Saturday, April 21, 2018

Weekend reading links

1. The agriculture distress cycle threatens to repeat again. Sample this latest status on farm prices in Maharashtra (unlikely to be much different elsewhere),
Barring soyabean, not a single commodity is trading at government-specified Minimum Support Price (MSP). In the case of perishables like fruits and vegetables, the situation is worse. Rabi tomato, which sells at the rate of Rs 10 a kg, is now trading at Rs 1-2 per kg at the markets of Narayangaon and Junnar. Onions, which till recently were fetching Rs 20 a kg at wholesale markets, are now priced at Rs 6 a kg... A crop like tur, which has reported lower sowing than last year, is also trading over Rs 1,200 per quintal below its MSP... Last year, the government had increased the procurement price of milk from Rs 24 to Rs 27 per litre. Dairies are, however, barely able to pay Rs 20 per litre to farmers owing to a glut of milk powder in the market. Sugar prices are on a steady fall which has made mills default in their payment. There are over Rs 2,200 crore in dues by the mills to cane farmers.

The result has been that farmers are staring at another debt trap. With no immediate relief in sight, the farmers find themselves with no option but to start a fresh stir. Their demands are no different from the last time — assured returns and a full loan waiver.
2. What explains economic growth? Free Exchange highlights the limitations of economic theories, 
An economist might explain China’s rapid growth in the 1980s by saying that it began to deploy more capital per worker and to adopt foreign technologies. Yet it was very clearly the result of a political decision to loosen state control over economic activity. It would similarly be accurate to say that China’s future growth will depend on how well it develops and deploys new technologies. But that depends on decisions about economic governance taken by its leaders, which will in turn be influenced by social and geopolitical forces that economists scarcely understand and generally ignore... a formula for growth that takes no account of social and political complexities is no formula at all... The economics of growth should therefore be central to the discipline, even though the questions it poses are objectively hard, and the answers rest more in history and politics than in elegant mathematics. Until they can give better answers in this area, economists should speak with greater humility about how this structural reform or that tax change might affect long-term growth. They have not earned the right to confidence.
3. India's state capacity problem in law and order management is acute even by the standards of the G-20 economies. 

4. Thomas Piketty uses evidence from France, Britain, and US for the 1948-2017 period to explore the long-run evolution of political cleavages and the rise of populist parties in recent times,
In the 1950s-1960s, the vote for left-wing (socialist-labour- democratic) parties was associated with lower education and lower income voters. It has gradually become associated with higher education voters, giving rise to a “multiple-elite” party system in the 2000s-2010s: high-education elites now vote for the “left”, while high-income/high-wealth elites still vote for the “right” (though less and less so). I have argued that this can contribute to explain rising inequality and the lack of democratic response to it, as well as the rise of “populism”. In effect, globalization and educational expansion have created new dimensions of inequality and conflict, leading to the weakening of previous class-based redistributive coalitions and the gradual development of new cleavages...Two main lessons emerge. First, with multi-dimensional inequality, multiple political equilibria and bifurcations can occur. Next, without a strong egalitarian-internationalist platform, it is difficult to unite low- education, low-income voters from all origins within the same party.
5. Tadit Kundu in Livemint explores the North-South taxation. I am not sympathetic to going down the numbers based approach on this issue. 

The issue here is not and was never about the cold logic of numbers. In fact, going down the numbers tunnel and framing the debate around it may actually be counter-productive. For example, establishing that fiscal transfers in per capita total population terms is not progressive, while refuting those critical of the current fiscal transfers regime, also makes it more difficult to moot any incremental progressivity. After all, after defending the status quo and the fact that transfers are not progressive, you cannot turn around and start arguing for increased transfers to the poor states. And the critics could come up with another framing, say, a fiscal transfers in per capita poor people population terms and maybe that is progressive? 

This is essentially a debate about being a nation state, a single country, and the appetite for the same. The numbers debate is a shadow-boxing for real and perceived emergent social and political trends. They need to be discussed in the open. In Econ-speak, it is about being an optimal currency area and the benefits of shared and mutually dependent prosperity. Net fiscal transfers across regions are necessary to sustain either a country or an optimal currency area. The counterfactual is the challenge with maintaining the European Monetary Union without a fiscal union. This has to be debated on those political and economic grounds. I have not seen too many of them. 

In any case, that federalism is never the case of each one's tax for himself, is borne out by the examples of other countries.
6. Just 13 years after the Multilateral Debt Relief Initiative which cancelled debt for African countries that met economic management and poverty reduction criteria, Africa stares at yet another debt crisis! The FT reports that 40% of Sub-Saharan African countries now are at high risk of debt distress - double that of five years - and the number of countries unable to service their debt doubled to eight last year.
It is taking a toll on public spending, as it eats up an ever increasing share of tax revenues and fiscal expenditures.
The problem with even a future debt relief becomes difficult given that almost half the region's debt comes from commercial sources instead of country governments, thereby making restructuring a difficult proposition.

Would be interesting to know how much is China's contribution?

