloud their perceptions. Just a handful of people manage to escape this trap, being cognisant of these impulses and having the resolve to overcome them. I will call them genius. 

1. Induction bias

Human being are fundamentally inductive beings, prone to draw generalisable conclusions from their specific experiences. It is very difficult to recalibrate the lens of logic when applying inductive reasoning. Important dimensions get glossed over, most often because the context and its structure varies, often very widely. And without having been in that context, it is very difficult to appreciate the nuances. 

The most classic such inductive reasoning bias comes from those working in the private sector who tend to apply similar set of operational principles to public sector issues. They see outsourcing services, aligning incentives of agents, defining targets and efficiency parameters, making payments based on outcomes, work-flow automation and so on as natural accompaniments in the public sector. Truth to say, public sector could do with all of these, in varying degrees. But there is some distance between "could" and "would". 

Similar failings apply to other generalisations, especially when they involve tackling complex public policy challenges. And in most of these cases, difficulty in appreciation of the context is the major contributor to the difference in perceptions. 

2. Anecdote bias

Human beings suffer from representative and anchoring biases, which make us crystallize our views on an issue from a few personal experiences and the limited examples that immediately come to our mind while discussing that issue. Such biases prevent us from realizing that our exposure is but just one data point and the particular outcome may have been deeply influenced by its specific context.

People who travel widely and engage with experiences during these travels or who are integrated to the global seminar/conference circuits are especially vulnerable to this bias. Politicians belong to the former and international development cosmopolitans to the latter. An innovative approach or idea to overcome a supposedly intractable problem that you have seen either directly or in a presentation is likely to stick deep and long in our memory. 

Unfortunately, most often such success is circumscribed in place, time, supervisory effort, and context. In case of presentations, especially on complex public or social issues, they are most often half-truths. It may be presumptuous to generalize from such experiences.

3. Achievement bias

It is a common feature that people are strongly attached to their perceived personal ‘achievements’. It means that their comprehension of the particular issue is very deeply influenced, or clouded, by their prior experience. 

Two cognitive biases amplify the attachment to personal experiences. The availability bias anchors human mind to evaluate a topic based on the examples available and entrenched in our memory. The over-estimation bias makes us repose far higher subjective confidence on our own judgements (in this case of the 'achievement'), than their objective accuracy would suggest. Accordingly, in any such achievement, the ‘success’ elements get amplified even as the ‘failing’ dimensions are underplayed.

Policy makers and practitioners, especially the successful and competent ones, are vulnerable to this. Even the most successful ones are likely to have only a handful of 'successes' from among the several initiatives that they would have tried over a career. They invariably advocate either its particular replication or generalise inferences for application in other problems. Almost always, the contribution of the specific individual (the extraordinary 'personal' energy, unavailable in business as usual contexts) and confluence of favourable environmental factors to its success gets glossed over. The median public system is most likely to struggle to get the initiative past the post. 

While there is some overlap among the three biases, there are also subtle differences as reflected in the categories afflicted by each.

Sunday, April 9, 2017

Weekend reading links

1. Amidst all the negative news that surrounds Europe, we overlook the real successes. Spain's recovery from the binge growth of the last decade is outstanding. Even more impressive has been its resolve to push ahead with reforms to labour market, banking systems, and corporate bankruptcies. The wage restraint and flexibility given to companies under the 2012 labor market reforms have ensured that the country's unit labour costs have fallen by 14 per cent since 2010, thereby enhancing the country's external competitiveness.

But the chronicle of the  construction boom that built up the excesses is worth remembering,
That boom coincided with the arrival of millions of migrants from Latin America, eastern Europe and north Africa, fuelling demand for homes that eventually reached fantastical proportions. In 2007, Spain accounted for more housing starts than Germany, France, Britain and Italy combined and 2.7m Spanish workers were active in the construction sector — equivalent to 13 per cent of the national workforce.
In Valencia, the boom was even more pronounced, helped by two factors that had nothing to do with central bankers in Frankfurt. One was the decision by the regional and local government to sink billions of euros into one-off events and pharaonic architectural designs. The other was the proximity between political leaders and the cajas, or regional savings banks, under their control. Poorly run and poorly supervised, the cajas provided the rocket fuel for Spain’s housing boom, dutifully funding one unviable project after another... Local politicians had little incentive to urge restraint, if only because so many of them stood to benefit personally from the boom... But the combination of mismanagement, hubris and greed, coupled with a banking system that lent according to political not financial criteria, proved disastrous. As the bubble continued to inflate, it touched on the lives of more and more people: teenagers left school without any qualifications to work on building sites. Orange farmers pulled up their groves to build apartment blocks. Owners of family companies abandoned them to sell real estate. A region that once prided itself on its manufacturing industry succumbed to the dream of dinero f├ícil or easy money.
Construction booms, especially those fed by real estate prices, should count as the most pernicious forms of resource misallocation. This story plays itself out with surprisingly high frequency, including in developing countries.

