Weekend reading links

1. A new NBER paper highlights another example of capitalism with Chinese characteristics, in the faster growth of private firms with connections to state-owned firms,

We use administrative registration records with information on the owners of all Chinese firms to document the importance of “connected” investors, defined as state-owned firms or private owners with equity ties with state-owned firms, in the businesses of private owners. We document a hierarchy of private owners: the largest private owners have direct investments from state-owned firms, the next largest private owners have equity investments from private owners that themselves have equity ties with state owners, and the smallest private owners do not have any ties with state owners. The network of connected private owners has expanded over the last two decades. The share of registered capital of connected private owners increased by almost 20 percentage points between 2000 and 2019, driven by two trends. First, state owned firms have increased their investments in joint ventures with private owners. Second, private owners with equity ties to state owners also increasingly invest in joint ventures with other (smaller) private owners. The expansion in the “span” of connected owners from these investments with private owners may have increased aggregate output of the private sector by 4.2% a year between 2000 and 2019.

2. Former Secretary Agriculture T Nanda Kumar has an article here with very practical suggestions to amend the agriculture legislations and break the deadlock. 

3. Following its decision to counter-sue a participant in the clinical trials who had sued Serum Institute, the company's high-profile founder has now demanded government indemnification against all lawsuits. 

4. Reetika Khera, Sudha Narayanan, and Prankur Gupta separate the wheat from the chaff on the issue of MSP. Using FCI data on procurements, they find,

One, the proportion of farmers who benefit from (even flawed) government procurement policies is not insignificant. Two, the geography of procurement has changed in the past 15 years. It is less concentrated in traditional states such as Punjab, Haryana and western UP, as Decentralised Procurement Program (DCP) states such as Chhattisgarh, Madhya Pradesh, and Odisha have started participating more vigorously. Three, perhaps most importantly - it is predominantly the small and marginal farmers who have benefited from the MSP and procurement, even if the size of the benefits may be larger for larger farmers. This is true not just in the DCP states, but also in the traditional states. 

5. Twenty20, the Charity registered by Kerala's largest private employer, Kitex, and which had been ruling Kizhakambalam Panchayat of Ernakulam district since 2015, has now expanded its political base by retaining the Panchayat and winning three more in the same district and becoming the largest party in another in the recent local body elections in the state.  

6. Good explainer in Indian Express on the findings of the recently released NFHS-5 survey. 

The article points to this paper by John Hoddinott and two others which has an assessment of the benefits-cost ratio (in terms of potential increments in future incomes) for interventions that reduce stunting.

7. As the pandemic broke out, governments across the world stepped in with, among other things, loan guarantee schemes to support small businesses. In US, the Paycheck Protection Program distributed about $525 bn to 5.2 m companies in the April-August period. In UK, £43.5 bn has been distributed to 1.4 million businesses, and it is still ongoing and expected to reach about £87 bn.  

The efforts to quickly push out these loans was always going to be difficult and ran the risk of serious frauds. Unsurprisingly, both the US and UK loan guarantee schemes have seen massive frauds. The US PPP program has even been described as "legalised fraud". See also this and this on the US fraud and this on the allegations of fraud with the UK program. 

8. Excellent NYT photo feature on how Russia may end up benefiting from global warming as it makes its cold northern parts amenable to agriculture. 

A great transformation is underway in the eastern half of Russia. For centuries the vast majority of the land has been impossible to farm... But as the climate has begun to warm, the land — and the prospect for cultivating it — has begun to improve... Across Eastern Russia, wild forests, swamps and grasslands are slowly being transformed into orderly grids of soybeans, corn and wheat. It’s a process that is likely to accelerate: Russia hopes to seize on the warming temperatures and longer growing seasons brought by climate change to refashion itself as one of the planet’s largest producers of food... for a few nations, climate change will present an unparalleled opportunity, as the planet’s coldest regions become more temperate. There is plenty of reason to think that those places will also receive an extraordinary influx of people displaced from the hottest parts of the world as the climate warms.

And what does it mean for global geo-politics in the years ahead,

No country may be better positioned to capitalize on climate change than Russia... Russia is rich in resources and land, with room to grow. Its crop production is expected to be boosted by warming temperatures over the coming decades even as farm yields in the United States, Europe and India are all forecast to decrease. And whether by accident or cunning strategy or, most likely, some combination of the two, the steps its leaders have steadily taken — planting flags in the Arctic and propping up domestic grain production among them — have increasingly positioned Russia to regain its superpower mantle in a warmer world.

9. The persistent low interest rates and pandemic induced buying opportunities meant that private equity industry had a record year, with buyout groups striking deals worth $559 bn in 2020 with more than 8000 deals, the highest since records began in 1980.

10. Fascinating article in NYT about Japan's centuries old businesses. The article covers Ichiwa, a shop which makes grilled rice flour cake and which has been in existence for 1000 years.

