Saturday, November 22, 2014

The role of management in schools

Fascinating new paper by Nick Bloom and three others which compares management practices in high schools in 8 countries across the world, including India. Their finding is that improving management could be an important way to raise school standards,
Autonomous government schools (i.e. government funded but with substantial independence like UK academies and US charters) have significantly higher management scores than regular government schools and private schools. Almost half of the difference between the management scores of autonomous government schools and regular government schools is accounted for by differences in leadership of the principal and better governance...
Having strong accountability of principals to an external governing body and exercising strong leadership through a coherent long-term strategy for the school appear to be two key features that account for a large fraction of the superior management performance of such schools... Autonomy by itself is unlikely to deliver better results, however, finding ways to improve governance and motivate principals are likely to be key to make sure decentralized power leads to better standards.
The differences in the quality of management in all types of schools among different countries is captured in the graphic below. The good management tail is virtually absent in India. This is in line with management practices elsewhere in India - fractions of manufacturing firms, hospitals, and schools, scoring above 3 is 22%, 10%, and 1.6% respectively.
Another graphic captures the difference in management scores across different types of schools - public, autonomous public, and private - in each country. Note that, unlike other countries, the aided schools do almost as bad as others while the private schools stand out as far better than others. Difficult to say whether the latter finding is a testament to the quality of private schools or its near-total absence in public schools.
A few observations.

1. The poor performance of aided schools in India is a testament to the deeply politicized and corrupt nature of allotment of these schools. Interestingly, Brazil runs its autonomous schools, which receive most of its funding from government, with such great success. In other words, there appears to be a massive "discount" associated with any activity that involves interface with government.

2. I see Prof Bloom's studies on management practices in business enterprises and now schools as important in highlighting the important role of guidance, monitoring, and supervision in the success of any enterprise, private or public. Given the poor quality of these attributes in public (and private) systems, a reflection of state capability deficiency, there is a terrific opportunity here. But I am not sure whether the conventional strategies to improve governance quality can be effective here.

3. There is a strong case (the high coefficient for India on Table II, Column 6 is reflective of this) that the quality of management is the foundation on which the various standard schooling inputs work their way. In other words, even if the students and teachers attend school regularly, the school has all physical infrastructure, and children are equipped with learning materials, the effectiveness in translation of teaching into learning is strongly dependent on the quality of management (leadership, governance, guidance, capacity building etc). In other words, the poor management of Indian schools may be having a value subtracting effect on the other interventions. 

Population density visualized

Two superb graphics which highlight how population density can affect the spatial dynamics of countries. The first shows the space, in term of area of US states, required to accommodate the total world population at the same density as in some global cities.
The second (sent by a friend) shows the sizes of different cities and their population. Note the relatively similar populations of New York and New Delhi, and Tokyo and Dhaka, and the manifold difference in their sizes.  
This blog has several other interesting similar graphics. 

Tuesday, November 18, 2014

The rich and the super-rich

The real story in inequality is the explosive growth of income and wealth at the topmost tier of the income ladder, the top one-hundredth. While the incomes of the top 1% have surged, those of the top 0.01% have rocketed.

Times has this story of how this is reflecting in the market for luxury consumption in the US,
The wealthy now have a wealth gap of their own, as economic gains become more highly concentrated at the very top. As the top one-hundredth of the 1 percent pulls away from the rest of that group, the superrich are leaving the merely very rich behind. That has created two markets in the upper reaches of the economy: one for the haves and one for the have-mores. Whether the product is yachts, diamonds, art, wine or even handbags, the strongest growth and biggest profits are now coming from billionaires and nine-figure millionaires, rather than mere millionaires...
For decades, a rising tide lifted all yachts. Now, it is mainly lifting mega-yachts. Sales and orders of boats longer than 300 feet are at or near a record high, according to brokers and yacht builders. But prices for boats 100 to 150 feet long are down 30 to 50 percent from their peak... The private jet market is splitting in two. Sales of the largest, most expensive private jets — including private jumbo jets — are soaring, with higher prices and long waiting lists. Smaller, cheaper jets, however, are piling up on the nation’s private-jet tarmacs with big discounts and few buyers... According a jet market report from Citi Private Bank, deliveries of new so-called light jets — the smaller, cheaper models — were down 17 percent last year from 2012 and 67 percent from their 2008 peak. But deliveries of the biggest new private jets jumped 18 percent last year...

Sunday, November 16, 2014

Scandinavian economy facts of the day

Times reports about Denmark's reliance on Moeller-Maersk,
Revenue at AP Moeller-Maersk, publicly traded but family controlled, equals more than 14 percent of Denmark’s gross domestic product.
And FT has this about the spectacular size of Norway's Oil Fund,
Every day for the past thirteen-and-half years, Norway's oil fund has grown by an average of $165 million... It has quintupled its assets in the past decade to $860bn and transformed itself into the world’s biggest sovereign wealth fund, with a 100-year plus horizon. Today, it owns the equivalent of 1.3 per cent of every listed company in the world.

