Weekend reading links

1. India might need to look for a Tom Barrack equivalent to open informal doors with Donald Trump. Barrack, a private equity magnate and long-time confidant of Trump, has swung the rapprochement between Erdogan and Trump. People like Barrack, Steve Witkoff, Joshua Kushner etc., seem to have an outsized influence in engaging with the Trump administration. 

2. In the meantime, Pakistan is throwing a series of goodies at Trump to entice deeper engagement with it. The latest is a proposal to construct a port at Pasni for $1.2 billion with Pakistani federal government and US-backed development finance, linked to a new railway to transport critical minerals from the country's interior. Pasni is just 100 miles from Iran and 70 miles from the Pakistani city of Gwadar, which has a China-backed port.

3. John Burn-Murdoch points to peak social media.

Time spent on social media peaked in 2022 and has since gone into steady decline, according to an analysis of the online habits of 250,000 adults in more than 50 countries carried out for the FT by the digital audience insights company GWI. And this is not just the unwinding of a bump in screen time during pandemic lockdowns — usage has traced a smooth curve up and down over the past decade-plus. Across the developed world, adults aged 16 and older spent an average of two hours and 20 minutes per day on social platforms at the end of 2024, down by almost 10 per cent since 2022. Notably, the decline is most pronounced among the erstwhile heaviest users — teens and 20-somethings... The shares of people who report using social platforms to stay in touch with their friends, express themselves or meet new people have fallen by more than a quarter since 2014. Meanwhile, reflexively opening the apps to fill up spare time has risen, reflecting a broader pernicious shift from mindful to mindless browsing.

The trend appears not to be the case with North America where it's still rising.

4. Hyper-charged technology diffusion!

Fixed-line telephony, the very cornerstone of 20th-century communication, took a staggering 25 years to reach 1 million users in the United States. Pagers took a decade, and the mobile phone slightly less. The internet, a seismic shift in itself, took about five years, and Facebook less than a year. But the most breathtaking leap came with ChatGPT — the world’s current favourite generative AI tool. It took a mere five days to cross the one million user threshold globally.

5. Palantir could be the makings of the 'mother of all bubbles'! (HT: Adam Tooze)

Once more for the record … Palantir is not some world-bestriding titan of reactionary capitalism that merits inclusion alongside the true giants of big tech. Palantir is a medium-sized business, enormously pleased with itself if it generates as much as $1 billion in revenue per quarter, 55 percent of which comes from modestly sized government contracts.

6. Fascinating profile of Bari Weiss, the former NYT journalist who quit in protest at lack of freedom to express there and founder The Free Press as an independent media outlet. Paramount has announced her appointment as the new editor in chief of the CBS News and acquisition of her startup The Free Press for $150 million.

6. Ruchir Sharma describes the US economy, and especially the equity markets, as one giant bet on AI.

The hundreds of billions of dollars companies are investing in AI now account for an astonishing 40 per cent share of US GDP growth this year... AI companies have accounted for 80 per cent of the gains in US stocks so far in 2025. That is helping to fund and drive US growth, as the AI-driven stock market draws in money from all over the world, and feeds a boom in consumer spending by the rich. Since the wealthiest 10 per cent of the population own 85 per cent of US stocks, they enjoy the largest wealth effect when they go up. Little wonder then that the latest data shows America’s consumer economy rests largely on spending by the wealthy. The top 10 per cent of earners account for half of consumer spending, the highest share on record since the data begins. 

No nation has seen an immigration boom-bust cycle near the scale of the one roiling America. Net immigration nearly quadrupled after 2020 to peak at well over 3mn in 2023, but the backlash led by President Donald Trump sent that figure into freefall. This year only around 400,000 net new arrivals are expected, and that could be the trend in the coming years. This labour force squeeze alone will reduce America’s growth potential by more than a fifth, Goldman Sachs analysis suggests.

This is an interesting snippet about the US equity markets. 

Foreigners poured a record $290bn into US stocks in the second quarter and now own about 30 per cent of the market — the highest share in post-second world war history. Europeans and Canadians have been boycotting American goods but continue buying US stocks in bulk — especially the tech giants. In a way, then, America has become one big bet on AI. Outside of the AI plays, even European stock markets have been outperforming the US this decade, and now that gap is starting to spread. So far in 2025, every major sector from utilities and industrials to healthcare and banks has fared better in the rest of the world than in the US.

7. China seeks to expand its influence in South Asia.

FT research shows Chinese officials have held at least seven high-profile meetings with Bangladeshi politicians in the 14 months since the interim government of Muhammad Yunus, a former social finance entrepreneur, took office. This compares with eight meetings in the last five-year term of Bangladesh’s long-standing autocrat, Sheikh Hasina. Beijing officials, meanwhile, have held 22 high-profile meetings this year with counterparts from Pakistan — on track to match last year’s 30. Among the smaller countries surrounding India, Beijing has conducted at least six high-profile meetings with Nepali officials this year and at least five in Sri Lanka.

8. French sovereign bond yields shoot up following the collapse of another government. 

The yield on the benchmark 10-year French OAT is now trading above its Italian counterpart (BTP) — a once unthinkable inversion. This financial penalty places the Eurozone’s second-largest economy behind a market sometimes characterised in the past as one of the bloc’s “peripheral” economies. This is more than a metric of fiscal imbalance; it is a loss of confidence in the French political system’s ability to govern decisively. Meanwhile, the sovereign spread between the 10-year French OAT and the benchmark German Bund has widened dramatically, pushing it to more 0.85 percentage points... The widening spread between French and German bonds threatens the ECB’s ability to ensure its single monetary policy is transmitted well across the bloc. When dispersion in yields increases, it risks the type of market fragmentation and stress that could become a systemic threat... The bond markets are losing patience with political paralysis.

9. OpenAI has signed up for 20GW for computing capacity.

OpenAI has signed about $1tn in deals this year for computing power to run its artificial intelligence models, commitments that dwarf its revenue and raise questions about how it can fund them. Monday’s deal with chipmaker AMD follows similar agreements with Nvidia, Oracle and CoreWeave, as OpenAI races to find the computing power it thinks it will need to run services such as ChatGPT. The deals would give OpenAI access to more than 20 gigawatts of computing capacity, roughly equivalent to the power from 20 nuclear reactors, over the next decade. Each 1GW of AI computing capacity costs about $50bn to deploy in today’s prices, according to estimates by OpenAI executives, making the total cost about $1tn... OpenAI is burning through cash on infrastructure, chips and talent, with nowhere near the capital required to fund these grand plans. The deals also involve circular arrangements between the world’s most valuable start-up and its partners, as well as complex financing terms that have in most cases yet to be agreed...

