Monday, January 16, 2017

The missing investment recovery in India

An examination of the credit-to-GDP gap data released by the BIS reveals an interesting picture. The data captures the difference between the actual credit-to-GDP ratio and its long-term trend of borrowings from all domestic and foreign sources to the private non-financial sector.
The BIS uses credit-to-GDP gap to assess systemic risks from excessive credit flows, having found this a useful early warning indicator. In particular, it has found that a credit gap in excess of ten percentage points was found to be associated with a two-third likelihood of a serious banking crisis within the next three years. Accordingly, as per the Basel III regulations, the counter-cyclical capital buffers for the banks should be raised as soon as the country's credit-to-GDP gap exceeds two percentage points. Three observations.

1. China is flashing red big time. Since late 2008, when the country triggered off its stimulus package, the credit to private non-financial sector has rocketed. Since late 2011, it has risen nearly five-fold to touch 30% of GDP. No country even comes close in terms of the scale of such excess credit build up.

2. India presents the other side of the spectrum, a stark contrast with China in terms of private sector investment activity. Its credit-to-GDP gap has been in continuous decline since the crisis, and is now in the negative territory and the lowest among all major emerging economies. In fact, from this and other data (the IIP has been on declining trend), it becomes clear that the private sector investment cycle did not recover after the crisis. Growth has largely been driven by public investment and consumption. 

3. The weakness in investment activity is surprising given that the balance sheet problems constrain only the infrastructure sector firms and certain large corporate groups. Aggregate corporate indebtedness, as measured by the private non-financial debt service ratio (ratio of debt repayments to income), has been very stable and under well below danger levels. 
Consider this. Two of the three growth drivers, business and households, have stable balance sheets. The government's Make in India campaign has doubtless done its part in stoking the animal spirits. But investment activity, even in consumer durables and other cyclicals, and intention to invest remains muted. 

There can be three explanations. One, businesses do not feel that the excess capacity built up during the boom years of 2003-08 have not been wrung out. There is some evidence to this effect in the RBI's OBICUS survey. Two, businesses do not find the prospects of growth in demand promising enough. Three, there is some other constraint holding back investment activity.

Saturday, January 14, 2017

Weekend reading links

1. John Thornhill captures the age of "dataism",
Gartner, a tech research company, estimates that 5.5m connected devices a day came online in 2016. It forecasts that their total number will more than triple to 20.8bn by 2020 as the “ internet of things” becomes a reality. According to IBM, we already generate some 2.5 quintillion bytes of data every day, meaning that about 90 per cent of all data in the world has been created in the past two years. To see the effect that this data use can have, just take a look at the advertising industry. Facebook and Google sucked up an astonishing 85 cents of every new dollar spent on digital advertising in the US in the first quarter of 2016. Their success is based on their ability to use data to target advertising at the likeliest consumers.
2. Economist argues in favour of Vienna as the "city of the century", built on the fecundity of ideas and art that emerged in the late Hapsburg era of Franz Joseph I. Sample this,
Often the Viennese intellectuals leapt ahead by transferring knowledge gained in one discipline to others, gloriously indifferent to the mind-forged manacles that have come to stifle modern academia and research. In America, several Viennese-trained devotees of Freud used the tools of psychoanalysis to revolutionise business. Ernest Dichter, author of “The Strategy of Desire,” transformed the fortunes of companies through marketing that purposely tapped into consumers’ subliminal desires.  
Another example was Paul Lazarsfeld, the founder of modern American sociology. Born of Jewish parents, he studied maths in Vienna, completing his doctorate on Einstein’s gravitational theory, and thereafter applied his expertise in data and quantitative methods to what became known as opinion, or market research—finding out what people really feel about anything from television programmes to presidential candidates. In Vienna in 1931 he conducted the first scientific survey of radio listeners, and also co-wrote a revolutionary study of the devastating social and psychological impacts of unemployment. His team of investigators conducted what is now called “field research”, meticulously recording the results of face-to-face interviews with laid-off factory workers in the town of Marienthal. Moving to America in 1933, Lazarsfeld went on to found the Columbia University Bureau for Social Research. His team was the first to use focus groups, developed with Dichter, his one-time student, and statistical analysis to delve into the mysteries of voter and consumer preferences or the impact of the emerging mass media. Lazarsfeld and others thus helped revivify moribund, antiquarian modes of inquiry, and re-equip them with the latest Viennese techniques, often saving entire Western intellectual traditions from decrepitude, or possibly extinction.
3. Most, if not all of Donald Trump's bombast is plain disgusting. But his tweet campaign on automobile manufacturers operating plants in Mexico may be a not fully undesirable antidote for a business world where commercial considerations override all else. If initial signs are any indication, this could provide a tipping point in getting businesses to incorporate non-financial considerations in their investment decisions.

