Global crisis: thinking out of the box

The world appears to be suffering from 'crisis fatigue'. There's been so much talk over the past seven years and so little by way of results that policy-makers seem to have given up. Top economists, gathered in Philadelphia recently, proposed a clutch of stronger measures than austerity or monetary loosening, the Economist reports: 

Ms Reinhart and Mr Rogoff suggest debt write-downs and “financial repression”, meaning the use of a combination of moderate inflation and constraints on the flow of capital to reduce debt burdens…….

The Harvard professors were not the only economists who argued in Philadelphia that desperate times may call for desperate measures. Olivier Blanchard, chief economist at the International Monetary Fund, among others, mooted inflation as a means to provide monetary stimulus when interest rates are stuck near zero. Hans-Werner Sinn of the University of Munich reckoned that since Germans will not consent to the use of higher inflation to ease European rebalancing, several euro-area economies need to leave the single currency, at least temporarily. And Larry Summers of Harvard University acknowledged that higher inflation might propel the American economy out of “secular stagnation”, but suggested that an ambitious five-year programme of public investment would be better.

In short, a huge U-turn was in evidence amid the snow of Philadelphia. Before the crisis the talk among macroeconomists was all about the Great Moderation and the primacy of keeping inflation low. Now it is all about the Great Recession—and the possibility that a bit more inflation might just help.

The easy route to crorepati status: independent director

We have a need breed of crorepatis in India: the members of the club of independent directors, Business Standard reports.

This club currently boasts of 15 members, including one ex-academic (Omkar Goswami), one retired bureaucrat (Vijay Kelkar) and several retired and present corporate executives. Goswami, the ex-academic, appears to top the list: he takes in a cool Rs 2.8 crore from his directorships. I am sure he must be the envy of the academic community.

What does it take to get into this club? Well, if you are a big name and have good connections in government or the corporate world, it certainly helps. Such people tend to belong to a closed club from which independent directors are chosen. You will not find a retired CGM of RBI or SBI, a college principleof repute or even several academics of stature in this club. The issue is not the ability to contribute in the board-room by enhancing the quality of discussions. The issue is your willingness to go along with management and your ability to contribute outside the board-room by, as they say, putting in a word where it matters.

One issue, which I have flagged repeatedly, is whether people who are paid enormous sums by the very people who bring them on board can be expected to act independently at all. Who would walk away from a fee plus commission of Rs one crore in order to speak his or her mind on the board? The issue is not just the amount that is paid. The issue is who does the selection. Management or the owner alone must not be allowed to select independent directors. Other stakeholders: minority and institutional shareholders and employees, for instance should be able to nominate independent directors. Then, the amount paid is not a problem.

Academic research is still US-centric

It used to be said that there is not much research in the top journals (which are mostly American) coming out of Asia, including India, because those journals still focus on issues related to the US. Well, that remains the case today, the Economist reports:

....a sample of 76,000 papers published between 1985 and 2005 shows that econo-nerds are infatuated with the “land of the free”.

There were more papers focused on the United States than on Europe, Asia, Latin America, the Middle East and Africa combined (see chart). And for the world’s top-five economics journals—where publication of a paper can push a young researcher towards a full professorship—the imbalance is yet more marked. Even accounting for the fact that lots of economic research (and often the best) comes from American universities, the bias persists.

 

The world’s poorest countries are effectively ignored by the profession. From 1985 to 2005 Burundi was the subject of just four papers. The American Economic Review, the holy grail for many academics, published one paper on India, by some measures the world’s third-largest economy, every two years.

Indian academics are asked to increase research quality as judged by publications in the top journals. This may not be much of a problem in the pure sciences and engineering where problems may not be location-specific. In the social sciences, including management, however, it does pose problems.

It is not just that the problem has to be US-related. There are tremendous advantages to being located in the US, advantages related to networking as well as to having the benefit of feedback on working papers in the US seminar circuit. Researchers based elsewhere are undoubtedly disadvantaged.

How do we reconcile the need for quality research with the disadvantages faced by researchers outside the US? One way would be for Asian schools to produce their own journals. These journals would take a long time, however, in catching up with international rankings. Besides, individual schools setting up their own journals does not work; we need a set of institutions to pool their resources to bring out a journal, say, the IIMs indeed getting together for such an initiative. (The HRD ministry has been pushing the IIMs to bring out such a management journal but without luck).


These journals must have the benefit of access to top quality refereeing so that it is accepted- at least within the Asian region- that a paper published in such journals passes the test of quality. It's a tall order. Unless the effort is made, however, in nurturing top journals outside the US, it will be hard to reconcile the need for quality output with the issue of getting US journals interested in non-US issues.