OpenAI’s deals with Nvidia and AMD could cost up to $500bn and $300bn respectively, according to Financial Times calculations, although both include incentives that could also help OpenAI pay for the chips it buys. Oracle’s deal will cost OpenAI another $300bn, while data centre group CoreWeave has disclosed computing deals with OpenAI worth more than $22bn. OpenAI also launched an initiative with SoftBank, Oracle and others in January known as Stargate that pledged to invest up to $500bn in US infrastructure for OpenAI. It is not clear how the Nvidia and AMD deal will fit into the Stargate plans. The ChatGPT maker has not disclosed whether it will buy chips directly or through its cloud computing partners, and is expected to lease some Nvidia chips.

This is an intriguing financing arrangement

AMD will give OpenAI warrants entitling it to buy up to 10 per cent of the company for just a cent a share, depending on their project hitting certain targets, including some linked to AMD’s share price. AMD shares were worth nearly $204 when markets closed on Monday. If they keep rising, OpenAI could sell its stock to fund its spending on AMD’s chips.

10. Leo Lewis points to Japan's demographic problem of labour shortages, which he describes as 'enshortification'!

Take carpenters — essential in a country where a great deal of construction uses wood. Their numbers have more than halved since 2020, while more than 43 per cent of those still working are over 65. Many projects, large and small, are being delayed. A shortage of bus drivers has caused operators in Tokyo to cut over 200 services. The military cannot get close to its recruitment targets. The Foreign Ministry revealed earlier this year that it cannot hire enough Japanese chefs for its embassies. In some parts of the countryside, home deliveries of certain goods are undertaken by scooter riders in their mid-80s. There are genuine concerns across industry that companies are going to run into trouble because Japan no longer has enough tax accountants.  

11. Ahead of the meeting between US and Chinese Presidents in Seoul later this month, China announces sweeping export controls on rare earths and related technologies, where China controls 70% of mining, 90% of separation and processing, and 93% of magnet manufacturing. 

Under the new rules, foreign companies will need Beijing’s approval to export magnets that contain even trace amounts of Chinese-sourced rare earth materials, or that were produced using the country’s extraction methods, refining or magnet-making technology. The restrictions announced on Thursday by China’s commerce ministry will for the first time create a Chinese version of the US foreign direct product rule, a measure Washington has used to block semiconductor-related exports to China from third countries. The rules give Beijing more leverage to exert control over the global rare-earth supply chain. Rare earth minerals and magnets are critical to technologies from smartphones to electric vehicles and fighter jets.

It has drawn a predictably strong reaction from President Trump, who has now threatened to cancel the meeting and raise massive tariffs on China. He has announced the imposition of 100% tariffs on all products from China and export controls on critical software. 

It's hard not to come away with the feeling that China has made a significant miscalculation with this decision. After having won Round One, it now risks squandering those early gains. 

12. Declining birth rates (18 million births in 2016 to 9 million in 2023) and a preference for inshoring (Nestle has won approval for a factory in Suzhou in eastern China to make and sell a similar product) have led to the shutdown of a Nestle factory producing formula for Chinese newborn babies and employing 540 workers in Askeaton, a small town in the Irish county of Limerick with a population of 1100. 

13. William Buiter on the rise and rise of gold.

Of the total 216,265 tonnes of above-ground stock of gold at the end of 2024, jewellery accounted for 97,149 tonnes (45 per cent). I believe that much of this “consumer demand” — indeed most of it — is in fact investment demand. Only gold coins and bars (including exchange traded funds) are counted as investment demand. At the end of 2024, this accounted for 22 per cent of the total stock. Central bank holdings were 17 per cent. Gold’s use in technology accounts for part of the 15 per cent of the global stock, classified as “other”... The flow supply of new gold in 2024 was 4,975 tonnes... Gold, extracted underground at material cost, was turned into gold bars and then put back underground at additional cost. Globally, gold reserves (ore deposits that can be economically extracted) are estimated at 54,770 tonnes and gold resources (ore deposits where the profitable extraction is more doubtful) at 132,110 tonnes. The only gold production strategy that makes socio-economic sense is to leave it all in the ground... At the end of 2024, gold holdings accounted for 20 per cent of central bank reserves, more than euro reserves (around 16 per cent). Gold’s price surge since would have pushed its relative share higher.

14. John Burn-Murdoch questions the narrative of the great graduate unemployment crunch, where new graduate entrants to the labour market are being squeezed by the rise of AI among other trends. 

Corporate India struggles to contribute to broad-based economic growth

For some time, the Chief Economic Advisor has been pointing to corporate India’s failure to supplement the central government’s efforts to boost economic growth. The lack of dynamism in corporate India has been a recurrent theme in this blog. See this and this on the balance sheet of corporate India. 

I’ll point to six ways in which corporate India is (not) contributing to broad-based and long-term high-enough economic growth. They have all been discussed on various occasions in this blog itself, and there’s compelling evidence on each. 

1. Wage stagnation. Even as corporate profits have been growing at a strong pace, rising four-fold in the last four years to a 15-year high (4.8% of GDP for Nifty 500 companies in 2023-24), wage growth has stagnated. 

2. Jobless growth. Corporate India was already deleveraging before the pandemic. The pandemic incentivised them to automate extensively. All the while, as mentioned above, profitability continued to rise sharply. The net result was very slow job creation. As a representative sample, consider the statistics from FY24 of the top six groups of corporate India consisting of 69 listed companies employing 1.73 million people - revenues grew 7.3%, profits 22.3%, market capitalisation 43.8%, and headcount declined by -0.2%! And the trend is longer term - in the 2012-19 period, while the gross value added (GVA) grew at an annual average rate of 6.7% the employment growth rate was just 0.01%. Job creation in the manufacturing sector has been stagnant in recent years. 

3. Strong preference to hire workers on a contract basis instead of regular recruitments. In the 2001-02 to 2022-23 period, while the number of workers in formal manufacturing rose from 5.96 million to 14.61 million, the share of contract workers rose from 21.8% to 40.7%. 

4. Reluctance to invest, despite good profits, de-levered balance sheets, and reasonable/stable economic growth prospects. An analysis of 408 non-financial corporates who make up the BSE 500 and form 94-95% of the net fixed assets of the index companies over the 2014-24 period reveals that their share of fixed assets (as a percentage of total assets) declined from 66% to 59% and the ratio of net fixed to financial assets declined from 1.95 to 1.49. 

