Philosophical about PPP

PPP in the subject header stands for Public Private Partnerships. Gulzar has a terrific post on that, in the context of the privatisation of utilities and the railway network in the UK. A great summary.

He should link this to the post (another terrific one) on corporate ethics in India. What is the difference? May be, one is too sophisticated and one is not. But, does that matter to the outcomes?

He should also link this post to the NYT page link he had given in one of his ‘Weekend Reading Links’.

Now, let us get philosophical.

How do we solve this? If governments are captured, how do you expect the government to extricate itself out of it? It is now powerless. Ex-ante, it had. Now, it does not. It is captured.

The only way is to wait for change agents to come when a crisis presents itself. Over time, the change agents are captured too and we wait for newer change agents! It is an unending struggle between power and people.

Lot of permanent fodder for bloggers 🙂

Punarapi Jananam; Punarapi Maranam. Endless cycle.

Two examples:

(1) Differentiated banking – inefficient – one size – one umbrella – scale – exploitation – conflict of interest – opacity – management bandwidth – households hit – fat bonuses – trim banks – back to differentiated banking.

(2) Higher taxes cripple private incentives – lower taxes – system gamed – business concentration – capital income rises faster than labour income – raise taxes.

The lesson for policymakers and critics is that: solutions will keep coming back in cycles because contexts keep changing or keep going and coming around in circles.

So, there is no permanent pro-market; no permanent pro-government attitude; no permanent fixation on low taxes or high taxes. No permanent commitment to fiscal policy solutions or monetary policy solutions. No permanent commitment to re-distribution nor to economic growth.

That is a bit like Hinduism of yore. Everything goes. Contexts dictates the prescriptions just as occasions dictate the dress we choose from the wardrobe. Even Dharma was and is context-specific in Hinduism.

But, that is too demanding, even of intellectuals. A permanent state of abstraction or being unsettled is not easy to handle. Clear and ‘black or white’ demarcations appeal to our bounded rationality. We like things to be settled. ‘Happily ever after’ appeals to us for we do not like to revisit the stories and find that our heroes and heroines were back to a different set of griefs and challenges afterwards.

So, we are going to live with religions and philosophies and economic and social dogmas that claim to be universal, permanent, absolute and all-weather prescriptions.

Once this path is fixed, the powerful know how and when to game the system. The rest of us will be happy for smaller mercies, miracles and good luck. Those who can blog, can keep blogging!

What can break this cycle? Some loud thinking here:

Without a spiritual outlook and detachment on the part of the rulers – they minimise the risk and incidence of capture – the cycle of capture and release and capture will be endless.

Some change agents come with their own agendas. For example, is Trump draining the swamp? I doubt because he has just received a certificate from Lloyd Blankfein of Goldman Sachs. That says it all.

Now, if and when he finally goes, after one term or two terms or whenever, the old elites will be back in the saddle – the elites who gave us financial de-regulation, Public-Private Partnerships, etc.

But, amidst all this, some good have happened. Millions of Chinese workers and their families have had better lives than they would have. Few millions of Indian software workers and their families benefited from globalisation. The Philippines and Mexico workers have benefited.

So, amidst the capture, let us count the small blessings because ‘WE (the World Economy) are like this only’.

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Problem disguised as solution!

A very ‘clever’ piece of writing by Ajay Shah on the Punjab National Bank scandal and the need for strengthening capabilities of the regulator, the Reserve Bank of India. Nothing wrong with the principle. But, really the devil is in the details.

In a country that does not know how to regulate banks, we should systematically reduce the size of banking relative to GDP. We should foster non-bank financing, and block the nominal growth of banking until we get to a minimum level of capabilities at the RBI.

That is the ‘clever’ bit, kept for the last.

What is the logic behind the assumption that non-banking sources of finance – i.e., capital markets – are exempt from scams, scandals and frauds? What about the capital market regulator, SEBI? Has India done enough to strengthen it with capabilities? Has India’s stock market been free of scandals and scams? Three, what about mis-selling of capital market products to retail investors if capital market financing becomes the route for Indian businesses? Yes, the Indian Financial Code (IFC) might have consumer protection clauses. But, they too require a regulator to implement. What is the guarantee that they will be born with those capabilities straightaway, in the Indian context? Four, reliance on capital markets means that savings are not pre-empted by a large State through the banking system. That is not the case in India, yet.

