Tag: andrew batson

Principles of Economics, Chinese Education Edition

Two of my favorite things to talk about on this blog come together very nicely in this lovely blogpost from Andrew Batson.

I love to talk about whether people have asked, and thought clearly, about the answer to the question “What are you optimizing for?”. And second, opportunity costs are everywhere.

The blogpost is about “The Education of Li Keqiang”, China’s former premier who passed away recently:

The general temptation to see Li as representing an alternative school of thought and the potential for a different political trajectory is as strong as it is unsupported by real evidence.

https://andrewbatson.com/2023/10/29/the-education-of-li-keqiang/

Reading this blog post is a good way to learn a little bit about China’ modern history (and then, of course, to use these learnings to want to learn even more about China’s modern history!).

For example, did you know that college entrance examinations only came to be in China in 1977 (after 1966)? You may want to ask how students got selected in universities before that:

The makeup of the student body was curious as well. None of them had to take an entrance test to gain admission—a surprising development given that China was the historic originator of the concept of qualifying public service examinations. Many of the students we met had spent two to three years working in farms and factories; most of them, they said, got into Beida on the recommendation of the farmers and laborers they had worked with. Other students had previously served in the army and were similarly recommended.
The prerequisites for admission were simple: good health, work experience, and high “political consciousness.” Academic prowess was much less important than a student’s commitment to the ideals of the Chinese revolution and to the belief that working with one’s hands was better than book learning. As part of what Beida officials called the concept of “open-door schooling,” students were expected to extend their education beyond the classroom and to engage in street cleaning, farming, and assisting factory laborers with compiling “revolutionary histories” of their workplaces. These would help develop their moral, physical, ideological and intellectual character, we were told.
The guiding principle for all the subjects was a rigid Maoist perspective, including the doctrines of “combining theory with practice,” of “learning by doing,” and of “being socially relevant.” Students said that high grades were unimportant. Academic performance was rated as excellent, good, or fair but no one failed. Each class automatically moved from one level to another every year. Individual achievement was downplayed. Assignments were completed collectively, including the writing of essays and even sitting for examinations. In another break with tradition, where it once used to take four or six years to complete a degree like physics, the requirement had been reduced to two or three years.

https://www.amazon.in/Class-77-Classmates-Changed-China-ebook/dp/B09ZVB947W/

I haven’t read the book I’ve linked to above, and that excerpt is from Andrew Batson’s blog. But what I note is that China was not optimizing for selecting students on merit, nor was it identifying the best students on merit. You may want to quibble with me about whether judging students on merit is fair or not – but surely we can agree that this was not a good way to decide who your best students were.

Regardless of our opinions about whether this was a good system or otherwise, the Chinese themselves were quite clear that it was very far from being a good system. Soon after Mao’s death, the Chinese decided to optimize for merit. 1977 was the first time (after 1966) that students would be selected in universities on the basis of an entrance examination. Demand, to put it mildly, was high:

According to the memoirs of former vice-premier Li Lanqing, the demand for the college entrance examination was so high that the government ran out of paper on which to print the exams; the problem was solved by using paper that had been allocated for printing Mao’s Selected Works. FlorCruz’s account makes it clear how the return to exam-based meritocracy was very much a form of “class struggle” in reverse, an explicit decision to valorize the groups that had been targets during the Cultural Revolution and downgrade those (the workers, peasants, soldiers) who had been valorized.

https://andrewbatson.com/2023/10/29/the-education-of-li-keqiang/

The post goes on to tell us that Xi was a part of the 1975 batch, while Li Keqiang was a part of the 1977 batch. But in the end, it seems to not have made that much of a difference – Xi and Li were both optimizing for rising up in the CCP, and the liberalism that people “expected” from Li Keqiang therefore never materialized.

The opportunity cost of being liberal was too high, more’s the pity.

Nothing is so permanent as a temporary government program

The title of today’s blogpost is a line by Milton Friedman, of course.

This chart, from Andrew Batson’s blogpost, caught my eye:

https://andrewbatson.com/2023/08/08/stimulus-is-never-just-temporary/

Quite a few things to note over here:

  1. The difference between the three lines, which is in and of itself interesting
  2. The persistence of augmented net borrowing (including unofficial local government borrowing)
  3. China is, in a sense, still recovering from the fiscal excesses of 2008

Here’s Andrew on the third point:

China’s political system therefore does not have a good track record of being able to take away the punch bowl in good economic times in order to be able to share out more punch in the bad times. The dubious legacy of the 2008 stimulus means that China now needs fiscal consolidation to get long-term debt dynamics under control–at exactly the moment that it once again faces a shortage of aggregate demand.

https://andrewbatson.com/2023/08/08/stimulus-is-never-just-temporary/

The context, of course, is that China is struggling to recover from the pandemic. There’s lots of reasons this is happening:

There are several reasons to be gloomy about China’s economic prospects, from America’s export controls on advanced semiconductors and skittish foreign investors, to President Xi Jinping’s crackdown on big tech firms. But the main culprit for the recent weakness is property, which before the pandemic was a crucial source of growth across the economy. Activity slowed, first as the government sought to rein in heavily indebted developers, and then more recently as sales have stayed weak. Between January and May, for instance, real-estate investment fell by 7.2%, compared with the same period a year ago. The danger is that the property bust now becomes an enduring malaise.

https://www.economist.com/leaders/2023/06/22/chinas-economic-recovery-is-spluttering-the-prognosis-is-not-good

…but given what happened in 2008 (and since), a fiscal stimulus seems to be off the table where China is concerned.

Fiscal profligacy is not, in other words, a good idea. Don’t get me wrong: I am not saying fiscal expenditure is a bad idea. In fact, in a country like India, it is unavoidable, and for a variety of reasons. But the answers to the questions:

  1. How much to spend?
  2. Where to spend?
  3. When to spend?

…are always important in the context of fiscal policy.

Note that this is not a comment about India and her fiscal policy both during and after the pandemic. It is simply a reminder that fiscal policy is extremely difficult to get right in terms of when to start, what the magnitude should be, and when to stop.

For example:

When Japan’s asset-price bubble burst at the end of 1989, growth slowed dramatically. Firms and households, burdened by debt, paid off their liabilities rather than spending on goods and services. Together with a shrinking workforce, this meant that Japan’s gdp growth lagged behind the rest of the rich world.
Part of the problem was that policymakers were too slow to respond. It was not until 1999 that the Bank of Japan cut its benchmark rate to zero; the government directed stimulus towards investment, rather than consumption.
The bust turned into decades of stagnation. Unfortunately, China looks as if it may repeat the same mistake. The government remains fond of directing stimulus to investment, rather than towards handouts.

https://www.economist.com/leaders/2023/06/22/chinas-economic-recovery-is-spluttering-the-prognosis-is-not-good

To spend the right amount, to start at the right time, to end at the right time, and to make sure one spends it right where it’s needed – it’s easy for a blogger to say that this matters. It is easy to point out where a country has gone wrong with the benefit of hindsight. But to actually do it when it is needed the most, that’s a whole other challenge.

Some might say it is all but impossible, but if you are a serious student of the Indian economy, you’re going to have to admit it is unavoidable.

Macro is hard.

More on Mental Models

One of my favorite blogs on China just got a new name…

… and the author, Andrew Batson, also published a new post. recently. It is of interest in and of itself, but given that I just wrote a post myself about mental models, it makes even more sense to talk about it today.

Andrew’s post is about a simple question: “What should we make of China’s recent and dramatic policy reversals?”

As he points out, there has been in recent times an abrupt reversal of China’s Covid containment policy, a relaxation on years of restrictions on the real estate sector, a ‘softer’ approach towards internet firms, and while wolves aren’t turning into kittens anytime soon, they don’t seem to be baring their fangs quite as much.

China is clearly adopting a slightly different stance along many different dimensions. Andrew Batson asks why this might be so.

Four key possibilities, he says:

  1. These are short-term political adjustments by Xi, in response to the changing, extremely fluid situation. Pure pragmatism in response to what the situation demands, in other words. But Xi is still Xi, and his ambitions remain intact.
  2. Xi isn’t optimizing for the long term attainment of his most important goals. Being in power for the long term is his goal. And if he can remain in power by changing the type of dictator he needs to be, so be it. Power isn’t the means to an end, it is the end.
  3. The eventual goals remain what they always were – national security and technological self-sufficiency – but he now has a new team that advises him on how to ensure that those goals are met in the long term, but by minimizing short term risks. Essentially the first point, but the cause isn’t Xi himself, it is his new team.
  4. Xi remains a leader in name alone, and the actual decision making is now being done elsewhere. This begs an obvious question, but Andrew Batson doesn’t answer it in this post.

Andrew Batson himself thinks that it is probably some combination of all of the above. He’s not denying the possibility that it is any one of these in isolation, but thinks that some weighted combination of all four is the most likely.

Time to ask oneself some questions:

  1. What probability do you attach to these scenarios yourself? Here’s one possibility: a twenty percent chance of any of the four, and a twenty percent chance for all four combined. How does that grab you?
  2. Me, personally, I’d say a combination of 1 and 3 is the likeliest – maybe 60% put together. Give another twenty percent to pt. 2 and divvy up the remaining 20% between pt. 4 and ‘all of the above’. How does this sound? (Have fun drawing up the Venn diagrams here, by the way!)
  3. If your numbers look different, why do you think this might be? What books, blogs, vidoes, podcasts, tweets and news articles do you have in mind when you make your assessment? What sources do you think I (let alone Andrew Batson!) might be using?
  4. Are our insights actionable? How so? Can we use these assessments to guide our financial decision-making? Can we use these assessments to decide what to read next? Whom to read more of? Whom to read less of? What questions should I be asking ChatGPT basis my assessment?