5. Abysmally low expenditure on R&D, even by the largest companies in the knowledge sectors like pharmaceuticals and IT. Indian firms invest just 0.3% of GDP in in-house R&D, compared to a world average of 1.5%. It has just 23 firms among the global top 2500 R&D investors, whose total spending was just 4.7 billion euros, compared to 596.15 bn euros among US companies, 222.01 bn among Chinese, 116.3 bn among Japanese, 103.77 bn among German, 37.02 bn among S Korean, 35.92 bn among British, 31.66 bn among French companies. 

6. A distinct preference to focus its efforts on expanding toplines through import substitution instead of export competition. This is borne out by the absence of any major consumer brands or globally competitive manufacturers from India. Public policy may have unwittingly played along by not insisting on export competition in the Production-linked incentive (PLI) scheme. 

Supporters of corporate India will argue that these views are efforts by the government to deflect attention from its failings and broader factors beyond its control. They’ll point to the elephant in the room: consumption demand growth. They’ll argue that unless there’s robust aggregate demand, it’s futile, even wasteful, to throw money at the supply (or investment) side. They’ll also point to the uncertainties posed by geopolitical tensions, technology developments like Artificial Intelligence etc.

Critics’ and supporters’ claims are not mutually exclusive. Both are right. Yes, there are genuine aggregate demand concerns, but that cannot absolve corporate India of short-sightedness and unwillingness to contribute to broad-based and sustainable economic growth, especially when their balance sheets are in the pink of health.

Surprisingly, there’s such a paucity of serious research examining these trends and surfacing them for public debates. It’s also due to the dominance of a lazy ideological narrative on India’s economic growth that lays all the blame and responsibilities on the government while overlooking these important failings of the private sector. It’s time that this narrative be questioned. 

Temporary recruitment in government

One of the proposals on the problem of job creation in India is the idea of using government employment as a combination of temporary employment and skill acquisition opportunity for youth at the start of their labour market journey.

On these lines here's one proposal about temporary employment in government.

One is, I think, the government could expand the number of people it employs if it didn’t offer them the kind of terms they’re offered. For example, in China — I haven’t checked the data — there are three people with a bachelor’s degree in every village working for the village government. That changes the world. These are people with certain skills and a certain amount of knowledge of the world. So one thought is that the government should start introducing maybe a transitional mechanism where you take a job, and then it’s only if you’re good at it, that you keep it otherwise you can work for some years, and then you don’t. It’s like a tenure system. That will still create more jobs. We need more people on the ground. I don’t think our government is big enough. There’s a lot of people who will say that we have a big government, but in fact, we have a small government that’s trying to keep control, which looks like a big government, a heavy government, but it’s not actually so. The size is small (but) the hands are heavy, as a result partly, because it can’t do anything new because it has so little bandwidth. So rethinking the shape of the government, having more young people in government, as a trial as a way to start your life, but then you can go out and do something else. And somehow getting the court systems to agree to not ex-post turn everybody into a government official. I think it needs a set of tough decisions. But I think without that, our employability issues are going to be fraught all the time.

There have been other ideas like recruiting local youth as apprentices, training them, giving performance-based marks, and offering exit payments if they do not get into regular recruitments. 

This is a logically good idea and has already been tried out in some form of other. The most salient example is that of the vidya volunteers in education, who were the local educated and who were recruited with a honorarium wage under the Sarva Sikhsha Abhiyan. The idea was that these local educated youth would meet local teacher shortages and also get some experience while also acquiring their BEd/DEd qualifications and preparing for their Teaching Eligibility Test (TET) examinations. If they qualified, they would get recruited as a regular teacher, and if not, they could move on to elsewhere. 

The only problem is that in general the movement to elsewhere rarely happen. The volunteers stay on, and then the political economy takes over to mount pressure to regularise them. And it's a matter of years (sometimes decades!) before they get regularised. Or be absorbed into something like the minimum time scale on the principle of equal pay for equal work enunciated by the Supreme Court. 

Once recruited on contract or any other temporary employment mode into the government, the political economy makes the retrenchment very difficult. And the strength of the political economy factors increase with the size of the group under consideration. 

Further, since the recruits internalise this expectation at the time of recruitment itself, very few of them end up leaving on their volition for better opportunities. After all why seek better opportunities, when you have a strong chance of being regularised, sometime or the other. 

Another example is contract faculty in higher education institutions. Thanks to the Supreme Court orders, all of them are now paid at the minimum time scale. When originally conceived, the idea was that these faculty would be only for a short time till the regular faculty got recruited. But for a variety of reasons, the contract faculty have continued. Very few among them leave after getting better opportunities. 

An emerging category of large non-regular recruitment that's happening in governments is that of data entry operators, who have largely replaced the Junior Clerks or Junior Assistants. Here too the logic of temporary recruitment was that these people will pick up some skills and experience and move on to the private sector. This rarely happens. And there are already pressures to regularise them in several states. 

As an empirical validation, it would be useful to look at examples of more than 100 people recruited by a government department or agency on some temporary mode across states and see how many of those recruitments got formally terminated. My guess is that there'll be just a few, if at all. We could start with examples of large scale temporary (or non-regular) recruitments in governments - vidya volunteers, contract teachers, work inspectors, anganwadi workers, ASHA or community health workers, municipal sanitation workers, and home guards. What proportion of those recruited got into regular government jobs, what proportion left for the private sector, what proportion got regularised, and what share are now left? This would be a great PhD thesis for a young scholar - the political economy of contract recruitments in Indian states! It would unpack several aspects of public recruitments hitherto unknown to outsiders. 

Similarly, all government recruitments come with a 1-2 year probation period. In fact, most states recruit teachers with a two year probation. And there have been numerous instances of clear irregularities and moral turpitude by probationers. But there'll be hardly any instance of terminations during probation in any state. 

I believe there are three very strong reasons why this logically appealing solution will struggle in the Indian context. One, there's a very large premium associated with local employment, even if it's on a contract mode and has limited career progression opportunities. Two, government employment, especially in the same district or region, is economically and for social status considered the best among all employment opportunities. And there is the strong moral hazard that the political economy will ensure regularisation of contract (and nowadays even outsourcing) recruitments even if it might take time. Finally, there are limited comparable opportunities available in the private sector. For a start, educated youth prefer white collar jobs. But in these kinds of jobs, till the middle-levels, private sector pays far less than their public sector counterparts. Also, unlike government jobs, good private sector jobs are found only in the larger cities, where costs of living too are much higher. Further, it also does not help that the vast majority of these youth would anyways be unemployable in the positions they aspire to work in the private sector. 