7. Talking about China, sample the impact of Chinese loans funded railways investments in Pakistan,
In total, Islamabad says it has rehabilitated more than 300 locomotives, over 1,000 passenger coaches, nearly 5,000 freight wagons and 31 stations. Pakistan also purchased 75 high-powered locomotives last year in a $413.5 million deal with General Electric Co... Now the unprofitable state-owned Pakistan Railways has doubled its revenue to 40.1 billion rupees ($362 million) in the past five years and aims to do so again over the same time period... The drive is already attracting more passengers, up 25 percent to over 52 million people since 2013. Working through the carriages, 40-year-old Rana Iftikhar Ahmad has been selling snacks on trains for last 15 years and said his sales have grown as much as 50 percent in recent years. Five years ago a train from Karachi would take four days to get to Lahore, he said. That same route now takes just over half-a-day on the Green Line (22 hour express service from Islamabad to Karachi).
But the question is whether Pakistan can afford all these?
Beijing is set to upgrade a 1,163-miles track from Karachi to Peshawar near the Afghan border with an $8 billion loan to Pakistan. It’s part of Chinese President Xi Jinping’s Belt and Road trade initiative, which includes $60 billion of badly-needed works financed in Pakistan... To help ease increasing congestion in Pakistan’s second-largest city, a $1.6 billion metro-line in Lahore — funded by Chinese banks — is scheduled to open before this year’s vote.
8. On debt within China itself, nice summary of the problems by Henny Sender. The UBS estimate of debt-to-GDP ratio of 272%, itself a big concern, is surely on the lower side,
The biggest concern for a country with worsening demographics and which is trying to recalibrate away from investment to consumption is the rise in household debt, and in particular the spectacular growth of internet finance options like Peer-to-peer lending.

9. Adam Davidson thinks the Cohen raids form the beginning of the end for Trump,
Even if Trump pardons Cohen, the information the Feds have on him can become the basis for charges against others in the Trump Organization. This is the week we know, with increasing certainty, that we are entering the last phase of the Trump Presidency. This doesn’t feel like a prophecy; it feels like a simple statement of the apparent truth. I know dozens of reporters and other investigators who have studied Donald Trump and his business and political ties. Some have been skeptical of the idea that President Trump himself knowingly colluded with Russian officials. It seems not at all Trumpian to participate in a complex plan with a long-term, uncertain payoff. Collusion is an imprecise word, but it does seem close to certain that his son Donald, Jr., and several people who worked for him colluded with people close to the Kremlin; it is up to prosecutors and then the courts to figure out if this was illegal or merely deceitful... However, I am unaware of anybody who has taken a serious look at Trump’s business who doesn’t believe that there is a high likelihood of rampant criminality...

Cohen, Donald, Jr., and Ivanka monetized their willingness to sign contracts with people rejected by all sensible partners... There are important legal questions that remain. How much did Donald Trump and his children know about the criminality of their partners? How explicit were they in agreeing to put a shiny gold brand on top of corrupt deals? The answers to these questions will play a role in determining whether they go to jail and, if so, for how long.
10. Finally, India technical education fact of the day,
There were no takers for 51 per cent of 15.5 lakh BE/BTech seats in 3,291 engineering colleges in 2016-17.

Wednesday, April 18, 2018

The protectionist debate in perspective

As trade wars loom large (or is it one more example of this), it is worth remembering that everyone is equally to blame. Further, the historical trajectory of development of every country is filled with policies that have helped level the playing field for their local industries.

In fact, to the extent that development is a form of arbitrage play, whereby countries seek to exploit their advantages to squeeze their competitiveness compared to competitors, protectionism in some form or other has been always around the corner.

Times has a nice article which captures some of the protectionist policies that China and the US have resorted to. What has China been doing?
To stay in business in China, Apple has had to set up a data center there to store Chinese customers’ personal information. Amazon recently had to sell equipment to its Chinese cloud services partner to comply with new Chinese rules. Facebook and Twitter are blocked in the country; newer American players, such as Snap, are not even trying to enter anymore... China could require that foreign tech companies undergo costly additional tests for new products, or simply make it more difficult to operate in the country... It could also devise new regulatory hoops for foreign companies to jump through. China’s Ministry of Commerce has not yet approved Qualcomm’s proposed, $44 billion purchase of NXP Semiconductors, a Dutch chip maker. The deal, more than a year in the making, needs a signoff from Chinese antitrust authorities because the two companies count a large number of electronics makers in China as customers...
A Communist Party-linked newsmagazine singled out the American companies that it said had penetrated most deeply into China’s information infrastructure. The “Eight Guardian Warriors,” as they were called — Apple, Cisco, Google, IBM, Intel, Microsoft, Oracle and Qualcomm — had been able to “drive right into China,” the article said, whereas Huawei and another Chinese equipment maker, ZTE, had been kept out of the United States... Beijing banned government offices from installing the most recent version of Microsoft Windows, and antitrust investigators raided Microsoft’s offices. Cisco, Apple and Intel products were removed from state lists that officials use as guides when buying equipment. Qualcomm got slapped with a $975 million fine for anticompetitive behavior... Cisco partnered with a Chinese firm to sell networking systems. Microsoft, in conjunction with a state company closely tied to the Chinese military, developed a version of Windows more suitable for China’s government. Advanced Micro Devices, Intel and Qualcomm began working with Chinese organizations in microchips, which China imports in huge quantities to put into smartphones, computers and other electronics.
What has the US been doing?
In the United States, regulators have repeatedly thwarted attempts by Chinese tech groups to acquire American firms. And espionage concerns have for years kept Huawei — one of the world’s biggest suppliers of telecom gear, and a powerhouse of China’s tech scene — largely out of the American market... Mr. Trump recently blocked a hostile bid by Broadcom to buy Qualcomm. He did so not because the bidder was Chinese — Broadcom is headquartered in Singapore — but because the administration said the deal would weaken Qualcomm, leaving Huawei with a stronger hand to shape 5G, or fifth-generation mobile technology... Chinese attempts to scoop up foreign chip makers mostly have not worked out. State-owned Tsinghua Unigroup tried to buy Micron Technology, a memory chip maker based in Idaho, for $23 billion in 2015, but regulatory worries scuttled the deal. The Trump administration last year blocked a China-backed investor from buying Lattice Semiconductor, an Oregon-based manufacturer. And regulatory concerns scotched a Chinese investment group’s plan to buy Xcerra, even though the Massachusetts-based company makes chip-testing equipment and not chips themselves.
These restrictions have all along been imposed, albeit silently, without high-profile twitter rants. Chinese, in particular have never shied away from aggressive use of industrial policy to tilt the playing field for its businesses. 