One short article, but so many questions to think about!

On State Capacity

A student of mine and I have been sending each other papers, books and articles on state capacity, and it has been a very enjoyable exchange, with lots of interesting stuff to read and ponder upon.

What is state capacity, you ask?

Here’s a definition that I came across recently, and I think it does a very good job:

“State capacity is the ability to design and execute policy effectively”

https://www.nytimes.com/2022/05/29/opinion/biden-liberalism-infrastructure-building.html

That quote/definition is by Brink Lindsey, and he’s got a recently published paper on the topic that is worth reading.

That paper’s executive summary has another definition of state capacity, with an explanation for why it matters so much in the rest of the paragraph that follows:

State capacity refers to the government’s ability to do its job effectively: to raise taxes, maintain order, and provide public goods. A series of calamities during the 21st century—the Iraq War, Hurricane Katrina,
the financial crisis, and most recently the COVID-19 pandemic—have made it painfully clear that American state capacity is not what it once was. This deficit not only undermines effective public policy in a wide variety of important domains; with our republic now so deeply polarized, it threatens the legitimacy and continued vitality of liberal democracy as well.

https://www.niskanencenter.org/state-capacity-what-is-it-how-we-lost-it-and-how-to-get-it-back/

Matters so much, that is, in an American context, although my argument is that state capacity matters in all countries, at all points of time.

Consider China, for example:

State capacity is a difficult concept to make concrete: a government’s ability to do stuff is obviously important, but how to tell if it is high or low? As a useful overview over at the Broadstreet blog shows, the most common way to measure state capacity in general is to measure fiscal capacity: the government’s ability to extract revenue from the economy. This makes sense historically, as the growth over the last few centuries of governments’ ability to do things like wage wars and provide social benefits went hand-in-hand with the development of tax systems and debt markets.
For the 20th century onward, the authors suggest a more precise metric: “To measure the fiscal capacity of the modern state, we use the share of income tax revenue in total tax revenue, as the collection of the income tax calls for high administrative capacity to ensure compliance.” This is an interesting choice, as on this measure China is a real edge case.

https://andrewbatson.com/2022/05/19/state-capacity-and-the-income-tax/

Read the rest of the blog post to understand why China is an edge case, and reflect on how difficult it is to define and measure state capacity. But that being said, never, ever underestimate its importance.

But why, you might wonder, is state capacity so important? Why can’t we rely on markets to get the job done? Well, this is where things get really tricky. But let’s begin with a simple question, and one that you’ve been asked before on these pages:

What are you optimizing for?

That is, when you say that one should rely on markets to get the job done, you need to be clear about what the job is, and you need to be clear about your metrics for considering said job to be one that is well done.

Say you, as part of the leadership in your country, would like to have a well functioning steel industry. You would like this industry to be robust, resilient, competitive, with a large presence (at least eventually) of domestic producers – and you would like it to be profitable. How do you make that happen?

Or, if you would like to be very specific, how did a country like South Korea get its steel industry up and running?

It was not easy getting the Pohang plant financed and built. The Korean government tried three times in the 1960s to move the project ahead, presenting different, detailed plans. But equipment suppliers would not advance credit and financiers – including the World Bank – would not lend to the kind of large-scale, integrated operation that the Koreans wanted. A World Bank report published in November 1968 cited the failures of major integrated steel projects in Brazil, Mexico, Turkey and Venezuela. In the end, Park financed Pohang by using Japanese war reparations. He put his favourite student from his teaching days at the Korean Military Academy, a 43-year-old general called Park Tae Joon, in charge. The younger Park had already turned around a state mining company. Each day workers at Pohang were lined up in front of the main, corrugated-iron site office and told that Japanese reparations money was being used for the project and that it was preferable to die rather than suffer the humiliation of wasting the money.

Studwell, Joe. How Asia Works: Success and Failure In the World’s Most Dynamic Region (pp. 116-117). Grove Atlantic. Kindle Edition.

This is a book I have recommended before, and will recommend again. It just is that good a read. In the paragraphs that follow, Studwell goes on to explain the factors that made POSCO such a huge success.

  1. A focus on scale from the get-go, but married to a step-by-step approach
  2. Being open to technical advice from abroad, but never being reliant on only one source
  3. A gargantuan appetite to learn more about the industry
  4. A relentless focus on exporting the steel that was produced
  5. Subsidies for the plant – they only had to ask, and they got (subject to the fourth point above being met!)

