governance, political economy, institutional development and economic regulation

Archive for December, 2015

Small guys always win

Star Wars episode VII tells it like it is, in reel life. The small guys — with fire in the belly and a higher moral purpose as their force — always win in the end.

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In this universe, big is evil. Thomas Picketty, the celebrated French economist, agrees. The bigger you get the further behind you leave most people. Just a handful hoarding wealth can’t be good and it isn’t.

Government of the underdogs but not for the underdogs

India has a long tradition of the government trying to protect small guys against the big guys. Our post-colonial mindset and our laws pretend to penalise the rich and big business. In actual fact, they work against the middle class and the poor. To make things worse, government has been pretty poor at doing the things rich people and big business could do, like investing in infrastructure and creating jobs.

The government in China manages to do this. But the government there has some advantages: The tight social compact between it and citizens and its credibility based on sustained growth, increasing incomes and improving lifestyles. Higher levels of homogeneity help.

In real life, of course, being big is often an advantage. Teenagers will agree instantly. Older folk may not be so sure. A great body with bulging muscles looks awesome at 19. But as the 40s kick in, things begin to sag and get lumped around as useless weight. Nations are no different. India is a big, old nation with a governance history and systems developed over the last 500 years. It is unsurprising that it is flabby today.

Our options

We can go two ways. Either we can reenergise the existing, highly-centralised system of governance or invent a new, highly-decentralised system celebrating the small guy.

Technology enables efficient centraisation

Technology enables and often induces a higher degree of centralisation today than ever before. In earlier times the bigger an empire became, the more loosely were the far reaches managed. It took the British force, marching up from Calcutta, three months to relieve the siege of the Lucknow Residency in 1857.

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Today a trained and equipped special force can reach a trouble spot anywhere in India within a day. Things can be monitored in real time, across enormous distances, providing early signals of “hot spots” or flashpoints for potential trouble. Social media has created a new, real time, citizen-centric information ecosystem. For every two Indians there is one mobile connection. Of these 20 per cent are smart phones. Within five years there will be as many mobile connections as Indians and 60 per cent of these will be smart phones.

Standardisation is another advantage of centralisation. Education, health, products and services all reflect the “Big Mac” effect — places change but the service remains the same. This is very attractive if you are a fan of robotic life. It also reduces the cost of doing things.

But centralized templates sap innovation

But there are problems which come with big, centralised empi-res. One problem is how to manage the concentration of power at the top. Humans have coped with inequity for generations. But “glass ceilings” sap potential and deaden the desire to innovate and take risks.

Choice is at the heart of efficiency. Old, immigrant nations like the United States retain their mojo because people choose to become citizens; virtually no one is born to a job and everyone has a voice. China is also a meritocracy, though choice is limited there.

But humans are neither robots nor pets. We are honed to express our individuality, search for better alternatives, a better way of doing things.

Inefficient, small, good guys versus efficient, big, bad guys

In Star Wars terms, India is the good guy and China the bad guy. We are the small good guy. We cannot destabilise the world economy. China can. We do not have a history of flexing our muscles. China does. We don’t deliberately infringe human rights. China puts national interest above human rights. But we the inefficient small guy, unlike Singapore, Mauritius or Malaysia, whilst China is the efficient, big guy.

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Competition and choice make decentralized systems efficient

Large, efficient democracies are not born overnight. They are nurtured over six to eight generations. Ours is just three generations old. Our Constitution recognises that one size does not fit all. That is why it establishes state and local governments. Most state governments haven’t empowered local governments, partly because even their own empowerment is very recent. Smaller state governments work better than bigger ones. The shining stars are the five southern states, Punjab and Haryana. Gujarat and Maharashtra are the outlier, efficient, big states. The bigger northern and eastern states illustrate that size is a handicap especially if coupled with antagonistic social diversity.

Choice is embedded in our Constitution. But powerless local governments make choice a redundant option. Our nascent democracy makes us obsessive about potential threats to the unity of India. Destabilising threats from our immediate neighborhood heighten this paranoia.

Consciously dumbing down the Center to the bare essentials of sovereignty is the only way of making the big guy efficient. Empower state governments by transferring human development and social protection functions with the required financial resources. Make the transfers conditional to states empowering their local governments in turn. A cascading stream of resources empowering the smaller guys is the mantra for equity with efficiency. It is only then that India will become an efficient good guy, even as we grow bigger and bigger.

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Adapted from the authors article in Asian Age December 26, 2015 http://www.asianage.com/columnists/small-guys-always-win-373

Let billionaires manage the global commons

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Photo credit: huffingtonpost.in

Facebook CEO Mark Zuckerberg’s pledge to give away 99 per cent of his shares in the company, assessed at $45 billion, is the most recent in a series of over 138 billionaires who have signed the “giving pledge” to donate 50 per cent of their fortunes to charity. The 500 top billionaires in the Forbes list have a net worth of $4.7 trillion. Donations to charity, in the US alone, amount to over $300 billion every year.