Japan is an old-business superpower. The country is home to more than 33,000 with at least 100 years of history — over 40 percent of the world’s total, according to a study by the Tokyo-based Research Institute of Centennial Management. Over 3,100 have been running for at least two centuries. Around 140 have existed for more than 500 years. And at least 19 claim to have been continuously operating since the first millennium... The businesses, known as “shinise,” are a source of both pride and fascination. Regional governments promote their products. Business management books explain the secrets of their success. And entire travel guides are devoted to them. Most of these old businesses are, like Ichiwa, small, family-run enterprises that deal in traditional goods and services. But some are among Japan’s most famous companies, including Nintendo, which got its start making playing cards 131 years ago, and the soy sauce brand Kikkoman, which has been around since 1917.

Such old businesses cannot survive merely by maximising profits, but need to have a higher purpose. This is called 'kakun', or family precepts which have guided such companies business decisions for generations. These businesses offer useful pointers for those look at an alternative to free-market capitalism. 

11. The Economist on the importance of waste pickers,

The world’s cities produce over 2bn tonnes of solid waste every year. Even before the covid-19 pandemic local governments in poor countries struggled to keep their streets clean, clearing less than half the rubbish in urban areas and around a quarter in the countryside. Informal workers, who make up around 80% of the 19m-24m workers in the waste industry, have helped plug that gap. They both haul rubbish and scour municipal dumps and public spaces for things which can be re-used or sold, normally through middlemen, to recycling companies. In India waste-pickers divert over 40m tonnes of refuse away from landfills and into recycling every year, a task that would cost municipalities 15-20% of their annual budget. In South Africa they are responsible for recovering 80-90% of packaging.

12. In recent weeks regulators in US have opened anti-trust investigations against Facebook and Google, and in China against Alibaba. The markets in the US appeared to have hardly taken any notice of the actions against the two tech giants. But in stark contrast, the markets in US reacted strongly by clipping over 13% from the share price of Alibaba. 

Does this mean that anti-trust investigators in China have greater credibility than their US counterparts? Or is it a case of markets pricing in the resolve of Chinese regulators to go after this particular offender?

At one level, these actions may be another example of capitalism with Chinese characteristics. 

Regulators must consider the broader economic and strategic picture while implementing the law... What prompted the regulator's shift may not be that monopolistic abuses have gotten particularly bad lately, but rather that tech giants are thought to have gone astray in the directions they have pursued. For example, Alibaba and Tencent are criticized for leveraging their dominant digital platforms to repeat their tried and true winner-take-all approach in the local community fresh produce group buying sector. Once again using subsidized user acquisition and rapid scaling via online traffic diversion, tech giants are seen as greedy profit harvesters squeezing small Chinese businesses and potentially causing instability. In the eyes of China's anti-monopoly regulators and the central government, it is equally important to both curb such bad behavior and to point the tech companies to the right place to target, or even to monopolize.

And this, 

A researcher at a Chinese government-affiliated think tank explained the clampdown on Alibaba this way: "Ant was like a loan shark. If the authorities did nothing about Ma, who led Ant, the public could rise up against the government."

13.  Finally, after years of acrimony and months of intense haggling, EU and UK have closed a Brexit deal. While Britain leaves the customs union and single market, it is still a £660 bn trade deal which avoids the potential disruptions from a complete divorce. The preferential access deal means that imports from either side would be free of tariffs and quotas, a provision that goes far beyond any trade deal EU has with another country. This is a good summary of the provisions of the deal and this about the progress of the nine month long talks. 

14. Interview of the NHAI Chairman here about the latest with the agency's road construction program. The agency is planning to use a mix of securitisation of toll revenues, InvIT, and toll-operate-transfer models for asset monetisation. 

Two things, which this blog has long since been advocating and which goes against the commentary in mainstream media, stand out. 

One, the vast majority (over 90%) of the projects are being built with significant upfront public investment, either through HAM (where 40% viability gap funding is given during construction) and EPC. The share of BOT-toll and even BOT-annuity projects has declined to negligible proportions. 

Two, the vast majority of financing is coming from domestic capital, with bank loans being the major contributor (on the developer side in HAM projects, their debt will be mostly bank loans). It's good that NHAI are able to issue a significant share of bonds. Foreign capital will remain negligible in greenfield projects. Even in case of asset monetisation, the share of foreign capital will be small. 

15. A big challenge as fiscally strapped governments, including states in India, navigate the post-pandemic world will be with managing the fiscal balance. Historically governments have sought to respond to such situations by cutting down on capital expenditures. This RBI report on state government finances has a graphic which shows that states have consistently scaled back Capex.

Interesting also that India has the highest Capex decentralisation among a sample of countries. 