POSCO, the South Korean steel producer, is now a globally recognized brand name, and is a behemoth on the global stage, let alone South Korea. The South Korean steel industry may not be very competitive (there are only three players), but it is robust, it is resilient, has domestic producers, and is profitable.

And as Studwell’s book makes clear, this needed the presence of the state. Left to its own devices, there would likely have been no domestic steel industry in South Korea.

Was the approach adopted by the South Korean government perfect? Nope. Did it tick all the boxes? Nope. Could a different approach by either the South Korean government itself, or by South Korean industry have done a better job?

That’s the devil of it where economics is concerned, because we will never know. We can’t go back in time, try a different approach and compare the results – all we can do is hypothesize, or compare South Korea’s experience with that of other countries, all the while keeping in mind that it will never be an apples to apples comparison.

But I will say this much and I think there is a broad consensus on this: state led industrial policy matters. What shape it should take, to what extent and for how long, and whether different countries should have different industrial policies are topics that will provide employment and educative opportunities (of an excellent kind!) for years to come.

But industrial policy? It really, really matters.

Ezra Klein’s point in his essay is about American state capacity (and naturally so, of course). This is how he ends his essay:

Democrats spend too much time and energy imagining the policies that a capable government could execute and not nearly enough time imagining how to make a government capable of executing them. It is not only markets that have failed.

https://www.nytimes.com/2022/05/29/opinion/biden-liberalism-infrastructure-building.html

My point, if you are a student of economics anywhere in the world is this: it is not only America that needs to think deeply about this topic.

On Xi Jinping’s Stubborn Attachment(s)

These are not good times for the credibility of China’s GDP growth targets. Just weeks after unveiling an ambitious target of 5.5% real GDP growth for 2022, the central government effectively ensured that target will not be met by requiring local governments to impose strict lockdowns to contain the spread of Covid-19. The restrictions cover most of China’s major cities, have had a clear negative impact on economic activity in March that will only worsen in April.

https://andrewbatson.com/2022/04/18/why-gdp-growth-targets-are-underrated/

So begins a thought provoking blog post on China’s growth prospects for this year, written by Andrew Batson. I’m a very (very!) amateur student of China, and follow a more or less random group of people on topics related to China – but Andrew Batson’s blog, I think, should definitely be on everybody’s list.

This one speaks about growth prospects in China this year, but so much else besides. Let’s learn a little bit about China by parsing through it.

The first point that he makes is that growth targets this year are all but likely to be missed. This, of course, is because of the lockdowns in Shanghai and other parts, and pretty much everybody knows that they’re not going well – and that’s putting it mildly. Targets were missed last year, and the year before – so why, one might be entitled to ask, should one have them at all in the first place?

There’s shades of Goodhart’s Law in the paragraphs that follow, and when I read the piece the first time, my blogging antennae were up. Aha, I thought to myself, one more post in an ever increasing canon. But the post then moves in (for me) an entirely unexpected direction, and in a way that makes it even more interesting.

Targeting GDP growth, Batson says, is not A Perfect Thing, but is, all things considered, Still A Good Thing Given The Alternatives.

https://andrewbatson.com/2022/04/18/why-gdp-growth-targets-are-underrated/

One way to understand Batson’s defense of GDP growth targets is by internalizing what I think is his key point: giving up on a GDP growth target doesn’t mean there will be no targets – it simply means there won’t be economic growth targets.

That is to say (and this is my understanding of his point), it’s not as if giving up on GDP growth targets will mean a very laissez faire approach to the economy. Instead, China will be set other, non-economic targets. Such as what, you ask?

…“regulatory storm” of 2021 with its multitude of highly interventionist policies aiming to reshape entire industries. Limiting the power of large private companies was even a fairly explicit goal: it’s probably not a coincidence that the main targets of last year’s political-regulatory campaigns were real estate and the internet, the two economic sectors that have created the biggest private-sector fortunes. All of this was certainly enabled by Xi’s dictum that there are more important things than GDP growth. The costs and economic downsides of the regulatory storm were put aside in favor of other goals.

https://andrewbatson.com/2022/04/18/why-gdp-growth-targets-are-underrated/

Regular listeners of Amit Varma’s excellent podcast, TSATU will no doubt be aware of the line “Politics is downstream from culture”. The quote is originally by Breitbart, of course, as Amit always points out. The reason I bring it up over here is because economic growth, if you ask me, is downstream of politics. In this framing, economic growth serves political needs, and those political needs are downstream of culture.

Rarely does one get to quote Brietbart in one paragraph and then follow it up with a supporting quote that references Lenin, but hey, welcome to 2022:

…China’s Leninist political system, which is organized around mobilizing officials to direct social transformation. As Ken Jowitt put it: “The definitional tendency of Leninist regimes [is] their attempts to control and specify the substantive dimensions of social developments, not merely the framework within which such developments occur.”

https://andrewbatson.com/2022/04/18/why-gdp-growth-targets-are-underrated/

As Andrew Batson goes on to argue in the following paragraphs, de-emphasizing growth targets in a liberal political framework is very different from de-emphasizing them in a Chinese set-up. The focus on growth for its own sake is very different from the focus on growth to serve other aims. Batson argues that Deng Xiaoping was optimizing for economic growth, and that Xi Jingping is optimizing for national greatness. National greatness includes, but never as a primary target, economic growth.

