Wednesday, January 17, 2018

India state capacity graphs of the day - police and judiciary

From a Livemint article examining the slow pace of India's criminal justice system comes this graphic about India's policemen to population ratio.
And this about judges to population ratio!
We are stuck in a really bad equilibrium with respect to government. We have the classic "starve the beast" at work. The intellectuals, opinion makers, and media have to share the major part of the blame for creating an environment where anything government has become stigmatised and any plans of expanding the "bloated" bureaucracy is scorned upon. Even government officials aware of the gravity of the state capacity challenge being faced have become captives of this ideological hegemony. 

Leave aside the likes of teachers and medical personnel, recruitments to important regulatory positions in the government (judges and policemen, building and food inspectors, drugs and school inspectors, and so on) have been either frozen or are being done very parsimoniously. This has coincided with a period of dramatic expansion of the scale and scope of responsibilities of these regulatory officials. The result has been to make an already overburdened bureaucracy even more so, and in turn appear even more inefficient. And this makes the demands for privatisation and outsourcing grow louder.

None of this is to suggest that we go ahead and hire people and things will be fine. It is not a good use of money to just hire people without more deep structural reforms of the bureaucratic system - process re-engineering, delegation of authority, right level of regulatory engagement, use of technology to make transactions more transparent and efficient, measures to contain politicisation etc.  But hiring more people should be right at the top of the agenda! There is just no need of being defensive about this! 

Monday, January 15, 2018

Uber and traffic congestion - two sides of the same coin?

I have blogged earlier pointing to the negative externalities of transport aggregators by way of increasing traffic congestion, drivers without social protections, and crowding in large number of drivers into a business whose commercial viability (especially in developing country markets) is still not established. 

But I am surprised that the case about traffic congestion is still contested.

Consider this. Cities suffer from traffic congestion. Public policy response to address them include congestion pricing, license plate auctions, high vehicle taxes, prohibitive parking fees and so on. All of these seek to make vehicle ownership and use expensive. In other words, reduce the number of vehicles on the road. There is nothing profound here - take vehicles off the road to reduce congestion! 

Now what does Uber do. It brings those idle vehicles into the road. In other words, more vehicles into the road. Exactly the opposite of what public policy tries to do to reduce congestion. 

So here is an innovation, which in the guise of enhancing efficiency (better use of investments already made), artificially increases vehicles on to roads, which are already choking with traffic, with limited prospect of any commensurate or reasonable accompanying infrastructure expansion. 

Note that the efficiency improvement argument too is biased - it takes into account the private benefit for the vehicle owner while overlooking the social costs from all the negative externalities. In fact, I will argue that far from promoting innovations that allow more optimal use of purchased vehicles, public policy should have made the vehicle ownership itself prohibitive. Having missed the first window, the least that one can do is to ensure that vehicle use is curtailed. Aggregators do exactly the opposite!

In simple terms, the likes of Uber increase our private convenience (we can easily summon a car at any time, not own a vehicle and so on) but at the far higher social cost of greater traffic congestion. 

The real efficiency improvement would be to encourage all existing taxis (individual and operators) to move into aggregator platforms (and individual taxis can even offer their own specific rates) and there is competition among the various platforms.

Sunday, January 14, 2018

Development graphic of the day!

Stunning contrast of Doha skyline between 2006 and 2016.
This really is one small powerhouse of a country which punches way above its weight!

(HT: Spectator Index)

Thursday, January 11, 2018

Priorities for a District Collector?

It would be a useful exercise to study the priorities of District Collectors or Municipal Commissioners across India. 

I will stick out my neck and claim that in general two priorities would stand out. One, effective implementation of important (as signalled by the Chief Minister or the Government) hand-me-down government programs. Two, pursue specific individual initiatives (mostly very narrowly defined) launched by them (which generally get dismantled by the successor). 

I am not sure that this is what they ought to be doing. Come to think of it, many districts are large enough to be equivalent to full-fledged countries. Imagine a world where the main priority of national governments (or Prime Ministers) is implementation of one-size-fits-all programs made by a distant multilateral entity like the United Nations. It does not need much convincing that it would be an extremely dysfunctional world. Yet we unquestioningly adopt the same approach for our Districts. 

Now, I don't want to get into the well-known debate on the pros and cons of program design for large countries. The objective is to figure out a more relevant set of priorities for the District Collector in today's world. 