Traditionally India has been on the defensive with respect to protectionist allegations on local content requirements, public procurements, food subsidy, and so on. These are perfectly legitimate policies which every developed country of note have pursued at their respective development stages. It therefore need not be defensive on these perfectly justifiable policy decisions. However, it needs to cautious in stretching this too far and falling back to a bygone era by introducing import restrictions and raising tariffs on a broad cross-section of goods.

Monday, April 16, 2018

The Xi Jinping turn in Chinese policies

The Economist gets to the heart of US-China trade dispute,
At the heart of the disagreement is China’s industrial policy. The Americans suspect the Chinese government of enticing their firms with the promise of a vast consumer market, only to use regulatory pressure to strip them of their bargaining power and expose them to the theft of intellectual property by forcing them into joint ventures. They spy a plot to undercut and eventually surpass American industry... Upon joining the WTO (and a further eight times since 2010) China’s government pledged not to make handing over technology a condition for market access. But the Americans say Chinese officials continue to pressure firms to do so. Such a claim is hard to prove—all the more so, given the opacity of China’s regulatory processes. And experience suggests that any deal would be devilishly difficult to enforce. The Chinese authorities can say that contracts involving technology transfer were signed voluntarily. They can make life hard for any foreign company that dares say otherwise.
Depending on which side you are on, it is hard not to be impressed by the Chinese playbook. I am surprised why India does not do the same with say, at least its strategic and large procurements - airlines, defence, metro rail, power etc? Or does India not yet have the economic leverage to play this hardball? Or is it that India does not have the stomach to play this game? Or is it not desirable at all?

But all that is beside the main point and to be discussed another time. Staying on the same topic, Chris Balding shines light at the creeping nationalisation of Chinese tech sector and how it could exacerbate trade tensions with the US. Consider this,
Communist Party committees have been installed at many tech firms, reviewing everything from operations to compliance with national goals. Regulators have been discussing taking a 1 percent stake in some giants, including Alibaba and Tencent, along with a board seat. Tech companies have been widely encouraged to invest in state-owned firms, in the hopes of making them more productive. The common denominator of all these efforts is that the government wants more control... One recent report found that 60 percent of Chinese unicorns have either direct or indirect investment from the Baidu Alibaba Tencent (BATs). China's venture-capital sector is dominated not by traditional tech dealmakers but by the state: There are more than 1,000 government-owned VC firms in China, controlling more than $750 billion.
The US is not the only aggrieved partner. Consider the situation as perceived by Germany, China's largest European trade partner. 
Not only has the opening of China shifted into reverse under President Xi Jinping, but Chinese firms have moved up the value chain far faster than many in Germany expected... In private, some executives liken the situation of German industry in China to the proverbial frog in a pot of slowly heating water which ends up boiling to death because it won’t or can’t jump out. Germany’s ambassador to China, Michael Clauss, warned at a meeting with industry chiefs in Berlin last month of “tectonic changes” in the relationship, according to participants... Bauer AG, which employs 11,000 workers in 70 countries, built its first production facilities in China in the mid-1990s. At the time, not a single Chinese firm could make the sophisticated drilling machines it produces – towering yellow structures used to build the foundations for skyscrapers, power stations and airports. By 2013 Bauer counted 36 Chinese competitors able to make such machines, a shift the CEO says was accelerated by European suppliers selling co-designed parts to the Chinese...

