Credibility

In this piece published some two months ago, Harish Damodaran states that the Ministry of Agriculture in India has been overstating milk, soya bean and wheat production, the last of which has even led to the imposition of a 25% duty on imports.

the only reason for it is the Agriculture Ministry maintaining that the country harvested a bumper crop of 94 mt-plus even under poor soil moisture conditions, aggravated by high temperatures and absence of winter rains

Agriculture Ministry’s estimates of wheat production, which, for 2015-16, has been pegged at 94.04 mt, as against the previous year’s 86.53 mt…. The US Department of Agriculture has reckoned India’s wheat crop at 88 mt, with the private trade putting it even lower at 85-86 mt.

The same goes for soya bean, where Krishi Bhawan’s output estimate of 8.92 mt is much more than the USDA’s 7.38 mt and the Soya bean Processors’ Association of India’s 6.93 mt

Reservations on reservations

Came across this story in MINT on how the new Minister for HRD would insist on IIMs recruiting faculty members as per the policy on reservations. About half the faculty positions have to be reserved for SC, ST and OBC candidates, apparently.

In general, affirmative action policies are all about divvying up the gravy. Meritocracy policies are about growing the pie. Hence, it is unsurprising that there is no correlation.

Hard to resist the former in poor societies with history of oppression but latter is needed for catch-up with prosperity. There has to be a balance. India has continued to move in the direction of the former and far less, if at all, in the latter direction in the last forty+ years, at least, if not longer. It is unsustainable.

The art pricing of pulses

It all started with my stumbling upon Seetha Parthasarathy’s critique of the Arvind Subramanian (AS) committee report on the pricing of pulses in India. He is the Chief Economic Advisor (CEA) to the Government of India. On Saturday, my good friend Praveen Chakravarty had already flagged my attention to that report. But, I had to leave for a get-together of some of my batch-mates visiting from India.

Seetha did not appear particularly thrilled either with the report or with the press conference in which the report was released. She thought that recommendations to increase either the Minimum Support Price for pulses or raise the procurement quantity were standard solutions. Further, she was disappointed that the CEA was not forceful enough on market solutions – on abolishing export quotas, restrictions, ban on forward and futures trading on commodities, etc. She had a point.

Sunil Jain had written a slightly more positive comment on the AS Committee Report (ht: Aashish Chandorkar). However, he was wrong in one respect. Contrary to what he wrote, the report did not officially recommend a reduction in Minimum Support Price (MSP) for Paddy. It discusses it and mentions it as a desirable recommendation but stops short of putting it in its list of recommendations. Pages 5-6 and 36-37 summarise the recommendations (yes, twice). But, the recommendation to cut the MSP for paddy is not there.

I went through the report. First, the CEA had consulted widely. Second, the report does a good balancing act, in my view, between the politically possible and economically sensible and tried to find the middle ground by opting for incremental improvement while retaining some recommendations that politicians are familiar and comfortable with.

Third, the report was understated on export bans, stock limits and raids. Yet, there is a full page on the need to rethink the Essential Commodities Act 1955 (appendix 3, page 40). But, I think that is the politically correct thing to do. To beat up the politicians for what they have done, from an economist’s perspective, might be intellectually satisfying but politically unlikely to get the recommendations accepted.

Some of the highlights of the report:

Yields in India are relatively low compared with those abroad. For example, tur yields average close to 725 kg/ha whereas in Myanmar it is nearly double that.

Pulses, in contrast, are grown by small and marginal farmers in dry-land areas. They are not as wealthy as cereal farmers and are less able to mobilize.

arvind-subramanian_subsidies-for-pulses-and-grains_sept-2016

The debate over feasible vs. ideal policy proposals does not have a conclusion. Perhaps, pushing the boundaries of what is possible may lead to a better than expected outcome whereas setting goals lower means leaving a lot more for the future. Alternatively, pushing the limits of what is feasible might lead to an outright rejection of the proposals shutting out the possibility of incremental progress. What is the right approach? There is no universal answer. The context and the personalities of the individuals involved will determine the context-specific answer.