In recent days Trump has initiated a similar tirade against predatory pricing techniques of pharmaceutical companies. His comments that pharma companies were "getting away with murder" wiped off $24 bn from the value of Nasdaq listed biotech market capitalisation. Even if you do not agree with his approach, one cannot but feel like supporting Trump on this campaign. 

In other words, Trump would have turned back the remorseless march of the market's logic in economic decision making. A desirable outcome, though achieved through questionable means and with potential path dependent incentive distortions!

4. FT reports that China invested $103 bn on renewables in 2015, more than double next-placed America's $44 bn.
5. The cost of carrying cash in India, even without demonetisation, is very high!
6. One of the stories going on around demonetisation has been about the Jan Dhan bank account being used to launder black money. This, advocates argue, has been a major reason why the vast majority of black money has found its way back to the formal banking system, as reflected in the near complete return of 500 and 1000 rupee notes.

But a Livemint analysis appears to refute this. It finds that the Jan Dhan deposits rose from Rs 46,636 Cr on 09.11.2016 to Rs 74,322 Cr on 30th November and Rs 70,070 Cr on 4th January, 2017. To put this share in perspective, it increased from 0.05% to 0.45% of the aggregate deposits of schedule commercial banks between September 2014 and October 2016, reached a peak of 0.71% in November 2016 and declined to 0.68% again in December 2016. Rounding error!

7. Sundeep Khanna has a nice article which argues that instead of courting Apple, the Government of India should be trying to attract Tesla to invest in the country. I had blogged earlier about the futility of trying to attract Apple. But this is a teachable point about the problems with industrial policy. It is deeply vulnerable to ongoing fads, which leads to governments backing the wrong horses,
If concessions have to be given to persuade global companies to set up manufacturing in India, they are better off given to those at the forefront of technologies that will drive the future... There are many... companies pushing the boundaries of technology, which may be both easier to woo and whose multiplier effect may be far greater in the long term. As an example there is Cortex Composites, the Draper Associates-funded California-based developer of a new type of cement called Cortex which has uses like canal lining, ditch lining, slope protection, erosion control and lining ponds. It replaces expensive mixing trucks in places that need just thin layers of cement. There is also a clutch of innovative 3D printing companies like 3D Hubs, Carbon, Made in Space or Voxel8. For hardcore manufacturing there is Daijiang Innovations (DJI), the world’s most successful consumer drone-maker based in China. Country strategies have to be based on a long-term vision. The smartest countries are now looking at building ecosystems around artificial intelligence (AI), which is expected to have the same impact on the world as the internet or electricity before that.
8. Mint examines the case for a Universal Basic Income (UBI) guarantee for India. The different scenarios are captured below.
I have been coming to the view that a UBI may be worth considering in countries or areas where state is virtually absent or so weak as to be missing. This would not apply to India. Apart from the numerous very compelling substantive arguments against UBI and the politics surrounding the substitution of existing in-kind subsidies, some of these numbers being estimated (including in the Economic Survey) are like the optimistic "expectations-stretching" that happens when you are pushed against the wall and have no other hope.

For example, consider the math surrounding the 5.2%. The assumption is that you would squeeze out all those increments to the tax-to-GDP ratio (itself questionable) and then divert them all to a UBI, over-riding other far more important claims like increasing the share of GDP spend on health care, infrastructure spending etc. It is not only snake-oil policy prescription, it is also plain bad economics. 