Today, what Bauer and other German firms say they are most worried about is the role of the Chinese state in the economy. Last year, China introduced a cyber security law which tightened state control over internet services, including secure VPN connections that are used by foreign firms to communicate confidentially with headquarters. More recently, some German companies have complained of pressure to accept Communist party officials on the boards of their joint ventures. The Bauer boss fears that Xi’s “Made in China 2025” strategy, which identifies 10 key sectors – including robotics, aerospace and clean-energy cars – where China wants to be a leader, represents a direct challenge to German manufacturing dominance. 
This blog, while cognisant of the several critical failings and distortions, has been in general an admiring observer of the awe-inspiring growth of China as well as its ability to put its money where its mouth is and execute both massive engineering projects as well as complex social and industrial policies. It has believed that the Chinese will eventually figure a way out of any problem. But that view may need to be revisited. 

Since its re-integration with the world economy nearly four decades back, the Chinese economic and foreign policy playbooks have been largely about recovering lost ground and catching up. Doubtless this has involved an aggressive industrial policy to nurture domestic industry and keepings it disputes with neighbours simmering as a low-cost strategy to retain its geo-political influence and focus its energies on economic growth and internal policies. 

But such industrial policies were not new. Which country would not have maximised their leverage and resorted to help local firms with subtle ways to force technology transfers or impose local content requirements? The fact is that China is such a big country and market conferred it with unique advantages of scale, unavailable to others. It did not hesitate to exercise the choice available. As mentioned earlier, I am sympathetic to India exercising the same options. Actually, any big enough country which has that leverage would have done. History is littered with such examples. 

The Communist Party had enough internal checks and balances to prevent the recurrence of a Maoist autocracy and align incentives of Party functionaries across the length and breadth of a large country with the country's development objectives. The Party Politburo was tolerant of the creative tensions on economic and political policy directions.  

Then came Xi Jinping and things have gradually taken a turn in domestic, economic, and foreign policies. This shift in China's policies is a qualitatively different paradigm. Consider the economic policy domain. 

Instead of focusing on improving its own productivity and national income, China is trying to achieve economic supremacy by dominating and controlling the markets of the future and that too by pushing the boundaries of unfair trade and investment practices beyond what may be construed as acceptable. The nationalisation and infiltration of corporate Boards with party functionaries is only one example. There was no need for this. Even without these practices, Chinese makers would have been at least dominant in these markets. 

The centralisation of authority within the Party with Xi is striking. All the safety valves to release the inevitable discontent have been shut. In fact, the discontent is now likely to be aggregated to the top. The different institutional forums to debate different perspectives on economic and social policies, albeit within the acceptable Party line, have been weakened. The internal checks within the Party to prevent the emergence of an echo-chamber have been destroyed.

On the foreign policy side, instead of keeping the disputes simmering, the objective now appears to be settle them at China's terms. More importantly, Beijing now seems to have the intent to engage aggressively with its external partners, neighbours and others. It wants to ring-fence its near-abroad from external influences and bring it firmly under its own control. It has not hesitate to use military brinkmanship to secure this objective. This is surprising since the Chinese can easily afford to be very generous with its ASEAN neighbours. Is Vietnam or Philippines even a remote threat to today's China? It has used economic levers, whether the sovereign loans to countries in Africa and Latin America or the One Road One Belt (OBOR) initiative, in pursuit of its larger global geo-political agenda.

One could always argue that this Xi turn was always likely. It was part of a larger plan to buy time to regain its economic might and then pursue aggressive policies for world domination. Or it is the latest incarnation of the Thucydides Trap - the inevitability of war when one power seeks to displace another. There is no satisfactory way to settle this debate. My personal inclination is to believe that this shift is part of the new paradigm that Xi Jinping has brought to Chinese polity. 

I am inclined to believe that this shift may actually carry the seeds of its own destruction. What was the need for aggrieving countries like Germany with whom the mutually beneficial partnership could have gone on for much longer? What was the need to pursue economic policies in such a nakedly exclusionary manner as to get every developed economy ganged up against China? After all, the global market is large enough to be able to support several firms in robotics, aerospace, drilling equipment and so on!

Anyways this is part of the several wrong turns that Xi has forced China to take during his tenure - aggressively exclusionary economic policies, expansionist foreign policy, repressive domestic policies, excessive centralisation within party etc. If in twenty years China falls short of its ambitions it has today, it may well have its roots in the shifts which are happening now. 

In cricket sometimes when two batsmen are batting very fluently and without a care in the world, it is often said that only way to get them out may be a run out. The Xi Jinping turn may well be the Chinese runout!

