Saturday, April 29, 2017

Weekend reading links

1. Nick Bloom has this explanation for increasing inequality,
The real engine fueling rising income inequality is “firm inequality”: In an increasingly winner-take-all or at least winner-take-most economy, the best-educated and most-skilled employees cluster inside the most successful companies, their incomes rising dramatically compared with those of outsiders. This corporate segregation is accelerated by the relentless outsourcing and automation of noncore activities and by growing investment in technology... studies now show that gaps between companies are the real drivers of income inequality. Research I conducted with Jae Song, David Price, Fatih Guvenen, and Till Von Wachter looked at U.S. employers and employees from 1978 to 2013. We found that the average wages at the firms employing individuals at the top of the income distribution have increased rapidly, while those at the firms employing people in the lower income percentiles have increased far less. In other words, the increasing inequality we’ve seen for individuals is mirrored by increasing inequality between firms. But the wage gap is not increasing as much inside firms, our research shows. This may tend to make inequality less visible, because people do not see it rising in their own workplace. This means that the rising gap in pay between firms accounts for the large majority of the increase in income inequality in the United States.

2. Fascinating series of graphics in Citylab that captures the evolution of urban planning.

3. The Economist has a nice graphic from the work of Zhang Qiang et al which tries to capture the deaths due to global air pollution arising from physical transport of particles and trade of goods and services. 

The headline takeaway,
Rich countries are exporting air pollution, and its associated deaths, as they import goods.
Countries like India are importing air pollution related deaths as they export products! Or when Trump talks next time about what other countries should do to reimburse America, he should be asked what US will pay to compensate the victims from its consumption.

4. Fascinating study by Wendy Williams and Stephen Ceci about how perceptions cloud opinions, in the context of the liberal opposition to a speech by Charles Murray (of "Bell Curve" fame) at Middlebury College, Vermont,
So we transcribed Mr. Murray’s speech and — without indicating who wrote it — sent it to a group of 70 college professors (women and men, of different ranks, at different universities). We asked them to rate the material on a scale from 1 to 9, ranging from very liberal to very conservative, with 5 defined as "middle of the road"... American college professors are overwhelmingly liberal. Still, the 57 professors who responded to our request gave Mr. Murray’s talk an average score of 5.05, or "middle of the road"... No one raised concerns that the material was contentious, dangerous or otherwise worthy of censure. We also sent the transcript to a group of 70 college professors who were told that the speech was by Mr. Murray. The 44 who responded gave it an average rating of 5.77. That score is significantly more conservative, statistically speaking, than the rating given by the professors unaware of the author’s identity (suggesting that knowing Mr. Murray was the author colored the evaluation of the content). Even still, 5.77 is not too far from “middle of the road.” Finally, we divided Mr. Murray’s speech into 10 portions and got ratings on each portion from a paid sample of 200 American adults via Amazon’s Mechanical Turk, an online marketplace for jobs and tasks. These participants identified themselves as having an average political orientation of 4.21, or leaning slightly liberal. When their ratings for the 10 sections were averaged, they too gave the talk a centrist score: 5.22. (Average ratings for the 10 portions ranged from 4 to 6.)
5. So the "build and they will come" approach to opening bank accounts may after all have been an effective strategy. A new paper disaggregates various confounders and find evidence of rising active transactions (cash deposits or ATM withdrawals as against interest debits or DBT transfers) for the period Aug 2014 to Nov 2016,
We find that the number of active transactions per account transacted by PMJDY account holders starts off slow but increases with the age of the account... Active transactions initiated by account holders represent nearly 45% of all transactions... account balance grows steadily with time. This shows that PMJDY accounts are also used for accumulating savings... Finally, in line with the national numbers, we find a steady decline in the number of zero-balance accounts... Simply opening the gates of the formal sector seems to bring in the excluded.
The low baseline access surely helps. But instead of sitting on the laurels, the challenge now is to increase utilisation.