No idea or innovation can wish away these fundamental problems. All these ideas end up providing backdoor for virtual public recruitments without any of the eligibility qualification requirements of formal recruitments. Governments are left with poor quality employees.

In general, it's observed that such approaches work best for higher skilled contract posts like individual consultants or technical personnel, and where the recruitments are done in small numbers. In these categories, the pressure groups will be too small to mount pressures to demand regularisation.

Weekend reading links

1. Debashis Basu writes about the case of C&C Towers Ltd (CCTL), the latest example of the unholy nexus between bankers and businessmen that has resulted in socialised losses.

It had signed a 20-year concession agreement with the Greater Mohali Area Development Authority (GMADA) in April 2009 for an inter-state bus terminal (ISBT), three multi-storey towers with retail and office spaces, a multiplex, a five-star hotel, a banquet hall, hypermarkets, and a helipad on top of one of the towers. The project turned bankrupt and went into liquidation, and was admitted for debt resolution. On October 19, the Chandigarh Bench of the National Company Law Tribunal (NCLT) passed an order... against an admitted claim of over Rs 579 crore, the resolution plan could provide for only Rs 81.5 crore, or just 14.08 per cent... The moment CCTL bagged the large multiplex project, it immediately gave an advance of Rs 110.78 crore as pre-construction advance and Rs 63.30 crore as mobilisation advance to a group company, C&C Construction Ltd (a listed firm which is also bankrupt). As always, a bunch of public-sector banks sanctioned money in November 2010. CCTL also collected Rs 490 crore from 400 property buyers. Construction was inordinately delayed, leading to the GMADA issuing termination notice in April 2016 and invoking bank guarantees of Rs 11.90 crore. A corporate insolvency resolution process (CIRP) started on October 10, 2019...

Consider these details of related-party transactions. CCTL had extended an advance to the extent of 35 per cent of the contract price to C&C. The transaction auditor has pointed out that the general business/industry practice is to advance 15-20 per cent of the contract value. As much as Rs 25.93 crore of the advance is still unadjusted against construction. CCTL had also made an excess payment of Rs 40.87 crore to C&C over and above the bills and mobilisation advances allowed. No lender approval had been sought for this payment, said the NCLT order. According to the terms of the contract, CCTL had the right to impose and levy liquidated damages of 0.25 per cent of the contract value per week or part of a week, a maximum of up to 5 per cent of the total contract value, ie Rs 15.82 crore in the case of default by the contractor (C&C). The work was scheduled to be completed within 18-30 months from December 16, 2009, for the ISBT and the hotel & commercial complex. Despite inordinate delay, CCTL has not imposed liquidation damages on C&C.

Basu is spot on in his assessment,

The CCTL promoters crafted a contract to drain substantial amounts of money and got away with it. The bankers and “independent engineers” of the GMADA did not monitor the project and did nothing to prevent money from being drained off to group companies. They are primarily responsible for this fraud, but they too got away... What were the bankers doing? What were the engineers of the GMADA doing? The answer is crystal clear in all such bankruptcy cases (especially in real estate involving public-sector banks), but it is one that we don’t want to see: Rampant fraud and corruption by everybody involved... The source of humungous bad loans that are written off periodically has nothing to do with poor bankruptcy laws, as claimed by bankers, such as Arundhati Bhattacharya, former State Bank of India chairperson. Yet, there is widespread opposition (even articulated by former Reserve Bank of India governor Raghuram Rajan) to criminal action against bankers because they would like to label these normal “business failures”.

Solutions like IBC and privatisation of banks without addressing fundamental issues of governance and political economy are like band-aid policies. 

2. Interesting that the technology companies have laid off more people in India this year than all but the US! And layoffs among startups in India this year has already exceeded that for the full of last year.

This hiring winter comes even as Infosys and Wipro which together hired 208,000 graduates last three years have announced that they'll not be hiring this year. This is the first time since 2008 that any of the big Indian IT firms have not hired. 

3. China's Belt and Road Initiative (BRI) is at a crossroad.

The decline in investments has also been accompanied by rising criticism and domestic opposition in BRI countries, even as those countries struggle to repay the loans. 

The best example is Pakistan where projects worth $62 bn have been committed. But 40% of projects have run into problems of corruption, cost overruns, funding shortfalls or adverse environmental impacts, and 20% have been cancelled or delayed indefinitely.

The current problems should also not take away from the scale at which BRI was done and its unprecedented promise.

Recipient countries such as Pakistan find themselves able to finance projects they could never have dreamt of under old-style foreign bilateral or multilateral aid programmes, from power plants to high-speed data networks... “In some senses, it was an absolute game changer,” says Bilal Gilani, executive director of Gallup Pakistan, a consultancy. He added that China was bringing in almost as much foreign investment into energy alone than “what Pakistan received as FDI in total in various sectors in 25 years prior to CPEC”. Hussain, the Pakistani senator, goes further, saying infrastructure on this scale was inconceivable in the country prior to BRI. “The only two projects which we have successfully done with a certain sustainability, with a certain perseverance, with a certain determination — one was the nuclear bomb . . . and the second is CPEC.”

A big problem has been the absence of private sector linkages. The Chinese have avoided seeing BRI as an economic investment opportunity. Instead, they have followed the model of lending, contracting, and supplying, thereby multiplying the value capture from the loans and limiting local spillover benefits. 

“[We hoped] to get some Chinese companies to invest in Pakistan, in our special economic zones and then to export,” says a former Pakistani official, who declined to be identified. “That never took place. It’s OK to borrow money and build infrastructure, but it’s more difficult to bring investors into our zones to make stuff and sell it.” This lack of follow-through from Chinese private companies has arguably been CPEC’s biggest shortcoming. Analysts say that few Chinese businesses have shown an interest in setting up factories there, depriving the Pakistani government of the foreign currency earnings needed to service its non-rupee borrowings.

4. Livemint points to the annual survey of Indian cities by Janagraha and has some interesting graphics. This on the human resource deficiencies of Indian cities

This on the the low degree of devolution of powers to municipalities. 

This on how poorly paid municipal councillors are.

5. Tell-all memoirs by senior government officials like this do a lot of dis-service. Most often, as in this case, it's driven by personal agendas and egos. If that's not bad, it immediately increases risk-aversion in already risk-averse governments. 

Senior bureaucrats earlier too used to write their memoirs. But there are three differences. One, their memoirs used to be atleast some years after their retirement. Two, even when it came out, it avoided controversial topics and playing to the galleries. Three, these memoirs used to be dignified accounts. 