Saturday, April 14, 2018

Weekend reading links

1. My graph of the week, a fascinating one which nicely captures arguably the biggest challenge faced by our urban engines of growth, affordable housing, and its reason, restrictions on housing stock expansion due to restrictive regulations and other limits to growth (like spatial expansion).
2. As protectionist rhetoric dominates, a reminder about the benefits of trade and openness to foreign investment comes from Vietnam. The Economist explores how Foreign Direct Investment (FDI), especially from South Korea, has transformed the country. On the importance of Samsung, 
Samsung Electronics’ factories in Vietnam produce almost a third of the firm’s global output. The company has invested a cumulative $17bn in the country. But Samsung is as important to Vietnam as Vietnam is to it. Its local subsidiary’s $58bn in revenue last year made it the biggest company in Vietnam, pipping PetroVietnam, the state oil company. It employs more than 100,000 people. It has helped to make Vietnam the second-biggest exporter of smartphones in the world, after China. Samsung alone accounted for almost a quarter of Vietnam’s total exports of $214bn last year... The number of local firms listed as important suppliers to Samsung has increased sevenfold in the past three years.
And on FDI, especially from S Korea,
Of the $108bn of foreign direct investment (FDI) Vietnam has received since it joined the World Trade Organisation (WTO) in 2007, a third originated in South Korea... Vietnam received FDI worth 8% of GDP last year—more than double the rate that went to comparable economies in the region. Foreign-owned firms now account for nearly 20% of the country’s output. They have grown more than twice as fast as state-owned enterprises over the past decade, despite the country’s nominally communist government. 
3. SCMP reports on the latest big-bang reform from China - the announcement during Xi Jinping's visit there that Hainan, a 35000 sqkm island populated by 9.3 million people, and home to China's largest Special Economic Zone, will be the country's 12th and largest free-trade port. 

And it is not just an announcement, there is a clear vision and even a plan,
Xi said... that it was an important step in China’s opening up to the world and advancing economic globalisation. He urged the island authorities to speed up reforms in urban-rural integration, human resources management, fiscal policy and finance, income disposal and state-owned enterprises. Exchanges in international energy, shipping, commodities and carbon trading will also be established. Xi said Hainan would build a modern economy and develop information technology in fields such as big data, satellite navigation and artificial intelligence. The island will also focus on developing modern service industries such as tourism, the internet, health care, finance and hosting conferences and exhibitions. Direct international flights to the island will be increased and duty-free shopping will be expanded beyond the city of Sanya to the whole island. Authorities on the island will also be encouraged to pilot a scheme to attract foreign talent and technology experts. This will include measures to make it easier for people from overseas to find work and acquire permanent residency. Also, foreign students who have obtained master’s degrees will be allowed to start their own companies.
The thing about Chinese economic growth is that they seem to have this unending supply of big growth boosters, which are not just unveiled but is also executed in quick time. Of course, there is no doubt that the financing strategy and capital use efficiency is questionable. 

So even if we think the entire Chinese growth today is a giant Ponzi scheme, moving from one booster to another, we have the world's BIGGEST ever Ponzi scheme at work. Something to be looking at with awe, if only when the party is on...

How long will this last? Or will the dynamics of sustainable growth (increasing consumption, growing middle class, moving up the value chain etc) kick-in at some point to ensure that Ponzi scheme will not collapse but there will be a gradual and slow landing?

4. Good Survey in The Economist on Artificial Intelligence (AI). Sample this,
Ping An, a Chinese insurance company... lets customers apply for loans through its app. Prospective borrowers answer questions about their income and plans for repayment by video, which monitors around 50 tiny facial expressions to determine whether they are telling the truth. The program, enabled by artificial intelligence (AI), helps pinpoint customers who require further scrutiny... Johnson & Johnson, a consumer-goods firm, and Accenture, a consultancy, use AI to sort through job applications and pick the best candidates. AI helps Caesars, a casino and hotel group, guess customers’ likely spending and offer personalised promotions to draw them in. Bloomberg, a media and financial-information firm, uses AI to scan companies’ earnings releases and automatically generate news articles. Vodafone, a mobile operator, can predict problems with its network and with users’ devices before they arise. Companies in every industry use AI to monitor cyber-security threats and other risks, such as disgruntled employees.
The Survey is good all around - monitoring employees and workplace activities to make workplace more efficient and creepier; recruitment and human resource management practices in companies; making customer service more responsive and cost-effective; transforms supply chain management by making companies swifter, cleverer, and leaner.

And its costs on the labour market is never far away. Sample this,
China Merchants Bank, a commercial bank, uses a bot on the popular Chinese app WeChat to handle 1.5m-2m queries every day, a workload equivalent to around 7,000 human staff... Gartner, a research firm, expects the number of phone-based customer-service agents worldwide to decline by 10% by 2019.
But this FT article looks at the AI hype in banking and comes out less than impressed. 

5. Staying on with AI, this article by Erik Brynjolfsson and Andrew Mcafee presents a reality check on AI. This graphic captures some common use cases of AI systems.

6. Chris Balding shines light at the creeping nationalisation of Chinese tech sector. Consider this,
Communist Party committees have been installed at many tech firms, reviewing everything from operations to compliance with national goals. Regulators have been discussing taking a 1 percent stake in some giants, including Alibaba and Tencent, along with a board seat. Tech companies have been widely encouraged to invest in state-owned firms, in the hopes of making them more productive. The common denominator of all these efforts is that the government wants more control... One recent report found that 60 percent of Chinese unicorns have either direct or indirect investment from the Baidu Alibaba Tencent (BATs). China's venture-capital sector is dominated not by traditional tech dealmakers but by the state: There are more than 1,000 government-owned VC firms in China, controlling more than $750 billion.
The article talks about the likelihood of nationalisation in technology sector exacerbating trade tensions with US. This is where I do not agree. I can understand the argument that this nationalisation may be bad for the Chinese tech sector in the long-run. But the decision to nationalise is a conscious political decision by a sovereign country and why should it be constrained by any trade regulations? If international trade regulations favour private ownership over public ownership, a clear political choice that I strongly feel national governments should have, then I am inclined to abrogating those regulations. 