It is useful for the government, at state and centre, to go beyond programs and signal to its officers a more broad-based set of expectations, with focus on outcomes. How about economic growth, job creation, human resource quality development, and a couple of issues specific to the district? How many Collectors have sought to address job creation or learning outcomes (beyond skill development  trainings or increasing attendance/enrolment) in a comprehensive enough manner? How about economic growth, affordable housing, and transportation planning and infrastructure for the Municipal Commissioner? How many commissioners have sought to address traffic congestion or affordable housing (beyond road widening and weaker section housing construction) in a comprehensive enough manner?

Unfortunately these are not the typical uni-dimensional projectisable activities (though the components may be) nor possible to complete within the two-three year duration that is the tenure of officers. Further, meaningful attempts at addressing them demands comprehensive and multi-pronged strategies and their long-drawn implementation, not exactly the sort of things that District administrations typically do or prefer.

It is therefore important that officers be encouraged to look beyond their limited tenures and focus on the big picture of creating the enabling conditions for achievement of each of the identified priorities. This involves preparing long-term action plans (or updating an existing plan, if required), mobilising stakeholder coalitions, dovetailing resources, institutionalising implementation protocols and monitoring frameworks, and so on. In other words, laying the foundations or creating the conditions for sustainable progress. They should view success or failure of their tenure in terms of achieving progress with the priorities.

We need to make these the aspirational goals for young officers (and not claiming success with geo-tagging toilets or completing biometric attendance in schools or planting 1 million saplings in a day or getting the highest matriculation pass percentage). How about signalling accordingly with the likes of Prime Minister's Award for Excellence? How about retweeting and FB liking of achievements in these new areas (not the latter)?

This paradigm shift cannot be achieved by individual District Collectors acting on their own in the prevailing regime. It will require State and central governments embracing this world-view of development and supporting the District Collectors as required both administratively and financially. For example, programs should have sufficient flexibility to allow District Collectors to shift resources across components (of the same program) or programs themselves, as well as tweak norms based on the local requirements.

It is also not possible nor desirable to achieve this as a uniform and abrupt transformation. The State simply does not have the capacity to do this with any reasonable degree of effectiveness in most districts. Once the enablers are in place, some Collectors, both due to their own commitment and initiative as well as favourable contexts in their districts, will show the way. Staying the course over a decade can help achieve a transformation in the thoughts, priorities, and strategies at the cutting-edge of government.

None of this is to deny the importance of effective implementation of government programs. In fact, given the extreme poverty in the vast hinterland, coupled with a withering state, good old trying to just implement hand-me-downs effectively can make massive difference in savings lives and mitigating social discontent. But we should strive to gradually make them by an large (except those that sync with the district's own long-term growth agenda) simple hygiene factors to be addressed systemically without expending too much of the energy and commitment of the District Collector.  

I have blogged here and here about a closely related skew in priorities - the excessive focus on redistribution to the marginalisation of focus on growth. While pervasive extreme poverty and the stage of development means that redistributionary policies are important, the latter is no less so. In fact, if the former is about getting through life today, the latter is about creating the conditions for the world of tomorrow we aspire for. In the absence of the latter, we end up having more of today tomorrow too.

Wednesday, January 10, 2018

The challenge faced by small cities

Granted cities are the engines of growth, but it is not clear that urbanisation in the developing countries will involve big and small cities or mostly a few big cities. The context for this debate is the the perceived trend of hollowing out of small cities in countries like the US and the success of the larger cities. So what is the outlook for small cities? 

Two separate examinations by Paul Krugman and Emily Badger both raise questions about the future of small cities. 

Emily Badger points out that in earlier times, cities were built on the one or two big businesses that made the city their base. They created supplier networks and jobs which in turn supported significant economic activity not just in the city but its surrounding region. In contrast, the big modern companies have limited local supplier networks and are part of large global supply chains (or the digital ones do not even have a physical supply chain), and even have greater affinity with other similarly place global cities. 

