Sunday, February 26, 2017

Africa industrialisation fact of the day

But Africa has not managed to take part fully in industrialization, a failure that has caused it to lag behind the rest of the developing world since the 1970s. In 2015, all of Sub-Saharan Africa exported only as much apparel as tiny El Salvador.
Given that textiles offers the most commoditizable employment for large-scale manufacturing labor, this is deeply disturbing. 

Saturday, February 25, 2017

Expanding India's tax base

Praveen Chakravarty makes the point that India's very high income tax threshold, one of the highest in the world at 2.5 times the country's per capita income, is a major contributor to the country's low tax base. For the record, only 3 per cent of Indians and just seven out of 100 voters file tax returns!

Without getting into the merits of this proposition, I would argue that this is unlikely to make much dent on the problem of low tax base. 

Even assuming a 10 per cent tax on all income above Rs 1 lakh (i.e. 1 to 2.5 lakh) and assuming everyone one of the 10 million (assesses with income below Rs 2.5 lakh) have an income of Rs 2.5 lakh, we are left with an increment of 0.1 per cent of GDP to the tax-to-GDP ratio. This is a rounding error!

This goes back to the point that Ananth and I tried to make here.  Any which ever combination of policies (base expansion, forensics, agricultural income, higher income tax rate etc) to expand the tax base are most likely to be orders of magnitude off from the 3-5 percentage points increases that one would expect from a country of comparable economic development. We should do all of them for sure, but expectations should be tempered.

When we make inferences based on anecdotal and our own life experiences (the apparently countless people around us who have cars, go for vacations, and own expensive houses) and feel aghast at the low tax compliance, we may be overlooking the fact that the representative sample is misleadingly small. For sure, we can triple or quadruple that wth better compliance etc. But even that would be marginal. 

We could also look at several urban proxies of consumption - aspirational food like burgers/pizzas from global chains, vehicle ownership, consumption of services like vacations and cosmetic procedures, retail purchases of consumer durable brands etc - in comparison with others at similar stages of growth and my guess is that we would find that the real "consuming" middle class is relatively narrow. No wonder that fast food chains are already hitting a growth plateau, just a few years into their full-growth phase. Given our representative sample One would have thought that these things should have comfortable double digit growth for atleast 10-15 years.

More reliable quantitative measures can be obtained from an analysis of e-commerce transactions and comparing trends in other similarly placed countries and China. I would be very surprised if they contradict these trends. 

A recent analysis of the Socio-Economic Caste and Census (SECC) data by the excellent folks at Credit Suisse gives a sense of the scale of rural deprivation. It found that 30% of rural households had cultivation as the source of income, but a large 51% do manual labour, indicating a small percentage of HHs controlled the majority of rural income. Only 17 mn, or less than 10 per cent households had salary income, of which nearly two-thirds were in government or government-owned firms. Only 6.5 mn (3.5 per cent of total rural households) had private salary income (and the vast majority would be those with annual incomes below Rs 2.5 lakh), indicating the limited reach of corporate India. 
Given that agriculture formed 29% of GDP in 2011 and just 30% of the 180 million rural households got their income from cultivation (and only a very minuscule proportion of them are likely to be anywhere close to contribute significantly to tax revenues), the scope of squeezing out significant tax revenues from even agriculture income is marginal. As a disclaimer, this is not to say anything about the merits of taxing agriculture income, but a reminder about the futility of significant tax base increases from such efforts.

So what should be done? Apart from the broader issue of more capital accumulation covered in our book, a more realistic and fruitful place to start, would be in plumbing issues. The Central Bureau of Direct Taxes (CBDT) should quickly establish professionally competent tax policy and data analytics divisions. They should develop an eco-system of data sharing, with appropriate safeguards, with various state and central government departments. The former should use data for better tax policy design, and the latter should use it to improve assessments, compliance and collection. 