The case against public ownership is that State can lavish subsidies on their enterprises and thereby distort the level playing field. By the same argument, private market dynamics confers an unfair advantage to the larger firms which are more likely from developed economies? Why should the benefits of economies of scale not be considered a level playing field distorting problem, and a less disturbing concern to the benefits of public subsidies?

7. The Chinese One Belt and Road Initiative (OBOR), with its focus on sovereign loan financing, has the potential to become the largest indebtedness creating single initiative in history. Ananth points to a CGD paper that documents the likely implications in terms of indebted low income countries.
Pakistan and Maldives are among eight countries most vulnerable to become heavily indebted due to the OBOR loans from China. The IMF Chief Christine Lagarde has cautioned that “ventures can also lead to a problematic increase in debt, potentially limiting other spending as debt service rises, and creating balance of payments challenges”.

8. The retaliatory airstrikes on Syrian chemical weapons facilities near Damascus and Homs by US, British, and French will most likely, as was the case with last year's bombing, turn out to have been made on fake news! And NYT was even suggesting that the strikes have been inadequate.

There is little to suggest that the Assad regime in Damascus was behind the alleged chemical weapons attack on civilians in Douma last week. In fact, the strikes came well before a fact-finding team from the Organisation for Prevention of Chemical Weapons even landed in Douma to establish whether it was indeed a chemical weapons attack. Even if it were so, what would Assad have gained by chemical weapons bombing at this point in time, a surefire invitation to Trump to retaliate, when he was clearly winning the war with the rebels almost flushed out and the US had even announced last week its decision to withdraw its troops from Syria? But wouldn't many others on the rebels side have had enough incentive to do so and blame Assad so as to suck the US into the situation and pre-empt a withdrawal?

Governments fabricating news (or at the least jumping into critical decision making without anything close to proportionately sufficient evidence) seems to have become the norm in US and UK. There was little evidence that Russia was behind the chemical agent attack on turncoat Russian spy Sergei Skripal when UK decided to impose sanctions on Russia. Similarly, it has since become clear that Assad was not behind last year's alleged chemical weapons attack which led to US air strikes on Syrian targets. 

There is clearly a narrative on among the liberals in the US. Anything that involves Donald Trump has to be a faith-based (and not fact-based) perception. And since Russia and Trump have become synonymous, anything involving Russia has to be bad. So the Syrian situation gets viewed through that lens. And this gets amplified by the instinctive urge to intervene unilaterally in some (not in others though, given what the Saudis are doing in Yemen is in no way any less repugnant) countries, bomb the hell out of them and effect regime change. 

A regime change in Syria may be the worst of all worlds, and pose a massive danger from stability in the region. It may well give a new lease of life to ISIS. 

In any case, isn't it striking that the liberals and the establishment want US to intervene and bomb Syria, whereas Trump supporters would prefer not to. And the liberals by their rhetoric in forcing Trump's hands may actually be only hardening his support base!

9. Fascinating interview in FT with Vladimir Potanin, one of the last two remaining of the seven original oligarchs who benefited from the Yeltsin era shock therapy and privatisations. He comes out as being practical and realistic. For example, this is a very surprisingly less understood insight,
“Some people like attention and to appear bigger than they are,” Potanin responds, with a sip of his wine. “Look,” he says, speaking very carefully. “I always felt smart enough and have good connections to bring my ideas to decision makers. But I have never felt I could push them through.”
And this perspective of the shock therapy may not be too inaccurate,
“Of course, the privatisation process has to be transparent. And in our case it was not. My plan was different. I wanted to privatise the companies with banks and qualified people, raise their value, and then sell them. “The choice was not between being fair and open or creating oligarchs. It was whether to leave these companies in the hands of [former Soviet] red directors and forget efficiency forever, or sell them in any way possible.” ... “Yes, it made me incredibly rich,” he says, glancing out over a frozen lake. “Everybody knows I won control of 38 per cent of Norilsk in loans for shares, cheap.” The last word drips with condescension. “There is a certain unfairness in treating those deals as evil. It was more complicated than that.... “When people come from a totally closed system to openness; from a planned economy to a market economy; from a powerful state to a state in difficulties, there is no place for fairness.”
10. Finally, Dileep Premachandran relays Victor Hugo Morales' commentary of Diego Maradona's memorable second goal against England in the 1986 Football World Cup,
Maradona on the ball now. Two closing him down. Maradona rolls his foot over the ball and breaks away down the right, the genius of world football. He goes past a third, looks for Burruchaga. Maradona forever! Genius! Genius! Genius! He’s still going... Gooooal! Sorry, I want to cry! Good God! Long live football! What a goal! A memorable run from Maradona. The greatest solo goal of all time. Cosmic Kite, which planet did you come from?
That would have been fabulous if it were written words. But to have come out spontaneously in a commentary is awesome!

