Tuesday, August 19, 2014

The globalization opportunity in secular stagnation

Consider this parable of a two-country world.  Stagnation Land is a prosperous country with high per-capita incomes while Emerging Land is poor.

However, in recent years while the former has been experiencing declining productivity growth, the latter has been experiencing large gains in productivity. A large majority of people in Emerging Land have been moving out of agriculture into more productive manufacturing and services sectors. This transition has been accompanied by sharp increase in consumption and aggregate demand. Further, Stagnation Land has an aging population while Emerging Land is at the demographic sweet-spot. This has had the effect of increasing savings and dragging down aggregate demand in the former. As a result of these trends, businesses in Stagnation Land have declining investment opportunities and lower returns on their investments whereas those in Emerging Land have a rapidly expanding supply of investment opportunities and higher rate of returns.

Faced with such a situation, Econ 101 teaches us that the natural response would be expand trade and other economic linkages between the two countries. Stagnation Land has the technologies, businesses, and even capital, all searching for opportunities. It also faces an aging population and resultant demand for different kinds of labor. Emerging Land has rising productivity, remunerative investment opportunities, growing consumer demand, and a large pool of labor. The complementarity could not have been any more mutually beneficial. The scope for a new growth compact between the two countries could not have been more opportune.

Now replace Stagnation Land with the developed economies and the Emerging Land with the developing economies, and the context to the prevailing socio-economic prospects of both parts. Commentators in developed countries have been wailing at the prospect of a long period of economic stagnation, popularly described as "secular stagnation". If the aforementioned parable has any significance, then we should see the current problems in the developed world as a great opportunity to construct a new paradigm of economic and social co-operation between the developed and developing countries driven by mutually beneficial imperatives.

This paradigm would have to be constructed on a platform of cross-border business trade and investments, technology transfers, relaxation of labor migration controls, and so on. In simple terms, more global economic and social integration. 

Monday, August 18, 2014

India's agriculture and manufacturing productivity failures

Three graphics from a recent cross-country study on drivers of economic growth involving more than 100 countries shows why India's economic growth lags behind China.

1. For a country where more than half the population is involved in agriculture, India's agriculture productivity gains have been smaller than all major emerging economies, despite having the catch-up advantage from lower productivity levels. In fact, as the graphic below shows, global agricultural productivity has exhibited a divergence trend between the more productive and less productive economies.
2. An even bigger failure in aggregate value added terms has been the poor performance of India's manufacturing productivity. While both countries started off with similar productivity levels in early 1990s, China has pulled ahead spectacularly. India's performance looks even more dismal given the distinct global trend of manufacturing productivity convergence between developing and developed economies.
3. The importance of manufacturing is underlined by its dominant contribution to China's GDP growth itself. As the graphic shows, India's agriculture performance has been poorer than even the low income countries.

Sunday, August 17, 2014

Weekend visualization graphics

The Times has been pioneer in great data visualization journalism. A few weekend graphics

1. This interactive graphic illustrates how the market capitalization of Wall Street firms shrank and then grew during the peak of the sub-prime crisis (October 2007-September 2009).

2. This interactive graphic shows how the different components and the sub-components of the Consumer Price Index in the US changed from March 2007 to March 2008.
3. This interactive graphic (Voronoi tree map) shows the proportions of people in each US state in 2012 based on their places of birth. This is a series of state-wise graphic of the places of birth since 1900.

4. This interactive graphic from Atlanta Fed is a spider chart which tracks 13 US labor market indicators covering four categories for the period from December 2007 to July 2014. 

Thursday, August 14, 2014

Urban renewal, gentrification, and inequality

I have blogged earlier about the increasing contribution of urban real estate prices to the widening if inequality in many countries. The rising property prices in most major cities across the world have made them a very attractive investment opportunity for the city's richest residents. In many cities, developers have re-developed blighted areas, creating expensive residential and commercial spaces, which have also had the effect of displacing the less well-off to the suburbs.

In this context, the Times has an article about the re-development taking place in a Parisian block. The project involves the redevelopment of a couple of streets, involving 36 store fronts, into a sleek epicurean village, La Jeune Rue (The Young Street), dedicated to farm-fresh gastronomy and a culture of the chic. It writes,
The trend of gentrification has become almost unstoppable. Paris, New York, London and other major metropolises have undergone waves of urban renewal for decades, each ushering in more wealth than the last, while also pricing out those with less money. While the essence of Paris has hardly disappeared, property prices have jumped an average of 165 percent in 20 years, with a 30 percent surge in the last five. The impact has been striking, cutting Paris’s working-class population to 27 percent from more than 40 percent over the same period. 
Much the same story has been a feature of Michael Bloomberg tenure at New York as he oversaw a massive redevelopment of blighted areas. While it has transformed the landscape of those areas and contributed to the overall economic growth of the City, it has had adverse demographic consequences. As the supply of lower rental housing units, concentrated in these areas, has shrunk, rents for properties at the bottom of the market have risen sharply and the less well-off have been marginalized into the suburbs. 

