Innovation, RIP

What is common between the Reserve Bank of India, the Dodd-Frank Bill and the Pharmacists and Lawyers’ Professional Trade Bodies in Germany?

Let us consult ‘The Economist’:

One local bank boss says the RBI “runs a repressed financial system which is intolerant towards innovation. If the US was at 90 out of 100 in terms of complexity and sophistication, we are at 10…I sometimes get the impression it [the RBI] is resting on its laurels, not realising that more financial innovation could help India’s development.” [Full article here]

This article is actually generous in its praise of the Reserve Bank of India and its stewardship of India’s monetary policy, overall.

But the really big issue that Dodd-Frank raises isn’t about the institutions it creates, how they operate, how much they cost or how they are funded. It is the risk that they and other parts of the Dodd-Frank apparatus will smother financial institutions in so much red tape that innovation is stifled and America’s economy suffers. [Full article on the Dodd-Frank bill here]

This is another well written article on the complexities that Dodd-Frank would create; how compliance under the Act would be very difficult; how banks might get caught up in complying with the letter of the law and not manage risks properly, etc. But, the comment on innovation got stuck in my throat.

It is a different story that ‘The Economist’ wrote this article a week later.

But it would have a big payoff. Livelier services might encourage the sort of game-changing innovation that is more common in America than in Germany. [the full article on the uncompetitive German Services sectors is here]

We need to have a full and more honest debate on the role of so-called innovations in Services more generally and in Finance, in particular:

What is their track-record in improving economic welfare (growth or redistribution or poverty reduction or productivity)

What is their contribution to systemic stability or instability?

Do innovations in Services merely lead to transfer of the surplus from providers to users without adding anything to the broader economy? For example, what exactly is the outcome for the German economy if there is competition for German lawyers from foreign law firms or if more pharmacies are allowed to be opened?

What has innovation in American legal industry engendered by competition achieved, for example, that is denied to Germany?

Are there empirical precedents and can they be relied up on to provide reasonable and unbiased guidance?

Are credit cards truly innovative or did they also encourage frivolous consumption having pandered to the human instinct for instant gratification? What are the net benefits to the society and the economy, if any?

What is the innovation that is needed in the finance sector in a developing economy like India? It should be focused on how to achieve more financial inclusion? How does one open up access to banking for more people for savings, credit and disbursements/transfers?

Is that where RBI comes in the way? If so, how? What more can it do in that area?

At least after the global financial crisis, one should stop taking an uncritical line on innovation and stop parroting, unthinkingly, the line that regulation stifles innovation and that, therefore, regulation is bad.

Perhaps, that is what is intended for the regulation to achieve and that is what is needed.

AT the very least, the burden of proof should be on the so-called ‘innovators’ and not ‘regulators’ to show that innovation in specific Services is a net positive good.

‘Feel guilty’ non-sense

The editor of THE HINDU might have changed. But, its editorial policies have, presumably not. On February 11th, its Op-ed. pages carried a ‘Feel guilty’ non-sense by the ‘famous’ Harsh Mander because the newspaper does not bother, at the end of the article, to provide more information about the author, to its readers. All that matters, I suppose, is that his heart bleeds for the poor. Apparently, the hearts of THE HINDU readers are made of iron and hence, as most of these types do, the article sets out to make the reader feel guilty and ashamed about eating good food.

The articles uses the story of two youngsters who chose to live life as poor do in India to experience poverty first hand. I applaud them for what they did. There is no way that one can truly appreciate what another person goes through without living their lives. However, that too is only and more often an attempt in vain. Even the same physical experience can elicit different intellectual and psychological reactions and leave different residues in human beings – even among family members.

Similarly, it is not possible to experience what the poor go through as most of the poor might not feel that sad as the youngsters felt because they knew what it was to have a sumptuous food. The poor are not necessarily unhappy. Poverty is not synonymous with unhappiness just as material affluence is not synonymous with happiness.

Second, even when they had choices, they preferred instant gratification. That is what the book, Poor economics’ by Abhijit Sen and Esther Duflo, based on actual conversations with the poor across the world, told us.

It goes against the romantic notions of poor as good and worldly wise that we like to believe in or, more precisely, as the NGO world would like to have us believe, to accentuate our guilt so that we part with more money.