16. A not so flattering report card by the RBI on UDAY, the power sector reform initiative.

17. The heavily over-subscribed IPO of Bectors Food has drawn attention to the surprisingly under-reported story of Mrs Rajni Bector. She started her banking business in the seventies with an investment of Rs 300 and has now gone to raise Rs 541 Cr in the IPO. Sandeep Goyal writes,

By 1990, the business was clocking a respectable Rs 5 crore in turnover under the Cremica (cream-ka because of Mrs Bector’s lavish use of cream) brand she created in the 1980s. Business grew quickly to Rs 20 crore by the mid-1990s. But the big leap forward came with McDonald’s signing up Mrs Bector to bake the buns for their burgers in 1995. Today, Mrs Bector’s business, largely run by her sons, counts ITC, Mondelez, Hindustan Unilever, Big Bazaar, Spencer’s, Taj Group, Air India, Indian Railways, Barista, Café Coffee Day, Pizza Hut, Domino’s and Papa John’s as large institutional customers, besides a vast direct-to-customer sales network that retails breads, buns, biscuits, dips, spreads and sauces, and ice-creams under her own brand names... 12 per cent of all of India’s biscuit exports today come from her.

As Goyal writes, it is surprising that she's not received any recognition for her achievements.  

18. Finally, as this NAR report points to (HT: Ananth), the Covid 19 is a great window for some vaccine diplomacy by India to enhance its soft power.

Weekend reading links

1. Very good Livemint oped by V Praveen, an economics student, on the disconnect between economists and the markets.

2. Sweden is perhaps the epitome of generous and compassionate social democracy, a society where everyone lives a dignified life, gender inequality non-existent, sustainable development a cornerstone, and so on. Its economy is among the most competitive and it does more in terms of helping poor countries than almost anyone else. But next Sunday Sweden faces an election which threatens to disrupt the status quo. The center-left Social Democrats, who have come first in every election since 1917 and ruled the country, faces the prospect of losing power after more than a century. 

After receiving 163,000 asylum seekers in 2015, the highest proportion of any country, Sweden has been facing a growing populist backlash, led by the right-wing Sweden Democrats party. A spate of shootings, grenade attacks, and burned-out cars have gripped the country and fuelled the rise of populists. This has been coupled with the strains on the famed Swedish welfare state, Folkhemmet, which is financed by a 60.1% marginal tax rate. Rising waiting times in hospitals and deteriorating school results have become the lightning rods for this discontent. The consequence, as outlined, in a nice article in FT,

Scarcely a day has gone by in the past few years without a shooting, burned-out car, or even a grenade attack being reported in one of the cities. That has upended the usual political calculus in Sweden. Conventional issues around the state of the economy and jobs have seemed less important than normal, to the detriment of the ruling Social Democrat government and prime minister Stefan Lofven. Into the breach has stepped... the Sweden Democrats. Rooted in Sweden’s neo-Nazi movement, the party has tried to shed its racist image, entering parliament in 2010 and becoming the third-largest group four years later with 13 per cent of the vote. A stronger performance than that awaits this time as the party challenges for second — or perhaps first — place... The Sweden Democrats’ long-term core message is that Sweden needs to make a choice between immigration and guaranteeing the Folkhemmet.

3. Chris Balding argues that the new US trade pact with Mexico, with its 75% local content requirements and 40-45% content come from factories paying more than $16 per hour, and strict intellectual property rights regime, is also aimed against China and likely to curtail the use of Mexico as a trans-shipment or assembly location using Chinese inputs. He writes,

The Mexico accord tightens rules of origin on automobiles, so that 40 percent to 45 percent of their content must be made by domestic companies whose workers earn at least $16 an hour. This limits the scope for assembly in Mexico with Chinese components, favoring higher-value parts from manufacturers covered by the agreement... In digital services, the draft limits a government’s ability “to require disclosure of proprietary computer source code and algorithms,” something China has mandated for most IT providers. This section also targets prohibitions being applied to “digital products distributed electronically,” such as Facebook and Twitter. The data and financial-services obligations even prohibit local data-storage requirements: Beijing has declared the audit records of Chinese firms listed in New York off-limits to U.S. regulators, for example. If doubts remained, consider the environment section: Mexico and the U.S. agreed to prohibit “shark-finning,” the practice of cutting the fins from sharks and leaving them to die. China is a major consumer of shark fins. The two sides also agreed to prohibit illegal or unregulated fishing. The labor section of the accord requires “worker representation in collective bargaining.” While independent unions in Mexico and the U.S. have varied challenges, they don’t face the level of official intimidation of labor activists in China.

As Balding writes, Trump can now achieve his objective of reining in China as no other US President if he can now use this opportunity to strike similar pacts with Canada and Europe.

Even if the real impact of the local content requirement is less than the hype, taken together the deal turns the tables on China's remorseless unilateral trade policy actions.