India's MOOC experiment: is it ill-conceived?

India has kicked off a big experiment in MOOC with a hundred engineering colleges getting recorded lectures of IIT professors in nine subjects, according to an article in BS:

Under the QEEE programme, courses will be taught by a combination of senior Indian Institute of Technology (IIT) faculty and others. During regular class hours, the students will hear and see faculty deliver recorded lectures. Regular faculty will be present during class hours, in a supportive role. In the evening, e-tutorials will be held to enable live virtual discussions between students and tutors. Real time online experiments will be made available via e-labs.
According to a news report, as many as nine subjects will be delivered in MOOC format, including in the fields of mechanical engineering, civil engineering, computer engineering and mathematics. The courses will all be in advanced subjects such as wireless connections, linear algebra, and heat transfer for mechanical engineering.

What took my breath away was the quote from the founder of one of the leading MOOC providers, Udacity, Sebastian Thrun:

Thrun said in an interview he "was realising, we don't educate people as others wished, or as I wished. We have a lousy product. It was a painful moment (when I realised this)."

Thrun's statement came in response to the weak performance of students who took MOOCs over the Udacity platform at San Jose State University in remedial mathematics, college algebra and elementary statistics. Only 25 per cent of the online students passed, less than half the pass rate for students who took the course face-to-face in real time. Thrun is so distressed with the performance of MOOCs that he is changing the focus of Udacity from academic education to corporate education.

The author, Rafiq Dossani, raises pertinent questions about the viability of the programme. He distinguishes between MOOC for basic courses and MOOC for advanced courses. The latter require far more interaction in order to contribute to learning, he contends. Hence the former are more likely to succeed; deploying resources for the latter is not efficient.

I would go along with this proposition and I would add that MOOC can be used for scaling up student numbers at elite institutions by using it to provide very basic concepts, background and additional information and analysis. Scarce faculty time can then be deployed for exposition of more advanced topics.

Where MOOC is intended as a substitute for class-room education (other than executive training), the employability of students who have taken a MOOC diploma must be tested before we commit more resources.




 

Economist's Aam admi politician of the year

The Economist selects its country of the year based on the way Paraguay's president conducts himself. Here is one politician at the top who actually lives up to the ideas professed by Aap here:

President José Mujica (of Paraguay), is admirably self-effacing. With unusual frankness for a politician, he referred to the new law as an experiment. He lives in a humble cottage, drives himself to work in a Volkswagen Beetle and flies economy class. Modest yet bold, liberal and fun-loving, Uruguay is our country of the year.

Labour's falling share of national income

Workers' share of national income has declined across the globe, the Economist reports. It has happened not just  in the US but in more egalitarian economies such as those of Scandinavia  and it in emerging markets as well.

What has caused this and should be something be done about it? The Economist dismisses the familiar theories: exploitation by large firms and weakening unions. Labour's share of income, it notes, has declined in economies with different levels of unionisation. The bigger factors seem to be greater use of IT, which has increased the wages of those with better skills, greater capital-intensity and globalisation, which has led to jobs being exported to cheaper parts of the world.

What should be done? Jobs go to those with better skills, so education and worker retraining are important. More jobs need to be created - and this could mean a cut in corporate tax rates. Thirdly, higher taxes on capital gains, which would harmonise taxes on incomes of labour with those on returns to capital.

A decline in workers' share of income and a rise in incomes at the top are both contributors to growing inequality. Policy makers need to wake up before the social costs become unaffordable.

Where India's financial sector is truly world class

India's financial sector is truly world class on one dimension- gender equality. Female-led lending institutions control 40% of assets, a figure not matched, perhaps, by any other economy's financial sector, says a report in FT. Some of the institutions that have female heads: SBI, Axis Bank, ICICI, JP Morgan, HSBC, Morgan Stanley and NSE. At one point, two out of the four deputy governors at RBI were women. Whew!

AAP - a reality check

More than the AAP's success in Delhi, it is the media's treatment of the party that has come as a surprise to me- until one or two days ago.

Let us leave aside the uncritical acceptance of the AAP's approach to corruption- that it is a matter of some bad guys misusing office. One would have expected the media to make the elementary point that corruption is built into social and economic structures. What is talked of as corruption is some individuals taking better advantage of the system than their peers. It is not about tackling the underlying structure at all. When you replace one set of individuals with another, nothing much changes; it is the underlying structure that needs to change.