Even initiating a debate on assessment of agriculture incomes, without any tax payment, would involve some idea of the numbers involved, currently lacking with the policy designers.

Thursday, February 23, 2017

The evidencariat takes hold, and this too shall be no different!

I have blogged earlier arguing that the case for evidence based policy making was, like every other all encompassing ideas, slowly becoming an ideology. Its proponents, the evidencariat, disown all priors and prefer to leave policy and program implementation design questions on important development issues completely open-ended.

Accordingly, we have no idea of the education or healthcare production function and should leave design elements on any intervention to achieve learning or treatment outcomes to the discretion of the implementers, to be figured out by them on context-specific considerations by drawing on rigorously generated evidence.

Such evidencariat come from different directions. On the one side there are those advocating field experiments, the main object of the aforementioned blogpost, who seek to establish priors by trying to generate rigorous enough evidence. Then there are those who claim that it is not possible to have unified and universally-applicable solutions and therefore advocate a decentralised, iterative process of discovering solutions. There are others who go one step ahead with the second approach and argue in favour of using finance to align incentives and target outcomes. Different variants inhabit the space between.

This evidence-dogma has taken strong hold in influential global development circles. There is something logically very neat and attractive about such solutions that appears to overcome the complex challenge of making development happen. Its impact will be felt in an increasing degree in aid and other forms of external, public and private, spending in the years ahead. But like with all such cycles of development fads, and there have been several over history, this too will pass by as the earlier ones.

The incentives too are aligned favourably. The donors get the comfort of trying out something different and that too through an approach which revolves around the use of evidence and empowerment of the recipient governments. The latter will nonchalantly play along, with the firm conviction that given the multiple dimensions of what constitutes "evidence", they can game the process any which ever way. This is a conversation taking place in completely different worlds, two sides talking past each other and still comfortable with each other's positions. 

No government in any developing country has either the time or resources or capacity to do development as suggested by any of the different schools of evidencariat. Unlike the academia and intelligentsia, they inhabit the real world with short election cycles and bureaucratic tenures, impatient citizens and opinion makers, entrenched legacies, scarce resources competing for multiple unavoidable demands, and shockingly weak state capacity.

In the circumstances, the Bayesian approach is the only way forward. Conditional on the aforementioned constraints, what is the best approach to improving the effectiveness of development spending?

A prudent compromise may be required. Evidence based research should be a complement to a process of discovering latent institutional knowledge (or priors) through the standard toolkits of deep-dive problem solving. If we are able to do the latter with some reasonable degree of rigour, that alone would be sufficient to have a robust enough minimum viable product in policy design and implementation plan. The most cost-effective and context-specific approach of evidence generation should be used to figure out the remaining one or two uncertain elements in the design, if any. There is no need for a high standard of evidence when less would suffice. And any implementation should have a very rigorous monitoring system that feeds back credible information and the implementation design should allow for refinements and course corrections as required. A more detailed illustration of this is available here

And on the absence of a production function, this from S Africa is only the latest in evidence to the contrary,
Scripted lesson plans have great potential to improve teaching practice in resource- and capacity- constrained settings, but there are risks that they undermine teachers’ autonomy to cater teaching to the level of the child, especially if lesson plans require adherence to an overly-ambitious curriculum. Both programs provide teachers with scripted lesson plans and supporting reading materials, such as graded readers and flash cards, but they differ in the mode of implementation. In some schools (Training) teachers receive two two-day training sessions over the course of the year. In other schools (Coaching), teachers also receive monthly visits from specialized reading coaches. We find that after only 9 months of implementation both the Training and Coaching interventions had a positive impact on reading proficiency, by 0.13 and 0.14 standard deviations respectively. Teachers are also more likely to provide individualized assessment and assign pupils to reading groups within the classroom based on ability. Furthermore, there is substantial pupil-level heterogeneity, mediated by class size: Pupils who performed badly at baseline do not benefit from the program, but this trend is reversed in larger classes... 
The coaching treatment is twice as expensive... We can therefore conclude that scripted lesson plans can be more cost-effectively implemented through a traditional model of training, and need not be combined with ongoing monitoring and feedback from reading coaches.
However, the scalability of such approaches will be difficult given the limited success, for example, with training public school teachers to use the Pratham model of remedial instruction. This, is more a reflection of weak state capacity than the application of a wrong education production function. And the approaches advocated by the evidencariat demand far more intensive engagement of state capacity.