And its banking sector clean up was instructive,
“Spain did a textbook bank rescue,” says Angel Ubide, a managing director at Goldman Sachs and until recently a senior fellow at the Peterson Institute for International Economics. “It shut down the banks that couldn’t survive and recapitalised the ones that could. And then it moved all the bad assets into a bad bank.” The overhaul killed off the cajas, which were either folded into larger private banks or forced to become normal lenders, free from political influence. But it also meant that markets regained trust in the broader banking system relatively quickly. Balance sheets were cleaned up, bad loan ratios fell and loan loss provisions started to decline.
Unlike the misallocation problem, I don't think the banking sector clean up is relevant to India.

2. Martin Wolf explains the massive deleveraging and rebalancing challenge facing China.
Annual gross savings in the Chinese economy amount to 75 per cent of the sum of US and EU savings, at over $5tn last year. China’s gross investment, at 43 per cent of gross domestic product in 2015, was still above its share in 2008, even though the economy’s rate of growth had fallen by at least a third. To sustain such high investment, the ratio of credit to GDP soared from 141 per cent of GDP at the end of 2008 to 260 per cent at the end of last year... China saves more than it can profitably invest at home. In 2015, gross national savings were 48 per cent of GDP. World Bank data show that households contributed only a half of this. The rest came from corporate profits and government savings. International comparisons suggest that economic growth of 6 per cent warrants investment of little more than a third of GDP. This indicates that China’s surplus savings — surplus, that is, to domestic requirements — may be as much as 15 per cent of GDP.
3. India has one of the highest trade tariff barriers among all major economies,
UberEats launched in London in June, promising “the food you want, from the London restaurants you love, delivered at Uber speed”. In a bid to recruit self-employed couriers to ferry food from restaurants to customers, UberEats initially offered to pay £20 an hour. But as customer demand increased, the company began to reduce pay. By August, the couriers were on a piece rate with a fiddly formula: £3.30 a delivery plus £1 a mile, minus a 25 per cent “Uber service fee”, plus a £5 “trip reward”. Then, one day, the couriers woke up to find the app had been updated again. The “trip reward” had been cut to £4 for weekday lunch and weekend dinner times, and to £3 for weekday dinner and weekend lunch times. Outside those periods, it had been cut altogether.
Not only does e-commerce firms benefit from regulatory arbitrage, they also have the flexibility of changing the rules of the game at their choice.

5. Fascinating graphic in the Times that captures the scale and speed of urbanisation in China's Pearl River Delta. Guangzhou, Shenzhen, and Dongguan have become bustling economic centres in Guangdong province over the last 35 years from being small backwater townships. The rapid growth has encroached into the wetlands, reclaimed water courses, and destroyed mangrove forests, making the region vulnerable to recurrent floods and sea water ingress. So much so that Guangzhou has been classified as the city most under risk from climate change.

6. Incidentally Economist has a feature on the Pearl River Delta (PRD), comprising nine cities of Guangdong province and Hong Kong and Macau. Its significance,
The World Bank recently declared the PRD the world’s biggest megacity, surpassing Tokyo. With over 66m residents, it is more populous than Italy or, just, Britain... Its GDP, at more than $1.2trn, is bigger than that of Indonesia, which has four times as many people. It has been growing at an average of 12% a year for the past decade. As a global trading power the region is outranked only by America and Germany. For China itself, the PRD is crucial. Though it accounts for less than 1% of the country’s territory and 5% of its population, it generates more than a tenth of its GDP and a quarter of its exports. It soaks up a fifth of China’s total foreign direct investment and has attracted over a trillion dollars-worth of FDI since 1980... Most remarkably, a region once known for copycat products is emerging as a world-class cluster for innovation. 

7. City Lab has this nice video of how existing road patterns can be rationalised to squeeze in bike lanes and parking, without reducing vehicle volumes and carrying capacity and while increasing safety. 
Not sure of its relevance to developing countries like India where lane driving comes at a premium and bike usage unlikely to take-off for practical reasons. 

8. The latest version of inequality analysis by Piketty-Saez-Zucman is out. 
For the 117 million US adults in the bottom half of the income distribution, growth has been non-existent for a generation, while at the top of the ladder it has been extraordinarily strong... From 1980 to 2014, for example, none of the growth in per-adult national income went to the bottom 50%, while 32% went to the middle class (defined as adults between the median and the 90th percentile), 68% to the top 10%, and 36% to the top 1%...
Because the pre-tax incomes of the bottom 50% stagnated while average national income per adult grew, the share of national income earned by the bottom 50% collapsed from 20% in 1980 to 12.5% in 2014. Over the same period, the share of incomes going to the top 1% surged from 10.7% in 1980 to 20.2% in 2014... these two income groups basically switched their income shares, with about 8 points of national income transferred from the bottom 50% to the top 1%. The gains made by the 1% would be large enough to fully compensate for the loss of the bottom 50%, a group 50 times larger. To understand how unequal the US is today, consider the following fact. In 1980, adults in the top 1% earned on average 27 times more than bottom 50% of adults. Today they earn 81 times more.