Compare this with the fate of the pledge to stop climate change, proposed at just $100 billion every year from 2020 onwards. The nations of the world are scrapping over who should pay how much. Nothing better illustrates the ascendancy of the “box wallahs” (big business) versus the public bankruptcy of nation states.

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photo credit: http://www.cnbc.com

The leaders of 190 nations of the world and their extensive delegations could have more effectively sought an appoint-ment with the 1,826 billionaires in the Forbes list with a net worth of $7.5 trillion — equal to around 10 per cent of the world’s gross domestic product. With an estimated annual income of around $150 to $200 billion they could potentially make up for the international intransigence in funding the global commons.

Private wealth has always been a metric of success, especially if it is built up within one’s lifetime, if it is legitimate and if some of it is used to do good deeds. Could the talent, which has demonstrated private success, be institutionalised for achieving similar success in global public affairs?

This rhetorical question merits consideration because the governance record of multilateral institutions has been pretty lacklustre, particularly in matters related to promoting the global commons. And time is running out.

Cynics would assert that billionaires are created from unpaid taxes, which they are big enough to avoid paying, unlike common folk. Others may baulk at trusting rich folks with the world’s future — after all many have grown their private wealth at public expense — as is the case with oil, mining and tobacco companies.

Why trust those who don’t walk the talk?

But it sounds somewhat ridiculous that the heads of 196 nations should have more “voice” in managing our future than 138 billionaires who are willing to pledge more money to charity, than all these nations can collectively gather over the next two decades, to protect the global commons.

Big is not beautiful

Have we ballooned the functions of nation states way beyond what they can efficiently do? Is the nation state a “fit for purpose” entity for the new, integrated world order of this century and beyond?

It is conventional to think it necessary to limit the power of the state versus the human rights of citizens — a concept embedded in the principle of the rule of law. It is less conventional to think it necessary to limit the economic functions and fiscal powers of the state. The success of “developmental” states, like China, in sharply reducing poverty and spurring economic growth has bolstered the case for fiscally empowered, intrusive or “nanny” states. The world and India are rediscovering the virtues of public finance-led growth.

This is a sharp departure from the conventional wisdom, which prevailed from the latter half of the 1980s till the 2008 financial crisis, that private investment and management trump public finance options in effectiveness. The 12th Five Year Plan (2012-2017) — incidentally possibly the “last supper” for planning in India — reflected this earlier consensus by relying on private investment for around one half of the plan outlay. The definition of “private investment”, of course, was somewhat disingenuous. Loans taken by a private firm from a publ-ic sector bank were categorised as private investment. Today, such loans, particularly to private infrastructure developers, have turned sour and increase the non-performing assets (NPAs) of publicly owned banks.

Minimum government equals maximum governance

Fiscally muscular, democratic states, with expansive public ambitions, are wasteful and inefficient. Their instinct is to throw money at the problem. This is always the politically safest option though it may not be the most efficient “value for money” alternative. Examples abound. Why is it easier to construct a village school building than to staff it with teachers? Why are public buses in Delhi, bought just five years back during the Commonwealth Games in 2010, increasingly seen on the roads in a breakdown condition? In both cases, a fiscal windfall — a central scheme or a high-prestige project — makes available the capital investment, but there is no link with sustainable revenues for keeping the asset operational over its useful life.

India’s electricity supply industry is another case in point. In the First Five Year Plan, large-scale public investment was the planner’s choice for rapid electrification. More than six decades on, distribution utilities — primarily publicly-owned and managed — have an accumulated loss of $50 billion despite two previous bailouts in 2012 and 2002. Sadly, even on the most easily achieved efficiency metric of transmission and distribution loss, only the private utilities and some public utilities in Maharashtra, Gujarat and West Bengal perform well. In others, between a quarter to one half of the energy input into the grid, never gets billed to customers.

The core developmental function of the government is to regulate by setting standards of performance and by financing the delivery of public goods and services, which the private sector would otherwise have no incentive to supply. In India, unfortunately, our first response is to propose the direct delivery of public goods and services via state-owned enterprises. This in-house option is often preferred as being less time consuming and more controllable. There is also the implicit comfort that no one gets punished for the inefficiency of the public sector. But officers rooting for private sector service delivery face the challenge of having to stand ready to be hauled over the coals for the slightest mishap.

If our concern is jobs and better service delivery, it is only private investment and management which can generate results. Open the gates to the innovative genius of public-spirited billionaires. Why look a gift horse in the mouth?

Adapted from the authors article in the Asian Age December 10, 2015 http://wwv.asianage.com/columnists/let-billionaires-save-world-605

Climate balance sheet post Paris

Paris cops

Paris cops patrol the streets prior to COP21: photo credit: http://www.nytimes.com

The Paris terror attack, days before the COP21 meet, seemed to be the only outlier in the run up to this event. Expectations from the meet were low and procedural, rather than substantive, in terms of doing something concrete and time bound to limit global warming.