In the circumstances, for school systems entrapped at very low equilibriums struggling to move from the bad to satisfactory, scripting may not be a bad idea. After all, the much validated Pratham model is a  very minutely scripted model of instruction. However, for a system striving to move from satisfactory to good, much less from good to great, scripting is unlikely to work.

In the real world, with the challenge of working in a resource constrained environment with the objective of achieving scale in a reasonable period of time, we cannot afford not to have priors. We have to accommodate decidedly second-best approaches.

Monday, February 20, 2017

A proposal on urban transport management

Arguably the two biggest immediate constraints facing large cities in developing countries like India are the availability of affordable housing and acute traffic congestion. Unlike several other problems, including the availability of adequate utility infrastructure and jobs, these two are not easily mitigated and the costs on the typical urban resident can be huge. 

In the absence of affordable housing within a reasonable enough distance from the city centre to make you feel that you are living in the city, a reality in most Indian cities, immigrants are forced into  living in outer suburbs or squat on cramped illegal settlements. This amplifies workplace commute times and adds to the traffic congestion. The latter spares none, reducing peak-time travels to crawls, and leaves a toxic smog of air pollution. This post will focus on urban transport. 

I have written earlier arguing that cities need to embrace several complementary policies to address the challenge of traffic congestion. The main levers are four-fold - increase the cost of vehicle ownership (higher emission standards, higher vehicle taxes etc), vehicle usage (congestion charging, higher parking fees etc), extensive promotion of public transport, and focus on transit-oriented development (higher FAR on transit corridors and around stations). Addressing traffic congestion is an ongoing process, with no final destination in terms of policies, and cities will have to constantly play with all these levers.  

The problem suffers from a serious incentive alignment and jurisdictional problem. The city residents suffer the consequences and the local government has no power or role in the exercise of at least two of the four policy levers - vehicle ownership and public transport. Both are the domain of state governments, leaving policies to control vehicle usage and transit oriented development as the only available lever with cities. It is indeed scandalous that, outside of road infrastructure, very few Indian cities spend anything on urban transport. 

Unfortunately, both these run into challenges of the political economy. Higher parking fees and congestion pricing risk inviting the wrath of the middle class vehicle users. Higher FAR on transit corridors, as the example of Mumbai DP 2034 shows, generates opposition from existing land owners. Also, there is the realisation that any progress on these as isolated events may not suffice.

In the circumstances, the standard response of Indian cities to traffic congestion has been road widening and fly-overs. That has run its course in all the larger cities. Now it is left to the demand side policies of internalising the costs of vehicle ownership and usage and the supply side one of expanding public transport. I have argued here that the odd-even vehicle ban in Delhi may have a crossing of the Rubicon moment in India. So is there a way forward?

How about an initiative whereby Government of India volunteers to support cities who embrace an integrated approach that combines all these levers? To start with, it may be tried out in 3-5 cities over a 10 year period. Some of the cities where metro rail systems have been sanctioned may be the best places to initiate this approach. Based on initial learnings, it can be gradually extended to other cities.

The cities should develop an integrated transport plan, with focus on addressing effective transport management. This should be done differently from the current approach of semi-cooked, cookie-cutter transport plans made on shoe-string budgets that every city flaunts. The plan should bring together all the levers and integrate them with existing policies, and be supported by credible data and  rigorous enough quantitative analysis. It should seek to align incentives, institutional roles, and resource requirements.