9. FT has an excellent investigation on the maritime ambitions of China. The importance of China in the global maritime market is stunning,
Investments into a vast network of harbours across the globe have made Chinese port operators the world leaders. Its shipping companies carry more cargo than those of any other nation — five of the top 10 container ports in the world are in mainland China with another in Hong Kong. Its coastguard has the globe’s largest maritime law enforcement fleet, its navy is the world’s fastest growing among major powers and its fishing armada numbers some 200,000 seagoing vessels...
Beijing’s shipping lines deliver more containers than those from any other country, according to data from Drewry, the shipping consultancy. The five big Chinese carriers together controlled 18 per cent of all container shipping handled by the world’s top 20 companies in 2015, higher than the next country, Denmark, the home nation of Maersk Line, the world’s biggest container shipping group. In terms of container ports, China already rules the waves. Nearly two-thirds of the world’s top 50 had some degree of Chinese investment by 2015, up from about one-fifth in 2010... And those ports handled 67 per cent of global container volumes, up from 42 per cent in 2010, according to Lloyd’s List Intelligence, the maritime and trade data specialists. If only containers directly handled by Chinese port operators are measured, the level of dominance is reduced but still emphatic. Of the top 10 port operators worldwide, Chinese companies handled 39 per cent of all volumes, almost double the second largest nation group... since 2010, Chinese and Hong Kong companies have completed or announced deals involving at least 40 port projects worth a total of about $45.6bn

The modus operandi is simple - give loans and construct ports in developing countries, invoking some commercial interests. But its military and political dimensions are undeniable,
“There is an inherent duality in the facilities that China is establishing in foreign ports, which are ostensibly commercial but quickly upgradeable to carry out essential military missions,” says Abhijit Singh, senior fellow at the Observer Research Foundation in New Delhi. “They are great for the soft projection of hard power.”...

China’s naval strategy is aimed primarily at denying US aircraft carrier battle groups access to a string of archipelagos from Russia’s peninsula of Kamchatka to the Malay Peninsula in the south, a natural maritime barrier called the “first island chain” within which China identifies its strategic sphere of influence. Another focus is the string of artificial islands that Beijing has dredged out of coral reefs and rocks to help reinforce China’s claim to most of the South China Sea, putting it on a collision course with neighbours from Vietnam to the Philippines, as well as the US. The artificial islands have been equipped with landing strips and a US think-tank recently said, after analysis of satellite images, that Beijing appeared to have installed anti-aircraft guns, anti-missile systems and radar facilities on them.
India, in particular should be concerned at the Chinese built ports in Gawdar (Pakistan) and Hambantota (Sri Lanka), both of which have undeniable security and force projection dimensions. Forget a "string of pearls" around India, China appears to be a stringing one to encircle the globe itself!

10. Even as MS Dhoni relinquished captaincy, I came across this Mark Nicholas article,
He talked about chasing as if he were a Roman imperator waiting upon Nearer Gaul. Take it to the point where they are more scared than you, was his theme. ... the power of his personality... imposes himself upon you. It is an intimidation of sorts, a sense of ownership of the moment that creates doubt, fear and awe in the opponent. If you are left bowling to Dhoni at the death, you are not - consciously or subconsciously - backing yourself. Worse still, you are probably backing him.
11. Finally, Virat Kohli is the flavour of the cricket season. I've been reluctant to bracket him with Tendulkar for a reason. If you watch Virat close enough, apart from admiring his breathtaking stroke play, you could also come away with the feeling that those strokes are born out of a talent for exceptional hand-eye co-ordination. I can think of only Brian Lara and Virender Sehwag with comparable talent. But such talent based skills atrophy far quickly with age than a more learned technique. Just watch Virat execute the cover drive (especially on spinners) with quick-silver reflexes and compare it with the same stroke of say, Tendulkar, which is simpler (and graceful) and has fewer moving parts. 

To put Kohli in perspective, Sehwag was no less influential and feared, and arguably more destructive, in the 2008-10 period.  Sehwag was aged 30-32 in this period. To be fair to Kohli, he appears to have realised his potential earlier than Sehwag, at the age of 27. So, maybe he will have a longer period of dominance. But contrast this with Tendulkar's last period of influence, 2007-10, when he was 34-37. 

The one area where he seems to clearly score over even Tendulkar is, surprisingly, his temperament and his ability to play the percentage game in the shorter and far riskier formats of the game. This graphic of T20 performance (as well as his average in successful one day chases) is no less stunning than Bradman's average.