Mercifully, with the passing of the Lokpal Bill, both AAP and the media have gone beyond tackling corruption as the only or even the central issue. The AAP itself has positioned itself as addressing the needs of the masses. It has played on the perception that corruption is one reason why the masses do not have their basic needs met. That is, conceptually, a better position to take.

Suppose we move on to the bread and butter issues. There is a case for what the AAP has attempted in Delhi, namely, subsidies for water and power, provided such subsidies are carefully targeted and the costs of such subsidies are thought through not only for Delhi but at the national level. It is important to address the question: is the AAP approach to water and power replicable all over the country? In other words, subsidies will have to fit into an acceptable fiscal framework. Astonishingly, the very media, which has been vocal in criticising the UPA for its welfarist approach and for subsidies implied in the Food Security Act, Right to Education etc, seemed bowled over by AAP's rapid fire announcement of power and water subsidies in Delhi.

"AAP DELIVERS ON POLL PROMISE", the headlines boomed. Yes, but at what cost? More broadly, many of the measures favoured by AAP would position it to the left of not just the UPA but the erstwhile CPM in West Bengal. There is, perhaps, space in Indian politics for such a position but is this what the financial press would favour? I thought the weight of media opinion, as also the general economic wisdom, was in favour of moving away from subsidies and towards more investment as a means of addressing the needs of the poor.

Fortunately, in the last couple of days, we are seeing AAP being subjected to a reality check. ET and Business Standard have both voiced serious reservations about the AAP approach. ET comments:

Its water policy seeks to further subsidise those with piped metered connections, barely half the households, never mind that over 50% of Delhi's daily supply is lost in leaky distribution.

Read more at:
http://economictimes.indiatimes.com/articleshow/28253857.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

The AAP decisions on water and power would have several unintended consequences. For one, the plan for nil water charges for up to 667 litres per day, and a sharp increase in the rates thereafter, would be perverse incentive for meter tampering and exaggerated claims of leakage in the system. What is required, instead, is a vastly improved piped network that reaches all and sundry, and regulated user charges linked to usage. .....  

.....As for power tariffs, we need to eschew needless politicisation of the rates. The AAP government has reduced tariffs 50% by executive order for those consuming up to 400 units a month, who constitute a large majority. It would make the rates probably the cheapest nationally, but also among the most subsidised. Worse, the fiat would discourage badly-needed power investments, including in last-mile distribution.

Business Standard is equally critical:

Responsible governments know that subsidies are easy to declare, and not so easy to take back. There are also leakages and misuses of such subsidies, which in the normal course can be neither plugged nor prevented. In its rush to fulfil campaign promises, the AAP has chosen to overlook the principles of good governance. And, in the act, it has rendered its promise of an audit irrelevant, too. The new government need not be in such a hurry; responsible policy making requires it should ascertain the facts first. If it fails to do so, all its potential may come to naught.

I might add: too much should not made of the superior moral calibre of the leadership of AAP or its commitment to austerity. The idea that there is a special set of people who got together at AAP and who are free from the temptations of power and money and are there only to serve people is ridiculous. There could be some committed individuals (as there are in Congress or BJP or in any other party) but the distribution of virtue or vice in the party as a whole is unlikely to be different from that in society at large. After all, it is not as if members of the AAP were parachuted onto the planet from their abodes in heaven.

As for austerity, that's how the Congress started off (and it still keeps that pretence at AICC meetings where people sit on the floor and are propped up by cushions). We know now what the Congress version of austerity means.

It is best to recognise that the exercise of power requires certain privileges, whether in the form of a large house or office or a certain minimum of security or a police escort to minimise time spent in commuting. It is good that the media has highlighted the twin duplex bungalows to which Kejriwal intends to move; and also the elaborate security that was required at the metros to facilitate AAP members reaching the Ram Lila maidan for the swearing-in ceremony (and this security was, from all accounts, much greater than the deployment at the typical swearing-in function). The media should also have focused on the disturbing fact that Kejriwal has chosen to keep so many important portfolios (home, power etc) to himself. Is it suggested that nobody in AAP qualifies for these positions? One was ominously reminded of AICC general secretary Digivijay Singh's observation that there is a dictatorial streak in Kejriwal.

We need those in power to have a coherent set of policies and the administrative ability to implement those policies; we do not need self-proclaimed ascetics or a set of godmen free from human foibles. The AAP, like any other party, must be judged not by appearances but by the acid test of sustainable performance.