6. The extend and pretend continues with the stalled projects, and things are getting worse. Livemint reports that while the proportion of stalled private sector projects climbed to a 52 quarter high of 20.2% in the March quarter, the growth of new project announcements hit a 10 quarter low.
The breakup of the reasons for stalling show this.
But, as I blogged earlier, these stats conceal more than they reveal. A very significant proportion of these projects are fundamentally unviable projects which need to be scrapped and losses apportioned among all concerned. Extend and pretend will only keep increasing the final cost.

7. How about something similar to this for India?
The Paperwork Reduction Act in the US requires the government to justify any information it seeks, explain how it will be used, and to estimate how much effort it would take for a person to provide this. No form can be introduced until it has been approved by a specialist agency with expertise in process design. The US government publishes an estimate of the total time required by citizens to fill its forms and strives to reduce this.
At the least a first order costs-benefits analysis before any form is notified or issued by a government agency?

8. Livemint has a very good story of why increased production of tur dal in 2015-16 has led to demand for farm loan waivers for farmers in Maharashtra. While the two preceding years were drought hit, it led to central drought relief measures as well as loan reschedules, the combined effect of which significantly mitigated the suffering. In contrast, in 2016-17, the distress has been market-driven,
Both the centre and state appealed farmers to plant more pulses, oilseeds, and move away from sugarcane and cotton. Farmers responded by producing a bumper crop of pulses, especially tur... Maharashtra is estimated to have produced 1.1 million tonnes of tur this year as compared to only 440,000 tonnes in 2015-16. The MSP for tur has been fixed at Rs5,050 per quintal but farm activists and experts say farmers are being forced to sell for Rs3,000-3,500 to traders since the government procurement agencies claim they do not have the infrastructure to store tur on this scale. An official at the state’s agriculture marketing department said the various government agencies had managed to procure only 340,000 tonnes so far for Rs1,600 crore, of which dues worth Rs300 crore are yet to be paid to farmers. Farmers don’t have holding capacity and so, they are forced to sell to traders at a lower price if the state procurement agencies refuse to buy.
9. The defeat of AAP in the Delhi municipal election results have ensured that property taxes will not be abolished in the City. Important, because of this,
Property tax is the single most important source of revenue for municipal corporations and municipalities. It accounts for 30 per cent of “own” municipal revenues in India... Total municipal revenues in India declined from 1.08 per cent of the GDP in 2007-08 to 1.03 per cent in 2012-13, the latest year for which this information is available. The same ratio is 6 per cent in South Africa and 7.4 per cent in Brazil. What is more, the transfers from the state governments in India are neither guaranteed nor predictable. In South Africa, the transfers are determined and announced at the time of the annual budget.
10. FT reports that emerging markets have overtaken developed economies in filing of patents.
The 12 leading EM nations applied for 1.49m patents in 2015, outstripping the 1.48m in developed market countries, according to figures from the World Intellectual Property Organisation, collated by Comgest, a Paris-based asset manager... The figures are a far cry from 2004, when the 12 emerging market countries, which account for the vast majority of developing world filings, made just 372,000 applications, 29 per cent of the 1.3m made by the advanced world.

11. The latest in urbanisation from China is the announcement of the development of Xiongan New Area as a greenfield city in Hebei province, two hours from Beijing, with the objective of decongesting the capital. The project is backed by President Xi Jinping. It is expected that this sleepy backwater with agriculture will house many universities and other institutions to be relocated from Beijing

It’s also intended to ease the pressure on Beijing, the capital city that plans to cap its population at 23 million by 2020. Morgan Stanley expects the investment in infrastructure and relocation to run about 2 trillion yuan ($290 billion) in the first 15 years... It spans three counties. The infrastructure build-out will cover 100 square kilometers initially, expand to 200 square kilometers and eventually occupy a space of about 2,000 square kilometers, similar to Shenzhen in the south now, the government says. It will have 5.4 million people in 15 years and boost China’s investment growth by 0.33 percentage point and its gross domestic product by 0.13 percentage point to 0.19 percentage point per year, according to Morgan Stanley’s base-case estimate.

