Saturday, December 3, 2016

Kritarchy again?

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

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

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

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

Update 1 (03.12.2016)

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

Thursday, December 1, 2016

Management as Technology and SME productivity

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

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

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

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

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

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

Wednesday, November 30, 2016

Decision making on complex public policy challenges

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

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

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

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

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

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

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

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

Tuesday, November 29, 2016

Forget growth to achieve growth

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

Sunday, November 27, 2016

Weekend reading links

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

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

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

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

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

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

Thursday, November 24, 2016

Demonetisation and the informality debate

The end-game of demonetisation and less-cash economy is arguably about rolling back the informal sector. But this endeavour has to overcome an externalities play with a set of fundamentally conflicting objectives. 

Businesses and consumers optimise on costs and prices respectively. This is all the more so for the vast majority of enterprises, mostly micro and small, and consumers in a country like India. The net result is an equilibrium where businesses skimp on costs, especially which can be evaded (or avoided) and the resultant costs are affordable. On their side, consumers' very high elasticity (or marginal sensitivity) on prices encourage businesses to keep costs as low as possible. Nobody in this market bears any burden for the external costs of their actions. A weak or non-existent state and deficient formal markets helps maintain the equilibrium where a very significant proportion of transactions are informal. 

On the other hand, formal markets have a different set of dynamics. Here the rules of the game are strongly aligned towards internalising the external costs. The market equilibrium gets established subject to the rules of the game. The layers of external costs get added to the shares of the respective actors in the market. The net result is a higher cost for businesses and higher price for consumers. I have blogged earlier about the costs of formality in manufacturinglaborhousing, and land markets.

Consider the roadside barber shop or street-corner kirana store or small restaurant. They survive in a cash and informal economy, which pervades everything from shop rent, employee payments, purchases of intermediates, to final sales. In the process, they (and their transaction counter-parties) avoid making payments on their legal obligations - income and other taxes, social protections, safety and other standards etc. Everyone in the transaction chain agrees with this bargain with all its attendant compromises on quality.

There is nothing wrong with this. At a fundamental level, development is a process of seizing arbitrage opportunities. Across markets, capital and goods move from areas where they are cheaper to where they are more expensive. The formal and informal markets are no different. People earn incomes in the informal markets to access a progressively increasing share of consumption in the formal market, which expands in turn. Countries see an increasing share of their economic transactions move into formality as they develop. 

Now consider the introduction of formality into these establishments. It immediately exposes two binding constraints. Most fundamentally, the vast majority of consumers will not be able to afford the incremental price. In other words, there are only so many people who can afford the beauty saloon instead of the roadside (or small shop) barber. The other constraint feeds in from the first - businesses will not have the market demand to service if they incur all the costs of formality.

The only way around this is to have standards (on environment, labor etc) that are not benchmarked to global best practices, but pegged to realistic levels and which tighten gradually and progressively. This would have to be complemented with a robust safety net that provides publicly financed social protections for those employed in the country's millions of small enterprises, so that the costs of going formal are not high. After all in the US, the largest beneficiaries of its social safety net are large firms like Walmart and McDonalds. But the argument in favour of a second-best set of standards goes against the grain of political correctness (the debate surrounding the real estate bill was instructive in this regard), while any attempt at building a deep enough social safety net runs into fiscal constraints.

There are no easy answers to such complex development challenges. I am less convinced that we can transition to a significantly less-cash (or less informality) economy over a five or ten year period. As we argue in our new book, the endeavour should be persistent economy-wide capital accumulation that grows national incomes to create a large enough consuming class, encourages firms to start formal and then grow, and builds up state capacity to regulate. That requires diligent action on multiple fronts. 

Tuesday, November 22, 2016

State capacity constraints and India's growth

Me and Ananth have our second column here based on our report on India's growth prospects. This is a more comprehensive view on the state capacity constraints. This also includes the focus on the veto often exercised by the Ministry of Finance, which has not been included in the oped but is available in our report.