6. Some snippets on the emerging trends with the Indian economy.

Sample this about wages

Real wages of casual wage workers in agriculture shows a negligible growth of 0.1% per year compared to the wages in 2019. For non-agricultural wages, they are yet lower than the level in 2019, with a decline of 1.1% from a year earlier... The situation for regular workers is no better... The latest Periodic Labour Force Survey (PLFS) gives their earnings in 2022-23. Still, they fare worse, with real earnings remaining lower compared to the pre-pandemic levels. For the April-June quarter, real monthly earnings of regular workers have declined 0.5% per annum compared to their 2019 level. This is also true for the July-September quarter of last year, which shows real earnings decline at 1.6% per annum compared to their 2019 levels. But even compared to 2017-18, which is the year when the PLFS series begins, real earnings are lower for every quarter of 2022-23 compared to their levels in 2017-18. The decline is greater when compared to 2017-18, at an average 1.8% per annum.

This on a possible K-shape in the housing loans sector,

The housing loan interest rates before May 2022 had stood at 6.5-7%. Now they are at around 8.4% to 10%, with housing loan equated monthly instalments (EMIs) having jumped 20%. But this hasn’t slowed down their disbursal. Why? The answer lies in looking at the breakdown of housing loans between priority sector loans and the non-priority loans. Priority sector housing loans are defined as: “Loans to individuals up to ₹35 lakh in metropolitan centres (with a population of 10 lakh and above) and up to ₹25 lakh in other centres… provided the overall cost of the dwelling unit in the metropolitan centre and at other centres does not exceed ₹45 lakh and ₹30 lakh, respectively." The remaining loans are non-priority loans.

In the months leading up to May 2022, priority sector housing loans formed around 35-36% of the overall outstanding housing loans of banks. By June 2023, they had fallen to 31.5%, implying that banks are giving out more non-priority housing loans. Of course, these loans are largely taken on by the well-to-do, who do not get impacted much by the rise in EMIs. In fact, the outstanding priority sector housing loans of banks from January to June have been just 1-2% higher than during the same months in 2022. When it comes to non-priority housing loans of banks, they have been around 22% higher from January to June in comparison to the same months in 2022. Further, the percentages don’t explain this inequality well enough. The outstanding priority sector housing loans from June 2022 to June 2023 went up by ₹137.76 billion. In comparison, the non-priority sector housing loans went up by ₹2.47 trillion, nearly 17 times more.

And this about automobile sales in India. 

Vehicle sales have been declining since 2018-19 and car and passenger vehicle sales have been nearly stagnant since 2011-12. The real growth in all categories happened from 2003-04 to 2010-11.  

7.  One of the intriguing things has been the stock market's calm reaction to geopolitical events like in the Middle East. But Ruchir Sharma points to historical data which appears to inform that the reaction now is par for the course.

In the days after the terror attacks in the US on 9/11, much cited as an analogue to 10/7 in Israel, America was on red alert for a follow-up. The S&P 500 fell by 12 per cent, the fall magnified no doubt by the fact that the US was six months into an eight-month recession. But that phase passed quickly — the S&P 500 would recover all its losses by October 11. The same pattern can be traced back much earlier. Looking at the stock market reaction to 25 of the most significant geopolitical crises since the second world war, including cross-border conflicts from Korea in 1950 and acts of terror from the first World Trade Center bombing in 1993, the S&P 500 dropped on average by around 4 per cent, reaching bottom in 15 days, but recovering fully in 33 days. Sixteen of these events took place in the Middle East or stemmed from conflicts or terror groups there — such as the bombings on public transport that hit Madrid in March 2004 and London in July 2005. After an initial impulsive sell-off, the market usually recovered the losses quickly. And the market sell-off on the latest conflict in the Gaza Strip is so far less striking than it has generally been. The bigger worry is rising interest rates.

We tend to overreact to present crises

The collective mind of the market, in contrast, recognises geopolitical risk as a historical constant, and frames fraught moments in that context. Is it clear, for example, that the Middle East is more precarious now than during any of the major conflagrations there since the second world war? That Russia is a more dangerous power after the loss of half its combat capacity in Ukraine? That China is a greater threat today, despite the steady weakening of its economy? The sum total of these threats is highly uncertain and debatable; the market, an aggregation of millions of views, is inclined not to rush to judgment. I met the legendary investor Julian Robertson in the late 1990s, when the hopes for world peace that followed the collapse of the Soviet empire were erased by new risks, including India and Pakistan carrying out a series of nuclear tests. Robertson advised me, as a young rookie investor, not to overreact.

This is a very wise article. 

There's a natural propensity of humans to be more alarmed by their present and be blind to the long view. Are we really in a more fractured times? Is it worse than in 1972-73 or 1979, or earlier times of convulsions, especially during the peak of the Cold War? I'm being deliberately contrarian here.

8. On the implications of India's decision to ban on rice exports on the face of rising prices

By the end of July, India had banned exports of non-basmati white rice and followed this in August with a minimum sale price for basmati rice and a 20 per cent tariff on parboiled rice, extended until March. “It’s tough when a country that accounts for 40 per cent of global trade slaps a ban on half of what they export, and duties on the other half,” says Joseph Glauber, senior research fellow at food security think-tank International Food Policy Research Institute (IFPRI) and a former chief economist at the US Department of Agriculture... the benchmark rice prices in Thailand and Vietnam, the world’s second and third largest rice exporters, have risen 14 and 22 per cent since India imposed its ban. Arif Husain, chief economist at the UN World Food Programme, points out that the countries likely to be worst affected are already suffering from a litany of woes: sky-high food prices, soaring debt and depreciating currencies... 

... countries in west Africa... are particularly exposed to India’s export ban, says the WFP’s Husain. In Togo, for example, almost 88 per cent of all rice imports came from India in 2022 and 61 per cent for Benin, the world’s largest importer of Indian broken rice. In Senegal, where 47 per cent of rice imports come from India... 

The rice export ban is also important since over 40% of the global rice exports come from India. 

The article points to concerns about global rice production going forward and its ability to meet the rising demand

Today’s predicament, analysts warn, is not so easily fixed. Fifteen years ago the world was not lacking in the grain, but that is no longer the case. The world population is set to reach close to 10bn by 2050 with the biggest growth in Africa and Asia. Researchers estimate this rise will increase demand for rice by almost a third, but yields are not keeping pace. After decades of rapid growth thanks to the development of new varieties, yields are stagnating in four big rice-producing countries in south-east Asia, according to a recent study in Nature Food, an academic journal. Globally, on average yields increased 0.9 per cent a year between 2011 and 2021, a slowdown from 1.2 per cent a year between 2001 and 2011, according to data from the UN. 