Having seen the commentary from Seetha and Sunil Jain, I checked the web to see if others had written something. On September 2nd, Harish Damodaran had written a brilliant commentary on why restrictions on stockholding and export of pulses must go. It is a master class in development economics. I recall this very well from the course on Development Economics that I audited while I was at the University of Massachusetts in Amherst early in the 1990s. It was taught by Professor Mohan Rao who was quite a Marxist. Nonetheless, I learnt quite a bit from that course. One of them is the feature of ‘urban bias’ in policymaking.

Tomes of literature in Development Economics on the urban bias in policymaking are summarised in that Op.-Ed. by Harish Damodaran. Sample this:

There is a clear pattern in all this. Any price increase in farm produce is immediately followed by government action, invariably violating every rule of free trade. In the meantime, farmers themselves respond to higher prices by ramping up production, as they did for potatoes in 2014-15 and for onions in 2015-16. Prices crash as a result, yet the restrictions remain; by the time they go, it’s too late for farmers. The alacrity in imposing controls, and the lack of urgency in withdrawing them, is a reflection of the larger political economy, where the voices of urban consumers carry far more weight than that of rural producers.

He is unfortunately very right. As I mentioned earlier, Harish Damodaran not only summarises the literature on urban bias in policymaking that is very familiar to development economists but he also shows up the inability and the failure of the policymaking establishment (that includes bureaucrats too) to appreciate lags in policy and impact.

Finally, he reminds us of the unintended consequences on Consumer Price Index (CPI) inflation targeting in an economy where CPI has a 46% weight assigned to food and where production structures are fragmented.

Does it lead to price ceilings on farm produce for the sake of meeting a numerical inflation target? Will RBI take the broader view and be prepared to write letters to the Government even allowing for an overshoot up to the upper limit of the band? Or, should the Government and the Reserve Bank of India (RBI) have gone for a core CPI target that excluded food but not energy?

Alternatively, would it have been better to wait until food became progressively less important to CPI basket, so that what happened to farmers’ prices did not affect CPI so much, giving more policy freedom on boosting farm income and productivity? That would happen when the economy roughly doubles from the current size of Rupees 13,40,000 crores (USD2.0trn).

His column throws up these questions.

That said, Harish was not entirely right (nor entirely wrong) in his piece written in June on Raghuram Rajan and RBI’s CPI target pointing to deflation in wholesale prices (Wholesale Price Index or WPI). That was an extreme example as WPI is not representative of the overall economy. It is heavily skewed towards manufacturing whereas the economy is dominated by services. So, he is not very correct in using WPI as the deflator to calculate real rate. But, he is right to point out that, given the importance of food to the CPI basket, a CPI target imparts an anti-farmer bias to monetary policy. RBI should be mindful of that.

He again is wrong in attributing farmer-unfriendly policies to the inflation target of RBI: “It naturally predisposes policymakers towards freezing minimum support prices, imposing curbs on farm exports and stocking limits at the slightest indication of prices going up, and opening up to duty-free imports”.

The simple fact is that these were being resorted to even when India did not have a CPI inflation target for monetary policy.

The urban bias in policymaking has been an endemic feature in India and in other developing countries too. Well, they are the ones who made it to civil service and they had no clue about the rural side. The solution is not to replace one bias with another by only hiring candidates from rural India – affirmative action – although that can be one part of the solution, as long as minimum standards of competence are maintained.

It is trite but not wrong to stress sustained education and exposure of policymakers and incentives to get it right and disincentives for getting it wrong. Writing Op.-Eds. is easier.

(This was published in ‘Swarajya’)

On robotic conclusions on robots

Following up on my earlier post on Branko Milanvoic’ blog post, I ran into the blog site called ‘Bank Underground’. It is a platform for Bank of England economists, analysts, et al, to post their comments on various issues that may or may not agree with the official policy of the Bank of England. Very good platform, in that sense.