4. Nice article on the transformation of Seattle. The rapid growth of Amazon in particular has transformed the City for the good and the bad - traffic congestion, unaffordable housing, homelessness, and gentrification. The strong resistance to change zoning laws to allow greater density exacerbates these problems.

The role of Microsoft co-founder Paul Allen's construction company, Vulcan, which alone has developed properties worth over $6 bn in Seattle and occupies a fifth of the city's prime office space, bears resemblance with the role of DLF in Gurgaon.

It is one more reminder about the dangers of rapid urbanisation. To quote Greg Nickels, Seattle Mayor from 2002-10, “One of the big challenges with growth is to not allow it to overwhelm you.”

5. Gillian Tett looks back at the Global Financial Crisis and asks whether lessons have been learnt. I am inclined to answer mostly in the negative.

6. The Economist captures the delicious irony of the academic economist shoving aside his own theory when faced with the real world challenge of running a central bank.

Imagine if Milton Friedman had been put in charge of a central bank, only to lose his job for expanding the money supply too quickly. Or if Robert Shiller, the Nobel-prizewinning author of “Irrational Exuberance”, were given a similar post, only to depart having allowed a stockmarket bubble to inflate. That is the kind of irony that attended the resignation under pressure of Federico Sturzenegger as governor of Argentina’s central bank on June 14th, a casualty of deepening turmoil in emerging markets. Mr Sturzenegger's most-cited paper showed that stated currency policy was often a poor guide to actual policy. Many countries claim to let their currencies float freely but in fact “intervene recurrently to stabilise their exchange rates”. Their deeds often belie their words. Mr Sturzenegger lost his job for much the same thing... After Argentina agreed on a $50bn loan from the IMF, he said he would intervene in the foreign-exchange market only in “disruptive situations”. But when the peso soon came under renewed pressure, he resumed selling foreign-exchange reserves, which fell by $665m on June 12th-13th. He gave up the fight on June 14th, allowing the currency to drop by 5.3% against the dollar on a day that ended with his departure.

7. Another article captures this decline in use of public transport in the US,

The American Public Transportation Association’s figures show that the number of journeys in the country as a whole has fallen in each of the past three years. In 2016-17 every kind of mass public transport became less busy: buses, subways, commuter trains and trams. New Yorkers took 2.8% fewer weekday trips on public transport and 4.2% fewer weekend trips in the 12 months to April 2018, compared with the previous year. In Chicago and Washington, DC, the decline in public-transport trips has been even steeper.

This broad trend is mirrored, even if with less strong decline, in European cities. In the 2007-13 period, Madrid metro, for example, lost 19% of its commuters. One reason for the decline is the rise of ride-hailing services,

In San Francisco public transport accounts for 16% of all weekday trips, ride-hailing for 9%. People mostly seem to use Uber and Lyft to get to places well-served by mass transport (see map). One study of the city by five Californian academics asked ride-hailing customers how they would have made their most recent trip if the service did not exist. One-third replied that they would have taken public transport. In a study of Boston, 42% said the same thing. Self-driving taxis are likely to steal even more riders in future, because they will be so cheap.

The article also points to other potential sources - economic weakness and e-commerce make less people venture out, changing work habits as more people work remotely as well as in co-working spaces near their homes, increased use of bicycles, the boom in office development around transit stations reduces last mile commutes, and cheaper driving costs due to fuel efficiency and cheaper fuels.

8. Finally, a good story in Indian Express narrating the challenges faced by India's cleanest railway station. Two things stand out. First, cleanliness comes with a significant fiscal cost. The station awarded its cleanliness contract in 2016 to a new contractor for a three year cost of Rs 8.7 Cr, a near doubling from the earlier Rs 4.8 Cr. This cost is fiscally unsustainable when replicated across the country.

Second, the increased cleaning and enforcement of fines appears not to have had much impact on the generation of waste itself or the habits of rail passengers. The real success will be to reduce the generation of waste and ensure more responsible disposal by those generating waste.

Weekend Reading Links

1. Insightful analysis by Dani Rodrik on why liberal democracies are so scarce,

Liberal democracy rests on three distinct sets of rights: property rights, political rights, and civil rights. The first set of rights protects owners and investors from expropriation. The second ensures that groups that win electoral contests can assume power and choose policies to their liking – provided these policies do not violate the other two sets of rights. Finally, civil rights guarantee equal treatment before the law and equal access to public services such as education. 

Property rights and political rights both have powerful beneficiaries. Property rights are of interest primarily to the elite – owners and investors. They may be comparatively few in number, but they can mobilize material resources if they do not get their way. They can take their money elsewhere, or choose not to invest – imposing substantial costs on the rest of society. Political rights are of interest primarily to the organized masses – the working class or ethnic majority, depending on the structure and cleavages in society. Members of the majority may be comparatively poor, but they have numbers on their side. They can threaten the elite with uprisings and expropriation.