State governments should commit to transition the responsibility of urban transport to the local government, with adequate financial and institutional support. They should also evolve mechanisms to impose surcharge or higher registration and annual taxes on vehicles registered in the city, while minimising tax arbitrage opportunities.

Cities should commit to a progressively rising schedule of internalising vehicle usage charges - higher parking and congestion pricing, and pedestrianisation of certain areas. Most importantly, they should accept the incorporation of transit-oriented development into their master plans, with a plan for phased rise in FAR and corridor coverage, starting with the densest travel corridors. And cities should commit an increasing share of resources to invest in urban transport.

GoI should make conditional all its investments in metro-rail and other urban transport systems to the adoption of transit-oriented development and value capture frameworks. It should support any city which volunteers with the aforementioned reforms with significant long-term resource commitment.

All sides, as well as opinion makers, need to realise that there are no short-cuts like PPPs that can substitute for large public investments in urban transport. And public support will have to cover even a significant share of operating expenditures. It is for this reason that all financing options should be explored, including value capture instruments that can help socialise at least some of the private windfalls from these measures.

The city, state, and GoI can negotiate a tripartite agreement to implement the first phase of this over a 5-8 year period, with reasonable milestones and timelines.  

This approach has several benefits. The most important is that it enables more effective realisation of the full benefits of investments like those on metro rail systems. Currently, in the absence of higher FAR and value capture frameworks, metro rail projects are set up to struggle for their viability and benefit none but rentier landowners. Or programs like Smart Cities make isolated transport investments, whose full potential remain unrealised without complementary measures. Or an Urban Mass Transport Authority gets established and ends up as powerless Committee. Or city master plans remain disconnected from policy levers, thereby limiting the impact of both.

Another benefit of an integrated approach is that it binds everyone together into a compact, allowing burden sharing, and attenuating the political economy challenges. A congestion pricing or higher vehicle taxes can become palatable when seen as part of a package that includes investments in public transport.

This also creates the demand side pressures to proceed with an integrated implementation. It then becomes largely an effort to effectively implement the plan. It should be hoped that these cities will have at least one or two very competent enough set of officials during the period to generate the thrust required to achieve the objective.

Sunday, February 19, 2017

Paul Collier's on future of capitalism - social maternalism grounded on pragmatism?

Paul Collier (HT: Ananth) channels Jonathan Tepperman's recipe for successful national transformations from his book The Fix which chronicles ten case studies of national leaders,
eschew ideology; focus on pragmatic solutions to core problems, adjust as you go, but be as tough as is necessary.
The article is good in general, as Collier seeks to chart out a course of capitalism. He identifies "pragmatism" as the new ideology. He advocates the use of tax policies to generate growth - moving away from income-specific to context-specific taxes, that discriminates based on source of income (rents as against innovation), regulatory arbitraging (real economy versus sharing economy), resource misallocation (financial markets versus real economy), geographical privileges (cities as against suburbs and rural areas), etc. 