Thursday, January 12, 2017

Mathiness and the narrowing of economics

Lars Syll has a nice post with several interesting links on the ongoing debate on the "intellectual regress" in macroeconomics. In particular, the post discusses the problem with the Lucas-Prescott-Kydland-Sargent "calibration" models. 

Calibration modelling involves identifying uncertain parameters and revising the model coefficients using actual historical data with some measure of goodness-of-fit. See Paul Krugman here and here on calibration modelling. 

Stripped off the jargon, the issue at hand is that one school of thought advocates using a model arrived at based on their theory of change whose parameters are refined (or calibrated) by testing it against actual data. But another group critiques this approach arguing that such calibration is barking up the wrong tree if the theory of change and, therefore, the model itself is flawed. They also argue that unlike scientific models which are generally time and path invariant, the dynamics of change in social science are time and path dependent.  

Also Paul Romer's scathing attack on how "mathiness" and excessive deference led macroeconomics astray,

a general failure mode of science that is triggered when respect for highly regarded leaders evolves into a deference to authority that displaces objective fact from its position as the ultimate determinant of scientific truth.
The complement of "mathiness" is the narrowing of the study of man in the ordinary business of life from its older version of "political economy". On a related note, Economist has a nice year-end article on the Cambridge school of political economy founded by Alfred Marshall. The contrast between the multi-disciplinary school of political economy of Alfred Marshall and AC Pigou and the modern "mathy" econometrics-heavy instruction is seen in their respective student instruction and assessments,

The goal can be seen in the exam questions of the time. Students were expected to combine economic principles with a strong grasp of current affairs. In 1927, for example, one paper on public finance asked students to explain the size and reasons for the main areas of British government spending. They were expected to have the skills of an essayist, spending one three-hour exam on a single question such as the future of gold, the rights and duties of shareholders, or alternatives to democracy. Cambridge economics considered itself to be an analytical science but calculation was not of the essence. A module in statistics produced a page-long test for final-year students; all the other papers were bare of mathematical symbols. Compare this with the exams of today. Charlotte Grace, a student in the third year of the economics tripos (as undergraduate degrees are known in Cambridge), says she could have passed all the questions she faced in her first year without reading a newspaper. And though the five-page final-year macroeconomics exam that was set in 2015 asked about some contemporary policy conundrums, like which features of the euro zone may have contributed to its sovereign debt crisis, most of the paper sought to test students’ knowledge of tricky, algebra-heavy models. Three-hour pontifications on a single topic have been ditched in favour of a compulsory dissertation in which original empirical analysis is encouraged.

These tests reflect changes in the discipline. Students must master the technical apparatus of a highly specialised field. The maths they need to know and apply is sufficiently taxing as to barely leave time for history. Evidence-based conclusions are preferred to arms-length analysis; economists should know the limits of their expertise, and shy away from political judgments as they think through the effects of whatever policy tweaks providence might throw at them.

Tuesday, January 10, 2017

State capacity weakness and addressing black money flows

I had argued in an earlier post that the success or failure of the campaign to curb black money and expand the tax base initiated through the demonetisation decision would depend on how the flow problem would be addressed

Indira Rajaraman has an excellent article which argues that the path to increasing tax revenues is to detect and reduce flows of tax evasion. She advocates the use of presumptive methods for identifying tax evasion - focus on occupation categories with high incomes and high value purchases of goods and services, and track individuals for tax payment proportionality.  

It is plain obvious that there is massive tax evasion at the highest levels of income ladder. It is also a reasonable premise to argue that the same is concentrated in a few areas. A few occupational and economic activity categories come straight to mind - lawyers, doctors and hospitals, professional colleges, tuition centres, entertainers, construction contractors, real estate developers etc. And purchases to target include vacations (hotel bookings, air travels etc), gold, real estate, luxury durables (vehicles, designer wear, antiques and art, etc), management quota college seats, club memberships, wellness services (spas, therapeutic, cosmetology etc), entertainment services, and general transactions beyond a certain value. These two should be coupled with data on credit card spends, savings account transactions, financial market investments etc. 

Evidently, this would require accessing multiple data bases, most of which are unlikely to be readily available. One way to ease the identification challenge is to link up transactions with the Income Tax PAN. Once the individuals concerned are identified, a first order scrutiny would be to check for proportionality with their tax payments. 