9. A new paper points to the sustained and much faster economic expansion since the dawn of the 20th century to "less shrinking in recessions",
Stephen Broadberry of Oxford University and John Wallis of the University of Maryland have taken data for 18 countries in Europe and the New World, some from as far back as the 13th century. To their surprise, they found that growth during years of economic expansion has fallen in the recent era—from 3.88% between 1820 and 1870 to 3.06% since 1950—even though average growth across all years in those two periods increased from 1.4% to 2.55%. Instead, shorter and shallower slumps led to rising long-term growth. Output fell in a third of years between 1820 and 1870 but in only 12% of those since 1950. The rate of decline per recession year has fallen too, from 3% to 1.2%.
10. Finally, the best read comes from a fantastic article in the Economist about how parking norms influence the urban form and growth 
In 2004 London abolished minimum parking requirements. Research by Zhan Guo of New York University shows that the amount of parking in new residential blocks promptly plunged, from an average of 1.1 spaces per flat to 0.6 spaces. The parking minimum had boosted supply far beyond what the market demanded.
The cost of parking mandates invariably gets passed on across the economy,
Donald Shoup, an authority on parking economics, estimates that creating the minimum number of spaces adds 67% to the cost of a new shopping centre in Los Angeles if the car park is above ground and 93% if it is underground. Parking requirements can also make redevelopment impossible. Converting an old office building into flats generally means providing the parking spaces required for a new block of flats, which is likely to be difficult. The biggest cost of parking minimums may be the economic activity they prevent.
Free parking is not, of course, really free. The costs of building the car parks, as well as cleaning, lighting, repairing and securing them, are passed on to the people who use the buildings to which they are attached. Restaurant meals and cinema tickets are more pricey; flats are more expensive; office workers are presumably paid less. Everybody pays, whether or not they drive. And that has an unfortunate distributional effect, because young people drive a little less than the middle-aged and the poor drive less than the rich. In America, 17% of blacks and 12% of Hispanics who lived in big cities usually took public transport to work in 2013, whereas 7% of whites did. Free parking represents a subsidy for older people that is paid disproportionately by the young and a subsidy for the wealthy that is paid by the poor.

Saturday, April 8, 2017

Natural gas market update

Excellent article that summarizes the global gas market which is likely to see a production glut and low prices for the foreseeable future, especially so with Qatar's decision to lift the production moratorium on the world's biggest natural gas field, the North Field. 
Four countries are vying to be the world’s biggest exporter: Qatar, the current leader, with 78 million tons per year capacity (10.3 billion cubic feet of gas per day), is likely to be overtaken by Australia this year. The U.S., awash with cheap shale gas, is building five projects totaling 74 million tons per year, and expansions could boost this further. On Thursday, Russian President Vladimir Putin said his country would become the top exporter, though that seems a distant aspiration... New supplies are also set to come from big fields off Mozambique and Tanzania. Gas is easy to find around the world; the tough part is getting it to market at a competitive price.
All these aspirants now realize the giant of the LNG world is back in the game. With its prolific reservoir, existing infrastructure and large scale, new Qatari LNG should again be the world’s cheapest to produce. Developing more at home will be lower-cost and less risky than searching for gas in Morocco and Cyprus, which QP recently entered. Qatargas may even be able to inexpensively de-bottleneck existing "trains" (LNG-producing units), rather than having to construct new ones at a cost of some $14 billion. So, this move is partly about deterring new LNG projects, with the threat of new ultra-competitive Qatari gas arriving around 2022, just when many observers expect the market to be tightening again.
A few lessons for India

1. All this coupled with the construction of terminals on US Gulf Coast means that fragmentation and index pricing in global gas market is soon likely to be a thing of the past. India's gas companies should therefore be cautious about long-term external contracts with index pricing

2. In an environment of low gas prices, the Government of India would do well to forget chasing foreign companies for gas exploration in/off India.

3. Instead, this is an opportunity to lock-in long-term purchase contracts, especially leveraging the LNG infrastructure of Qatar that is likely to come on line.

4. More of the existing model for producing fertilisers - cheaper to produce fertiliser in Qatar and bring them here rather than bring gas here and then produce fertilisers here.

5. I am not sure about this, but the economics of some of our RLNG terminals/FSRUs under construction will come under strain if gas stays low for too long.

Thursday, April 6, 2017

Putting poverty in perspective

Manas Chakravarthy has this to say about India's wealth inequality problem,
The average value of assets held by a household in decile 10 in urban India, or the richest 10%, is Rs1.5 crore. That is 50,034 times the average value of assets held by an urban household in the lowest decile. It’s 18.7 times the average value of assets held by a household in the 6th decile. And it’s 4.1 times the average value of assets held by a household in the ninth decile, one rung lower than the top 10%... If we count the assets of the poor, we find the poor do not count... The household in the poorest decile — decile 1—will then have Rs291, the one in decile 2 assets worth Rs9,565 and so on. The richest household will then have assets worth Rs1.5 crore. But if we add up the total value of assets held by all the rest, that is the other nine households, that amounts to Rs82,90,418. In other words, the richest household’s assets are worth much more than that of all the others combined. 
To put this in perspective, with Rs 35,13,327, the average wealth of those in the 9th decile, it would not be possible to buy a two bed room house in any large city! Forget house, a family in the sixth decile would just be able to afford a decent car, and that too only if they mobilise all their assets!

This tallies with the findings of every survey, public and private. Poverty is far deeper and pervasive than we all believe. And the vast majority of those we consider above the notional poverty line are not much better off than their below poverty line counterparts. They are maybe one shock away from slipping back to poverty. 