I came across this somewhat optimistic post on the impact of robotisation. This one line, of course, does not do justice to the post which is, on the whole, quite thoughtful. It has many links. I clicked on one of them that took me to a FT Alphaville post of November 2015. In turn, it led me to a speech (‘Labour’s share) by Andrew Haldane in November 2015 and a piece by Martin Wolf in Feb. 2014. I read the latter and have downloaded the former.

Martin Wolf’s piece itself has many links. His final point is well made:

Above all, technology itself does not dictate the outcomes. Economic and political institutions do. If the ones we have do not give the results we want, we must change them. [Link]

But, that is true of a lot of things. Most prominent is money, for example. Or, may be, fast cars. They cannot kill or destroy character or whatever, on their own. It is supposedly up to us. But, that also assumes a lot of things about human abilities at self-control that years of research have shown us to be incapable of.

In his famous TED talk, Dan Ariely reminds us that we do not know our own priorities and that, when the decision becomes a trifle complex, we fall back on the default options chosen for us. That is what gave rise to the whole concept of ‘nudge’. But, ‘nudge’ can be both argued for and against.

At some level, ‘nudge’ is playing God. It assumes that people do not know their preferences correctly. But, that includes the people and authorities nudging too! Second, it can be, with some justification, deemed elitist and even manipulative. All, supposedly, for good reasons and for good causes. What if they are used for wrong ends?

So, giving us tools that we do not know how to handle is not a good thing. Therefore, some tools are better off being inside the tool box.

That reminded me of the quote attributed to Christopher Hitchens:

Everyone has a book inside them, which is exactly where it should, I think, in most cases, remain. [Link – btw, the link explores how the deceased writer Christopher Hitchens came to be associated with this pithy and witty observation]

I had left a comment on the Bank Underground website under the post on Robot Macroeconomics:

Just three minor points worth thinking about or keeping in mind:

(1) We do not know if jobs would really be lost or not. Assuming they are not, is it also possible to state that robotics would not come in the way of creation of jobs? In other words, what would be the counterfactual in terms of job creation but for robotics? Can we even guess that?

(2) In the developed world, robots could firm up resistance against immigration from developing economies that have a surplus of labour.

(3) It could also lead, through trade, to job losses in the developing world if robots enable developed world to regain competitiveness and they use their muscle to prise open markets for various goods and services in the developing world. The employment hit to developing economies will arise not only from lost export possibilities but also from having to compete with cheap imports, enabled by robots.

Lawrence Mishel’s blog post in the Economics Policy Institute (ht: Martin Wolf’s article) is hard hitting and rigorously argued. He rejects the argument that technology is responsible for inequality and instead points the finger at compensation in the financial sector and executive pay:

…. rising executive pay and the expansion of, and better pay in, the financial sector can account for two-thirds of increased incomes at the top. If superstar actors, musicians, and others were driving growth at the top we wouldn’t see the close association of top incomes with the trajectory of the stock market, especially during the last two crashes….

… On their specific claim about executive pay it is true that such pay grew as firm size grew in the last two decades but it is also true that firm size grew for many decades before that without any escalation of executive pay. [Link]

His detailed work that proves these points can be found here. Regular readers of this blog would know that I am very sympathetic to these points of view. Technological change may not be the direct cause of it but capitalists might find that a handy instrument to beat the workes with, heightening their sense of insecurity and curtailing their own wage demands. Agree that correlation is not causation but an adjunct role for technology may be appropriate.

I was quite tickled to read this observation by Martin Wolf that Lawrence Mishel rejects that technology changes caused wage inequality. I had read this morning an interesting article (ht: TCA Srinivasa Raghavan) as to how Ronald Fisher, the father of modern statistics, could not accept that smoking caused cancer. Randomized experiment was not possible in establishing causation from smoking to cancer. Hence, he could not accept that smoking caused cancer. Establishing causality in many social phenomenon is very hard. Too many other factors at play and very few of them can be controlled or allowed to remain unchanged. More often than not, temporal sequence passes off for causality.