But that pursuit of national greatness, perhaps, has been taken too far in Chin’s case:

In December, when when Xi chaired the annual Central Economic Work Conference, the signal was clear: the priority is now the “stability” of the economy.
Since then, various political slogans and campaigns have been much less in evidence and the focus has been on more practical short-term measures. Senior officials have even promised not to introduce policies that “adversely affect market expectations”–effectively admitting that they had been doing just that in the recent past.

https://andrewbatson.com/2022/04/18/why-gdp-growth-targets-are-underrated/

I’ve said it before, and I’ll say it again, and this is applicable to individuals as much as it is to nations. Be very clear about the answer to that irritatingly simple question:

What are you optimizing for?

On Decentralization

Andrew Batson has a nice post out about an essay in the Palladium magazine. The theme of both the essay and the blog post is decentralization in China.

Dylan Levi King has a nice essay out in Palladium on the history of decentralization in China, opening with the assertion that “the most significant reform carried out in China after 1978 was one of systematic decentralization.” It is difficult to disagree with this. As the best China scholarship of the last few decades has made clear, local initiative played a central role in the country’s growth miracle–see for instance Jean Oi’s book on local state corporatism, or Xu Chenggang’s classic article on “regionally decentralized authoritarianism”.

https://andrewbatson.com/2021/11/29/the-consensus-on-centralization/

The essay is a reflection on how decentralization has evolved (and retreated) under the various leaders who have been in charge of the central Chinese government, beginning with Mao, and ending with Xi Jinping. As always, please read the whole thing.

The essay makes the rather unsurprising point that under Xi’s leadership, China is becoming ever more centralized. But the interesting (if not entirely surprising) nugget is that the attempt to increase the degree of centralization began about thirty years ago – Xi is the first leader since then who’s been very successful at it.

Well, so far, at any rate. See this thread, for example:

But the essay helps us think about a question which should be of interest to a student of economics: what is the appropriate level of decentralization? I mean this to be a one-size-fits-all question: for any organization, institution or level of governance, how should we think about the appropriate level of decentralization?

Think about the answer to this question in regard to your own college/school, for example. Who do you need to approach for permission in order to hold an event in your college? Does any prof have the ability to give permission, or are they likely to pass your question up to the head of the department? What about the head of the department? Are they likely to take the decision, or will they pass the question up to the principal or the director? In other words, how much decision-making authority is vested in the lower levels of hierarchy? And how much decision-making authority should be vested in the lower levels of hierarchy?

It is a question with far reaching implications: a centrally driven decision making system retains all the power at the centre, and everybody knows who to go to for getting approval. On the other hand, this is likely to make the system rather inflexible, with very little decision-making authority at lower levels.

Here’s a very simple example: let’s say you’re fifteen minutes late while checking out of a hotel. Should you be charged a fine or not? Should this be up to the clerk who is helping you check out, or should the clerk just blindly follow the “rule” with zero decision-making authority? If you (the guest) then kick up a ruckus, should the clerk call their superior? Should the superior call their superior? And on and on…

Management consultants agonize about this, as do politicians and bureaucrats. But so do government officials, professors in universities and even parents! What is the appropriate level of decentralization is an important question in literally any organization!

So how do we go about building a model in our heads to think about this issue?

Here’s one way to think about it:

Let’s assume that we’re seeking to optimize for the long term growth and stability of the organization in question. That is, to me, an entirely reasonable assumption. Concretely, the management consultant in charge of instituting check-out processes in the hotel is charged with creating a process that will optimize for the long term growth and stability of the hotel chain.

Should the management consultant vest, then, the clerk with the power to waive off the late fee? Under what circumstances? To what extent? With what amount of leeway given for mitigating circumstances? Maybe the clerk can waive off the late fees only for a certain number of times per month? Can HR track which clerks waive off fees the least across the year, and decide bonuses accordingly? Or should clerks be rewarded for building out customer loyalty by waiving off late fees by default for a period of up to an hour beyond the checkout time?

What about re-evaluation requests for semester-end examinations? What about disciplinary committees for deciding upon the punishment for low attendance? The decision to sell land in order to meet revenue requirements by local governments? As you can see, once you start to think of hierarchies and organizations, this can get very complicated very quickly.