It is for this reason that I am not a big fan of the current outsized focus on screening subsidy leakages. Yes, pilferage should be arrested. But inclusion errors are not exactly as bad as we think. And we haven't even got to thisthis and this

Wednesday, April 5, 2017

Is this the worst of kritarchy?

If you thought that only politicians indulged in farm loan waivers, wait. The Hindu reports,
The Madras High Court... while allowing a petition by the National South Indian River Interlinking Agriculturists' Association... directed the Tamil Nadu government to waive loans of all drought-hit farmers and restrained cooperative societies and banks from recovering their dues. It noted that the state’s financial situation was grim and it was single handedly shouldering the debt burden in a drought year in which farmers were committing suicide and suggested that the Centre come forward to extend financial help to Tamil Nadu during this difficult situation... It directed the cooperation, food and consumer protection department and registrar of cooperative societies to extend the crop loan waiver scheme under two Government Orders of 2016, to all farmers, including those whose landholding was more than five acres.
I just can't see even one reason for a judicial intervention on this. It clearly is an exercise of a political judgement by a judicial institution. Such judgements seriously call into question the competence and intentions of those administering them. 

It puts both the state and central governments in a great fix. Neither can the state government appeal against the order nor can the central government refuse at least some assistance without risking being dubbed anti-farmer. 

And unlike farm waivers which are now baked into electoral cycles, the Court has set a precedent by wading into loan waivers during droughts. Even if the Supreme Court overturns this, the damage has been done. The Chief Justice of India needs to save the country's judicial system from his own irresponsible and trigger happy brethren!

Postscript

It gets even worse! A friend sends me links to the campaign launched by the Madurai Bench of the High Court to remove prosopis juliflora from all public and private lands in the state. Principal District Judges were directed to inspect the lands and report the progress of removal to the Court. 

It was apparently for the public good. These trees absorb all the moisture in the atmosphere and prevents rains. It also causes several other harmful things. The Court even started a parallel executive administration of advocate commissioners to implement the order, directed the legislature to pass law,  and finally has set up an independent treasury to fund the project.

Monday, April 3, 2017

The problem with urbanisation in developing countries

Excellent new paper by Edward Glaeser and Wentao Xiong that summarizes the case for urbanisation for developing countries. 

The authors examine the reasons for the wide income and productivity differentials observed between cities and rural areas, as well as within industries in the same city. They examine whether the income gaps are due to productivity differentials or due to other factors like labour regulations, high housing costs and disamenities in cities, or unobserved worker human capital. Their findings are summarised here. This post though critically looks at the deeper forces driving urbanisation. 

The story about beneficial agglomeration effects goes like this. Firms and workers prefer to concentrate geographically. For firms, the economies of scale and network effects increases the likelihoods of access to suppliers, service providers, partnerships, skilled workers, distribution and marketing, and consumers. For workers, the same effects increase the likelihood of more opportunities, ideas sharing, partnerships, social amenities, similar friendship networks and so on. These locations then become attractive entry points for external technologies and ideas. Finally, there is the positive feedback loop associated with such locational equilibriums - the Mathew effect of agglomeration. 

But are these agglomeration effects real? Or they are because of the confounding effects of unobservable migrant and firm characteristics - the more skilled and enterprising workers and the more dynamic and productive firms (and industries) self-select themselves and locate in cities? Or is the concentration driven by the spatial attributes of the geography - ports, geographic proximities, special zones etc? This is a big research challenge. And it would be a very high value endeavour. 

If it is the latter two, then the agglomeration benefits may only be secondary and the real benefits accrue from having higher quality self-selected workers and firms moving into cities or specific locational advantages of the area. In that case, we may actually be ending up with something more closer to a zero-sum game, or one where the more skilled or competent vote with their feet to certain geographies (urban areas here). This potentially leaves the remaining areas, especially villages, less likely to be able to benefit from exactly the same set of dynamics (enterprising workers and productive firms) that drive the growth of the cities.

The most extreme and disturbing form of this dynamic is the one happening within cities, in the form of gentrification. See this, this, and this. If the current trends play themselves out, it is not unlikely that in the general equilibrium, the city cores will become affordable only for those above the upper middle-class. We would then have massive doughnut sprawls, with deficient infrastructure and poor quality of living even within the urban agglomeration. And, as is happening, if political power gets captured by the rich and (therefore) those who reside in the core, these trends will be accentuated and then urbanisation itself start hitting its limits.

It is for this reason that I am increasingly inclined to the view that housing and transportation are going to be the two most important determinants of the future of urbanisation, and, therefore, national economic growth itself. A time may have come to view gentrification (as we perceive it, a blighted area becoming upmarket) as a negative externality. We may no longer be able to afford leaving this to the dynamics of markets. Public policy may have to play an increasingly important role in moderating the gentrification effects, even with the risk of potential excesses.

Sunday, April 2, 2017

How to promote entrepreneurship?

One of the buzzwords in international development is entrepreneurship promotion. Governments in countries like India have hitched their growth wagons behind the energy and spirit of entrepreneurship. 

Public policies have been formulated to support entrepreneurs. Entrepreneurship training programs abound. Start-up incubators and accelerators are being established by governments across cities with policies to encourage their establishment. And the major driver of improving the ease of doing business may be unlocking of entrepreneurial energies. 