As for power tariffs, we need to eschew needless politicisation of the rates. The AAP government has reduced tariffs 50% by executive order for those consuming up to 400 units a month, who constitute a large majority. It would make the rates probably the cheapest nationally, but also among the most subsidised. Worse, the fiat would discourage badly-needed power investments, including in last-mile distribution.

Read more at:
http://economictimes.indiatimes.com/articleshow/28253857.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

Read more at:
http://economictimes.indiatimes.com/articleshow/28253857.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

The AAP decisions on water and power would have several unintended consequences. For one, the plan for nil water charges for up to 667 litres per day, and a sharp increase in the rates thereafter, would be perverse incentive for meter tampering and exaggerated claims of leakage in the system. What is required, instead, is a vastly improved piped network that reaches all and sundry, and regulated user charges linked to usage.

Read more at:
http://economictimes.indiatimes.com/articleshow/28253857.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

Its water policy seeks to further subsidise those with piped metered connections, barely half the households, never mind that over 50% of Delhi's daily supply is lost in leaky distribution.

Read more at:
http://economictimes.indiatimes.com/articleshow/28253857.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

Its water policy seeks to further subsidise those with piped metered connections, barely half the households, never mind that over 50% of Delhi's daily supply is lost in leaky distribution.

Read more at:
http://economictimes.indiatimes.com/articleshow/28253857.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

Its water policy seeks to further subsidise those with piped metered connections, barely half the households, never mind that over 50% of Delhi's daily supply is lost in leaky distribution.

Read more at:
http://economictimes.indiatimes.com/articleshow/28253857.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

Its water policy seeks to further subsidise those with piped metered connections, barely half the households, never mind that over 50% of Delhi's daily supply is lost in leaky distribution.

Read more at:
http://economictimes.indiatimes.com/articleshow/28253857.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

RBI paper on banking structure

The RBI came out with a discussion paper on banking structure last August. It outlines the RBI's thinking on issues such as bank consolidation, differentiated licensing, continuous authorisation and the role of small banks.

I'm afraid I find myself in disagreement with the RBI's position on these issues. Consolidation of public sector banks is a bad idea because it poses managerial challenges that public sector banks are not equal to. It will result in paralysing large banks as they go through the merger process. If the problem is funding the weaker PSBs, then adopt a two-pronged approach. Accept that government can no longer support the weaker PSBs and let them fund themselves in the market. This, of course, means letting government stakes in these banks fall below 51%. Then, government can focus on strengthening the better PSBs. Consolidation of the strong with the weak will end up weakening the entire PSB system.

Differentiated licenses- giving licenses for banks that cater to niches such as infrastructure or only wholesale or retail banking appears attractive in principle. But it won't work without special regulatory dispensations for such players. That would mean turning the clock back on the idea of a level playing field for all banks, which was the rationale for asking long-term financial institutions to become banks in the first place.

Continuous authorisation of bank licenses seems very reformist. Anybody can apply for a license any time. But you can't have bank licenses available on tap. In banking, you have to limit entry for a variety of reasons. After pausing to take stock, you decide when to let in players, once you have a view on whether there is enough competition or not, whether regulatory capacity is adequate or not and so on. Let us not get carried away by tokenism in one form or another.

As for small banks, these have proved not viable in general. Whether it is regional rural banks or the cooperative banking system, small banks have proved a headache because governance is an issue in these banks. Individual small banks may not pose systemic risk; in the aggregate, they can. Monitoring a host of weakly governed small banks is a big regulatory challenge.

Yes, we need some things to change in Indian banking. But it would be unwise to push through change for change's sake.

More in EPW article on the subject.

Buddhism and management? Gimme a break...

It had to happen and it has. After the Gita and management and lessons in leadership from Gandhi, Buddhism and management could not have been far off. Schumpeter reports that the Buddhist focus on "mindfulness" is gaining adherents in the management fraternity.

It is not entirely correct to suggest that "mindfulness" is a unique Buddhist contribution. 'Know thyself' is prescribed in the Hindu scriptures and, perhaps, other scriptures as well. The Buddha did emphasise the importance of "awareness"; J Krishnamurthi, the famous Indian guru, spoke of "choiceless awareness". The broad idea is that by simply watching the flow of one's thoughts, by being aware of one's surroundings, one can gain a better understanding of oneself.

What does this have to do with management, especially with producing better results? Self-awareness, no doubt, makes for better relationships. It may also contribute to a certain equanimity which helps one cope with the daily stresses of a managerial position.