12. Finally, good FT report on London property market which points out that it is cheaper to buy than rent, as reflected in the lower mortgage payments. But any significant dent on the affordability problem can come only from freeing up more land for construction,   
According to a 2015 report from the Adam Smith Institute, building on just 3.7 per cent of London’s greenbelt would free up enough land for 1m new homes — supply which could end the affordability crisis for many young Londoners.

Friday, April 28, 2017

India power sector graph of the day

The Achilles Heel of India's power sector is distribution, in particular the under-recovery of cost of service. The graphic below captures the problem.
For all the talk surrounding tariff increases as part of UDAY reforms, its political economy was always going to be a challenge. Given the difficulty of raising residential tariffs, discoms have preferred the easy way out and increased industrial tariffs. States have levied exorbitant cross-subsidy surcharge on their industrial consumers, thereby further exacerbating the already inverted tariff structure. The result, yet more erosion in the country's industrial competitiveness.

These distortions are secondary to the bigger challenge with distribution loss reduction, something this blog had pointed out as to possibly why UDAY may be no different. A good starting point for any serious attempt at power sector reforms is outlined here

Thursday, April 27, 2017

Resolving information and trust deficits with technology solutions

Consider the persistence of market failures in markets like that for low-skill labor, agricultural produce, medical services, rental housing and so on despite the introduction of technology solutions. 

In all these cases, it is theoretically possible to use modern technologies to facilitate the matching of buyers and sellers, either by removing matching frictions or easing access barriers. But, as we have seen from across developing countries, these markets remain naggingly impervious to technology solutions. What gives?

It helps to understand that these market failures arise from a combination of information and trust deficits. Accordingly, a household looking to hire a cook or house-help is looking for both information about the available choices as well as some validation of the antecedents (and sometimes the quality) of of the candidates. Similarly, a trader in Tamil Nadu venturing to buy onions from a farmer in Maharashtra seeks both basic information (price, quality etc), as well as the contractual commitment and intentions of the farmer selling those onions. And the home owner willing to rent out her property seeks information about the credit-worthiness as well as the credibility of the lessee. 

In all these cases, and similar others, technology can help bridge only a part of the twin deficit, the one that deals with information asymmetry - choices, prices, credit-worthiness etc. The other part - the one about validation of antecedents, intentions, and credibility - is largely a function of trust. It would take very invasive and complex interventions, with doubtful costs-benefits balance and often distortionary unintended consequences, to address trust deficits using technology.

The alternative is to have human presence on the ground, engaging deeply with the stakeholders, developing social capital, and becoming trust bridging agents. In other words, such markets are likely to respond only with a combination of technology and human engagement. But such engagement takes time and persistent efforts.

But unfortunately, far too many of start-up entrepreneurs, with their quest for instant gratification, prefer to focus on the former and overlook the importance of bridging trust, resulting in still-born markets.

India hospitality industry fact of the day

From the FT, highlighting yet another dimension of India's very small capital base, this time with hotel rooms,
Despite its population of 1.3bn, India has only 79,567 licensed hotel rooms — nearly the same number as Singapore, which has 63,580 but a population of 5m, according to data from the countries’ respective tourism bodies.

Thursday, April 20, 2017

State capacity and resource constraints

State capacity weakness in developing countries is a favourite topic of this blog. An important, but less discussed, dimension of weak state capacity is that public systems run on very thin human, physical and financial resources. The scale of disproportionality would become evident if we match the time-task-effort to the available resources. And once we have such deficiencies, the other dimensions of state capacity weakness (corruption, incompetence, apathy etc) invariably follow. 

And this is no less true in developed countries. From a Times story on the hell-hole that is the over-crowded St Clair Correctional Facility, one of the six maximum security facilities in Alabama,
Mr. Dunn, the corrections commissioner, points to this as support for his conviction that the root problems at St. Clair and in the Alabama prison system lie in the numbers. “I still believe that the fundamental, systemic problem is a combination of lack of staff and overcrowding,” he said... The construction of modern prisons, he said, is the important first step to making changes that will last, allowing for safer facilities and more rehabilitative programming.
Whether it is fundamental or not, I cannot disagree with the Commissioner. And he echoes correctional officials in many developing countries. 