But what is the evidence that such policies promote entrepreneurship? Edward Glaeser and Wengtao Xiong's excellent summary on urbanisation and agglomeration in developing countries has this to say regarding public policy on entrepreneurship,
The public role in generating entrepreneurship is less clear. It seems quite reasonable to believe that local regulations can stymie entrepreneurship, although there has been little research using U.S. data documenting such a relationship. While local governments do occasionally try to increase entrepreneurship by supporting specific “innovation clusters,” we know little about whether such clusters are really effective or whether other local policies, like entrepreneurship training programs, will bear fruit....

The U.S. literature does indicate that local entrepreneurship has been important for local economic growth. There is not yet any comparable literature for developing-world cities, and there is little hard evidence – in either the U.S. or elsewhere – on how public policy can potentially encourage local entrepreneurship. There are at least three public policy strategies aimed at increasing local entrepreneurship: training, clusters and deregulation. Business schools have tried to train entrepreneurs for decades, yet there is little rigorous evidence that such training works. There are cheaper programs that try to provide disadvantaged youths, such as “The Possible Project” in Cambridge, Massachusetts, but they have not yet been evaluated with randomized control trials. It consequently remains an open question whether cities can actually teach entrepreneurship.

A second approach focuses on the generation of entrepreneurial clusters, which presumably allow entrepreneurs to learn from each other. Boston’s Innovation District is one such public initiative. Private initiatives, such as co-working spaces for small start-ups, also provide scope for sharing entrepreneurial knowledge. In a sense, markets filled with small, individual merchants in the developing world, either with or without explicit public support, represent yet a third form of entrepreneurial cluster. Again, we have little firm empirical evidence on whether the formation of such clusters materially increases the overall level of entrepreneurship within a city.

A third approach starts with the view that at least some entrepreneurs are deterred by various regulations. Many U.S. cities, for example, forbid food trucks to provide meals on city streets, which appears to deter at least one form of urban entrepreneurship. In the developing world, really small-scale entrepreneurs typically ignore labor- and product-market regulations, so deregulation seems unlikely to increase the number of really tiny firms. However, it seems more likely that these regulations prevent the growth of such firms, especially when they reach the point to employ non-family members. Such regulations may explain the dominance of small firms in the firm-size distribution in the many developing countries. Small firms can’t grow into larger firms because they would then have to follow the rules.
In India's case, the concern should not be about whether the country needs more entrepreneurs or not, but that it may be having too many. So the concern should be about promoting the right kind of entrepreneurs. An even bigger challenge!   

Saturday, April 1, 2017

Amazon fact of the day

The Economist has some staggering numbers about Amazon, 
Since the beginning of 2015 its share price has jumped by 173%, seven times quicker than in the two previous years (and 12 times faster than the S&P 500 index). With a market capitalisation of some $400bn, it is the fifth-most-valuable firm in the world. Never before has a company been worth so much for so long while making so little money: 92% of its value is due to profits expected after 2020. That is because investors anticipate both an extraordinary rise in revenue, from sales of $136bn last year to half a trillion over the next decade, and a jump in profits. The hopes invested in it imply that it will probably become more profitable than any other firm in America. Ground for scepticism does not come much more fertile than this: Amazon will have to grow faster than almost any big company in modern history to justify its valuation.
To meet this valuation, Amazon's task is extraordinary and unprecedented
Morgan Stanley, a bank, expects Amazon’s sales to rise by a compound average of 16% each year from 2016 through to 2025: that is higher than its estimates for Google or Facebook. That is a slower pace than Amazon managed over the past decade; but the bigger a company is, the harder it is to keep growing. Amazon’s annual sales of $136bn are almost 50% more than those of Alphabet, Google’s parent, and over four times Facebook’s. Credit Suisse, another bank, calculates that only ten firms with sales of more than $50bn have managed to grow by an average of 15% or more for ten years straight since 1950; no company with sales of more than $100bn has done so. If Amazon were to pull it off, it would be the most aggressive expansion of a giant company in the history of modern business.

Friday, March 31, 2017

Causation or correlation, institutional deliveries are a step in the right direction.

Karthik has provoked me sufficiently with his comment on my last post on NRHM and reference to this older post by Jeff Hammer and Jishnu Das. And the article is a teachable exhibit. 

First, let's get some facts out of the way. The Das-Hammer observations are till the 2008 period and this is for the 2005-06 to 2015-16 period. The IMR outcomes do not seem to have tapered.
Be that as it may, even if this were not true, I still have several problems with the blogpost. I think it takes theory and the quest for evidence to some extremes. Just a few that pop out egregiously are as follows

1. C-sections get done in the bigger institutions, community health centres (CHCs) and above, rarely in Primary Health Centres (PHCs). While they are undoubtedly a big concern in general, they cannot be the reason for any relative stagnation in the decline in mortality rates due to deliveries in PHCs. 

2. I agree with the logic of the marginal cost/returns and that is a part of the larger state capacity issue itself - state is trying to address a vastly increased scope of its activities with pretty much the same set of institutional, human, and financial resources. 