And within the field of economics (at least for a specific context), the Oates Theorem is a good starting point to think about this analytically:

Many years ago in Fiscal Federalism (1972), I formalized this idea in a proposition I referred to as “The Decentralization Theorem.” The basic point is that if there are no cost advantages (economies of scale) associated with centralized provision, then a decentralized pattern of public outputs reflecting differences in tastes across jurisdictions will be welfare enhancing as compared to a centralized outcome characterized by a uniform level of output across all jurisdiction

Oates, Wallace E. “On the evolution of fiscal federalism: Theory and institutions.” National tax journal 61.2 (2008): 313-334.

In English, what this means is that so long as centralized provisioning doesn’t have any “bulk” benefits, lower levels of hierarchy will always know more about “local” tastes and preferences, and therefore decision making ought to be as decentralized as possible.

Put another way, a one-size fits all rule won’t be as optimal for the hotel chain as letting the clerk in question decide on a case-by-case basis.

So as a thumb rule, the more one decentralizes, the better. Alas, decentralizing decision-making also has the knock-on effect of decentralizing power, and that tends to not go well with those who, well, have power.

And so while effective decentralization has economic benefits, it also has political consequences. Which is why it makes sense to ask what one is optimizing for. And occasionally, it behooves all of us to ask what one should be optimizing for.

The answers are often wildly different, and more’s the pity.

How to think about the budget

This Saturday, I will be a part of a panel discussion about the budget.

This is happening at a college here in Pune, and today’s blog post is an answer to the question that I have been asking myself for the past couple of days: is there anything that has been left unsaid about the budget? For if not, I speaking at that panel discussion is a waste of everybody’s time, including myself.

Here are, very briefly, the three things hat I think are most noteworthy about this budget:

  1. In much the same way that we have the removal of exemptions, but not really, not just yet, we also have an admission of the real extent of the fiscal deficit: but not really, not just yet.

    To the credit of Finance Minister Nirmala Sitharaman, in this Budget, she has taken significant steps to improve transparency by presenting a statement on the vexed issue of extra-budgetary spending/borrowing (see Annex V of speech Part A and Statement 27 of the Expenditure Profile). That shows a total of about 0.85 per cent of GDP of such expenditures/borrowing in both 2019-20 RE and 2020-21 BE, excluding the footnoted reference to amounts for public sector bank capitalisation. Much of this is for financing the food subsidy through the Food Corporation of India. If added to the “shown” fiscal deficits (FD) for these years, it would raise the ratios to 4.6 and 4.4 per cent, respectively.
    ..
    ..

  2. Revenue will be less than the government was hoping for, and as a consequence, it will not be able to spend as much as we would have hoped in an economic slowdown. We also remain dependent on disinvestments working out on a scale that has never before taken place. Read this article, by Vivek Kaul – especially the section titled “The Family Silver”. Note that this was written before the budget came out. This year’s budget is as optimistic, if not more, about income it hopes to earn through disinvestment.
    ..
    ..
  3. We are, in the words of Shankar Acharya, lurching towards protectionism.

    For 25 years since 1991, successive Indian governments reformed our trade policies in favour of greater openness and engagement with world trade. Customs duties were greatly reduced and quantitative restrictions largely eliminated. As a result, our foreign trade — both exports and imports — expanded robustly, providing a significant boost to our economic growth and employment. Since 2017, we have reversed policy and retreated from engaging with the world economy. Our ministers and senior officials do not seem to appreciate that higher duties and restrictions on imports hurt our capacity to grow exports. No sizable, non-oil country has sustained high export growth while imposing significant duties and restrictions on imports. And no such country has sustained high overall economic growth without high export growth. We ourselves grew fastest when our exports expanded robustly (1992-97 and 2003-2012).

If you ask me, there really isn’t that much more to say about the budget, that is so noteworthy that it bears repetition and emphasis. In any case, I’d much rather think about the Economic Survey to reflect on that state of the economy, and what needs to be done about it. The budget, Andy Mukherjee says (and I agree), isn’t all that important.

But this past week, I read about Clayton Christensen and Andy Grove. Clayton Christensen, author of The Innovator’s Dilemma, and one of the most respected thinkers on strategy, passed away recently. I had been reading essays and blog posts written in his honor, and came across an essay written by Clayton Christensen himself about the distinction between the “what” and the “how”.

I’ve thought about that a million times since. If I had been suckered into telling Andy Grove what he should think about the microprocessor business, I’d have been killed. But instead of telling him what to think, I taught him how to think—and then he reached what I felt was the correct decision on his own.

The essay is much more than that, and you might want to read it. But that part truly resonated with me: the how over the what.

Now, you might be wondering about what this has to do with the talk on Saturday – or indeed about anything at all.