Sample this,
Such a picture, Ms. Saskia Sassen, a sociologist at Columbia, said, “breaks a past pattern where a range of smaller, more provincial cities actually fed the rise of the major cities.” Now major cities are feeding one another, and doing so across the globe. Ram Mudambi, a professor in the Fox School of Business at Temple University, offers an even more unnerving hypothesis, in two parts: The more globally connected a city, the more prosperous it is. And as such cities gain global ties, they may be shedding local ones to the “hinterland” communities that have lost their roles in the modern economy or lost their jobs to other countries...
Those changes have come from multiple directions — from globalization, from computerization, from the shift in the United States away from manufacturing toward a knowledge and service economy. These trends have buffeted many smaller cities and nonurban areas... “The economic base has shifted in a way that highly favors cities — and big cities — because it’s now based on knowledge, on idea exchange, on agglomeration,” said Mark Muro, the policy director of the Metropolitan Policy Program at the Brookings Institution. Programmers benefit from having more programmers nearby, in ways different than when assembly line workers gather together. The forces of agglomeration, which big cities enable, are strongest in the kind of knowledge work that has become central to the economy... “The hinterland for Silicon Valley is Shenzhen,” said Timothy Sturgeon, a senior researcher at the M.I.T. Industrial Performance Center.
Then Paul Krugman has a fascinating hypothesis on how Agriculture sustained small cities earlier and then it was the good luck of industrial development triggered off by the chance coming together into that area of one or two companies. 
Once upon a time, it was obvious what towns and small cities did: they served as central places serving a mainly rural population engaged in agriculture and other natural resource-based activities. The rural population was dispersed because arable land and other resources were dispersed, and so you had lots of small cities dotting the landscape. Over time, however, agriculture has become ever less important as a share of the economy, and the rural population has correspondingly declined as a determinant of urban location. Nonetheless, many small cities survived and grew by becoming industrial centers, generally specialized in some cluster of industries held together by the Marshallian trinity of information exchange, specialized suppliers, and a pool of labor with specialized skills.
What determined which industries a small city developed? In some cases particular features of the location and nearby resources were important, but often it was more or less random chance at first, then a sequence in which one industry created conditions that favored another... Some localized industries created fertile ground for new industries to replace them; others presumably became dead ends. And while a big, diversified city can afford a lot of dead ends, a smaller city can’t. Some small cities got lucky repeatedly, and grew big. Others didn’t; and when a city starts out fairly small and specialized, over a long period there will be a substantial chance that it will lose enough coin flips that it effectively loses any reason to exist... it makes sense to think of urban destinies as a random process of wins and losses in which small cities face a relatively high likelihood of experiencing gambler’s ruin... for generations we have lived in an economy in which smaller cities have nothing going for them except historical luck, which eventually tends to run out.
And he has dismal prognosis about their future,
Are there policy implications from this diagnosis? Maybe. There are arguably social costs involved in letting small cities implode, so that there’s a case for regional development policies that try to preserve their viability. But it’s going to be an uphill struggle. In the modern economy, which has cut loose from the land, any particular small city exists only because of historical contingency that sooner or later loses its relevance.
I am inclined to agree with both of them in the context of developed economies.

But I do think that small cities have more legs to play out in the developing countries. For one, agriculture and rural areas are and will remain major economic drivers well into the future. Second, knowledge based industries are not as predominant as drivers of urban growth as in developed economies.

Finally, there is nothing sacrosanct about the dynamics and trajectory of urbanisation from developed countries which should be applicable to developing countries too. For example, unlike the developed countries in their growth phase, two major factors - traffic congestion and resultant commute times, and affordable housing - have worsened to an extent that they seriously threaten the growth prospects  of the largest cities in developing countries. Unplanned development means that spatial growth in the larger urban centres of developing world is inefficient and it hits its its limits much sooner in the city's development when compared to cities of the developed world.

Tuesday, January 9, 2018

India state capacity fact of the day - fire safety

In the aftermath of the Kamala Mills fire accident, Livemint digs up this status report on India's fire safety preparedness,
A ministry of home affairs-sponsored study found that of the minimum 8,559 fire stations needed in the country, only 2,087 are in place, a shortage of 65%. Urban areas alone require an additional 4,200 fire stations just to meet the minimum standard for response time... As many as 17,700 Indians died—48 people every day—due to fire accidents in 2015, of which 10,925 (62%) were women.
Even where stations are available, the equipments available, they are insufficient and also woefully inadequate to fight fires in high rise buildings etc. 

And to pre-empt the natural inclination in such situations. No, I don't believe this should be outsourced. This is just one Exhibit. It has to be borne by the government. And local governments have to bear a significant share of the burden.

But how many states have transferred Fire Department to the local government under the 74th amendment?