But I am not sure whether the marginal cost curve has reached the diminishing returns part in case of PHCs and institutional deliveries. My guess would have to be that the average monthly institutional deliveries in PHCs would be 15-20 (and very few would have, say, more than 75). In any case, what is the authors' basis for making their own assumption about the marginal cost argument? It appears to be only a hypothesis? It would have been useful to engage with this hypothesis if it was backed by more evidence of the like I just mentioned.

3. Surely the standards on promotion of institutional delivery and drugs validation process cannot be equated! Do governments need to wait for evidence before promoting institutional deliveries? Or should governments wait to fix state capacity before they promote institutional deliveries? Or should governments stand aside and ask local communities to iterate on institutional deliveries? 

4. Again the author's argument about respecting the decisions of the poor is as much as their thought exercise as the practitioner's explanation of their theory of change. Does it mean that we now question the narrative about people not delivering in hospitals because of ignorance, customs, social norms, religious beliefs, and so on? Do we need evidence on that? In remote areas, and these are very large swathes, transportation is a big constraint on institutional delivery. Do we need evidence to show that this is indeed a constraint?

In all such examples, there are no one or two "starting points" to explain trends and behaviours. There are many, and it varies from region to region. And trying to figure that out on a context basis is obviously ideal, but of no practical relevance in our Bayesian world. 

5. Some other arguments are plain baffling (italics mine),  
Government encouragement of institutional deliveries is based on the idea that poor people choose to deliver at home either out of ignorance or an inability to make the right decisions or due to cultural norms and the exercise of (male) power. But an alternate starting point is that people were not using institutions to begin with precisely because quality was low, and that increasing quality would also bring more people in. In fact, this is the most obvious explanation for the correlation between increasing institutional deliveries and lower child mortality. To base policy on the belief that we can make better decisions over the lives of those who are about to be born than their parents is a stand that minimally requires the onus of proof to be on those who claim such knowledge.
How can we say with any degree of certainty that which of the two, supply or demand sides, are the bigger constraint on institutional delivery? Further, the answer could vary widely across regions, rural-urban, and so on. In fact, there is most certainly no one constraining factor across the general population. Frankly, not only do we not have answers to many of these issues, nor are we likely to ever have satisfactory enough answers to them. 

Right now, we know that given the context in these developing countries, it is a good thing to encourage institutional deliveries. But we need to be simultaneously cognisant of the systemic weaknesses and try to address them. The NRHM has certain institutional features which tried to make some (obviously limited) attempts at this. As a counterfactual, Sarva Siksha Abhiyan allocates nothing to the school to improve learning outcomes (apart from a meagre annual grant to the teacher to make teaching materials). 

Look, I hold no brief for India's health care system, which I will emphatically say is broken and needs fixing big time. But try coming up with a politically acceptable and administratively feasible action agenda (a program to address maternal and child health issues, leave aside a policy for healthcare), conditional on the world as it exists, for scaled up implementation across India!

Let us dispense criticism with some realism. I can understand some academics critiquing other academics for the latter's unquestioning embrace of some models like the NRHM or Chiranjeevi voucher scheme. In fact, this blog has consistently questioned the obviously inflated claims of many government programs. But I cannot understand academic critiques of governments for focusing on institutional deliveries. 

If critiques are to be constructive, it would have to focus on more practical issues. Conditional on the focus on institutional deliveries, what additional resources are required to support the PHCs? What is a reasonable number of deliveries an institution can perform and is there some mechanism to support institutions where they exceed this number? 

May be they are not amenable to academic research publications. Instead, if we disown any priors and open up all boundaries, we are left with idle critiques of no relevance to practitioners. Of course, it is fair to say why should academics be held to that test. Well, that is a different matter and for a latter post.

Thursday, March 30, 2017

Is NRHM the most successful healthcare program in the world?

In the dismal world of pervasive program failures in development, India's National Rural Health Mission (NRHM) should stand out as a heartening positive deviance. While it is undeniable that there are fundamental problems like poor quality of health care, which need systemic reforms that go beyond a single program, the NRHM has helped achieve significant improvements in a broad spectrum of health outcomes (maternal and child mortality) and outputs (immunisation, ante-natal care, institutional deliveries etc). 

The most striking indicator is the near doubling of institutional deliveries over a ten year period.
Given the importance of this single intervention of promoting safe delivery, I cannot recollect an achievement of similar scale on any similarly important indicator in any other sector. The contrast with Sarva Siksha Abhiyaan in school education cannot have been starker. Granted the nature of challenges are different. 

The Janani Suraksha Yojana, initiated in 2005, has been instrumental in the success with maternal and child health interventions. It is the world's largest conditional cash transfer program, and makes payments to mothers to undertake institutional deliveries and to community health workers for ante-natal and post-natal visits, institutional deliveries, and immunisations. 

The NRHM's success (as evident from the graphics here) can be traced back to its unique focus on implementation flexibility, untied resource allocations, local accountability, demand-side incentives, and outcomes-based payments. In fact, the NRHM may also be the only example of Payment by Results (PbR) financing that has worked in scale in social sectors anywhere in the world.