The chief reason for this setback is climate change. Because rice grows in hot climates — 90 per cent of the world’s rice is produced in Asia — it is often assumed that a few extra degrees will not matter... This is not the case. Above certain temperatures, rice yields drop, explains Sander, adding that the grain is particularly sensitive to night-time heat. A 2017 study found that a global increase in temperature of 1C was likely to reduce rice yield by an average of 3.3 per cent. Temperatures have already risen by at least 1.1C since pre-industrial times. Modelling by commodity data group Gro Intelligence forecasts that by 2100, Asia’s top rice exporters will all experience a sharp increase in the number of days above 35C, with Thailand potentially seeing an 188 additional days above this threshold in a worst-case scenario. For Asia’s rice-producing deltas, from the Mekong to Ganges, climate change could present other complications. As temperatures increase, sea levels rise and salty water flows into fresh water rivers, irrigation channels and the soil, reducing yields or making growing impossible.

9.  Parental income determines your SAT score in the US. Among SAT takers, the children of the richest 1% were 13 times and top 20% seven times more likely to score 1300 than children of the poorest quintile. 

Given the low proportion of SAT takers among poor students, the disparity becomes even greater when we compare the ratio for all students who score more than 1300.

And the picture of the distribution of SAT score by income is even worse.

10. Aswath Damodaran writes the obituary of ESG investing

Born in sanctimony, nurtured with hypocrisy and sold with sophistry, ESG grew unchallenged for a decade, but it is now facing a mountain of troubles, almost all of them of its own making... If an asset is less risky, it should have lower expected returns. Thus advocates who argue that improving ESG will make firms less risky are directly contradicting other claims that investors will earn higher returns if they invest in high ESG companies. Adding an ESG constraint to investing will lower expected returns, with the only question being how much, leaving fund managers who have fallen for its charms in a fiduciary bind.

And he points to an unintended perverse consequence of the ESG fetish,

ESG pressures have led publicly traded fossil fuel companies to reduce spending on exploration and to divest fossil fuel assets, but private equity has filled the investment void. Is it any surprise that after trillions of dollars invested in fighting climate change, we are just as dependent on fossil fuels now as we were a decade or two ago?

11. Rana Faroohar points to the latest UNCTAD report that highlights rising business concentration among exporters,

High levels of export concentration among the largest 2,000 firms globally increased during the pandemic. This was particularly true in developing countries, where data shows that the top 1 per cent of exporting businesses within each country received between 40 and 90 per cent of total export revenues for the nation as a whole. The median rate of corporate export concentration in a database of 30 developing countries is a whopping 40 per cent... The rise in corporate concentration has also mirrored the continued decline of labour share globally, which is down from 57 per cent in 2000 to 53 per cent today. As the authors put it: “The declining labour share and the rising profits of [multinationals] point to the key role of large corporations dominating international activities . . . [and] driving up global functional income inequality”.

12. Newspapers are reporting that Reliance is close to clinching a deal to buyout Walt Disney Co.'s India operations, Disney Star, at $7-10 bn. This would be a big coup for Reliance, coming on the back of pipping Disney Star to buy IPL rights for $2.7 bn and clinching a multi-year pact to broadcast Warner Bros Discovery Inc.'s HBO shows in India. 

This of course raises concerns about India's media landscape and the control that Reliance would exert on it, over advertisers, content producers, and audiences. 

13. India should refrain from pushing hard on IMF voting reform for now unless it has a good proposal with reasonable backing from others. As Alan Beattie has written here, any reform of IMF quotas in terms of voting rights proportionate to contributions or economic output is playing into China's hands and would leave India even worse off. He estimates that it would increase China'a voting rights from 6.4% to 14.1% and India's from 2.7% to 3.5%, a multiple of four compared to 2.25 now. 

For now, replenishing IMF and WB's finances without change in voting pattern would be in India's interest. This is an area where India and US align perfectly.

14. Akash Prakash explains the perspective of foreign portfolio investors to the Indian equity market

The primary concern regarding India is its valuations. India is now, along with the US, the most expensive market in the world. Most allocators are naturally hesitant to commit capital with such high expectations already priced in. The most common questions remain on what can go wrong and what are we missing? What are the flaws in the India story? Some mentioned that we have been here before only for India to disappoint in the past. Why is this time different? My sense is that on any correction, a wall of money is waiting to come in, as few doubt the long-term potential of India. Every allocator we met was clear that five years from now they will have a lot more capital in India than they have today. While new investors are hesitant to commit capital today, most of the existing India investors are happy to live with the current valuations and keep their allocations largely unchanged. I heard the comment that India has always been expensive many times from this set of investors. There seemed to be no desire to take profits off the table in any significant manner.

15. Seven US tech companies not only dominate the US S&P 500 but also the global markets.

Seven large US tech companies have driven all of the gains in global stocks this year, pushing the US dominance of equity markets to new heights. The so-called “magnificent seven” — Apple, Microsoft, Meta, Amazon, Alphabet, Nvidia and Tesla — have been propping up the S&P 500 index of blue-chip US companies for most of the year because of investor excitement about the growth of artificial intelligence. The trend has become so extreme that it is dominating markets abroad. But for the seven companies, MSCI’s benchmark All-Country World index of almost 3,000 large and midsized companies would have declined in the year to date, according to Bloomberg data. The seven have added almost $4tn in market capitalisation in 2023, compared with $3.4tn in gains for the MSCI index as a whole. They have added a combined 40 points to the index, which has risen 37 points overall. Unless there is a sharp turnaround by December, 2023 will mark the eighth year in the past decade that the US share of global market capitalisation has risen. US companies now account for 61 per cent of the $60tn index, compared with less than 50 per cent a decade ago. The largest 10 stocks make up almost 19 per cent of the index, up from 8 per cent in 2013.

This dominance has been accompanied by a rising concentration in valuations at the top in global equity markets. 

16. I have blogged on multiple occasions about the need for startup businesses to establish their value proposition to build long-lasting businesses and not focus on scaling/growth for its own sake. Here's what Nitin Kamath of internet stock brokerage firm Zerodha said while referring to his firm's valuation being "way higher than reality".

All of us on the core team have never thought of notional valuations right from the start because they can go up and down with market conditions. Focus on ever-changing valuations is a distraction... The focus has always been on building a resilient business, which means never having to rely on external capital.