The main beneficiaries of civil rights, by contrast, are typically minorities that possess neither wealth nor numbers. Turkey’s Kurds, Hungary’s Roma, Russia’s liberals, or Mexico’s indigenous population ordinarily command little power within their countries. Their demands for equal rights therefore do not have the potency that demands for property and political rights have.

Theories that purport to explain the historical origins of democracy have overlooked this asymmetry among claimants for different types of rights. These theories revolve largely around a bargain between the propertied elite and the working classes: faced with the threat of revolt, the elites expand the franchise and allow the masses to vote. In return, the masses – or their representatives – agree not to expropriate the elite... But these democratic bargains, by their very nature, produce electoral democracies rather than liberal democracies. The dispossessed minorities who have the strongest stake in civil rights play no role during the democratic transition for the simple reason that they cannot normally bring anything to the bargaining table. So the democratic bargain yields property and political rights, but only rarely civil rights as well.

The full paper is here.

2. Even as trade between China and Latin America surged from $12 bn in 2000 to $285 bn in 2014, the Chinese embarked on a "railroad diplomacy" in the continent. This has now hit a roadblock, 

China has sought to build a “dry canal” in the form of a railway across Colombia, linking the Caribbean to the Pacific. Chinese investors announced another huge venture in Honduras, two ports and a 375-mile railroad from sea to sea. Then this June, China announced yet another megarailway — nearly 10 times as long — across Brazil and Peru, stretching from one coast of South America to the other. But across the region, one large Chinese rail venture after another has come crashing against the hard realities of Latin American politics, resistance from environmental groups, and a growing wariness toward China... Still, political leaders, farmers and environmental activists are eyeing China’s difficulties in completing railroads elsewhere in Latin America. They point out Brazil’s particularly nettlesome bureaucracy, its laws prohibiting China from hiring its own laborers, a web of auditing courts, and the capacity of dozens of different prosecutors to cripple megaprojects with lawsuits... Powerful political and business figures, whose river ports and soybean processing centers could be threatened by the railway, are already blasting the Chinese venture. 

3. Paul Theroux laments the decline of America's Deep South, which he blames on globalization and the off-shoring of manufacturing,

Take a Delta town such as Hollandale, Miss. Two years ago, the entire tax base of this community of around 3,500 was less than $300,000. What the town had on hand to spend for police officers, firefighters, public works, outreach, welfare and town hall salaries was roughly the amount of a Bill or Hillary one-night-stand lecture fee; what Tim Cook, the chief executive of Apple, earns in a couple of days. When Hollandale’s citizens lost their jobs in the cotton fields to mechanization they found work nearby, in Greenville and elsewhere, in factories that made clothes, bikes, tools and much else — for big brands like Fruit of the Loom and Schwinn. They are gone now.

4. John Tierney has a contrarian take on the conventional wisdom that promotes recycling of all waste, and argues that it makes sense to recycle only cardboard, some paper, aluminium cans, and some plastics,

To offset the greenhouse impact of one passenger’s round-trip flight between New York and London, you’d have to recycle roughly 40,000 plastic bottles, assuming you fly coach. If you sit in business- or first-class, where each passenger takes up more space, it could be more like 100,000. Even those statistics might be misleading. New York and other cities instruct people to rinse the bottles before putting them in the recycling bin, but the E.P.A.’s life-cycle calculation doesn’t take that water into account... if you wash plastic in water that was heated by coal-derived electricity, then the net effect of your recycling could be more carbon in the atmosphere. To many public officials, recycling is a question of morality, not cost-benefit analysis.

According to the E.P.A.’s estimates, virtually all the greenhouse benefits — more than 90 percent — come from just a few materials: paper, cardboard and metals like the aluminum in soda cans. That’s because recycling one ton of metal or paper saves about three tons of carbon dioxide, a much bigger payoff than the other materials analyzed by the E.P.A. Recycling one ton of plastic saves only slightly more than one ton of carbon dioxide. A ton of food saves a little less than a ton. For glass, you have to recycle three tons in order to get about one ton of greenhouse benefits. Worst of all is yard waste: it takes 20 tons of it to save a single ton of carbon dioxide. Once you exclude paper products and metals, the total annual savings in the United States from recycling everything else in municipal trash — plastics, glass, food, yard trimmings, textiles, rubber, leather — is only two-tenths of 1 percent of America’s carbon footprint.

5. The completely deregulated (prices are decontrolled) pharmaceuticals industry in the US has been witnessing a new trend of firms (floated by financial market executives) buying up existing drugs and steeply raising price to maximize their returns. In recent weeks, Turing Pharamaceuticals has taken flak for raising the price of anti-infection drug Daraprim from $13.50 to $750. Now comes Valeant Pharmaceuticals, which this year alone, has raised the prices of its brand-name drugs by 66%.