To begin with, it may not even be necessary to adopt rigorous enforcement actions. Merely intimating the respective individuals about the observed discrepancy between their expenditures and income tax payments and seeking their explanation may be adequate to nudge significant compliance. This would avoid the inevitable harassment and corruption associated with enforcement based tax campaigns, which generally brings disrepute to such well-intentioned efforts. 

So why have we not been able to do this? My strong belief is that it can be traced back to state capacity weakness. Indira Rajaraman too appears to say the same,
We live in a country where utility companies are not able to collect their dues, leaving public-sector banks groaning under default. A simple administrative requirement for PAN numbers attached to electricity dues or leasing of generators (for lavish marriages) would have led to higher revenue for both the income-tax department and power distribution companies. Large-scale tax evasion has long been practised right in the face of the income-tax authorities through political connections. Those without political connections have had to pay their way out. Either way, unless these features of the taxation system are reformed, there is nothing demonetisation can do for tax revenue. 
Assembling and analysing the data required to identify such leakages is no mean task. For a start, it is painstaking work to extract data on the occupational categories and purchases. There are no single, readily available databases for any of them. Assembling this information would be a massive exercise in inter-departmental co-ordination and engagement with various market participants at different levels. Apart from overcoming strong resistance from entrenched interests, legal constraints and privacy concerns would have to be addressed. It would also require reconfiguring compliance and other reporting formats by businesses. The Revenue Department of the Ministry of Finance, on its own, simply does not have the capacity nor the convening power to pull this off. 

Then there is the matter of their analysis with respect to actual tax assessments. This too is far from being just some sophisticated software based analytics. As Rajaraman cites with the example of Israel's use of presumptive taxable income estimate linked to transaction value, such analytics has to be built on painstaking ground work. 

Such plumbing challenges demand strong state capacity at all jurisdictional levels. Unfortunately, state capacity weakness is no less acute in Revenue Department and the Central Board of Direct Taxes (CBDT). Compounding the problem is the institutional and incentive structure of the CBDT, which is seen and sees itself largely as an implementation agency - tax assessment, collection and enforcement. Systemic transformations of the kind discussed above demand entities with strong policy conceptualisation, design, and research focus. This may be a good opportunity to pivot and build a strong focus in this dimension. 

Monday, January 9, 2017

Firm size and productivity

One of the most interesting areas of recent research is that which explores the reasons for the wide differentials in establishment-level productivity within a country as well as cross-country aggregate productivity. Poorer countries have been characterised by lower establishment level productivity which translates into lower aggregate productivity.

In a new working paper, Pedro Bento and Diego Restuccia uses data of manufacturing establishments from across 12 countries and finds a "clear positive relationship between aggregate productivity and average establishment size". They write,
We calibrate a benchmark economy to US data and show that reasonable variations in the extent of correlated distortions have substantial negative effects on establishment size, establishment-level productivity, and aggregate output per capita. In order to provide a quantitative assessment of this channel in explaining productivity differences across countries, we first document evidence from cross-country micro data for the elasticity between distortions (wedges) and establishment productivity, using establishment-level data from the World Bank's Enterprise Surveys.
We show that the elasticity of distortions with respect to productivity in the micro data is strongly negatively related with both average establishment size and GDP per capita across 53 countries... Compared to the calibrated U.S. benchmark economy, increasing correlated distortions to 0.56 (the elasticity between wedges and establishment productivity found for India) generates a reduction in establishment size to 3.4 workers versus the 22 workers in the US economy (a 6-fold difference), and a similar reduction in establishment-level productivity. 
Their sample finds the income elasticity of establishment size to be 0.26 - a one percentage increase in income is associated with an increase in establishment size by 0.26 percentage. This climbs to 0.33 when small countries with population less than half a million are eliminated. 

Industrial policies pursued by governments have largely been confined to fiscal concessions, cheap credit, and subsidised inputs. An encouraging development in recent years has been the increasing salience of policies to prune regulatory and transactional thickets that improve the ease of doing business. Another area that demands immediate attention is informality and small firm size. An industrial policy that seeks to help firms start formal and encourage informal firms turn formal, and then create the conditions for even 10-20% of them to grow in size, has the potential to unlock large gains. 