17. Evoking memories of its crackdown on Jack Ma following his questioning of the government, China has cracked down on Foxconn

Two months ago, Terry Gou was talking big. Announcing his intention to run for president in his native Taiwan, Foxconn’s billionaire founder argued that China — home to most of the factories where the world’s largest contract electronics manufacturer churns out Apple’s iPhones — could not touch him or his company. “If the Chinese Communist party regime were to say, ‘If you don’t listen to me, I’ll confiscate your assets from Foxconn’, I would say: ‘Yes, please do it!’ I cannot follow their orders, I won’t be threatened,” Gou said, insisting his business interests would not make him beholden to China. Now, Beijing has called his bluff on that boast. Tax inspectors have descended on Foxconn subsidiaries in two Chinese provinces and are investigating land use by group companies in two others, in a co-ordinated large-scale probe that Taiwanese executives and government officials say smacks of a politically motivated crackdown... His presidential bid has irked the Chinese leadership because it further fragments votes for Taiwan’s opposition and makes a victory for the Democratic Progressive party — which refuses to define the island as part of China — more likely, said a person close to Foxconn.

This might perhaps be the crossing the Rubicon moment for China's relationships with foreign investors. For decades, Chinese provinces and the central government have courted foreign investors. Foxconn in particular was especially feted. But now that Chinese companies have acquired enough expertise across the value chain of manufacturing in many sectors, Beijing feels that it can afford to arm-twist foreign investors who refuse to follow the Party line.

A thought on the political economy of monetary policy

The Fed has raised interest rates by 75 basis points for the second month in a row, taking the target range to 2.25-2.5%. Faced with the highest inflation in more than four decades, this is the Fed's most aggressive monetary tightening since 1981, with the first 75 basis points rise being the first since 1994. 

In his remarks, the Fed Chairman Jerome Powell hinted at the need for a period of slower growth and weaker jobs market to bring down high inflation. 

This belief draws its theoretical basis mainly from one of the most important and contentious concepts in Economics, the Philips Curve which emerged in the 1950s. It describes the inverse relationship between inflation and labour market strength. As unemployment rises, demand declines, driving down inflation. So, the theory goes, to kill inflation, unemployment has to rise. It's a different matter that this relationship has not held in recent decades.

Apart from this, there is another important conceptual framework which sees rising inflation as a process of reshaping of expectations towards a period of higher inflation which makes workers demand higher wages. A wage-price spiral emerges, with the trigger being wage demands. With average labour wages having risen 15% since the onset of the pandemic, this wage-price spiral framework resonates loudly in inflation debates. 

Taken together, it's assumed that killing inflation requires cooling down the labour market, both at the intensive (limiting wage increase demands among existing workers) and extensive (limiting further tightening of the labour market) margins. The underlying theoretical framework is of aggregate demand increase driving up inflation.

This demand-driven-inflation assumption has been questioned in view of the obvious impact of supply shocks on the current episode of inflation. The disruptions to the global supply chains and manufacturing facilities due to the Covid pandemic was just starting to normalise when the Russians invaded Ukraine and Covid made a comeback to China. As Claudia Sahm writes,

There is no increase in the unemployment rate that would produce microchips for new cars, end China’s lockdowns, defeat Vladimir Putin, drill oil and build apartments. The Fed raises interest rates and lowers demand, cooling off the labour market. Whether it inadvertently causes a recession or not, higher interest rates would not fix the supply problems and would probably make some worse by discouraging investments.

In other words, fighting the current episode of supply-shock based inflation by raising interest rates may be barking up the wrong tree. This cure may turn out to be worse than the problem. 

On an emprical note, the report points to a study by Adam Shapiro which decomposes inflation contributors and shows that less than a third of monthly core inflation is due to demand.

In addition, I see a political economy dimension to the Fed's response. In the collective consciousness of important opinion makers and decision makers, the old theoretical framework of wage-price spiral exerts an overpowering influence. This theory also fits neatly with the ideological narrative which posits capital and labour as the all-time antagonists. The establishment at all levels therefore have a strong collective resolve in keeping the bargaining power of labour constrained. 

So, even at the cost of increasing their borrowing cost and also triggering a recession, I'm inclined to argue that the establishment (Wall Street, opinion shapers, and decision makers) would prefer to nip in the bud any revival of labour's bargaining power and the attendant possible wage-price spiral. Even if there is no overt conspiracy to do the same, this motive is baked into the collective consciousness of the establishment as to be a reflex response. 

Weekend reading links

1. From a few months back, Andy Mukherjee peers ahead into the future of banking in the Indian context,

Google Pay wants to push time-deposit products of small Indian banks that don’t have much of a retail liability franchise of their own. According to a press release, Equitas Small Finance Bank will offer Google Pay customers up to 6.85% interest on one-year funds as part of a “branded commercial experience” on the platform... The move has global significance. It shows the tenuous nature of the hold financial institutions have on a core operation like deposit-taking, and their vulnerability to an assault from online search, social media and e-commerce behemoths. Alphabet, Facebook Inc. and Amazon.com Inc. may pose a far bigger challenge to brick-and-mortar lenders than fintech startups that don’t have the scale of platform businesses. Just like in India, deposit-strapped challenger banks might throw the keys to tech intermediaries with hundreds of millions of active users. When the giants storm the fortress, even larger banks will lose control of banking..

China’s homegrown tech titans have already shown how easy it is to dislodge traditional lenders from lending... India’s deposit-taking institutions don't have any special advantage left in moving retail money. Yes, they still hold the accounts for sending or receiving funds. But rather than transacting on their bank apps or cards, customers prefer to use Google Pay or Walmart Inc.’s PhonePe to pay one another and merchants... Since it won’t even take two minutes for a platform to book deposits from scratch, if another lender offers a better deal, idle funds might go there next. Customer loyalty, which is often just plain inertia, will no longer ensure stickiness... For a fee, platforms can easily extend their insights into consumer behavior and payment flows to influence deposit mobilization. The higher the commission, the lower the banks’ profit... Regulated institutions may be left holding a license to take deposits--and a thick rule book accompanying that privilege--but platforms will decide if a bank’s promotional offer is to be displayed prominently or buried in an obscure corner. The same slow, painful decline that gutted the print media after readers and advertisers moved online and publishers lost their sway over them may be waiting in the wings for banking, too.

2. FT has an interesting report on Dominic Cummings, former chief of staff to Boris Johnson and one of the leading forces behind his Brexit campaign. Cummings who courted numerous controversies during his tenure with Johnson at 10 Downing Street had a very bitter break-up with his boss, and is now leading a concerted campaign of leaks and media attacks to bring down Johnson.  