When they come into money, they do not buy protein or calcium rich food. They even borrow to buy colour TVs. They do not borrow to ensure that the whole family is immunized for a year against preventable and communicable diseases. Nor do they invest in mosquito nets.

It is not a criticism. It is a statement of fact about their priorities which are not dissimilar to ours. We too do not prioritise well. They do not, either. That is where some amount of rightful intervention and forcing them to do certain things which are in their own long-term interests is essential (through a mix of incentives and penalties). It is very similar to how you would try to make your children learn good habits. It is the same thing with the poor.

I doubt if the two youngsters really thought that their ‘experiment’ would be misused and abused by the NAC types. I do not know what they think of it or if they have been co-opted. I shall leave it at that.

Enacting laws to ensure food and nutrition would not deliver them out of poverty. If mere paper laws are adequate to make India a materially developed nation, India would already be one.

Being able to walk on the streets of the national capital is a fundamental right of every woman. Is either the Delhi Government or the Federal Government able to ensure that? Instead, we have the Delhi Police Chief advising women to dress modestly. Similarly, enacting the Right to Food and Right to Nutrition are not going to give them nutritious food.

We have our misplaced priorities in consuming and owning things that we do not have to. The poor make similar mistakes. My feeling guilty is not going to get them out of their poverty trap. [There is no need to feel guilty; only a bit embarrassed about living a life based on standards set by our peers who, in turn, do the same perpetrating a vicious circle of frivolous, wasteful and garrulous consumption – yes, garrulous. We talk about them too a lot and more than the half the things we do are because we want to talk about them to others].

All that the State can try and do is to keep working at creating an enabling environment wherein opportunities for education, good health and employment are not denied to them because they are poor.

The State (the government) can give them money and give them information on what constitutes nutritious food and its importance for our long-term health. Let us see if the nutrition gap is closed.

Some unwarranted and unsolicited advice to the boys: Having done their little thoughtful and romantic experiment, they would be better off re-joining the UID project and ensuring that the Government of India sent all the monies directly to the poor by identifying them correctly, instead of starting an NGO or joining the NAC staff).

The full article by Mr. Mander is here.

Why this kolaveri, di?

Some friends alerted me to this important comment in the MINT on how India’s farmers are rationally expecting another loan waiver and refusing to pay off their loans. Before last general elections, they got a loan waiver. They are hoping to get another now. Cannot blame them. Their expectations have been set by the ruling dispensation. There must be better ways to run a nation that was once a great civilisation. Some cannot be bothered or perhaps they are too bothered that its fall from its greatness remains an unfinished task. The Chairman of the State Bank of India did not mince words on the deteriorating credit culture in rural India. That is a solace, if it can be called that.

Given this, Niranjan is right to warn of a structural slowdown in the country and wonder politely if the stock market is getting things right. Of course, optimists would pit David Pilling against Niranjan. But, I think there are better ways to run a nation than to depend on unlikely heroes to bail us out on each occasion (a reluctant Prime Minister in the 1990s, a poet-Prime Minister in the new Millennium and the Supreme Court now)

I personally think that Raghuram Rajan has finally zeroed in on why politician-reformer is a rare species. The reason is that the environment does not allow him to thrive. The public does not or cannot grasp costs of acts of omission and commission that are yet to manifest themselves. Hence, any action taken to prevent a calamity or improve things might be viewed with disfavour since it involves upfront costs. Improvements may not happen. At least in such cases, there is a sliver of hope. But actions taken to prevent worse situations are doubly tricky. If the actions succeed and the worst outcomes are avoided, people will have no idea of what they were saved from but they will only remember the costs they paid. No wonder we are predictably irrational.

That is why it is rare for any politician or leader to stand out. There is another reason too. We are still governed by survival instincts. Survival chances are higher if you hunt and stay with the pack rather than stray from it. Remember reading in Jason Zweig’s ‘Your Money and Your Brain’ that our brains have not developed much since our hunter-gatherer days. If so, we must be already thankful that, as a race, we have come this far.