The Times writes about Valeant's version of predatory capitalism with attendant market failure,

Valeant is known for buying one company after another, and laying off their employees to achieve savings, while accumulating a debt of about $30 billion. It spends an amount equivalent to only 3 percent of its sales on research and development, which it views as risky and inefficient compared to buying existing drugs. Traditional big drug companies spend 15 to 20 percent of sales on research and development. Valeant also pays extremely low taxes because it is officially based in Canada...

But while more conventional companies do not typically triple or quadruple prices overnight, they do often raise them year after year at a rate far faster than inflation. Big pharmaceutical companies like Pfizer and Merck raised list prices an average of 13 percent in 2014 and 8 percent so far this year... smaller price increases on widely used drugs had a much bigger effect on health care spending than the larger increases by Valeant on drugs with small sales... insulin prices had risen so much in recent years that some patients were scrimping on groceries to pay for it. The price of a package of five Lantus injectable pens from Sanofi has gone from about $179 in 2010 to $372 last year and insurance will often cover only one package at a time.

6. The big story of the week was the conclusion of the Trans-Pacific Partnership Trade deal between 12 Pacific-rim countries who make up 40% of world GDP and a third of global trade. The importance of the deal, the biggest after the 1994 GATT, is not so much in reduction in tariffs but in its quest at regulatory harmonization of environmental, labor, intellectual property, subsidies to state-owned enterprises, legal systems, and investment protection standards; facilitation of unimpeded data flows (including the requirement that servers be not located within the country to conduct business there); easing nationality requirements and restrictions on investing in services sector,;and competitive neutrality with respect to state-owned businesses. Fundamentally, it frames the agenda and sets the rules for the next phase of international trade liberalization, focused on regulatory harmonization, and is therefore a major victory for the United States foreign policy. See also this from Pratap Bhanu Mehta on the choice facing India.

7. Chiara Criscuolo (via MR) has an interesting article in HBR which discusses this OECD study which finds vast variations in productivity across firms in both manufacturing and services. Most strikingly, as the graphic below shows, even as average productivity growth has slowed down, a small group of the most productive firms, those at the "global productivity frontier", are experiencing robust productivity gains

The study attributes this trend, which appears to debunk the notion of stagnation in innovation, to constraints on innovation diffusion. They include restrictive patenting regime, and the possibility that innovations are embedded in capital thereby requiring new investments (which are not readily forthcoming) for innovation diffusion. Drawing similarity with the fact that only a small percentage of firms export, Tyler Cowen points to the possibility that increasing returns to scale and fixed costs to trade abroad contributes to a bifurcation of firm productivity outcomes. His argument is that "only a small percentage of firms export"  and the "only a small percentage of firms are on the productivity frontier" may be used inter-changeably.

8. Larry Summers proposes pandemic bonds, similar to catastrophe bonds, to finance relief and rehabilitation in case pandemics strike. The bonds would be issued by some public entity, like a multilateral agency, "to investors and would be deemed to default in the event of an epidemic, thereby assuring the availability of resources to respond before the epidemic takes on pandemic proportions". Such bonds, uncorrelated with normal business cycle turns, are attractive for investors seeking risk diversification. The implementation question he raises is

Experience with hurricane and earthquake bonds suggests that in order to accept a 1 per cent chance of default, investors require about a 3 per cent yield premium. The same is probably true of epidemic or pandemic bonds... As an aid agency concerned with, say, health in sub-Saharan Africa, is it better to pay $3 m to support the issuance of a bond that will with 1per cent probability pay off $100 m, or is it better to give the $3 m to support improvements in local health care.

9. As domestic demand slumps, Chinese manufacturers are increasing their exports. Chinese steel exports have surged to a record high of 11.3 mt in September 2015. 

10. Fascinating set of graphics about start-ups in India. Though the country boasts 4200-4400 start-ups, the third highest in the world after US and UK, and is estimated to see $5 bn flowing into them this year, the total employment in these firms is just 80000-85000. While e-commerce, consumer services, and aggregators make up nearly 40% of all startups, there are number of them exploring ways to address various social and public policy challenges. 

Market aggregators - waste management edition

The Times has a story on Rubicon Global, which has emerged as the pioneering market aggregator in the business of private waste management in the US. Rubicon, using its proprietary software, Ceasar, acts as a hub connecting businesses with waste haulers, landfill owners, and trash recyclers. Times writes,

Across the country, millions of companies are creating trash, including food waste, cardboard, plastics and various other materials. These companies hire waste management firms to pick up their trash and truck it to a landfill. Two big national companies, Waste Management and Republic Services, dominate the market, owning fleets of trucks and hundreds of landfills. Thousands of smaller, regional trash haulers fill in the gaps. Rubicon, based in Atlanta, isn’t in the business of hauling waste. It doesn’t own a single truck or landfill. Rather, companies hire it as a kind of waste consultant. It begins by holding an online bidding process for its clients’ waste contracts, fostering competition among waste management businesses and bringing down their prices.