Thursday, November 13, 2014

India's Banking sector fact of the day

Ruchir Sharma has this stunning factoid about India's banks,
Since the end of 2010, when the Indian economy started to lose momentum, the value of shares in private banks has risen sharply, generating $33 billion in new wealth, while the state banks have destroyed $27 billion. This is the market’s way of pointing out which Indian banks work well, and which don’t.
In view of this and the need to raise alteast $50 bn required over the next five years to meet the Basel III provisioning requirements, he suggests outright immediate privatization. I am not sure for the following reasons

1. While the point about private sector efficiency is undoubtedly true and well-taken, its magnitude may be vastly over-stated by the appalling quality of corporate governance and rampant cronyism that bedeviled Indian banking sector in recent years. I have blogged earlier arguing that an examination of India's banking mess, especially as manifested in the massive portfolio of restructured loans, is certain to reveal scandals atleast as massive as anything uncovered so far. In fact, the shockingly high difference in levels of impaired asset stock between public and private sector banks, despite many of the latter themselves being no paragons of corporate virtues (less said the better of such banks elsewhere), is an even more damning indictment of India's public sector banks. The valuation difference pointed out by Ruchir Sharma is some proxy for the extent of malfeasance that went on in India's public sector banking boardrooms.

2. Sharma talks about attracting long-term foreign capital into banks to broaden India's capital base. While again undoubtedly desirable, controversies, real and imagined, are certain to emerge about whether this is the right time to do that is most likely to vitiate the atmosphere and derail the process. This would limit the very confidence that is expected from such divestment. The gross mis-management and large build-up of impaired asset stock has severely dented market confidence and eroded valuations of public sector banks, as captured in the factoid. At a time when public sector banks command fire-sale valuations, it may neither be desirable nor prudent to privatize these banks.

So, what should be done to resolve arguably India's biggest immediate economic policy challenge? I would suggest a five step process.

1. Immediate administrative reforms, including separation of Chairman and CEO/MD posts and changes in the leadership recruitment process, that would increase operational accountability and freedom as well as reduce government interference. The government would have to step back and assume the role of an investor (rather than as sovereign) and stop meddling with operational activities and goals (only time will tell what is the damage done to bank balance sheets by a target-driven program like Jan Dhan Yojana) of the banks.

2. Aggressive pursuit of the restructured loans, complemented with policies to reform bankruptcy regulations and ease restrictions to encourage second-generation reforms in infrastructure financing markets.

3. Urgent recapitalization, by, say, diverting a major share of the subsidy savings from lower oil and commodity prices. This would help not only boost market confidence in the banks themselves but also improve economic prospects by enabling credit growth as the economy starts looking up.

4. Implement a phased divestment plan, with major part, including strategic sales, back-loaded to a not-too-distant future when the aforementioned reforms restore market confidence, get credit flowing, and raise valuations.

5. A process of stakeholder consultations to prepare the ground for the changes, especially in personnel, that are inevitable with any type of privatization.

Update 1 (18/11/2014)

Good article by Subir Gokarn on how banking woes will constrain economic growth in the coming days. The lesson is simple - even if demand picks up and businesses start investment cycle, it will be held back by paucity of credit.

Sunday, November 9, 2014

Examining India's long-term economic growth prospects

As India's economic prospects improve, euphoric voices like this about the possibility of double-digit economic growth rates are bound to rise. But such speculation, anchored around the memories of China's spectacularly long period of double digit growth and our own brief interlude with similar growth last decade, overlook the presence of very strong headwinds.

In this context, the work of economists like Dani Rodrik and Arvind Subramanian cautions against such excessive hope and speculation. Three arguments are worth examining. 

1. Apart from favorable domestic conditions, the long period of East Asian economic growth, whose salience is amplified manifold by China's rise, benefited from a happy confluence of benign external conditions. This period of unconditional convergence coincided with favorable geo-political dynamics (the US provided geo-political stability, which also relieved E Asian economies from spending on defense), high-noon of globalization facilitated by sharp fall in tariffs and un-bundling of global manufacturing supply chains, rapid emergence of trade facilitating technologies like containerization and ICT, a receptive consumer market in US and Europe, availability of abundant cheap domestic and global capital, and so on. 

These trends are either considerably attenuated or have run its course. But all narratives of India's high growth prospects are significantly predicated on the continuation of these conditions. Furthermore, there is the strong likelihood of technological disruption of the labor market due to increasing automation and resultant disemployment. While these forces are not likely to immediately bind in any significant manner in countries like India, their potential to disrupt global manufacturing and thereby global labor market, is considerable and deeply uncertain. These are first order headwinds that the Indian economy will have to surmount in its quest for growth comparable to what the East Asian economies sustained for long periods.