Monday, January 8, 2018

Caution about globalisation and harmonisation

The very wise Dani Rodrik has this summary of his thoughts on globalisation.
There is little question that multiple rounds of multilateral trade negotiations after the end of the Second World War did a lot of good. Import tariffs and quotas on trade in manufactured goods were back then extremely restrictive; relaxing them allowed the world to reap serious gains. Furthermore, at first, this liberalisation affected trade mostly among relatively advanced economies, where wages and working conditions were not so different. The first signs of trouble started after developing countries began to join the world economy: because their low wages began creating distributional tensions in the importing countries.
All this is just as economics teaches. According to the celebrated Stolper-Samuelson theorem of trade theory, in places—like the US and western Europe—where skilled workers are plentiful, unskilled workers will see their wages decline under freer trade. Openness to trade always hurts some people in society, except in the extreme case (not relevant for any large economy) where the only things imported are things that are never produced at home. In theory, countries could always compensate their losers by redistributing from the winners, and in practice they sometimes did. With its extensive safety nets, Europe in the second half of the 20th century was relatively well prepared to deal with disruptive trade flows. In addition, trade negotiators initially carved out special regimes for garments and textiles exporters in the advanced economies, limiting their exposure.
This explanation of the diminishing returns and rising distributional costs associated with increasing globalisation is less discussed but very important,
Even in the best of circumstances, however, freeing up trade caused pain as well as gain. After the 1980s, the balance began to look worse and worse. When tariffs (like taxes) are too high they distort economic behaviour more, and do more damage to prosperity. Back in the 1950s and 1960s, tariffs were often very high and so their reduction did much to grow the overall economic pie. But four or five decades later, in a world where typical tariffs were in single figures, the picture was different. If you’re starting off with the tariffs of the post-war era, the standard economic models suggest that to achieve an overall net gain of $1 in national income through liberalising trade, you could expect to see around $4 or $5 of income being reshuffled across different groups within a particular country. But under the tariffs that applied by the end of the 20th century, achieving that overall dollar of gain would be associated with as much as $20 being redistributed, implying the creation of an awful lot of losers. And what’s more, by the 1990s we were into an era of welfare state retrenchment rather than expansion. So it became less plausible than it used to be to believe that those losses will be compensated.
Let’s take Nafta, for example, which entered into force in 1994. A recent study of the labour market impact finds that an important minority of US workers suffered substantial income losses. Not surprisingly, the effect was greatest for blue-collar workers: a high-school dropout in heavily Nafta-impacted localities had 8 percentage points slower wage growth over 1990-2000 compared to a similar worker not affected by Nafta trade. Wage growth in the most protected industries that lost their protection fell 17 percentage points relative to industries that were unprotected initially. And the overall benefit of the agreement? According to most recent estimates, the net economic gain to the US was well below 0.1 percentage points of GDP—that is, less than one-tenth of one per cent of national income. 
On the "unfairness" of trade,
Sometimes international trade involves competition that would be ruled out at home because it violates agreed norms. It’s one thing to lose your job to someone who competes under the same rules as you do. It’s another when you lose your job to a company that takes advantage of lax labour, environmental or safety standards abroad. Such competition can undermine important regulations and also tax rules through the back door. The concerns about fairness here go beyond the individuals directly affected. The broader community will be troubled when it sees fellow citizens being denied decent work as the result of “unfair” practices. The hyper-globalisers, however, ignored such concerns. Instead, they doubled down and pushed for trade deals which were, in truth, no longer really about free trade at all. Their focus shifted to regulations beyond the border—restricting agricultural subsidies, standardising investment regulations, product standards, intellectual property rights, financial measures. All of these things are traditionally the product of institutional arrangements, or domestic political bargains. Suddenly, they came to be seen as trade barriers and subject to remake through trade agreements.
On the quest for harmonisation of policies,
Unlike conventional free trade, beyond-the-border harmonisation does not necessarily promise efficiency enhancements. There is no general theory to compare with Comparative Advantage to explain why unified food or banking regulations should, for example, in principle be able to work to the advantage of all countries. What harmonisation does entail, however, is sacrifice of national regulatory autonomy—and with it the ability to respond to the contours of individual economies and societies. Pacts governing cross-border investment and initiatives such as the TRIPS agreement, which has regulated intellectual property since 1995, were certainly what multinationals, financial firms, and big pharma wanted, and often obtained. Such agreements became contentious because they were viewed as privileging corporate interests over societal ones—and also as representing a direct assault on national democratic control.
On the contrast between theory and reality with financial globalisation,
Free flow of finance across the world would, it was confidently predicted, set money to work where it could do most good. With free-flowing capital, savings would be automatically channeled to countries with higher returns; with access to the world markets, economies and entrepreneurs would have access to more dependable finance; and, ordinary individual savers would benefit, too, as they’d no longer be compelled to put all their nest eggs in one national basket.
These gains, by and large, simply never materialised; sometimes, the effect was the opposite of what was promised. China became an exporter of capital, rather than an importer of it, which is what the theory implied young and poor countries should be. Loosening the chains of finance produced a string of extremely costly financial crises, including that in East Asia in 1997. There is, at best, a weak correlation between opening up to foreign finance and economic growth. But there is a strong empirical association between financial globalisation and financial crises over time, as there has been since the 19th century, when freely moving international capital would flow with gusto into the Argentinean railways or some far-flung corner of the British Empire one minute, only to flee away from it the next.
He raises important questions about the conventional wisdom that while short-term portfolio flows are bad foreign direct investments are an unqualified good. In particular, he questions their impact on labour's bargaining power and tax base erosion,
For as long as wages are partly determined by bargaining, employers will benefit from having a credible threat: accept lower wages, or else we move elsewhere. There is some evidence that the decline in the labour share of national income is related to the threat of relocating production abroad. Furthermore, if capital becomes much more mobile than labour, then labour is left more exposed to local shocks. Workers with the lowest skills and qualifications, those least able to move across borders, are typically the most affected. As capital becomes mobile, it also becomes harder to tax. Governments increasingly have to fund themselves by taxing things that are less footloose: consumption or labour. Indeed, corporate tax rates—which Trump is currently engaged in cutting—have come down sharply in virtually all advanced economies since the late 1980s, sometimes by half or more. Meanwhile the tax burden on wages (social security charges, for example) has remained roughly constant, while rates of consumer and value added taxes (VAT) have very often increased.
As to the way forward, he fears for a failure to learn lessons and a continuation of the hyper-globalising agenda which would fuel more populism and protectionism with potential threat to liberal democracy itself. 