The problem arises when one views awareness not as an end in itself but as a means to producing better results or, bluntly, higher profits. Relating religious or spiritual injunctions to commercial performance is a bad idea. It could well be that heightened awareness makes one question what is going inside one's company. It may mean questioning things going in society at large. It may mean having to challenge the assumptions on which business is built. This sort of questioning, which is a whole-hearted questioning that arises from deep awareness, could end up being inimical to business performance. Such performance, you could say, depends at least partly on your being blind to many things that are going on around you.

Business performance may have very little to do with spiritual development. On the contrary, it may call for a degree of ruthlessness and disregard for values that are contrary to the tenets of religion and spirituality. Mixing the two may well cause those in managerial jobs to fall between two stools- they mess up performance and they mess up their inner worlds as well. Schumpeter ends up posing the right questions:

The biggest problem with mindfulness is that it is becoming part of the self-help movement—and hence part of the disease that it is supposed to cure. Gurus talk about “the competitive advantage of meditation”. Pupils come to see it as a way to get ahead in life. And the point of the whole exercise is lost. What has parading around in pricey lululemon outfits got to do with the Buddhist ethic of non-attachment to material goods? And what has staring at a computer-generated dot got to do with the ancient art of meditation?

Larry Summers thinks a strong recovery is unlikely

The Fed is poised to withdraw QE following signs of recovery in the US economy. Larry Summers, writing in FT, thinks a return to full employment and strong growth is difficult without "unconventional policy support".

He gives four reasons:

First, even though financial repair had largely taken place four years ago, recovery has only kept up with population growth and normal productivity growth in the US, and has been worse elsewhere in the industrial world.

Second, manifestly unsustainable bubbles and loosening of credit standards during the middle of the past decade, along with very easy money, were sufficient to drive only moderate economic growth. Third, short-term interest rates are severely constrained by the zero lower bound: real rates may not be able to fall far enough to spur enough investment to lead to full employment.
Fourth, in such situations falling wages and prices or lower-than-expected are likely to worsen performance by encouraging consumers and investors to delay spending, and to redistribute income and wealth from high-spending debtors to low-spending creditors.

The Fed has said that a return to normal interest rates would be contingent on the unemployment rate falling to 6.5%. Summers argues that, at the interest rates that were earlier regarded as the norm, aggregate expenditure will be lower than before. Again, he provides a number of reasons:

Investment demand may have been reduced due to slower growth of the labour force and perhaps slower productivity growth. Consumption may be lower due to a sharp increase in the share of income held by the very wealthy and the rising share of income accruing to capital. Risk aversion has risen as a consequence of the crisis and as saving – by both states and consumers – has risen. The crisis increased the costs of financial intermediation and left major debt overhangs. Declines in the cost of durable goods, especially those associated with information technology, mean that the same level of saving purchases more capital every year. Lower inflation means any interest rate translates into a higher after-tax rate than it did when inflation rates were higher;

If Summers is right, it is bad news for emerging markets, including India. Export growth will not be strong given a weak global recovery. At the same time, tapering of QE means capital inflows to finance India's CAD may not be adquate.

Summers does not spell our what "unconventional policy support" he has in mind. Does he think QE should continue? And what measures would he want on the fiscal side given the difficulties President Obama has faced in dealing with the Republicans in Congress? 

How to spot a dysfunctional CEO

CEOs, many think, are crucial to corporate performance. Get the right CEO and you get results. Equally, as Schumpeter points out, the wrong CEO or a CEO gone wrong can wreak havoc on a company. Think World Com, Enron, RBS and Lehman Brothers. Boards spend a lot of time bringing on board somebody who they think can deliver. Somewhere along the line, however, the CEO loses the plot. Can we pick up signs of dysfunction early on? Schumpeter gives some pointers:

An obvious sign of a boss breaking bad is grandiosity. He attributes the company’s success wholly to himself, indulges in endless self-promotion or demands ever more extravagant rewards.... One study shows that chief executives who appear on the covers of business magazines are more likely to make foolish acquisitions. A second sign is over-control. The boss surrounds himself with yes-men and crushes dissent. He tries to control every detail of corporate life rather than building a strong executive team. A third sign is distorted decision-making. The chief conflates personal and corporate assets, is obsessed with buying other companies, or focuses on bizarre details....A chief executive becomes likelier to succumb to these vanities the longer he stays in the job. He gets used to people fawning over him...... A boss may think himself so brilliant he refuses to plan for his eventual departure or undermines possible successors.

Yes, every one of these is an indicator of trouble ahead. Schumpeter quotes a consulting firm as suggesting that boards should monitor "behavioural risk", perhaps, by talking to senior management from time to time. Schumpeter himself suggests introspection and timely self-correction on the part of CEOs themselves.