Consider the case of how cities privilege its residents and especially the high income earners among them,
A megacity is a powerful engine of inequality. Exceptional taxation is justified because only some of the high incomes generated in a megacity are attributable to the few who appear to earn them. The rest are attributable to everyone who contributes to the connectivity, including those who do not live in it. A straightforward example is land values. Since locating in the city enables firms and workers to be more productive, its land becomes valuable... London abounds in such “undeserving rich” because governments have been slow to use the tax system to offset them. Despite Brexit, London is a vast reservoir of unexploited tax potential: it is the new oil. The provinces are right to be angry. A metropolis differentially benefits the highly educated. The scope for specialization enables them to use specialist skills that become very valuable. Someone with the brains and opportunity to have fathomed the intricacies of finance will be hugely valuable within the City of London, and so will earn a fortune. But that productivity is in part due to advantages such as the integrity of English law and non-corrupt government, endowments from generations of national struggle. These super-returns from a London location accrue, by default and disproportionately, to the high-skilled worker; but there is a good normative case that they should be shared more evenly, and so highly educated Londoners are less deserving than they think. 
 And on resource misallocation,
Uncorrected, the market will generate too many asset managers and lawyers and too few innovators. What is needed instead is a redesign of corporate taxation... smart corporate taxation would shift resources from those activities where there are too many people to those where there are too few. It would become an instrument in delivering growth, not public services.
 On the sharing economy,
Those changes that cause major disruption, such as Uber and the impending switch to driverless vehicles, could be taxed, not so heavily as to prevent them but to ensure that they pay for the social costs that they inflict. Currently, tax systems are so antiquated that the same transaction is taxed more lightly in the “gig economy” than in a conventional business: in part, Uber, airbnb (and Amazon) are tax scams.
In corporate practices,
Currently, massive economic power is concentrated in the hands of chief executives, disciplined only by whether asset managers ditch their shares. This has led to two serious forms of abuse. One takes us back to rents: British CEOs virtually set their own pay, constrained only by City norms. As decency has eroded, their pay has risen 80 per cent in the past decade, with negligible evidence of enhanced performance. They are the highest-paid CEOs in Europe. The other abuse is that the bonus-driven short-termism of asset managers has made firms averse to long-term investment, not just in equipment but in their workforce. As labour markets have become more “flexible”, the low unemployment that flexibility has delivered has come at the price of reduced training.
Collier concludes,
I think of the pragmatic policies I have suggested as social maternalism. In this model the state would be active in both the economic and social spheres, but it would not overtly empower itself. Its tax policies would restrain the powerful from appropriating rents, rather than stripping income from the rich to help the poor. Its regulations would empower those who suffer from creative destruction to claim compensation, rather than attempting to frustrate the very process that gives capitalism its astonishing dynamic. Its inclusive nationalism would be a force for binding together, replacing the emphasis on the fragmented identities of grievances. Its social interventions would aim to sustain those families that are stressed, rather than assuming for itself the role of parent.

Saturday, February 18, 2017

Capitalism and Mathew effect

One of the characteristic features of modern capitalism is a Mathew Effect or a form of accumulative advantage. In simple terms, this translates everywhere to a trend where the rich and powerful become ever more so and the poor and weak become more diminished. 

This is pervasive across both the market for businesses and labor, across sectors. Large firms get larger by getting cheaper credit, recruiting better employees, capturing a far greater share of consumers who are also likely to spend more,  generating more surpluses, attracting more investors, and benefiting more from regulatory regimes. Citizens who strike gold with the ovarian lottery get richer by accessing better education, acquiring superior non-cognitive skills, getting higher-paying jobs, being more successful professionally, assortative mating within social cohorts, and so on.

In both cases, the opposite set of trends apply with even greater force to smaller businesses and less fortunate people. Furthermore, the proportion of beneficiaries among both businesses and labor across sectors has been shrinking rapidly over time, leading to egregious concentration of market power and incomes at the top of the respective ladders. Amplifying these trends is the capture of political institutions and control over the process of laying down the rules of the game in all spheres public life by the same set of small group of beneficiaries. Worse still, this control over political institutions leads willy-nilly to the erection of entry barriers that add more layers to an already inhospitable environment for vertical mobility for firms and labor. The financial market regulation in the US may be one of the best examples of "extractive institutions" in our modern economy. There is an inexorable dynamic to to these rapidly widening inequalities. 

The combination of technological advances, globalisation, and financialization over the past quarter century or so that may have hastened this trend. 