If we do not grow the banking system, will the public save more through small savings schemes? That carries a much higher interest burden and with tax exemptions, the effective cost to the borrower (the State) is even higher. The government will rely on it even more for covering its spending, if the banking system is ‘not allowed to grow’ until the regulator is strengthened, as the author says.

That will effectively raise the government’s interest burden and hence the deficit. Higher benchmark bond yields will follow and higher cost of capital for corporate borrowers. They will not want to tap capital markets and if, in the meantime, banks are not allowed to grow, what happens to capital formation in the economy?

If more domestic savings are either pre-empted by the government or is directed towards small savings, then for capital market, it means greater reliance on foreign savings for non-bank sources of financing to become more dominant. Is that desirable? Will that not have other consequences? Or, is there any basis to believe that foreign sources of savings are untainted and exempt from bad behaviour?

It does not make much sense to propose solutions that open a new can of worms and which, arguably or potentially, could be more destabilising.

Demonetisation update 38 – pre-dispositions

Prasanna Viswanathan of Swarajya had shared a good article from Economic & Political Weekly (December 30, 2017) on the impact of demonetisation in rural Tamil Nadu. It was a survey based article. What came out well was the fact that people found a way around the cash ban and yet stuck to cash. That came out well. The second thing is that informal networks got strengthened. The authors strangely note that as a failure of the demonetisation exercise. Far from it. The authors of the demonetisation exercise in the government did not wish to disturb social networks in India!

The other thing that came out – the authors mention it twice – is that there was widespread support for demonetisation. That makes us wonder if the inconveniences and difficulties faced by the public are exaggerated by those who were not well disposed towards the government. If it had caused huge hardship to people, the measure could not have remained popular for too long.

The paper is ‘Insights on demonetisation from rural Tamil Nadu’ – understanding social networks and social protection, Economic and Political Weekly, December 30, 2017, Volume 52.

If the authors of the article were not pre-disposed towards judging the demonetisation as a failure, it would have made for a scholarly article. Pre-disposition makes scholars look silly.

You do not have to look far from this FT article by Larry Summers on the American economy for a classic example of pre-disposition or prejudice making for poor scholarship. If my students had written it, they would have scored very low marks indeed. Just one example: for America, a weak currency is not a reflection of its economic weakness at all. Mr. Summers knows it well but mentions it all the same as reflecting economic fragility because he cannot get himself to say something good about the U.S. economy under President Trump.

While on the subject of the U.S. economy, it was amusing to read that President Obama was claiming credit for the improved performance of the economy in 2017. Well, debatable but would he then take the blame for its sluggishness up to 2016 in almost all parameters of the economy?

Coming back to pre-dispositions, we had one on the other side – this time from Surjit Bhalla. He wrote in ‘Indian Express’ that tax buoyancy had picked up in the current financial year 2017-18, despite the demonetisation. Well, he says, it was because of the demonetisation’s impact on black money that tax buoyancy (more like elasticity- % change in tax collection for a % change in GDP) picked up.

This is problematic. GDP growth slowed down in the first three quarters following demonetisation. That does not establish causality but it is reasonable to think that demonetisation had at least a partial impact on economic growth. If, on top of the growth slowdown, there was increased tax collection, then one has to wonder if it was a good or bad thing. Vigorous tax collection in the middle of an economic growth slowdown might have aggravated the slowdown.

So, I am not sure if improved tax buoyancy in the context of an economic growth slowdown that might possibly have been aggravated by demonetisation (if not caused by it) is cause for celebration.

Trickle-down hypocrisy

The Keynesian Fed economists who were dismissive of Reagan’s trickle-down theory still don’t appear to see the irony in the fact that they applied trickle-down monetary policy in the hope that by giving a boost to asset prices they would create wealth that would trickle down to the bottom 50% of the US population or to Main Street. It didn’t. [Link]

Well said, John Mauldin. The link is almost two months old. Does not matter. The observation is very relevant even now.

Painfully sloppy

Independent central banks played a critical role in bringing inflation down in the 1980s and 1990s. But in the current low-inflation environment, their exclusive focus on price stability imparts a deflationary bias to economic policy and is in tension with employment generation and growth. [Link]

A shockingly sloppy statement from one of the world’s most thoughtful economists. That was from Dani Rodrik in his most recent column in defence of economic populism.

Central banks have cut nominal interest rates to zero. They bought assets; increased the quantum of assets they bought; increased the range of assets they bought; re-invested proceeds from the assets they sold back into the assets; they tried negative interest rates and yet, Dani Rodrik thinks they impart a deflationary bias?!!