Rubicon also studies its clients’ waste for novel recycling opportunities, connecting businesses with the recyclers who see hidden value in their junk. For a national pizza chain, Rubicon determined that much of its leftover dough could be processed into ethanol. For a regional supermarket, Rubicon discovered that 400,000 old company uniforms could be shredded and resold as a stuffing for pet beds. Insulated containers that carried seafood for one business were repurposed to transport bull semen for another. So beyond saving money for its clients, Rubicon can nudge them toward environmental responsibility by diverting waste from landfills into recycled goods.

Its promoters claim that Rubicon is the "uber of waste". Two observations,

1. The advances in ICT over the past decade has facilitated the emergence of a distinct class of business service providers, market aggregators, who help consummate all kinds of transactions - buying and selling, erranding, renting, sharing etc. Commentators have christened them brokers in the sharing and renting economy. In the initial phase, these aggregators have been confined to services which could be delivered online through the internet, as evidenced by the success of agencies like Priceline and Expedia in purchase of airline tickets and holiday packages, and iTunes and Spotify in delivering music.

In recent years, it has spread to other parts of the economy, broking retail merchants and deal seekers, vehicle drivers and ride-seekers, errand seekers and chore suppliers, grocery chains and delivery agencies, employers and free-lance workers, and so on. This trend has just started and has a long distance to play out, covering large parts of the economy. All these platforms lower inefficiencies and waste, thereby benefiting both buyers and sellers. Fundamentally they have the potential to lower market inhibiting frictions, thereby easing market transactions and expanding the market.

2. Rubicon aims to help its clients divert 100% of their waste from landfills to recyclers by 2022. Rubicon's ambitions on recycling, motivated by the business opportunity there, is an example of how appropriate alignment of incentives among market aggregators and their clients can help attend to many social and environmental problems. There is window for public policy makers and non-profits to seek out these opportunities and influence the design of these markets in a manner that advances public interest without compromising on their growth.  

Tracking trash!

If you thought that solid waste generated in households go straight to the nearby landfill, just see the video below (skip the intro and start from aound 0.48 min).



(HT: Data Mining)

Municipal waste - landfills Vs incinerators?

Standard solid waste management techniques to dispose off municipal garbage include landfill dumping, composting of bio-degradable materials, biomethanization of biological materials, and incineration. All of these disposal techniques involve significant amount of pollution and are therefore done away from habitations. Strong public opposition to installation of such plants near residential areas are therefore natural. For this reason, despite the theoretical possibility of municipal garbage emerging as a clean alternative fuel (waste-to-energy), it has remained unexploited to potential in most parts of the world.

In this context, Times reports of municipal and industrial garbage incinerating plants abutting housing colonies in Europe, which are so clean that many times more dioxin is now released from home fireplaces and backyard barbecues than from such incinerators. Unlike the smoke-belching models of the past, today's waste-to-energy plants have arrays of newly developed filters and scrubbers to capture the offending chemicals — hydrochloric acid, sulfur dioxide, nitrogen oxides, dioxins, furans and heavy metals — as well as small particulates.

Across Europe, there are about 400 plants, with Denmark, Germany and the Netherlands leading the pack in expanding them and building new ones. Denmark alone now has 29 such plants, serving 98 municipalities in a country of 5.5 million people, and 10 more are planned or under construction. There plants are placed in the communities they serve, no matter how affluent, so that the heat of burning garbage can be efficiently piped into homes. Further, to increase public acceptance, some of the newest plants are encased in elaborate outer shells that resemble sculptures.



Waste-to-energy plants score over landfills in many ways. Primarily, the methane gas emitted by landfills is about 20 times more potent than carbon dioxide, the gas released by burning garbage. A study by the US EPA in 2009 found that even the state-of-the-art landfills which collect the methane that emanates from rotting garbage to make electricity churn out roughly twice as much climate-warming gas as waste-to-energy plants do for the units of power they produce. It also found that although new landfills are lined to prevent leaks of toxic substances and often capture methane, the process is highly inefficient. Secondly, it has been found (by the same EPA study) that waste-to-energy plants produce nine times the energy as landfills for the same amount of waste disposed off.

The graphic below compares the relative effectiveness of landfills, which are widely used in the US (and across developing countries like India), and incinerators.



The preference for landfills in the US comes from the presence of abundant landmass, which makes it easier and cheaper to dispose off garbage in this manner. For exactly the opposite reason, landfills are unattractive in Europe, forcing them into costlier but more environment friendly alternatives like incinerators. In fact, the European Union severely restricts the creation of new landfill sites, thereby promoting waste-to-energy plants. Cities in countries like India, which too face similar land scarcity, also may have to adopt such techniques to dispose its garbage.