Raghuram Rajan’s piece confirms a bleak prognosis for tough economic reforms in India. The public in India cannot be bothered (‘Kolaveri’ of Dhanush is more important to them than the policy kolaveri of the UPA government) while politicians go about looting the nation in the name of the poor. India’s imported crude oil basket price is up 11% this year. Japan has re-joined the money printing race with vigour. Policy rates in the once-developed nations are plumbing new lows while the central banks launch monetary liquidity into the stratosphere. Mix Middle East politics and bombs, oil can go a lot higher. India’s petroleum minister rules out deregulation of diesel prices. If he said anything else, he would face the wrath of the Indian ‘Aam Aadmi’s who own SUVs that run on diesel.

I wonder why terrorists bother to hurt India when we can do a far better job of it ourselves.

BoJ joins the race

At Tuesday’s monetary policy meeting, the Bank of Japan inched closer (a lot closer?) to joining the European Central Bank and the Federal Reserve Board of the US in blanketing the world with money. Quite a bit of confusion is evident in the English translation of the Bank of Japan decision.

I, for one, have a difficulty in understanding the exact meaning of this:

The Bank judges “the price stability goal in the medium to long term” to be within a positive range of 2 percent or lower in terms of the year-on-year rate of change in the CPI and, more specifically, sets a goal at 1 percent for the time being. [Full press release here]

One presumes that the inflation rate range that is being targeted is 0% to 2%. For now, they are targeting the mid-point of this range, i.e., 1%.

In the statement that is ‘link’ed above, BoJ uses the phrase, ‘powerful monetary easing’ twice. Something that conveys a new sense of determination to pursue money printing with vigour? Bodes ill for inflation in the developing world.

I am also not sure I fully understand the following sentence:

By fully implementing the Program (notice the American spelling used) including the additional expansion decided today, by the end of 2012, the amount outstanding of the Program will be increased by about 22 trillion yen from the current level of around 43 trillion yen.

I suppose this desire to reach the targeted asset purchase level of 65 trillion yen from the current 43 trillion yen is reflective of the determination to pursue ‘powerful monetary easing’. After all, before the announcement of additional asset purchase of 10 trillion yen, the asset purchase programme stood at 55 trillion yen. That the current level was ‘only’ 43 trillion yen shows that the BoJ was not fully utilising its asset purchase limits.

There is a footnote at the end of this sentence:

In addition to purchases under the Program, the Bank regularly purchases Japanese government bonds at the pace of 21.6 trillion yen per year.

These are mind-boggling sums. It is hard to know/quantify the contribution of the Bank of Japan to the worldwide asset price bubbles in the last 12 to 15 years given that the Japanese economy  had no other structural reforms that could unshackle animal spirits within the country and thus make use of that extra liquidity.

(Postscript: While I was searching for some academic/empirical work on the impact of the BoJ monetary policy on asset bubbles worldwide, I came across this comment in ‘Economist’ in January 2006 on Greenspan’s legacy. I must say that it is well written. Note the insightful and the prophetic comment on Bernanke. He is still in charge!)

Central banks: contrasts in Asia-Pacific

Reserve Bank of Australia: surprise inaction

Last week, the Reserve Bank of Australia surprised us by leaving the overnight cash rate (the official cash rate) unchanged at 4.25%. Most of us had anticipated a rate cut and, in fact, thought it was a shoo-in, given weak trends in retail sales, building approvals and employment. In the end, RBA chose to hold its fire. We could write a lot about the two-track Australian economy, its bank lending to real estate, its overvalued currency and the central bank’s inability to rein in the housing bubble, etc. But, by holding back on its rate cut, RBA demonstrated a certain prudence that is hard to find these days. No wonder investors love the Australian dollar no matter how egregiously overpriced the currency is. That said, considering the risks that the Australian economy faces this year, RBA might yet come to regret its prudence. Interestingly, they appeared to be doing that already on Friday when the central bank released its quarterly Statementof Monetary Policy. My weekly column in MINT on Tuesday examined Australia’s dual economy a bit closely.