Well, reading this post by T N Ninan in the Business Standard is what brought the anecdote above to mind:

So it might be a good idea for the next Economic Survey to deal with not just the many “What” and “Why” questions in economics, but also the “How”. There is no other way to understand how the impossible becomes possible — as more than a campaign slogan. India struggles with budgets and procedures, and still has a major corruption problem that can send a project off the rails. China has corruption, for sure, but no other economy with a per capita income of $10,000 is able to grow at 6 per cent, or anywhere near that rate.

Of all the articles I have read about the budget and the economic survey (and there have been a fair few of them) this was the one that resonated the most. Maybe because I just finished reading (and thoroughly enjoyed) In The Service of The Republic, or maybe because of other reasons. But all of those other articles are, using Ninan’s framework, about the “what”. This needs to be done, that needs to be done, if only we had this, that or the other.

And all of those things are true, to be sure. We would be better if all of those many, many things were around. But a la Grove: how, dammit?

Here is Ninan’s solution:

“Is there a solution? Yes, railway engineers of old like the metro builder E Sreedharan, builders of government companies like D V Kapur and V Krishnamurthy, and agricultural scientists like M S Swaminathan have shown how they made a difference when given a free hand. Vineet Nayyar as head of Gas Authority of India was able to build a massive gas pipeline within cost and deadline in the 1980s. The officers who are in charge of Swachh Bharat and Ayushman Bharat, and the one who has cleaned up Indore, are others who, while they may not match China’s speed, can deliver. Perhaps all we have to do is to spot more like them and give them a free hand.”

But as any experienced HR professional will tell you, spotting them is very difficult, even in the corporate world. And as any corporate CEO will tell you, giving these talented folks a free hand is even more difficult. And as any student of government bureaucracy will tell you, achieving the intersection set of these two things in a governmental setup is all but impossible.

And so what we need to study and copy from China is not so much anything else, but lessons in achieving, and sustaining, excellence in government bureaucracy. Or, if you prefer, how to improve state capacity.

In short, quality of government, not size of government, is what matters for freedom and prosperity.

Because we could analyze the budget and its numbers all we like, but without the Grovesian “how”, the “what” is essentially theory without practice.

For just one extremely effective example of the “how”, see this.

So how did China get so very lucky?

Indeed, we may now be living at the peak of the influence of the so-called Class of 1977. A September press conference ahead of the celebration of the 70th anniversary of the People’s Republic of China gathered together three of China’s top economic technocrats: central bank governor Yi Gang, Finance minister Liu Kun, and National Bureau of Statistics director Ning Jizhe. In an unusually personal moment for such an event, they mentioned that all three of them had taken the college entrance exams in 1977.

That is from Andrew Batson’s blog post titled “A Very Fine Reallocation of Resources“. An opportunity for some of her best and brightest to learn, and therefore apply meaningful change to their society, is one important factor in China’s rise. Du Runsheng, whose write-up I linked to above,  is just one example. There are many, many more.

More important than the budget is the Economic Survey, and I think T N Ninan is right, the next Economic Survey ought to focus on the how, not so much the what.

All that being said, here is a list of articles I enjoyed reading about the Union Budget:

Lessons from 1966 and 1991 for this year’s budget.

Contrary to the received wisdom that she should take steps to increase demand, I think she should do what was done in 1966 for exactly the same reasons: being broke. No fiscal boosters to artificially increase demand.

That said she should also do what the 1991 budget did: free businesses from random, illogical and counter-productive controls.

In short, we need a sensible combination of the1966 and 1991 approaches, namely, deep fiscal prudence (1966) and a withdrawal from the economic stage (1991).

Spend less and increase non-tax revenue significantly – and that’s pretty much the best way to judge if this is a good budget or not, says T C A Srinivasa Raghavan.

Surjit Bhalla’s summary of the good, the bad and the ugly in this year’s budget. I am slightly confused about exactly what his idea of the “good” was. For me, personally, it is the government being clearer about it’s actual expenditure.

Vivek Kaul provides an excellent summary in four parts over on NewsLaundry.

Deepak Nayyar is less than impressed with the budget.

Rathin Roy remains worried about the artihmetic.

 

Row: Links for 18th December, 2019

  1. ““If a Chinese would come this road is done in a month,” explained Kenyan real estate entrepreneur George Hinga in a 2017 Vice China documentary. “With the Westerners,” he added, “the bureaucracy to get this approved would take a year, first of all, without any construction. I mean, why partner with the West?””
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    China full speed ahead in Africa.
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  2. A classic example of the seen and the unseen, from China and her implementation of the one child policy.
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  3. “In our prison example, for OPEC, and with the trade war, what is good for the group is not necessarily the individual’s “dominant strategy.” And that is why OPEC nations don’t necessarily listen to production quotas and the U.S. and China continue raising tariffs. Each one’s dominant strategy relates to their opponents rather than the benefits of cooperation.”
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    Elaine Schwartz on the USA, China and the prisoner’s dilemma.
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  4. “Xi sees that development economics as a discipline was largely created by Western economists using their own economies as a model, rather than being an indigenous creation of developing economies. “
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    Andrew Batson on a very early essay by Xi Jingping.
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  5. Speaking of unintended consequences…(with reference to number 2 above)