Alas, neither will work. Boards are incapable of having frank chats with senior management and senior managers incapable of speaking their minds to the board. Megalomania in CEOs and introspection simply won't go together.

So, are we powerless to prevent implosions of companies at the hands of self-destructive CEOs? It seems to me that part of the answer lies in devaluing the post of CEO itself. It is the concentration of power in the hands of the CEO itself that is the root of the problem. I am constantly reminded of Peter Drucker's characterisation of the CEO: not an individual but a team of three. Only the diffusion of power in a company, the democratisation of organisations can provide a health check on the havoc wrong by dysfunctional CEOs.

Is this another impossible solution I am proposing? It's difficult, given the stranglehold of vested interest but not impossible. Boards will not do this on their own. Institutional investors and regulators must push for reform of the post of the CEO itself, ensuring that top management is truly a team and not one person.

How do online courses compare with a full time MBA?

MOOCs are in vogue and they are catching on, even if in a small way. One important question is : do they pose a serious challenge to the high-profile, full MBA programs? The answer would determine how the great names in management education need to respond.

Philips Delves- Broughton, himself an MBA from Harvard and author of a best-selling book on his experience there, sat in on some MOOC management courses to check them out. His experiences, he says, were mixed.

What struck me immediately is that the free online MBA is still in its Precambrian stage. What few courses there are range wildly in quality. Open, online learning offers a dif­fer­ent set of opportunities and challenges to classroom teaching. And clearly not all universities or professors know what to do about it. Some are simply dumping their classroom lectures and course materials online. Others are really engaging with the vast new audiences out there.

The more important point is that, to my knowledge, none of the better-known schools is offering the entire suite of MBA courses online. They have a sample or teasers. It would appear that the intent is to market themselves, not to educate people without cost. (Why would they want to do that? It would seriously threaten their business model). What we need is a good quality online that is reasonably priced, say,  a fourth of the price of an IIM MBA or around Rs 3 lakh. Are there any out there?

I would go along with a point the author makes. It's not necessary to match the quality of the top schools. Just offer something that's reasonably good and at a very low price- or completely free. That would not unsettle the top schools but it would provide enough to get people jobs.

Modi versus Kejriwal? Not quite.....

AAP is the flavour of the day, having made a terrific showing in Delhi. The party makes no bones about its national aspirations. It plans to contest Lok Sabha seats. There are those who think it has the potential to replicate its success in Delhi at the national level. Sections of the media are euphoric about the outcome and think a new dawn has emerged in Indian politics.

Opinion polls conducted during the Delhi elections suggest other wise. A large number of those who voted for AAP said they would vote for Modi in the general elections. Surjit Bhalla, in his article,provides an even more interesting statistic: only six out of every 100 BJP voters voted for the AAP, but six times as many (36 out of 100) Congress voters did so. If this is replicated elsewhere, it is the Congress vote that will get split and the BJP stands to romp home. (Here, of course, we are ignoring powerful regional players in UP, Bihar, Orissa and elsewhere). Bhalla believes there was a strong Modi wave in both Rajasthan and Madhya Pradesh, otherwise it is hard to explain the margin of victory. 

At the national level, voters are bound to ask whether the AAP has anything more to offer than an anti-corruption plank (which often amounts to no more than saying, "We should have no evil in this world"). The middle class enthusiasm for Kejriwal& Co is understandable, given its moral outrage over corruption. But businessmen rooting for AAP is astonishing. The AAP is, perhaps, to the left of not only the Congress but even the CPI (M) in its last years in West Bengal. Bhalla writes:

Economic policy according to the AAP/ Kejriwal should be as follows (obtained from interviews, manifestos, etc): "GDP growth should be directly related to the lives of the people, but such growth affects very few people.... The AAP opposes privatisation, wants government in oil extraction (and much else), recommends an increase in effective taxes on the middle class and supports increases in fuel and electricity subsidies. The AAP would take measures to ensure basic facilities, for example electricity expense reduction of 50 per cent and 700 litres of free water. Further, the AAP believes in government provision of high-quality education and health, regulation of fee of private schools, implementation of minimum wage, etc." 

The markets don't appear to have taken the AAP seriously so far, otherwise they would have tanked by now. Should the AAP come to power as part of any coalition, the chances of a rating downgrade by the rating agencies must be reckoned to be pretty high.