St Clair is acutely under-resourced - physical infrastructure, correctional man power etc. But St Clair is an exception to the norm of well-resourced correctional facilities in developed countries. 

Instead, St Clair is the norm in many developing countries. In fact, St Clair (at least from the photos) would even be considered one of the better endowed ones in many of these countries. And despite acute resource scarcity, most often far greater than St Clair, many correctional facilities in countries like India are run no worse than St Clair. 

This scenario of resource deficiency would repeat with building inspectors, bill collectors, surveyors, citizen charter counter operators, teachers, doctors, extension officers, police constables, clerks, and so on, and at all levels. 

In fact, I will not hesitate to argue that under the same same resource conditions and challenges, the State in developed countries would fare far worse than those in many developing countries. 

Wednesday, April 19, 2017

The problem with targeting outcomes in development

Outcomes-based payments has been a trend in international development for more than a decade-and-half, though with limited results to show. In fact, except for the deforestation programs, there may be no example of a pure outcomes project. Even the totemic examples skirt around outcomes and end up focusing, at best, on poorly specified outputs. In short outcomes-based financing itself has shown little evidence of outcomes. 

The fundamental premise with outcomes based approach to addressing development problems is the assumption that a financial incentive, adequate and appropriately structured, can force systems to get their acts together and achieve outcomes. The financial structure, it is believed, can help vault past inputs, processes, and outputs, to realize outcomes. 

Here is a listing of three important failings with this approach (assuming the focus being on outcomes and not outputs)

1. The assumption that a financial incentive is sufficient to overcome antecedent deficiencies and achieve outcomes betrays a very high degree of ignorance. In simple terms, the assumption is that financial incentive can ensure that processes are put in place, processes get adhered to, complementary inputs can be and are brought to bear, and execution is reasonably assured. And all this happens in scale. Take a break!

While it may be logical to target outcomes, in practice, the financial incentives alignment alone may not be sufficient to help leapfrog the process compliances that may be necessary to help achieve the objective. In most environments (places and sectors), just process compliance requirements (simple things like teacher attendance or individual student learning tracking, which are critical to achieving the objective) can be daunting enough, even if they are targeted directly. Now achieving them as an incidental benefit from an outcomes-based contract, may be expecting too much. 

2. The other assumption is that governments can afford to pay for outcomes. This, in turn, assumes that the same set of resources can be redeployed more efficiently to achieve the desired outcomes. 

But what if the real cost of achieving outcomes is much greater than the current expenditures? And what if the principles of government budgeting conflict with the requirements of outcomes-based budgeting? 

Answers to these can be found in the way government budgets are made. Logic would have it that allocations be made based on an objective assessment of the cost required to achieve the goals. But in the real world, allocations are made with another consideration as the foremost priority – balance and equity (in the coverage of geographies, sectors, and populations). 

The result is extensive skimping on the allocations, especially on maintenance, consumables, procedural compliances, newer types of activities, discretionary spending, and new investments. Nothing is sacrosanct except the salaries of employees and long-term contractual obligations. Spreading the limited fiscal butter thin, often to the point of being imperceptible (or seriously detracting from the objectives), becomes inevitable. 

Now imagine an outcomes-based project where procedural compliances, maintenance schedules, quality of engagement, rigour of monitoring, and so on are critical to its success. All this inflates the price tag for the actual achievement of outcomes. Governments will find the increment fiscally unsustainable. The option of a phased expansion, apart from raising several practical problems, would also be politically unacceptable. 

3. Finally, in case of private production, the assumption that the supply side is large enough to support outcomes based contracting in scale is most likely to be unrealistic. Forget education or health, try calling tenders for outcomes based water treatment facilities and, in most developing countries, within only a handful of tenders the no-response bids start to bind.

So, the argument would go that the markets take time to mature. We only need to catalyse it and will develop. But, as the far simpler and easier to contract market for infrastructure services has shown, such markets are more likely to remain elusive for a very long time. And, even plain simple outcomes contracts like long-term road concessions are rife with renegotiations and attendant moral hazard which distort contractual obligations. 