Suffice to say that this topic is going to become very important in the coming years and hence, we need to keep reading and keep expanding of our knowledge of past experiences, patterns, etc., on the introduction of technology and the impact – both general and relative – on workers, wages and on the society. Facile conclusions and generalisations need to be avoided. More than a touch of humility is needed – to avoid arriving at conclusions but to keep minds open for understanding the phenomenon and to abandon one’s policies when evidence and trends change.

If past were the (only) prologue for the future, there would be no need for intelligence.

An interesting postscript to conclude this long blog post:

The legend of how a union leader told an official in a car manufacturing company who was proudly showing off his new robots to the workers’ leader that robots would not buy the cars that his company was making, has been retold many times with everyone adding their own bells and whistles. This link gives the full monty behind that legend. It is authentic but happened more than six decades ago. There was one real character involved – Walter Reuther – leader of the automobile workers’ union. But, his counterpart in the conversation was not Henry Ford II.

 

 

On Milanovic on robotics

Branko Milanovic has a blog post on robotics. He calls these three fallacies:
  • Labour displacement by robots – more short-term
  • Ability to predict our needs – they may expand making labour and robots co-exist
  • Limits to raw materials.
But, are they unreasonable, based on the trends in the last three decades?:
(1) Jobs may not be lost; what about jobs creation foregone? Wage growth? Is the trend of last thirty years not a warning of the consequences of capital displacing labour. If there is more of it, then is it wrong to fear consequences of robots on employment and/or wages?
Don’t these have social consequences as well?
(2) Is he confusing between needs and wants? Have our needs changed much? May be, our wants have? May be, marketing has created many wants which did not exist before and made us believe that they are needs. Has Milanovic read the ‘Joyless society’? The boredom of prosperity and affluence could become even more oppressive.
(3) Limits to raw materials – if we expand raw materials to include clean air, water, lakes and rivers, flora and fauna – our growth model has shown that it pushes against these limits sooner than we expect or reckon with. We are already feeling the impact. What if robotics pushes growth limits even further? What kind of growth would it create? Will we allow creative destruction to play a role? Or, will there be a greater demand for protecting those businesses displaced and threatened by the arrival of robotics? Then, what happens to productivity, economic growth and innovation in the overall economy?
(4) Lastly, will robotics help alleviate or complicate human psychological and behavioural limitations? Groupthink, herd mentality, elitism, cognitive dissonance have been amply on display in the response to the crisis of 2008 and in the US Presidential elections. Robotics or any technology can do nothing to help these. If anything, they can complicate them further.
(5) Humans do not understand risks that well. We neither anticipate them nor are we capable of assessing their magnitude and impact where we correctly anticipate them. Faced with unknowns, it is good to be on guard rather than be complacent. If the fears turn out to be misplaced, then adjusting to a positive surprise is a lot easier than the other way around.

The rupee trick

On Thursday evening, was mildly concerned to see this story in MINT. That there was a brief flutter in the Indian rupee on the rumours of a possible meeting between the Ministry of Finance and Ministry of Commerce and Industry on Sept. 20 to decide on the appropriate value of the rupee.

The idea is wrong on many counts. Where there is no fixed exchange rate system, there is no devaluation. Government cannot do that. Second, it is wrong not to consult RBI on what the fair value of the rupee is. Third, this is no answer for India’s export woes, unless the talk itself counts as ‘deliberate devaluation’! Then, it is fine, at a tactical level. Some minor relief. Nothing more and nothing less. No big damage done.

But, if they are serious about it, then they are wrong. Besides the above, it ignores balance sheet implications. Indian companies have just issued Masala bonds and it would strike fear in the hearts of investors. India needs to raise money from overseas. Gross National Savings are stagnant and household savings rates are declining.

When global demand is weak, lowering the currency would not achieve much in terms of improved pricing for exports except to make imports costlier and foreign currency liabilities bigger!

Read this well-written edit in FE on how India’s export problems are not because of the exchange rate. It cites the example of Textiles sector but, across the board, the story would be replicated.

With the Minister’s call for aggressively low interest rates and this rumour allegedly emanating from Ministry of Commerce and Industry, it is not quite clear to me that the Ministry understands the implications and consequences of what it is doing.

Get to work on productivity on mission mode.