What of the AAP's prospects in the future? We need to ask whether a crusade against corruption suffices for a party to govern or even to sustain itself. Several anti-corruption movements have erupted from time to time- the Andolan in Gujarat in the time of Chimanbhai Patel, the JP movement, the Hazare campaign- but they tend to fizzle out. For a party to maintain its image in the grime of electoral politics is not easy: in the Delhi polls itself, the party drew serious allegations which voters seem to have overlooked for now.

The AAP faces a huge challenge in building the organisational infrastructure and creating the leaders in order to make a national impact- Kejriwal's call to 'good people' from other parties to join him already points to a measure of desperation. Not least, should  a party become serious about rooting out corruption, the entire weight of important interests- the corporate world, the political class, the bureaucracy- will be brought to bear on suppressing it. That is the grim reality of politics today. 

In sum, AAP looks poised to act as a spoiler for the Congress and thus boost the BJP's chances. The idea that Kejriwal is a challenge to Modi does not appear plausible at the moment.

A somewhat contrarian view on Nelson Mandela

The distinguished British journalist, John Pilger, has a rather different view of the Mandela legacy, whatever the heroism Mandela may have displayed in fighting apartheid.

In an article he wrote for the New Statesman, he suggests that the arrangement that Mandel arrived at with the Afrikaner regime, in effect, allowed the Afrikaner elite to continue their domination of the economy while coopting the black elite into it. For the vast majority of blacks, the transfer of power didn't add up to much:

With democratic elections in 1994, racial apartheid was ended, and economic apartheid had a new face. During the 1980s, the Botha regime had offered black businessmen generous loans, allowing them set up companies outside the Bantustans. A new black bourgeoisie emerged quickly, along with a rampant cronyism. ANC chieftains moved into mansions in "golf and country estates". As disparities between white and black narrowed, they widened between black and black.

The familiar refrain that the new wealth would "trickle down" and "create jobs" was lost in dodgy merger deals and "restructuring" that cost jobs. For foreign companies, a black face on the board often ensured that nothing had changed. In 2001, George Soros told the Davos Economic Forum, "South Africa is in the hands of international capital."

Something to chew over as the world mourns the passing of Mandela. 

America Inc dominates the world

America in decline? Certainly not true if you look at the world's leading corporations. Nine of the top most valuable corporations in the world today are American, the Economist reports. This is a significant increase from the figure of three in 2009. Post-crisis, it is American firms that have come out smiling. One reason is that the problems in the Eurozone have meant that the challenge from Europe has dimmed. The Economist lists other factors at work in driving the American resurgence:

Two deeper factors are also at play, though. First, America’s mix of resilience and renewal. Three of its nine biggest firms have their roots in a 16-year period in the late 19th century—Exxon, General Electric and Johnson & Johnson. Their durability reflects their powerful corporate cultures. But the country still does creative destruction, too. IBM and Intel have slid down the rankings to be replaced by Apple and Google. Chevron, an energy firm, has gone from a laggard to a world-beater. Success has been anything but parochial. Six of the nine biggest firms sell more abroad than at home.

Second, the old rule that buying shares in state firms is investment suicide has reasserted itself. The world’s ten biggest state firms in 2009 have lost $2.2 trillion of value, or 60%, from their peaks. Lower commodity prices are only partly to blame. Investors now award most state firms stingier valuations than their private peers. Gazprom is worth three times its profits, versus Exxon’s multiple of 11. And although emerging economies have slowed, nimble private firms are doing fine. In 2007 investors gorged on shares in PetroChina when it listed in Shanghai, briefly making it the only firm ever to be worth over $1 trillion. Now China’s hottest corporate property is Alibaba, a private internet firm plotting a huge flotation.

The point about American capitalism being vibrant is well taken. But it would be too early to write off  state-owned firms. The problem with many state-owned firms is not state ownership per se but lack of exposure to competition and lack of stock market discipline. Combine the two and state ownership is seen to do much better. It is useful also to build in incentives for management and workers. State-owned firms can have some advantages: no accounting jugglery, changes in top management from time to time, and a long-term view. Combine all this and you may still not be able to match the best in the private sector. But you can certainly do better than the average.

The Economist takes note of some signs of change:

Petrobras has allowed minority investors to appoint a director to its board. Maria das Graças Foster, its newish boss, has indicated it will be more careful with its investments. Russia’s government has talked about making state firms pay higher dividends, in part to force greater discipline upon them. China’s reformers signal that they would like to confront its mighty industrial lobby. A 2012 semi-official report called “China 2030”, written in conjunction with the World Bank, says that allowing state firms to act in a more commercial manner is a key objective. The hybrid model which makes firms answerable to both investors and politicians may never be satisfactory, but it can be improved.

