Why government should be careful in calling in management consultants

 I re-read this year-old interview with economist, Mariana Mazzucato, and I thought should post it  here.

Mazzucato is an economist who thinks the government is a force for good and that the good that governments do has been obscured by the rise of neo-liberal ideas.  She has co-authored a book, The Big Con, which contends that governments harm themselves by hiring big consulting firms to work for them. We have the usual problems, lack of genuine expertise in the firms and conflicts of interest. 

But the real problem, Mazzucato, contends is that it takes interesting work in government away from civil servants and is hence demotivating to them. The answer to finding expertise is to pay civil servants better and to give them challenging assignments,not oursourcing the work of government to consultants.

Here is an excerpt from the interview for those who can't access the interview:

For the past decade, she has waged a sometimes lonely battle to rehabilitate the state’s reputation as an economic motor. Her new book, The Big Con, written with Rosie Collington, argues that consultancies are hobbling governments’ ability to perform that role. In her office, holding a Diet Coke, she says: “For me, the big wake-up call was Brexit [preparations], because [the consultants] were everywhere.” In 2019-20, the British government spent nearly £1bn on strategy and other consultants — to the despair of some MPs. Mazzucato and Collington also widen their critique to include the Big Four accounting firms, such as Deloitte, and outsourcing companies, which carry out chunks of the state’s core functions.

Banks don't have to fear fintech

For some years now, we have been hearing about the fintech threat to banks, including large banks. It was said that these banks would use the internet or mobile to gather deposits and make loans. Thereby, they would dispense with the need for expensive brick and mortar branches. Moreover, they would provide a vastly superior customer experience- lightning fast transactions, bill payments and shopping that would work far more smoothly than anything the big bank had to offer.

Nothing of the sort has happened thus far, as this article makes clear in the case of the UK. (The UK experience is not unique; fintechs have not unseated banks anywhere). Very few fintechs make money, most of them are burning investor cash in garnerning customers. The three leading fintech ventures in the UK have been Revolut, Monzo and Starling. Ten years  after they started off - and ten years is a long time- only Starling  has turned a profit in the year ended March 2023. The other two hope to make profit in the next accounting year.

These three fintechs may have brought in a decent number of customers but they customers use them only to put through transactions on which the banks make a fee. The fintechs have yet to register a meaningful presence in the core banking functions, namely, making deposits and loans. People are not ready to place their savings in a meanginful way with the fintechs- one sure sign: the fintechs have a very low share of salary accounts. Large banks with their brick and mortar visibility inspire more confidence than fintechs. 

If you cannot take care of the funding side, you can't do much on the lending side either. Without low cost deposits, there is little competitive edge to lending. The ones they can lend to are customers whom the traditional banks won't entertain, that is, high-risk customers. Some fintechs claim to have cracked the problem with analytics and stuff but their high level of non-performing assets tells its own story. 

Finally, banks have not been idle in the face of the supposed fintech threat. They have invested hugely in technology and improvements in the customer interface. Some have got into collaboration with fintechs whereby the banks get the benefit of fancy technology and the fintechs collect a decent fee. 

The bottomline: the threatened disruption of the banking industry has not happened at all. If I were a depositor, I would go with a large bank for a simple reason: I know the authorities will not allow it to fail, so my money is safe. With a fintech, I have no such assurance. If the price I have to pay is that it takes more four seconds more to put through a transaction, I can live with that. 

Sceptical voices about AI's impact on economic growth

Will AI transform growth prospects for the world and usher in an era of greater abundance? That is what business executives and management consultants would have us believe. But serious economists are sceptical. Let me cite a few:

Daren Acemoglu of MIT cited here:

The professor ...... anticipates AI will boost GDP growth by only 0.93 percent to 1.16 percent over the next decade.

But even that figure may be too optimistic, he argues, because productivity estimates come from automating "easy tasks" – future tasks may be more complicated and less amenable to automation. He therefore contends there will be a more modest increase in TFP and GDP in the next ten years – on the order of 0.53 percent and 0.90 percent, respectively.

Nobel Laureate David Romer of NYU quoted here:

We’ve benefited from scaling up compute and ingesting a whole lot of data.... ....Scaling up compute is pretty easy. It’s just more machines, more chips. But what’s going to happen is we’re not going to have enough data. 

Charles I Jones of Stanford in a paper at the Jackson Hole Symposium last year:

*Automation has been ongoing for 200 years — stable growth ◦

*Steam engine, electricity, internal combustion, semiconductors ◦

*Maybe A.I. is the latest great idea that will allow 2% growth to be sustained a bit longer

Jones notes that long-term productivity growth in the US has been stable at 2 per cent. He reckons AI will help maintain that rate at best and prevent it from falling.