2. The second headwind comes from the changes taking place in manufacturing which raises questions about the traditional national economic development path. Manufacturing has traditionally provided the platform for rapid national economic development across history. Countries that have industrialized rapidly have done so by focusing on manufacturing and by moving up the manufacturing escalator - from less sophisticated to more technologically advanced products. Labor productivity in manufacturing has tended to "converge to the frontier"- the smaller the initial incomes, higher the growth in labor productivity (and therefore incomes). This convergence is significant in formal manufacturing, though absent in informal manufacturing. 
This feature of manufacturing sector helps absorb large number of less skilled labor, with prospects of moving up the skill chain on the escalator of industries. But, as Prof Rodrik and others argue, such manufacturing sector growth may be constrained by the weakening of the aforementioned favorable forces. They characterize it as "premature de-industrialization".   

Such de-industrialization, observed in the development trajectories of all advanced countries, appears to be happening much earlier among the emerging economies. In India, manufacturing's share of output has been stagnant at about 14-16% of GDP for nearly four decades and its share of employment peaked at 13% of labor force in 2002 and has since been trending downwards. As the graphic below shows, this feature has been true of even many East Asian economies, including China, who have started de-industrializing earlier than their western counterparts.
As can be seen, India started de-industrializing at a GDP per capita of $2000, in contrast to the $9000-11000 income levels at which manufacturing in western economies started decline. In fact, as the graphic from cross-national panel data below by Arvind Subramanian shows, at any stage in their development, not only are countries devoting less workforce to industries (the downward shift in the curves) but also the point of time at which industrial share of employment peaks is happening earlier (leftward shift in the curves). 
This potentially dampens the prospects for manufacturing led rapid growth for countries like India and Africa

3. In all the East Asian economies, the de-industrialization has been accompanied by proportionate growth in the services sector, "making them service economies at substantially lower levels of income". This has led to some commentators pointing to the potential for a new model of services led economic growth. The example of India's successful IT sector has often been cited in support of this, though an a cursory empirical analysis would reveal this as misleading, given its small size and limited relevance to India's overall economic growth. 

Prof Rodrik's argument, brought out also in this article, is that the inherent dynamics of services sector militates against generating similar growth and job creation trends as with manufacturing. The graphic below shows that there are very few examples of simultaneous growth of both productivity and employment.  
The high-productivity sectors, which are typically tradeable, being skill-intensive, cannot absorb much of the not so skilled workers who dominate the 12 million or so people entering India's workforce every year. In fact, as the graphic below from Arvind Subramanian shows, the more productive and therefore rapidly expanding (and mostly tradeable) services are also highly skill-intensive, far more than manufacturing. 
Further, unlike manufacturing, there is limited prospects for natural progression up the skill chain in services sector. While a textile or toy maker can with minimal training migrate into assembling electronic goods, the prospects of a barber or housekeeper moving into business services or banking, even at the lower end of that service, is remote or non-existent. 

India's woeful deficiencies in education and skill development would certainly come in the way of it being able to reap the benefits from tradeable services in any significant manner. It would require atleast more than a decade of intensive focus on education and skill development for the country to realize more substantial benefits from tradeable services. And even then, like with manufacturing, there are significant uncertainties over the possible disruption to parts of the services sector, especially at its labor-intensive lower end, from technological advances.    

The less productive non-tradeable services face self-limiting constraints - labor absorbing services are less productive and therefore slow growing, whereas the fast growing and more productive services experience higher relative wage growth with resultant limits on job creation. As Dani Rodrik writes, "services sectors that have the best productivity performance typically shed labor; labor absorbing sectors typically have worst productivity performance". It is therefore difficult to envision non-tradeable services as being the predominant channel for productive employment creation and rapid economic growth.

To conclude, global political, economic, and technological environment is undergoing important shifts. The traditional get-rich-quick route of escalator industries looks increasingly out of bound. And the prospect of services becoming the new rapid growth sustaining platform does not appear promising. In the circumstances, India and others will have to navigate against the combination of all three headwinds in their quest to attain high economic growth rates. 

In case of India, its preparedness - poor quality of human resources and pervasive weakness in state capability - constrain the country's ability to overcome these headwinds. The shackles imposed by restrictive regulations exacerbate our weaknesses, further limiting the ability to achieve high growth rates and sustain it for prolonged periods. With business as usual, given its massive size, even with all these internal weaknesses and headwinds, the country may grow rapidly in short bursts (as happened for a few years in last decade) interspersed with longer moderate growth periods. 

Sustaining very high growth rates for long periods like East Asia would require large-scale and long-drawn reforms in numerous areas coupled with concerted efforts to improve human resource capacity and state capability. Even if the reforms are initiated with vigour, it is unlikely to result in any dramatic gains in the short or medium-term. This, rather than cognitive biases, should form the basis for any examination or speculation on the country's long-term growth prospects.