Saturday, April 7, 2018

Some reflections on the Facebook data leakage

The Facebook problems over personal data leaks is yet another reminder that left to their own devices, businesses will always skimp on areas which are perceived as secondary concerns and socialise the externality costs. Regulation is therefore necessary. 

1. It is difficult to not believe that for Facebook, the biggest priority was to increase the value of its platform for users, content providers, and advertisers. Data protection, while important, cannot have ever been a proximate and direct commercial (bottom-line) concern. From all the news stories, it is clear that even certain basic minimum safeguards were not provided in the Application Programming Interface (API) that allowed third party content providers access to the platform and its data.

While such protection is important in the long-term for the firm's credibility, firms like individuals suffer from hyperbolic discounting and value the immediate much much more than something far later in time.  

In the absence of any strong enough regulation on data protection standards and its enforcement, what incentive did Facebook have to police it with intensity? Why would Facebook exercise self-restraint and err on the side of caution to disallow access to important platform features in the name of personal information safety to an external app which has the potential to bring in significant revenues? How many times over the past three years would the top 2-3 executives have personally reviewed data protection standards as they would have platform content, advertisement revenues etc? In fact, we need to go even further and investigate whether Facebook deliberately and with full-knowledge of the consequences (bypassing internal control cautions) decided to allow access to certain types of content and advertisers. I would not be surprised if there were instances. The stakes were simply too high.  

2. Some of the comments by the Facebook leadership were stunningly insensitive,
Mr Zuckerberg spoke about the power of Facebook to reconnect families, help couples meet, and marry and organise social movements and marches. Ms Sandberg described a taco maker in Houston who teamed up with a competitor during Hurricane Harvey last year and found hungry people to feed because they were sharing their location on Facebook.
We all know how much of these things happen and they need to be placed in their true perspective, given the costs associated - wholesale transfer of personal data to unknown parties and all the attendant risks (and benefits). Such comments are classic red herrings. They can detract attention from the central incentive compatibility challenge that exclusive data companies like Facebook and Google face. How much restraint should they exercise when faced with opportunities for commercial exploitation of the data they posses? Given the commercial stakes and returns-seeking investors involved, how much restraint can the company actually exercise? Worse still, wouldn't it be very natural for a profit maximising entity to err on the side of commercial returns and compromise on data protection and privacy concerns?  

3. The case for regulation of such market failures could not be stronger. As I blogged earlier, the entire sharing and e-commerce economy, including iconic firms, is built on a massive regulatory arbitrage, where such market failures are building up everyday and is waiting to implode one day as the Cambridge Analytics-Facebook episode. The European General Data Protection Regulation (GDPR) even with its compliance costs is well worth the trouble. 

If this is the state of data protection at Facebook, what about Google and Amazon? In the aftermath of the global financial crisis, bank balance sheets were repeatedly stress-tested by regulators. Why is nobody calling for an independent stress-test of the data protection and use standards of all the major tech firms whose business model relies exclusively on personal data? Apple's acceptance of the European GDPR is a step in the right direction. 

4. The callous disregard for the safety of personal data has strong similarities with the cavalier attitude with pollution from oil pipeline leakages and deaths from overhanging and unprotected electric lines in the early stages of development of both those technologies. The difference is critical - unlike the earlier oil, water, electricity, and so on, now we are dealing with people's personal, deeply personal, data. The need for safeguards and protections become even more compelling.

5. There were massive low hanging fruits from the initial flush of success from an emerging data economy, an opportunity which was amplified by light regulation and delayed appearance of egregious negative consequences (unlike say, smoke from a factory). The likes of Facebook, Google, Uber, and Amazon are reaping this first mover advantages just as Ford, GE, and Westinghouse reaped nearly a century earlier and other first movers in the technological cycles that followed. Two big differences that make the current technology cycle stand out is that unlike earlier this one has been much faster and on a much larger scale (given the global market place involved).  

6. The resultant successes may have papered over the concerns over several important business issues. Data safety is now being discussed. Would the markets have tolerated a regular firm where, like Zuckerberg, the founder is the Chairman, Chief Executive, and controlling shareholder? What is the difference between these firms and the routine family owned firms in developing countries? I guess only the good fortune of being at the rightpface and time in the evolution of the technology cycle!

What about competence at the executive levels, not just in terms of being smart but in being able to effectively manage large and rapidly growing organisations? How much of the expansion (I make the distinction with origination or establishment) of these firms have been the consequence of active management actions and decisions and how much that due to the market (and customer) momentum and a technology playing itself out? In simple terms, how much of the growth of the likes of Uber and Facebook have been due to the enterprise and superior skills of their glorified and even revered pioneering founders and how much due to post-emergence auto-pilot? 