China flexes its muscles- a new Cold War?

China's creation of an air zone around the disputed Senkaku (Diaoyu) islands (the dispute is with Japan) in the East China sea is undoubtedly a fresh sign of an emerging superpower flexing its muscles. The move provoked the US into sending two B-52 strategic bombers over the air zone by way of poking China in the eye.

China has ignored the poke. That doesn't mean it has lost its case. Far from it. The US may defy the Chinese air zone but China's own neighbours- and their airlines- are unlikely to do so. An article in the FT indicates how the Chinese hope to slowly alter the status quo:

For a start, the US cannot keep flying bombers over the region and say they are part of “long-planned exercises” (as they claimed this week’s flyovers were).
Doing so would quickly lose impact as a statement of principle and evolve into needless provocation, especially in the eyes of the Chinese public, who draw most of their opinions on such matters from tightly controlled state media.

...From now on they will start asking other countries to force their airlines to identify themselves to Chinese authorities when passing through the disputed airspace, thereby implicitly acknowledging that the territory belongs to China.The pressure will be much greater on individual airlines hoping to capitalise on the tens of millions of new Chinese tourists flooding out of the country every year.
When they cave they can always justify their compliance on safety grounds.

 An article in Asia Times blasts the US action as "criminally reckless and phenomenally stupid". It proceeds to explain why:

In contrast to the aging and completely overstretched US armed forces, the Chinese armed forces are catching up and catching up really fast. Yes, in the 1980s the Chinese military did look at lot like the Soviet military of the late 1950s, but the economic boom of China has deeply changed this, and today the Chinese armed forces are gradually acquiring more and more 21st century characteristics; soon, they will easily surpass the capabilities of South Korea and Japan.

Next, and before the folks in the White House fully understand it, the US will be facing a large and technologically equal or even superior Chinese military. China is also being very smart in forging an informal but truly strategic alliance with Russia, which, unlike the US, does every effort possible to show respect and support for its large neighbor.

Should it ever come to a shooting match between the US and China, there is no doubt in my mind whatsoever that Russia will offer its fullest support for China short of actually attacking US targets.

One thing is for sure. For China to have ratcheted up the stakes in the region knowing that it would provoke a strong US reaction points to a certain self-assurance in the Chinese leadership. But the Chinese are dealing here not only with the world's leading power but also with a nationalistic leader in Japan in Abe. Many analysts that the chances of a fracas arising from a small error of judgement are pretty high.

Just when we thought that the US- Iran rapprochement had made the world a little safer.....

Cash transfers- conditional versus unconditional

A recent issue of the Economist has an excellent analysis of cash transfers, based on a range of research on the subject. The bottomline is compelling: unconditional cash transfers (UCTs) - simply handing out cash to the poor without strings attached- seems best suited to alleviating poverty.

When do UCTs work best?

They work when lack of money is the main problem. The people who do best are those with the least to start with (in Uganda, that especially means poor women). In such conditions, the schemes provide better returns than job-training programmes that mainstream aid agencies favour. Remarkably, they even do better than secondary education, which pushes up wages in poor countries by 10-15% for each extra year of schooling. This may be because recipients know what they need better than donors do—a core advantage of no-strings schemes. They also outscore conditional transfers, because some families eligible for these fail to meet the conditions through no fault of their own (if they live too far from a school, for instance).

And what about conditional cash transfers (CCTs)? They are less expensive than UCTs because they typically hand out less cash than UCTs. They have other virtues:

Moreover, CCTs can focus on something which UCTs leave to chance: helping the next generation. Healthier, better educated children earn more throughout their lifetimes, so the requirement to attend school or clinics should cut future poverty. UCTs aim to reduce poverty now. So conditional and unconditional schemes are not always comparable. That said, a lot of effort has gone into making comparisons, and the results are now emerging. CCTs have their drawbacks but—at least where governments are concerned, and if you take a broad definition of poverty reduction to include health and education—they usually do a better job.

The broad conclusion?

In short, UCTs work better than almost anyone would have expected. They dent the stereotype of poor people as inherently feckless and ignorant. But CCTs are usually better still, especially when dealing with the root causes of poverty and, rather than just alleviating it, helping families escape it altogether.

The article does not, however, address the key issue of how the poor are best identified and the related issue of leakages in reaching the cash to the poor. How does one ensure that money reaches the intended beneficiaries? Do the countries surveyed have the equivalent of UID? Or is it done through some other means such as mobile accounts? Simply handing out cash does not seem a sensible thing to in a place like India where the problem of leakages is a real one.