RoW: Links for 27 Nov 2019

  1. Via Mostly Economics, a short write-up on how Islamic Banking came to be in Pakistan. I have many more questions than I do answers, so more reading is required on my end.
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  2. “Neumann, according to the Vanity Fair article, believed that WeWork “was even capable of solving the world’s thorniest problems. Last summer, some WeWork executives were shocked to discover Neumann was working on Jared Kushner’s Mideast peace effort. According to two sources, Neumann assigned WeWork’s director of development, Roni Bahar, to hire an advertising firm to produce a slick video for Kushner that would showcase what an economically transformed West Bank and Gaza would look like.””
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    Via FT Alphaville, Adam Neumann, founder of WeWork on…uh… peace for the Middle East.
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  3. “The paper identifies actions China has taken to pursue its territorial and maritime claims and control around features, including encroaching on coastal states’ exclusive economic zones, increasing its military presence around features, seeking to deny the United States and other countries navigational and other freedoms of the seas, and escalating its militarization of features it occupies. These actions have allowed China to gain military advantages in the event of conflict and, significantly, non-military advantages in situations short of outright conflict, by deterring other claimants from putting up a strong resistance to Chinese incursions and undermining U.S. credibility in the region. The paper examines the responses of Vietnam, the Philippines, and Malaysia.”
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    China in the South China Sea. That is all.
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  4. A short photo essay on Yongbyon. Let us hope as few people as possible are aware of this city, say, 20 years from now.
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  5. “This made me think of China, and its policy-driven booms and busts. Typically, money floods into a sector when it receives government favor and subsidies, leading to a surge in production, and later overcapacity, falling prices, and a shakeout as the government reconsiders subsidies (see: solar panels, wind power, electric vehicles). In terms of labor, the willingness of Chinese migrant workers to uproot themselves and their families also shows no shortage of capacity to transform, but perhaps at too high of a social cost. So while capacity to transform in the US may now be too low, China’s might be too high.”
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    The always eminently readable Andrew Batson on a lot of things, each of which worth pondering upon. Deliberately vague, this introduction: do read the post!

RoW: Links for 13th November, 2019

  1. From a while ago – Peter Baker on Trump’s pullout of troops:
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    “”The Taliban have wanted the United States to pull troops out of Afghanistan, Turkey has wanted the Americans out of northern Syria and North Korea has wanted them to at least stop military exercises with South Korea.

    President Trump has now to some extent at least obliged all three — but without getting much of anything in return. The self-styled dealmaker has given up the leverage of the United States’ military presence in multiple places around the world without negotiating concessions from those cheering for American forces to leave.”
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  2. “As a tribute to the bunnies who lived between the wall, in 1999 artist Karla Sachse installed 120 rabbit silhouettes near the area they once roamed so freely. Unfortunately, in the decades since, quite a few of the brass bunnies are now buried beneath new layers of asphalt. It’s unknown how many still exist, though you can spot some along Chausseestraße.”
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    On the bunnies of the Berlin wall.
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  3. “Young people, many of whom had seen their schooling opportunities delayed for more than a decade, hastily dusted off their textbooks and began studying to prepare for the college entrance exams. That year, 5.7 million entered their names for the exams, and 273,000 were enrolled. Because the number of applicants far exceeded the expected figure, for a time the authorities could not procure enough paper to print the exam papers. The problem was not resolved until the central authorities made the urgent decision to ship in all the paper previously allocated for the printing of the fifth volume of the Selected Works of Mao Zedong.”
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    Andrew Batson on the class of ’77. I cannot improve upon the title of his post, by the way.
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  4. “The upgrade of the China–Sri Lanka relationship to a “strategic cooperative partnership” in 2013 demonstrated the geopolitical consequences of China’s generous support to Sri Lanka. By 2015 Chinese companies had completed infrastructure projects there worth $ 10 billion. In 2016, China overtook India to become Sri Lanka’s biggest trading partner with its $ 4.43 billion trade pipping the $ 4.37 billion of India.”
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    About the upcoming elections in Sri Lanka, and the associated geopolitical factors.
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  5. “But there were signs of trouble from the start. In 2014, a mountainside glass walkway cracked under the weight of too many hikers. In 2015, a glass bridge fractured and had to be closed after a visitor dropped a thermos on it. A year later, the Zhangjiajie Bridge, a 1,400-foot span that hangs 1,000 feet over a gorge, had to be closed after it was mobbed by visitors far in excess of its designed capacity, a mere 13 days after opening. The next year, it was pummeled by falling rocks.”
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    On China’s bubble in building, uh, bridges made of glass.