Bank Indonesia: surprise and unwarranted rate cut

In contrast, despite cutting interest rates by 75 basis points in 2011, Indonesia chose to celebrate the release of moderately positive GDP growth numbers released earlier in the week (last week) by cutting rates another 25 basis points. This was as needless as it was surprising. One could be excused for thinking that the economy was tottering on the precipice of recession for a central bank to cut interest rates 100 basis points in a year. But, total outstanding loans of all banking institutions in Indonesia rose 25% in 2011. Annual growth rates in M1 and M2 are respectively 19% and 16%. Core inflation rate is 4.3%. One hears that the central bank is pushing banks to lend more and reduce rates too. The central bank is reportedly targeting growth of 27% in bank credit.

Indonesia is a good story in East Asia. It is a pity, then, that its institutions are not preparing for a more resilient and confident economic future in which economic growth consistent with prudent inflation and credit growth is pursued. With a good savings rate but possibly high incremental capital/output ratio, Indonesia needs to find ways to encourage investment and boost productivity. Superfluous rate cuts undermine both objectives. Lower compensation to savers eventually reduces the pool of capital available to investors.

More often than not, individuals never realize their potential because they are stuck in the past, unable to shed the baggage of history. It is as true of nations as it is of individuals.

No surprises from Bank of Korea – unchanged policy stance

Bank of Korea, expectedly, left interest rates unchanged at 3.25%. We had largely anticipated that but did not rule out a surprise rate cut. In the end, the Bank of Korea did not want to take chances on our abilities to handle too many surprises. It chose to leave rates unchanged. The statement accompanying the monetary policy decision was neutral to slightly positive on the economic outlook for the year, esp. in the second half of the year. It also did not take inflation developments for granted. That is prudent.

With the economic outlook in China uncertain and with Japan feeling the pressure of a stronger yen (TGS will have a separate post on the BoJ Monetary policy decisions taken on Tuesday), Korean policy rate of 3.25% appears positively high in a world where central banks take pride in withholding, until eternity, rewards for delayed gratification.

Reading links

It is about 1520 hours on Monday on Feb. 13th, 2012. The FT.COM page that I see has two interesting headlines and they are very insightful. We should not be wondering why there is the protest movement in Wall Street. We should be wondering why there are not many more.

Here are headlines:

(1) Athens passes demanded austerity bill: MPs vote for deal as violence rages outside Parliament. (Link)

(2) Greece austerity deal cheers Asia (the headline is referring to the trading pattern in Asian bourses on Monday morning) – Link

Bourses celebrate when the Greeks are protesting the administering of pain by the rest of Europe without painkillers!

Gillian Tett’s piece in FT on Feb. 9th on the widening probe into LIBOR fixing (literally and figuratively) by banks is insightful:

Firstly, and most obviously, the story shows that journalists – or any other outsider – should never give up trying to grope around in the murkier bits of finance; society desperately needs outsiders to peer into the financial weeds, asking naive questions, even – or especially – in the face of formidable, well-funded PR teams.

Secondly, the pieces of finance which most badly need probing are probably not the most exciting or visible parts. [Full article here; subscription may be required]

This may be old news but the blog post at on the Skyscraper index report (a friend from Chennai had sent me this a month ago) of Barclays Capital is interesting and useful. It is both unsurprising and disappointing that both China and India are in the top two positions globally on the number of skyscrapers being built. They are a useful contrarian indicator.

However, TGS think that its contrarian value is higher when countries go for a trophy tower (with record heights) rather than when countries build skyscrapers in general.

The average height of skyscrapers has been going up in China. That, indeed, is a useful warning sign.

Australian education for Indians

Surely, the Australian cricket team has taught a few lessons to the Indian team on how to cope with sustained fast bowling or so, we would like to believe. But, that is an education that Indian batsmen did not come looking for, when they set foot on Australia earlier this summer Down Under.

On a different plane, it appears that fewer Indians are coming to Australia in search of higher education and knowledge. This statement by the Reserve Bank of Australia in its latest quarterly ‘Statement of Monetary Policy’ (Feb. 2012) caught my eye:

Education exports, especially to India, have fallen particularly sharply, due to both the high exchange rate, which has made education in Australia more expensive, and the tightening of access to student visas. [Page 42 of SoMP. The full report is here]

One suspects that Indians might have a different view of it. They might think that the small matter of racially motivated murderous attacks might have had some thing to do with the demand for student visas, in the first place.

Mindsets take time to change, if they do at all.