Advocates of recycling strongly oppose waste-to-energy plants on the grounds that it disincentivizes recycling (though the example of Germany, the world leader in recycling, with its large number of incinerators of non-recyclable waste, points otherwise). They advocate measures that move towards "zero-waste" instead of spending energy to burn the garbage after it is generated.

However, such best-practice zero-waste strategies are invariably the enemy of the practical and possible. Instead of rejecting all second-base alternatives on the grounds that they are not as efficient as the "best practice", a more realistic option would be adopt a mix of all these methods to effectively dispose off municipal solid waste.

Though there are a few experiments with waste-to-energy (with municipal garbage) in India, I am not aware of any that have actually yielded the desired results (over a long enough period) to serve as examples worthy of emulation. In fact, the present policies may actually be supporting fly-by-night developers, out to knock off the generous upfront subsidies offered by the Ministry of Nonconventional Energy Sources (MNES) and also the massive land extents often allotted to such plants on the city limits.

Far from becoming a financial burden, the prevailing conventional wisdom in India is that municipal bodies can make money from solid waste disposal, especially from waste-to-energy plants (the possibility of accessing carbon credits under the Kyoto Protocol only adds to the impression). Accordingly, cash-strapped municipal bodies are loath to spend much on effective garbage collection, transportation and disposal, and look for quick-fix solutions in private operators for their solid waste disposal.

State and central government policies are structured with this in mind, without consideration for the fact that effective solid waste disposal is very expensive. For example, New York City paid $307 million last year to export more than four million tons of waste, mostly to landfills in distant states. In 2009, a small portion of New York's trash was processed at two 1990-vintage waste-to-energy plants in Newark and Hempstead, NY, owned by a private company, Covanta, and the City paid $65 a ton for the service. And incidentally, this is the cheapest available way for New York City to get rid of its trash.

Waste-to-energy plants do involve large upfront expenditures, that cannot be made without having access to assured municipal garbage and regulatory certainty. Instead of upfront subsidies, a more effective subsidy to such plants may be by way of feed-in tariffs (or generous tariff incentives) similar to that proposed under the National Solar Power Policy. This removes the risk of developers knocking off the MNES incentive and fleeing after some time and incentivizes the developers to generate as much electricity as possible, so as to maximize his returns. Municipal laws should also be revised to provide greater clarity to developers and ULBs (for example on the issue of assuring the supply of solid waste to such plants, etc) on the terms for sanctioning and setting up of such waste-to-energy plants.

See also this debate on MSW disposal in the US.

Update 1 (28/4/2010)
Normal Steisel makes the case for converting New York's garbage into energy. Rose George advocates generation of electricity from sewerage, by anaerobic digestion of the sludge and using the methane so produced to run turbines.

Nudging to recycle waste

Municipal waste disposal ranks alongside the more well-known problems like pollution and climate change as the major environmental challenges facing us. As part of efforts to more sustainably address this challenge, environmentalists have advocated encouraging recycling and ultimately moving towards completely eliminating garbage disposal in landfills.

Apart from its obvious environmental damage, cities across the world spend huge and increasing amounts on treatment and disposal of garbage, besides facing problems with adequate landfill sites. As aprt of its objective to cut the amount of garbage going to landfill sites to zero within 15 years by 2025, the City Council of London has embraced a Recycle Bank scheme that uses learnings from behavioural economics to nudge people into recycling.

As part of the scheme, instead of fining people into recycling, households are given shopping vouchers or donations to charity to the value of how much they recycle. It is hoped that an average household can earn upto £14 a month by recycling their home garbage, and this gets paid in the form of vouchers, which can in turn be either redeemed in certain shops or get credited to the account of charities.

The objective is to reduce the expenditure incurred on treatment and use of landfill sites, which is estimated to increase from around £245m to £307m by 2013. London spends approximately £600m every year to collect, treat and dipose off its 4 mt of annual household waste of which just 25% is recycled. The scheme has already been adopted by the Windsor and Maidenhead councils.

The British Government has already legislated to permit local councils to impose a "pay-as-you-throw" rubbish tax on households for the garbage thrown out by them.

The same approach can be adopted to nudge people into segregating garbage at source in Indian cities, atleast in the middle and upper-income areas. Municipal governments across the country have unsuccessfully tried different approaches to induce residents to segregate garbage at source by spending huge amounts on it. Households can be "nudged" into segregating their daily garbage (into two or three bins) and handing the same to the door-to-door municipal garbage collectors in exchange for dated vouchers that include

1. Ice-cream (!!) vouchers to children who can redeem the same in the local ice-cream parlour
2. Local school or community hall vouchers that go into providing facilities and maintenance of these assets
3. Donations to specific causes like improving the local library or garden
4. Partial refunds (tax credits) on their property taxes on producing the vouchers
5. Bulk transfers (or sanction of community assets) to RWAs who mobilize its citizens to segregate garbage at source