Sunday, August 10, 2014

"Living Wills" are no answer to TBTF

The US Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) last week rejected the "living wills" submitted by 11 large financial institutions as "unrealistic or inadequately supported". The "living wills" are detailed plans, as required by the Dodd-Frank Bill, that outline how banks will dismantle their operations and financial contracts in an orderly manner in the event of impending failure. The Vice Chairman of FDIC, Thomas Hoenig said,
Despite the thousands of pages of material these firms submitted, the plans provide no credible or clear path through bankruptcy that doesn’t require unrealistic assumptions and direct or indirect public support. 
Though the Fed has asked these banks to re-submit their "wills" in an year, the revised ones are not likely to be any more useful. While logically appealing, such pre-defined resolution plans are not likely to be of much use in a crisis involving the largest banks. They are too complex to be resolved with such plans. Their complexity spans atleast three dimensions - correlatedness among atleast some of the assets held by them, interconnectedness among several institutions, and opacity in their corporate structures - all of which are amplified many times over by their massive sizes. Taken together they constitute the too-big-to-fail (TBTF) problem.

Even assuming the "living wills" bridge all information asymmetry and provide a very clear understanding of the banks' operations and its assets and liabilities, itself highly doubtful, there is no guarantee that it will enable the implementation of a resolution plan when faced with the crisis. Even if AIG had a detailed "living will" it would not have been in a position to liquidate itself without threatening to pull the entire system down. The correlatedness and interconnectedness dimensions threaten both specific markets as well as other larger firms respectively, both with potentially catastrophic consequences for the financial markets as a whole. It is therefore unlikely that regulators and policy makers will let large institutions collapse in the belief that the "living wills" and the Orderly Resolution Authority (OLA) will limit the panic from its collapse.

The orderly resolution of large financial institutions cannot be divorced from the more important issue of addressing TBTF. For example, though the "living wills" lay out the steps the banks will take to distribute its large losses among stakeholders - creditors and bond holders, and even when all those stakeholders know it well in advance, its actual enforcement will be constrained by the TBTF problem. The only way around this is addressing the complexity problem in all its three dimensions. And that in turn takes us back to more stringent macro-prudential and micro-prudential regulations. Unfortunately, the likelihood of such tough measures appears very remote. 

Thursday, August 7, 2014

Public procurement Vs private contracting

Sometime back the Times ran a nice article explaining how the economy of Washington benefited from the massive federal government contracting industry. But this, in particular, caught attention,
Washington’s economy did well under Reagan (added military spending gave it a boost), but the move to contract out more and more government work proved to be a crucial long-term change. In 1993, Bill Clinton announced a “reinventing government” initiative, which ultimately included cutting the federal work force by about 250,000 positions. The agencies winnowed their rolls, but over the course of the Clinton years, their budgets expanded, and in many cases, the work just went to contractors. Those contractors often came at a bloated cost, too. In a study released in 2011, the Project on Government Oversight found that using contractors can cost the federal government about twice as much as federal employees for comparable work. According to the study, the salary for a federally employed computer engineer would be about $135,000; a contractor might bill the government around $270,000 for similar work. 
This is the classic paradox. Conventional wisdom has it that public systems are both inefficient and expensive in managing service delivery. In contrast, the perception is that private providers can deliver the same service more efficiently and at a lower cost. But reality is that private provision of public services is more expensive than their provision by public providers. So what gives?

This apparent paradox arises from the differences in the quality of service delivered as well as differences in the nature of public provisioning and private contracting. Private contractors are notionally held accountable for delivering a bench-marked quality of service. This adds significantly to the total cost of provisioning by bringing in the need for higher quality of consumables, maintaining redundancies, preventive maintenance, adequate insurance and risk mitigation measures and so on.

Irrespective of whether they meet those requirements and deliver on the bench-marks, most likely not given the lackadaisical contract management by public managers, private contractors price their bids at the cost of the bench-marked quality of service. This also means that private contractors generally end up delivering more or less similar (bad) quality of service as public providers, but at a much higher cost. In case of public providers, the absence of any accountability to deliver a similarly bench-marked service means that the cost of delivery is anyways smaller.

Tuesday, August 5, 2014

What is a Smart City?

The graphic below apparently represents a "smart" city.
It does in turn beg the question, what is a good "normal" city? Stripped off all the jargon, both are essentially the same. If we want to split hairs, we can define a "smart" city as a "normal" city which uses technology and progressive urban planning to create a highly liveable urban environment. 

Instead of focusing urban development agenda around delivering good quality civic services and creating the enabling conditions for entrepreneurship and sustainable economic growth, we have taken the easy way out by re-packaging all those essential elements of good urban governance and presenting it as an innovation!