Tuesday, March 28, 2017

India's campaign finance reform journey

The recently passed amendments to the Finance Bill 2017 by the Lower House of the Indian Parliament includes a provision to remove the caps on undisclosed donations to political parties. Critics are right in questioning the wisdom of pushing through such an important decision as part of a Money Bill. And it is most likely that this would be litigated and stuck down by the Supreme Court. 

But their critique that this would weaken campaign finance reforms is arguable. In fact, I am inclined to argue that lifting the cap on corporate donations may be a prudent compromise, though the government may have ended up overreaching with its other elements. 

The conventional wisdom on campaign finance reforms advocate a simultaneous pursuit of transparency (limiting cash donations), competition (capping of donations), and deter cronyism (making their disclosure mandatory). 

While logically unexceptionable and intellectually laudable, I am inclined to believe that this is impractical given the political economy and the scale of transformation that it would entail. Given the prevailing nature and scale of campaign financing, the massive gap between the actual and permissible amounts, and the difficulty of cobbling political consensus on such issues, it is surely unrealistic to expect a simultaneous targeting of all dimensions with one comprehensive strategy. 

A more realistic approach to addressing campaign finance may be to take a few steps at a time. Between the three, it may be prudent to address transparency initially by squeezing out channels of cash donations and ensuring that only clean money enters the political arena. While the decision to dispense with the cap on donations may actually be a practical response, the waiver of disclosure requirements is a retrograde step. The latter becomes all the more so since maintaining the current disclosure requirements would have been politically feasible. 

Instead of the current proposal, it would have been more appropriate and practical to have a much higher cap than the (now amended) 7.5 per cent of the average net profit over the past three years and either retain the current disclosure requirement or link disclosure to the revised cap. A progressive reduction of that cap would then have become the natural phasing of campaign finance reforms. Now, anonymous corporate donations have been given a complete free pass. And future reforms have to battle insertion of the caps on both donations and disclosure requirements.  

The credibility of government's commitment to campaign finance reforms will be measured by complementary measures to strengthen the rigour of audits and tax filings of political parties as well as enforceability of their violations. 

In any case, as already mentioned, I feel that the last word on this enactment may yet come from the Supreme Court, and it is here that some of the aforementioned suggestions can be considered.

Thursday, March 23, 2017

Oil industry automation fact of the day

From the Times on the new labor market normal in oil drilling in the US, 
Roughly 163,000 oil jobs were lost nationally from the 2014 peak, or about 30 percent of the total, while oil prices plummeted, at one point by as much as 70 percent. The job losses just in Texas, the most productive oil-producing state, totaled 98,000. Several thousand workers have come back to work in recent months as the price of oil has begun to rise again, but energy experts say that between a third and a half of the workers who lost their jobs are not returning. Many have migrated to construction or even jobs in renewable energy, like wind power... 
Indeed, computers now direct drill bits that were once directed manually. The wireless technology taking hold across the oil patch allows a handful of geoscientists and engineers to monitor the drilling and completion of multiple wells at a time — onshore or miles out to sea — and supervise immediate fixes when something goes wrong, all without leaving their desks. It is a world where rigs walk on their own legs and sensors on wells alert headquarters to a leak or loss of pressure, reducing the need for a technician to check. And despite all the lost workers, United States oil production is galloping upward, to nine million barrels a day from 8.6 million in September. Nationwide, with a bit more than one-third as many rigs operating as in 2014, production is not even down 10 percent from record levels. Some of the best wells here in the Permian Basin that three years ago required an oil price of over $60 a barrel for an operator to break even now need about $35, well below the current price of about $53...
Pioneer Natural Resources, one of the most productive West Texas producers, has slashed the number of days to drill and complete wells so drastically that it has been able to cut costs by 25 percent in wells completed since early 2015. The typical rig that drilled eight to 12 wells a year just a few years ago now drills up to 16. Last year, the company added nearly 240 wells to its Permian Basin inventory without adding new employees.

Wednesday, March 22, 2017

The start-up story clarification

This is in continuation to this earlier post. Let me clarify. No body can have a problem with start-ups. After all business creation has been a feature of economic life much before Amazon and Uber.

I see three narratives around the start-up story. One, start-ups allow the expression of entrepreneurial talents and energies of the youth. Two, start-ups create jobs. Three, start-ups innovate to create new products and services that enable more efficient utilisation of resources and solve development challenges.

The problem with the first is one of glorification of entrepreneurship, almost to the marginalisation of all else. This trend overlooks the fact that India needs not more entrepreneurship, but more productive jobs. Just as human resource misallocation towards the financial sector has been a problem in the US, it cannot be denied that the best and the brightest could end up being seduced by the hype and glitz of the get-rich-quick narrative associated with the world of IT start-ups. The best and the brightest find even the most high quality jobs unattractive and lose out on the invaluable experience of acquiring the skills and expertise that come with starting a career in good organisations. 

The second and third are even more complicated, with potentially adverse secondary effects. In case of the second, there is the strong likelihood that start-up activity may be crowding-out other activities. Are scarce savings being misallocated towards specific sectors, those which run on IT platforms, at the cost of other more important ones? Would the median entrepreneur have been better served by seeking a job employment? Would the economy have benefited more in the aggregate with a less exuberant start-up environment by channeling top class talent into medium sized firms engaged with making stuff? Would the aggregate job creation been greater with a greater share of wage employment? It is difficult to answer these questions either ways with any degree of certainty.