Financial conditions have eased remarkably since the Federal Reserve allegedly began tightening in the U.S. in 2014. There is a massive inflationary bias to asset prices in the world now. Perhaps, the deflationary bias in the prices of goods and services is related to the inflationary bias that monetary policy has imparted to asset prices.

Not taking cognisance of any of these in a seemingly throwaway remark is disappointingly thoughtless for a man whose intellectual depth and understanding of global issues have raised the bar so high for him. He needs to be conscious of that

Schumpeter and creative destruction

As we approach the end of the year, one is tiring of many things. Blogging is one of them. My friend Gulzar Natarajan alerted me to a couple of sentences in the article by Ricardo Hausmann on R&D in large corporations:

Joseph Schumpeter stumbled on to these two approaches at different points in his life. When he published The Theory Of Economic Development in 1911 at age 28, he emphasized that innovation came from the spirit of entrepreneurs in a process of creative destruction. By 1942, when a 59-year-old Schumpeter published the book Capitalism, Socialism, And Democracy, he realized that a lot of the innovation was coming from very large corporations that faced rather limited competition. [Link]

Public policy must be relentlessly focused on enabling firms to start reasonably ‘big’ and to be able to grow bigger. Subsistence entrepreneurship is romantic but will not move the economic growth needle much at all. It is disguised unemployment.

Congress and the BJP are making India lose

(1) Two days ago, TCA had a piece in BS asking Rahul Gandhi to step down soon. Not a bad advice, in my view. Well, actually good advice. Soon, the newspaper wrote an edit criticising the Congress leader’s anti-business rhetoric in the Gujarat campaign.

This must worry Indians beyond partisan politics. It is not time to gloat that Rahul is helping BJP win or stay ahead in the race. His campaign, just as his remarks on ‘Suit boot ki Sarkar’ did, would propel a policy race to the bottom. Further, it tells us that the Congress has not gone beyond sloganeering and has not absorbed any lessons from its disastrous rule from 2004 to 2014 (and earlier too).

India needs to grow the pie and help the poor get out of poverty. India needs to deal with criminals-promoters and yet make way for entrepreneurship and competition. India needs to collect taxes but also make the tax system and rates reasonable. India needs to enforce laws but laws should be transparent, clear and be made clear and accessible to the public.

In other words, India needs leaders who understand the need for a multiplicity of approaches, interventions and seemingly contradictory thinking. It is only ‘seemingly’. There is nothing really contradictory about them.

The Congress leader has given us no hint that he understands this and, unfortunately, increasingly, nor has the BJP.

Therefore, the question really is if both of them are making India lose.

There is a race to the populist bottom that both the parties are practising. Now, Arun Jaitley is defending that the Insolvency and Bankruptcy Code does not reward capitalists. On that note, actually, this government has done quite well. Perhaps, according to Andy Mukherjee, too well. But, I disagree with Andy Mukherjee and agree with Sunil Jain and Debashis Basu. The government has done the right thing.

However, in the light of the (wrong and unjustified) criticisms that it is soft on capitalists, the government may go overboard with either even more anti-business policy decisions or seemingly pro-poor and pro-farmer policies or both.

Separately, in the light of what I wrote in MINT on Tuesday about how solar panels are being deliberately reclassified as ‘DC generators’ and charged customs duty, the PM’s appeal for investment into India is amusing.

(2) THE HINDU has featured an article by a writer who has raised the red flag on the ‘bail-in’ clause in the new Financial Resolution draft bill that has gone to the Parliament select committee.

It is an enabling provision and the government and the regulator will decide on which creditors would be ‘bailed in’ and in what amounts, etc. There is a long way to go but uncertainties have cropped up. The article in THE HINDU engages in needless fear-mongering. Two friends have raised the issue with me and asked me to study it and recommend whether they should pull their deposits out of the banks!

I did spend some time on it last night and find that there is no immediate concern but there is plenty of scope for mischief and uncertainty. Those who wish to assuage themselves should check out www.prsindia.org and peruse the documents here, here and here. These two documents might be useful too.

(3) For the future of India, there is a latent need for a genuine centre-Right/Right discourse. BJP is nowhere near that. As I wrote some seven months ago, there is single party rule in India when it comes to economic policymaking. But, I doubt if the people of the country too are ready for a centre-Right/Right discourse. By and large, people do not appreciate – yet – that the populist discourse and policies are superficial and short-term with deleterious long-term consequences.

The state of the political and policy discourse on either side of the aisle should worry Indians – a lot.