They say adversity is the true test of a leader. And what does the duo of Mr Zuckerberg and Ms Sandberg do when faced with their first real test,
David Kirkpatrick, author of The Facebook Effect, says Mr Zuckerberg may have opened a can of worms by claiming connecting the world has always been more important to Facebook than advertising. Both he and his COO are resolute that one thing does not need to change: a business model built on targeted advertising that generated $16bn in net income last year. Ms Sandberg said keeping Facebook free is important for its 2bn users and that targeting enables 7m small companies to buy ads when they cannot afford traditional media such as television. She added that Facebook never worked to maximise profits.
Mr Kirkpatrick says: “For a leader of the most profitable company of its size in the history of capitalism, who has herself personally garnered over $1bn in stock gains based on the company’s success, to claim that the business side of the company, which she runs, has never worked to maximise its profits seems disingenuous to say the least.” Others were also quick to challenge Mr Zuckerberg’s claims. In an interview with Vox, he spoke of how Facebook had stopped false reports on its Messenger platform designed to incite violence in Myanmar. But those suggestions were strongly contradicted by civil society groups in the country, who said Facebook’s response has been “inadequate”.
Clumsy and ham-fisted responses to data leakages are not the exclusive preserves of governments governments and bureaucrats. One can imagine the way in which these rationalisations found its way into the responses by the two of them. In fact, by the standards of India's UIDAI, Facebook has been worse! And the leaders make millions for this type of responses!

Further, do not be fooled by the claims that for Facebook connecting the world has been more important that advertising revenues and it has never tried to maximise profits. In fact, that may well have been the case when as an insouciant Harvard dropout Zuckerberg was first developing this platform. Once the first revenues started trickling in, and especially after investors joined in, advertising and the data that pulls in advertising, were always going to have become the existential objective for Facebook. As it stands today, it cannot be any other reason for not only all its investors, but even Zuckerberg himself. Connecting people is certainly only an externality for this advertisement engine. And that's the way it will and should be. This is no blame on Facebook. So the response appears even more disturbing. 

Make no mistake, even though Facebook may be contrite now and apologising and informing that this will not be repeated, this will be repeated if not regulated firmly. It is a reality that businesses, of what ever kind, will skimp and market failures will develop. 

7. Finally, even if late, it is only good that people are waking up to the concerns about data. The concern with something like Aadhaar is not so much its immediate likely misuse or exclusion errors with welfare programs, but it is the powerful enabling tool that it can become in helping link up multiple data bases and the unimaginable ways in which it can possibly be used to manipulate the data and even human identity. In fiction at least, this can make Adolf Hitler look positively a boy scout! 

Thursday, April 5, 2018

Are intermediaries as big a problem as earlier everywhere?

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

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

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

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

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

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

Wednesday, April 4, 2018

More explanation for divergence

The causes for the counter-intuitive income divergence between rich and poor countries has been a subject matter for a lot of research for decades.

Valerie Cerra and Sweta Saxena of the IMF add one more to the list. Their fundamental insight is to refute the conventional wisdom that after recessions economies quickly recover back to their pre-recession growth trend. Instead, they use data from 190 countries over the 1974-2012 to show that "all types of recessions - including those arising from external shocks and small domestic macroeconomic mistakes - lead to permanent losses in output and welfare". It would also explain the relatively sluggish post-crisis growth in the world economy. 

They find
On average, the magnitude of the persistent loss in output is about 5 percent for balance of payments crises, 10 percent for banking crises, and 15 percent for twin crises... our evidence suggests that a recovery consists only of a return of growth to its long-term expansion rate—without a high-growth rebound back to the initial trend. In other words, recessions can cause permanent economic scarring.
Since poorer countries suffer deeper and more frequent crises and recessions, with attendant permanent output losses, they continue to keep falling behind the richer countries. 
This assumes significance also in the calculation of output gaps that serve as decision-support to both determine pre-crisis overheating and post-crisis slack. We need to use the new trend output rate in both cases to be able to generate credible decision-support. 


Ananth has a column which examines their paper in great detail. He writes,
Their simple thesis is that crises alone do not lead to permanent output loss. Even garden-variety recessions have that effect. And it is not because economic growth was unsustainably high before crises. They find that more often than not, signs of financial excess do not show up in economic growth. Second, contrary to what many think, they find that post-crisis growth always tends to belie the optimism of a swift reversal to trend. It’s not because crises result in sudden stops in technological progress or productivity improvements, for it is hard to explain why financial crises should result in such an abrupt reversal in technology and productivity-related developments. But they find that the rise in unemployment and fall in prices, after a crisis or recession, eventually leads to a cumulative shortfall in economic output that never catches up with the pre-crisis trend. In short, and in economics jargon, “demand shocks” eventually morph into “supply shocks” that permanently lower the trend rate of growth... they suggest that fiscal dynamics, post-crisis, should take into account the fact that output would never return to the pre-crisis trend, and, hence, accept that pre-crisis trends in tax revenue would be unlikely to be met... In particular, they are in favour of “more financial regulation, financial stability to be included as a consideration for monetary policy, building a larger war chest of foreign reserves, and maintaining a conservative fiscal stance during booms”... the authors bravely assert that monetary policy actions might be needed to supplement regulation and supervision. Prudential regulations may not be effective as, in practice, they can be sidestepped by misclassifying loans, for example. Further, in a world of international capital flows and shadow banking, there are questions over the full effectiveness of prudential regulations in isolation. For example, asset management companies and hedge funds provide credit through specially structured products that circumvent banking regulations.