It is on the third issue that I am least convinced. I will say no more than what has been written here.

Sunday, March 19, 2017

The need for regulation in e-commerce

In an earlier post I had raised the issue of how internet firms benefit from regulatory arbitrage. The competitive advantage of the sharing economy firms over their brick and mortar counterparts can be traced to their very low regulatory compliance costs, in terms of entry standards, labor protections and different categories of taxes. 

It was not that any of the externalities from such activities disappeared. But instead of being internalised, as with the case of brick and mortar enterprises, they were socialised away from the internet firm and borne by the tax payers. 

Consider two features of the ride-on-demand (RoD) market in India as against developed markets. One, unlike the US and developed countries where Uber drivers complement their incomes, those in India are largely full-time workers. Second, instead of enabling a more optimal utilisation of an already owned vehicle, Uber drivers here either lease or purchase vehicles or are doing part time with (mostly) informal taxi operators. 

Both these features mean that RoD market in India is not the classic "sharing" economy. In fact, they are often indistinguishable from a regular business with employees and a management. The only difference between a registered taxi operator and Uber is that the former pays all the taxes and adheres to all regulatory compliances. Uber, Ola and Co manage to shift the entire burden away to the tax payers. By using drivers who work for informal taxi operators, likely to be one of the largest categories of drivers, RoD firms are formally leveraging an informal economy platform. 

And the regulatory vacuum encourages perverse incentives,
In India, Uber leases vehicles to drivers through Xchange Leasing — a challenging proposition in a country with no centralised credit score system. “To us, creditworthiness is not a criteria, our goal is to give out leases and give out cars to as many people as possible,” says Amit Jain, president of Uber India. Several thousand cars have been leased through the programme, he said, which uses background checks rather than traditional credit checks. “If somebody cannot pay the monthly amount, they can simply return the car,” he added.
Don't be surprised if a significant portion of those "subsidised" Mudra loans, which the government is promoting to encourage entrepreneurship, is ending up financing Uber and Ola's expansion. And the risk is that when the powder runs short, as it should, and the price sensitive Indian customers inevitably retreat when prices rise to reflect commercial considerations and likely forthcoming regulatory burdens, these loans could end up adding to the already big pile of non-performing assets. 

What is happening in large parts of the e-commerce market is resource misallocation on a fairly significant scale. This is true as much of the so-called "sharing" firms like Uber/Ola and Oyo, as of the broader e-commerce market itself. Amidst this euphoria over start-ups and me-too firms, with their undoubted entrepreneurship (starting and doing a business of any kind in India requires some entrepreneurship!), I struggle to spot the fundamental rationale, innovation.

In this context, greater regulation assume significance. The problem when governments do regulation is that they tend to be excessive. But the problem with no regulation may be worse still!

Friday, March 17, 2017

China update

China's alarming obsession with debt is arguably the biggest concern regarding the country's economic growth prospects. Morgan Stanley's Chetan Ahya puts the scale of the problem in perspective,
China’s debt has risen from 147 per cent of GDP in 2007 to 279 per cent of GDP in 2016. Last year, China added 21 percentage points to its debt-to-GDP ratio, or the equivalent of $4.5tn. In effect, China needed almost six renminbi of new debt to grow its nominal GDP by one renminbi... only two economies which have a population of above 20m have been able to escape the middle income trap, in which rapidly growing economies stagnate at middle-income levels, over the past 30 years. Those were South Korea and Poland.
But, despite this, there is a rising tide of opinion that China may have done enough to overcome the worst fears. A recent Morgan Stanley China report clearly came out bullish on China. Its arguments for macroeconomic stability focus on Chinese debt being funded domestically, its very big external balance sheet with net international investment position of 16% of GDP, low inflation effect due to credit allocation being used to fund investment, political acceptance of lower growth going forward, potential for rebalancing towards consumption, reforms to transition away from low value manufacturing, and the sure signs of moving towards high value added manufacturing. 
This blog has been inclined to the view that China's growth momentum was built on strong enough foundations and, coupled with its unique size and fairly enlightened government unencumbered by the troubles of democratic politics, meant that the country could potentially tide over these problems without a hard landing. It has built everything that India does not have - human, physical, financial, and institutional capital - to sustain a high (relative to its income levels) growth trajectory. 

However, there are two concerns. The size of debt is massive and these numbers do not accurately reflect the non-bank sector debts. For corporates and local government entities, an orderly deleveraging cannot be taken for granted. Apart from the economic contagion from lurking potential too-big-to-fail dangers, there is also the likelihood of social disruptions from job losses and so on.  

Further, despite its net positive external investment position and foreign exchange surpluses, that channel may not be as secure as we believe. In a couple of years, a trillion has been wiped off from the reserves, and a significant proportion is not liquid enough to be drawn for use. In case of external and, more critically, internal events, if the renminbi becomes a one-way downward bet, then the flight of domestic savings capital from China itself and efforts to prop up the currency could end up rapidly eating up the reserves buffer. And then we could have a different scenario.

I am therefore not surprised that Michael Pettis holds the view of a "gradual decline in GDP growth to below 3 percent by the end of this decade, or shortly thereafter".