When he was at 10 Downing, Cummings, with his views on technocracy and scorn for the bureaucracy, had become a sort of poster child for tech-enthusiasts and supporters of bureaucratic reform. But as events since have shown, his hypocrisy and duplicity in trying to unseat Johnson reveals a dangerous and petty mind, one who is best kept as far away from the public realm as possible.

3. Business Standard reports on the near extinction of Indian mobile phone makers and the rise and rise of Chinese ones. 

To give a sense of the scale of opportunity, the Chinese makers sold over Rs 1.45 trillion worth mobile phones between January-October 2021. 

4. On the topic of Indians being successful outside India, there may be couple of statistical factors. One, Indians who emigrate are more likely to be the best and brightest, and therefore a super high quality pool with significant likelihood of spawning corporate leaders. Second, within the high quality pool of emigrants to the US, Indians are among the largest and naturally more likely to contribute such corporate leaders.

As I have written earlier, it's intriguing that all these highly successful Indians are concentrated as managers and executives, and there is hardly any presence in the ranks of similarly successful entrepreneurs. It does say something about the general nature of the emigrants. 

5. India's formal sector too may not be out of the woods,

Since the onset of the pandemic, the Employees’ Provident Fund Organisation (EPFO) has allowed members to avail of an advance to deal with expenses arising from Covid-19. Data from EPFO shows that between April 2020 to September 2021, 1.5 crore such claims were received. This implies that 23 per cent of India’s formal labour force (an upper limit, based on those contributing to EPFO) has availed of this facility. (Members were allowed to do so twice from June 2021). Of these 1.5 crore claims, 87.2 lakh were received in 2020-21. This works out to an average of 7.26 lakh claims per month. In comparison, in just the first six months of 2021-22 (April-September), 63.4 lakh such claims were received, at an average of 10.5 lakh per month. This suggests that not only has the formal labour force continued to face economic hardship, but also that it has been of a similar if not higher magnitude in the ongoing financial year.

It would be useful to compare these trends with the pre-pandemic share of EPFO members availing advances.  

6. Ganesan Karthikeyan has an interesting article where he argues that the endgame for Covid 19 has began. He claims that unlike till now, when the dominant mutants seek to maximise transmissibility, once large proportion of population are either immunised or infected the mutations that provide the virus with an evolutionary advantage are ones that help it evade immunity. Such mutants are more likely to produce milder illnesses so that its transmissibility is less reduced. 

He also makes an interesting point about what happens when the pandemic ends,

As has already become evident, we aren’t going to have lifelong protection after infection or vaccination. It is reasonable to expect that the virus will continue to mutate to evade immunity. Of the several unsavoury scenarios, one optimistic (and perhaps also likely) possibility is that the virus continues to circulate but infects only people without immunity — children born after the pandemic, older adults, or others with waning immunity. These vulnerable individuals will continue to require vaccination. This is presumably what happened after the 1918 pandemic. That virus now causes seasonal influenza.

Excellent primer on Omicron with links to latest research.  

7. The Economist makes an important point about China's AI ambitions

Despite leading America in the overall number of AI-related publications, China produces fewer peer-reviewed papers that have academic and corporate co-authors or are presented at conferences, both of which are typically held to a higher standard. It ranks below India, and well below America, in the number of skilled AI coders relative to its population. These shortcomings are likely to persist, for three reasons.

First, capital may not be being allocated efficiently... Beijing has created a system for rewarding local officials that favours debt-fuelled spending and seldom punishes wastefulness. Many state AI investments have been “reckless and redundant”... Jeffrey Ding of Stanford University. Zeng Jinghan of Lancaster University has documented the rise of firms that falsely claim to be developing AI in order to suck up subsidies. One analysis by Deloitte, a consultancy, estimated that 99% of self-styled AI startups in 2018 were fake... China’s second problem is its inability to recruit the world’s best AI minds, especially those working on high-level research... Though about a third of the world’s top AI talent is from China, only a tenth actually works there. A shortage of non-Chinese researchers further handicaps China’s capabilities... Even more problematic for the party, its master plan ignored the cutting-edge semiconductors that power AI. Since its publication Chinese companies have found it ever more difficult to get their hands on advanced computer chips. That is because virtually all such microprocessors are either American or made with American equipment. As such, they are subject to restrictions on exports to China put in place by Donald Trump and extended by his successor as president, Joe Biden. It will take years for Chinese companies to catch up with the global cutting-edge, if they can do it at all.

8. Scott Galloway points to the graphic that shows more than half US corporate profits are booked in tax havens, compared to roughly 5% in 1966.

9. Vivek Kaul argues in favour of a K-shaped recovery by pointing to the stagnant affordable housing market (compared to the rising higher income housing credit off-take) and declining two-wheeler market volumes (compared to the rising cars and vans market).

This on housing credit

And this on two wheelers (lowest in eight years)

This compared with a total of 2.15 m units of cars and vans sold in the nine months to December, compared to 1.78 m in 2020 and 2.12 m in 2019. 

10. As the pandemic continues, the OECD estimates that there are a record 30 million unfilled vacancies among its members. This raises questions about the much discussed concern that the pandemic will hasten automation and kill jobs. The Economist has an article which has links on research which points to the opposite direction,

Considering that so many doubts about the “robots kill jobs” narrative have arisen, it is not surprising that a different thesis is emerging. In a recent paper Philippe Aghion, Céline Antonin, Simon Bunel and Xavier Jaravel, economists at a range of French and British institutions, put forward a “new view” of robots, saying that “the direct effect of automation may be to increase employment at the firm level, not to reduce it.” This opinion, heretical as it may sound, does have a solid microeconomic foundation. Automation might help a firm become more profitable and thus expand, leading to a hiring spree. Technology might also allow firms to move into new areas, or to focus on products and services that are more labour-intensive.

A growing body of research backs up the argument. Daisuke Adachi of Yale University and colleagues look at Japanese manufacturing between 1978 and 2017. They find that an increase of one robot unit per 1,000 workers boosts firms’ employment by 2.2%. Another study, by Joonas Tuhkuri of the Massachusetts Institute of Technology (mit) and colleagues, looks at Finnish firms and concludes that their adoption of advanced technologies led to increases in hiring. Unpublished work by Michael Webb of Stanford University and Daniel Chandler of the London School of Economics examines machine tools in British industry and finds that automation had “a strong positive association with firm survival, and that greater initial automation was associated with increases in employment”... The methodology used by Mr Adachi and his co-authors is particularly clever. One problem is untangling causality: firms on a hiring spree may also happen to buy robots, rather than the other way round. But the paper shows that firms buy robots when their prices fall. This helps establish a causal chain from cheaper robots, to more automation, to more jobs.