Instead he suggests a 'democratic rebalancing',
Stepping back from hyper-globalisation without slamming the door, while restoring greater national autonomy in the service of a more inclusive domestic order... We can prioritise corporate tax co-ordination over stronger patent protections; better labour standards over special tribunals for investors; and, greater regulatory autonomy over the minimisation of behind-the-border transaction costs.
I am not sure about the benefits from what appears to be global policy harmonisation in areas where electorate in developed economies are aggrieved. What about the concerns of electorates in the developing countries or in the poorest economies? 

For example, a "fair trade" agenda is likely to become a convenient alibi to push through labour and environmental standards harmonisation policies to the detriment of developing countries. Economic theory may find it appropriate to extend the logic of anti-dumping and countervailing duties to cover "social dumping" with policies to harmonise away the labour market and other advantages of developing countries.

But this is a slippery slope. Which (perceived) advantages to address and which not? Why either ways? And what about those which are similarly perceived by the other side (the electorates in the poorest and other developing countries)? We also know that in such instances, the power balance in any multilateral negotiations will always favour the interests of the powerful (developed countries in this context). 

The whole argument about a level-playing field, especially in such contexts, is questionable. The electorate in rich countries will doubtless find it unfair that they are losing jobs due to imports from companies located in countries with poor labour and environmental standards. But doesn't the superior technologies, access to global finance at cheaper rates, access to large domestic markets, capture of national and global regulators, and the associated economies of scale "unfairly" benefit the large multinational corporations compared to the local enterprises in the developing country employing local workers which are shackled by restrictive regulations, harassed by corruption, hobbled with poor infrastructure, and constrained by smaller markets and all forms of resources? Each one of these advantages in turn can be traced back to beneficial eco-system effects that go far beyond the inherent enterprise and efforts of the company itself. Some would trace the beneficial eco-system itself to the good fortune of historical developments. Why should then the electorate in the developing world who lose their jobs not feel similarly short-changed due to imports from MNCs located in developed countries? 

Perceptions of "fairness" is not exclusive to electorates in one part of the world. They are universal. Also, apparent advantages have stories that goes far beyond the conventional notions of merit and innate abilities. Further, once we get into this territory, we would quickly realise that it would go against the whole historical dynamics of development, where arbitrage of various advantages have been the driving force.

Finally, I cannot but not feel a moment of schadenfreude here. All these debates appear like a reprisal of the debates of nineties when countless articles by the likes of Jayati Ghosh, CP Chandrasekhar etc from the left in India who questioned the "fairness" of policies like TRIPS and TRIMS. In the euphoria surrounding the collapse of Soviet Union and the triumphalism around the "end of history", these critics were denounced by esteemed intellectuals as being communist lackeys by esteemed intellectuals in India itself and in the West.  

Having said this, I will emphatically refrain from bracketing Dani Rodrik in the category of these "esteemed intellectuals". That would be "unfair" to someone who has consistently held firm to his beliefs even as the world has shifted around him chaotically!