Friday, December 30, 2016

Mid-week reading links

1. The world according to Trump

2. Buoyed by cheap capital, bond market capital raising hit a new high of $6.62 trillion in 2016, with corporate bonds contributing nearly half. 
Eight of the ten largest bond offerings this year were by corporates, who competed to take advantage of the cheap borrowing to finance a wave of mergers and acquisitions. 

The flip side to this is the risks it engenders as interest rates appear to be one the cusp of an upward cycle. Reflecting this, US 10 year bond yields have surged from a record low of 1.36 per cent in July to 2.57 per cent. The impact of a steep enough rise on the indebted corporate balance sheets can be devastating. 

3. Another study finds no evidence of link between executive compensation and company performance. The FT has a report on the study commissioned by the CFA Society of UK and done by the Lancaster University Management School. 
In a study of more than a decade of data on the pay and performance of Britain’s 350 biggest listed companies, Weijia Li and Steven Young found that remuneration had increased 82 per cent in real terms over the 11 years to 2014. Much of the increase was the result of performance-based pay. But, the report’s authors say, the metrics used to assess performance — such as total shareholder return and earnings per share growth — are unsophisticated and short-termist, acting against the interests of long-term investors. The research found that the median economic return on invested capital, a preferable measure, was less than 1 per cent over the same period... A separate research study, by Vlerick Business School’s Executive Remuneration Centre earlier in December found that the median UK chief executive earned €6.175m last year, 50 per cent more than the average counterpart in Germany, the next best paying country.
This really is getting so egregiously embarrassing in a world which increasingly claims to be evidence-based. The brazenness with which such claims are made is shocking. Worse still, instead of being stamped down on, the world continues to be tolerant of the evidence-free claims of the supporters of corporate compensation.  

4. Gavyn Davies has got this spot on. This will be one of the dominant themes of economic and political debates not just in 2017 but in the years ahead. 
How should we compensate the losers from globalisation?
Maurice Obstfeld, the IMF Chief Economist, has called for "trampoline policies" that act as springboard to new jobs as against just the conventional "safety net" policies. 

It is also a teachable moment in intellectual dishonesty and duplicity among the so called "economists" and "public intellectuals" in the west like Mr Davies. For at least three decades, developing markets, or at least significant population groups there, had been at the receiving end of the trade liberalisation agenda. Though the country as an aggregate may have gained, trade liberalisation and globalisation have destroyed local markets and livelihoods, disrupted their social fabric, and engendered political instability. Now, with the shoe in their feet and "economic nationalism" threatening to disrupt social and political status quo, the same worthies in developed economies who then insensitively waxed eloquent about the benefits of unfettered free-trade, have now suddenly turned sceptics. They argue for policies that protect local communities from cheap Chinese exports. 

Worse still, this revisionism cannot be construed as a matter of late realisation due to a mistaken analysis. The same people still support harmonisation of policies especially in labor standards and environment, despite its same consequences on developing country markets. 

Anyways, the issue by itself assumes equal or greater significance for developing countries, where population categories adversely affected by trade are even bigger and public resources required to mitigate much higher proportion of public spending. The challenge is compounded by the weaknesses in markets and state capacity to effectively administer such redistribution.

5. After this, Manas Chakravarthy swings to the other extreme in urging caution on informality. He's as much spot on this time as he was off the mark last time. He writes,
A 2014 paper by Rafael Porta of the Tuck School of Business and Andrei Shleifer of Harvard University, published in the Journal of Economic Perspectives, concluded thus: “we are skeptical of all policies that might tax or regulate informal firms. Rather than encourage informal firms to become formal, such policies may have the effect of driving them out of business, leading to poverty and destitution of informal workers and entrepreneurs. The recognition of the fundamental fact that informal firms are extremely inefficient recommends extreme caution with policies that impose on them any kind of additional costs.”
In other words, shock therapy such as demonetisation could very well turn out to be counter-productive. Instead, Porta and Shleifer say the cure for informality is economic growth. The evidence shows that informality declines, albeit slowly, with development. An 2009 OECD paper on Informality and Informal Employment also came to the conclusion that policies that make it more difficult for informal firms to carry out their activities and stricter enforcement of laws and regulations “have contributed to increased poverty and vulnerability by pushing already vulnerable groups of people into even more difficult situations.” What the government should instead aim for is expanding the formal sector, by making it easier for firms to operate there.
I am in complete agreement. To repeat, my concern with the debate on informality is that it is mistakenly seen through the lens of tax evasion. That is completely missing the point, since informality and tax evasion are inevitable because firms cannot become formal and stay competitive in an extremely price sensitive market where the vast majority of consumers are very poor.