So, is it futile to target outcomes in development? It is realistic to target outcomes in at least two areas. One, logistics based activities, especially infrastructure services, are amenable to outcomes targeting. This is largely because, there is little difference between outputs and outcomes. Two, where there is private production and public provisioning of services, and where outcomes can be quantified without any of the standard challenges, it should be possible to hold private providers accountable and demand outcomes. Skill trainings linked to placement is an example.

Yet with even these limited areas, the aforementioned three problems will bind to varying degrees, hampering the achievement of outcomes. 

Similarly, it is unrealistic to target outcomes in cases of public production involving engagement intensive activities. I would define engagement intensive activities as those where outcomes depend intimately on the quality of engagement. Education and learning outcomes is the best example. In all such cases, especially when done in scale in developing countries, state capacity becomes the binding constraint.

Monday, April 17, 2017

How should we manage urbanisation?

Far too often debates on urbanisation has focused on supply-side measures that encourage growth of cities. Accordingly, we have policies to expand city boundaries, incentivise businesses and skilled migrants to locate to cities, and so on. 

But as Edward Glaeser and Wengtao Xiong write, we may be focusing on the wrong set of policy instruments,
If urbanization can play an important role in abetting economic growth, then one question is whether public policies should do more to increase city size. There are many reasons to be wary of explicit spatial policies that encourage migration to one region or another. Most obviously, it is unclear whether encouraging urbanization would enhance welfare overall. On average, workers in cities earn more, but they also pay more for housing and suffer other costs. The standard economic model of migration assumes a spatial equilibrium, so that the marginal migrant is indifferent between the city and the rural hinterland, which implies that there is no direct welfare benefit from encouraging migration. Certainly, there may exist externalities from moving to cities, but these can be both positive and negative and we currently cannot tell whether those external benefits on net favor cities.
Moreover, accepting a role for spatial bias in policies sets an uncomfortable precedent. Spatially biased policies may well be used to favor politically powerful regions, rather than regions that should be subsidized. Loud voices will clamor for support for poorer regions, even if economic development suggests that people should leave such areas. A principle of spatial neutrality would seem to be the safest course, which would force regions to compete for capital and workers rather than relying on largesse from the national government.
A more sensible policy alternative is to focus on reducing artificial barriers to urban growth and improving the quality of urban life. If cities have benevolent economic effects, then it can be quite costly to impose land use regulations that stymie urban construction, such as the stringent floor-area requirements that Mumbai has had for most of the past 50 years. In some cases, including Mumbai, these land use controls were imposed to limit the growth of the city. Often, they have only prevented legal, safe housing and left a back door for the growth of sprawling slums.
City governments can also bring urban growth by becoming more effective at improving urban quality of life. Most of the downsides of density, such as contagious disease and congestion, are negative externalities that become magnified when people live close to one another. By reducing these externalities, developing-world cities can attract immigrant entrepreneurs and allow more people to enjoy the added productivity in cities...
First, growing cities need infrastructure, but to get infrastructure right, we need to get institutions right. Second, incentives must accompany infrastructure. Third, property titling and the protection of private property are extremely valuable in urban contexts. Fourth, infrastructure, incentives and institutions must be adapted to local conditions.
This is a very profound insight, very easily missed. In simple terms, ease the demand-side constraints to urban growth and let cities grow on their own, rather than directly targeting urban expansion. Address the regular deficiencies - restrictive regulations, inadequate infrastructure, and poor governance - and allow cities to grow organically.

Far too often governments, at all levels, end up favouring the more immanent and tangible supply-side policies and ignore the more diffuse and deep-rooted demand-side ones. For sure, there are compelling political economy and administrative reasons for such distortions. But the result is the choking and sprawling cities that characterise much of the developing world.

A pivot towards improving urban governance, encouraging vertical and transit-oriented development,  simplifying the doing business regulations, investments to expand and increase the quality of human capital formation, general initiatives that enhance the quality of urban life, and plugging the deficiencies in infrastructure should be the agenda for city managers as well as provincial and national governments. Cities will then take care of themselves.