The latest data point in this comes from the market for academic instructors in higher education institutions in the US (HT: Ananth). In this fantastic Truman Capote award acceptance speech, Kevin Birmingham highlights a sobering picture of the scale of 'adjunctification' of faculty positions in US universities, 
Tenured faculty represent only 17 percent of college instructors. Part-time adjuncts are now the majority of the professoriate and its fastest-growing segment... A 2014 congressional report suggests that 89 percent of adjuncts work at more than one institution; 13 percent work at four or more... An English-department adjunct at Berkeley, for example, received $6,500 to teach a full-semester course... According to the 2014 congressional report, adjuncts’ median pay per course is $2,700... Thirty-one percent of part-time faculty members live near or below the poverty line. Twenty-five percent receive public assistance, like Medicaid or food stamps... We cannot blame this professional anemia on scarce funding. The largest adjunct-faculty increases have taken place during periods of economic growth, and high university endowments do not diminish adjunctification. Harvard has steadily increased its adjunct faculty over the past four decades, and its endowment is $35.7 billion. This is larger than the GDP of a majority of the world’s countries.
He points to a market failure which is a feature in most labor markets,
The key feature of adjunctification is a form of labor-market polarization. The desirability of elite faculty positions doesn’t just correlate with worsening adjunct conditions; it helps create the worsening conditions. The prospect of intellectual freedom, job security, and a life devoted to literature, combined with the urge to recoup a doctoral degree’s investment of time, gives young scholars a strong incentive to continue pursuing tenure-track jobs while selling their plasma on Tuesdays and Thursdays. This incentive generates a labor surplus that depresses wages. Yet academia is uniquely culpable... New faculty come from a pool of candidates that the academy itself creates, and that pool is overflowing. According to the most recent MLA jobs report, there were only 361 assistant professor tenure-track job openings in all fields of English literature in 2014-15. The number of Ph.D. recipients in English that year was 1,183. Many rejected candidates return to the job market year after year and compound the surplus... From 2008 to 2014, tenure-track English-department jobs declined 43 percent. This year there are, by my count, only 173 entry-level tenure-track job openings — fewer than half of the opportunities just two years ago. If history is any guide, there will be about nine times as many new Ph.D.s this year as there are jobs.
And this is telling,
Universities rely upon a revolving door of new Ph.D.s who work temporarily for unsustainable wages before giving up and being replaced by next year’s surplus doctorates. Adjuncts now do most university teaching and grading at a fraction of the price, so that the ladder faculty have the time and resources to write. We take the love that young people have for literature and use it to support the research of a tiny elite... If you are a tenured (or tenure-track) faculty member teaching in a humanities department with Ph.D. candidates, you are both the instrument and the direct beneficiary of exploitation. Your roles as teacher, adviser, and committee member generate, cultivate, and exploit young people’s devotion to literature.
Yes, while things may not be as dismal across departments, the broad trends are similar, not just in academia but everywhere in the labor market. Mathew Effect dominates. 

We live in the age of "winner takes all" capitalism and with a declining share of winners.  In Rawlsian terms, it is minimax capitalism. This is arguably capitalism's biggest market failure. Its implications include declining business dynamism, shrinking labor market diversity, and erosion of the credibility of institutions that underpin modern economies.

And it may well carry the "seeds" of capitalism's own decline. Marx may well have been right, albeit with a delay of nearly two centuries! We need a version of "maximin capitalism", one where the rules of the game positively favour the less advantaged so as to counterbalance the inevitable Mathew Effect.

Thursday, February 16, 2017

Ireland and aircraft leasing fact of the day

The Economist has this on Ireland's role as the global hub for aircraft leasing,
Previously, airlines owned all their aircraft. Leasing allows them to finance rapid expansion or contraction of their fleets without taking on debt. Only 2% of aircraft were leased in 1980. Now over 40% are... Irish firms manage in excess of 5,000 commercial aircraft, worth over $130bn, accounting for half of all leased planes and a quarter of the fleet globally... The industry in Ireland is now growing so fast, it is skewing the country’s economic data. Official GDP growth of 26% in 2015 was largely the result of lessors buying so many new planes; the rest of the economy probably grew only by about 5%.