6. Ajit Ranade makes a very strong case for raising income tax rates on capital gains. He advocates treatment of short-term capital gains as similar to regular taxes and taxing long-term capital gains, especially given the Government's decision last year to amend the Mauritius tax treaty.
(This) was a relatively unsung but revolutionary tax reform. Opponents had warned that there would be hell to pay as foreign investors would flee India if deprived of the freebie Mauritius route. Nothing of that sort happened... The amount of tax foregone because of tax-free LTCG can be gauged from data released by the tax authorities this year. In assessment year 2014-15, the total amount that escaped the tax net due to LTCG was Rs 64,521 crore. A recent research report published in the Economic And Political Weekly estimates the loss to the exchequer due to capital gains tax exemption at Rs 45,000 crore. Just by way of comparison, in the US, all short-term gains are taxed as regular business income, and long-term gains are taxed at a rate of 15%. It must also be remembered that most foreign investors (FII) who come into India are long-only funds, with a minimum time horizon of three years. So for these investors, gains made in one year are immaterial. Hence it is inconsequential to them if gains beyond one year are made tax-exempt. It, of course, matters a lot for the exchequer. So, ideally, the LTCG tax exemption should kick in after completing three years. Anything shorter, the capital gains should be like regular income. Such a non-discriminatory and transparent tax regime will do away with arbitrage between gains in listed versus unlisted stocks and also foreign versus domestic investors.
7. Finally, the foreign policy victor of 2017, Vladimir Putin and Russia. Consider this from David Gardner,
The Kremlin seems to be getting away with its cyber intervention in the US election. It is having some success in dividing Europe and erecting an illiberal democratic pole inside the EU. And President Putin has a new admirer in US president-elect Donald Trump. President Recep Tayyip Erdogan of Turkey and President Abdel Fattah al-Sisi, the former army chief who rules Egypt, are already Putin fans. Benjamin Netanyahu, Israel’s rightwing premier, has cultivated the Russian leader. Mohammed bin Salman, the young deputy crown prince in de facto charge of Saudi Arabia, has developed what one Arab official calls “a functional relationship” with Mr Putin.

Wednesday, December 28, 2016

The Great Stagnation

MR points to a new paper by Nick Bloom, Charles Jones, John Van Reenan, and Michael Webb which finds declining ideas TFP (research productivity per researcher, or number of new ideas per researcher) across sectors. They write,
Our robust finding is that idea TFP is falling sharply everywhere we look. Taking the U.S. aggregate number as representative, idea TFP falls in half every 13 years — ideas are getting harder and harder to find. Put differently, just to sustain constant growth in GDP per person, the U.S. must double the amount of research effort searching for new ideas every 13 years to offset the increased difficulty of finding new ideas.
They claim that the relatively stable economic growth in recent decades has been the result of increased research effort (number of researchers), which has off-set the declining ideas TFP. They find the signatures everywhere. In the economy on aggregate,
Across agriculture crops,
Even in semiconductor chips, despite the much acclaimed Moore's law,
In pharmaceuticals research for new molecular entities,
And in medical research
But their conclusion has interesting implications for growth theories,
The only reason models with declining idea TFP can sustain exponential growth in living standards is because of the key insight from that literature: ideas are nonrival. And if idea TFP were constant, sustained growth would actually not require that ideas be nonrival... fully rivalrous ideas in a model with perfect competition can generate sustained exponential growth in this case. Our paper therefore clarifies that the fundamental contribution of endogenous growth theory is not that idea TFP is constant or that subsidies to research can permanently raise growth. Rather it is that ideas are different from all other goods in that they do not get depleted when used by more and more people. Exponential growth in research leads to exponential growth in At. And because of nonrivalry, this leads to exponential growth in per capita income.
This raises questions about the prevailing intellectual property rights regime.