There will be a deal…but it will be minimalist…noncontroversial….and most importantly universal…it will not make the commitment or the result legally binding…it will sidestep… review of the INDCs.On additional finance…it will not mention specifics” thereby freeing developed countries from their obligation under the UN Framework Convention on Climate Change to take the first and drastic actions because of their historical responsibility

Sunita Narain, India’s combative, veteran climate campaigner,November 22, 2015.

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The UNFCC (UN Framework Convention on Climate Change) has assessed the Intended Nationally Determined Contributions (INDCs), comprising actions till 2030, submitted by 166 countries as insufficient to hold global temperature increase over pre-industrial levels at the targeted 2⁰C. This is not what signatories to the 1997 Kyoto Protocol intended when they signed on for equitable, differentiated commitments to reduce Green House Gas (GHG) emissions.

The Science Of Climate Change

In the two decades since Kyoto, despite regular conferences of the parties to the UNFCCC 1992, an agreement has been elusive on the timelines and volumes for mitigation actions by specified countries. Adequate finance for mitigations is another problem. Meanwhile GHGs have continued to accumulate and the globe has continued to warm up.

Each of the last three decades has been the warmest since 1880. The global average temperature was 0.8⁰C higher in 2012 than in 1850. The science on what has caused the increase in temperature points to the accumulation of GHG – 78 per cent of which is carbon dioxide emissions from the burning of fossil fuels.

The IPCC (Intergovernmental Panel on Climate Change) in its fifth report in 2014 estimated that the maximum emissions the globe can adjust to, without severe adverse consequences, is around 2900 Giga tons of CO2. Accumulations by 2011 were already 1900 Gt CO2 leaving just around 1000 Gt of carbon space for future emissions. With annual emissions at around 50 GtCO2 in 2010 this leaves just about 20 years (till 2030) to prevent the globe going over the “tipping point”- popularized by the metric of a mean temperature increase of 2⁰C.

“Enormous costs and human suffering are inevitable unless adequate concessional finance drives mitigation aggressively and countries pull together to define a common strategy”

R. K. Pachauri Director General TERI and ex chair IPCC, November 27, 2015

The Conundrum

Collective action involving 196 sovereign nations is a gigantic task. Consider how porous the implementation of the Non Proliferation Treaty 1970, banning nuclear proliferation, has been even though it recognizes just five countries as Nuclear Weapon States.

At the heart of the problem of climate change compliance is the long disconnect between irresponsible behavior today and consequences occurring a century later. Corporate entities and nations rarely strategize beyond twenty years. This implies we should budget for crossing the tipping point. The inevitability of this scary scenario is what most nations – developed and developing – seem to be working towards.

Is there still time to do something?

Rapid economic growth in the developing economies is the best solution to even out the existing asymmetry between the capacity of the developed and the developing world to deal with climate change. But it also advances the “tipping point” by filling up the available carbon space. One-third of the world GDP today and nearly one half of incremental GDP added during the period 2000 to 2014 was contributed by low and middle income countries.

The OECD estimates that its trend growth till 2050 will be around 1¾ to 2¼ per cent per year. Compare this with expected growth in non-OECD countries of 7 per cent till 2020 declining to around 5 per cent in the 2030s and to about half that by the 2050s. Today’s developing countries will account for more than 60 per cent of the world’s GDP by 2030. This will still be less than their share of 85 per cent in the world population of 8.5 billion in that year, as assessed by UNDESA (UN Department of Economic and Social Affairs). But the continuing differential in economic growth will empower these new economies.

The Kyoto Protocol arrangements visualized a static world divided into Annex 1 (industrialized) and other countries, with only the former morally obliged to reduce emissions to “pay for the pollution” they had created. This argument – thin as it was even then – has proved impractical in the face of a dynamic and integrated world economy.

The developing world has copied the carbon-intensive path as it has grown richer. A bald per capita comparison of energy consumption across countries hides the fact that elites in developing countries – who are the domestic role models – are at least as energy profligate as people of a similar income level in the industrialized world. Moral outrage at the profligate West is mere rhetoric. But it is also true that the rich have not uniformly stepped up to the plate. In contrast, several “newly emerged economies”, like India, are pulling above their weight.

Interim strategies till 2030

Some more scientific clarity please

Much of the resistance to spending more on adaptation and mitigation relates to the uncertainty with respect to the timing and magnitude of the impact and the credibility of mitigation options. Diluting the uncertainties can greatly enhance the willingness to invest in green options for growth.

360⁰ strategy for sustainable development

Global climate concerns need to be built into local development strategies. Working bottom upwards rather than the more usual top down approach can pay rich dividends in resolving the presumed trade-off between development and the environment.

Take sea level rise – that most dramatic of adverse effects – which is expected to force people in small islands and low lands to migrate. A Climate Central Research Report estimates that a 3⁰C increase in temperature is expected to result in a rise in the sea level between 4.7 to 8.2 meters and induce displacement of between 255 to 597 million people based on 2010 population levels.

China has the most to lose from habitat disruptions followed by India, Bangladesh, Vietnam, Indonesia, Japan, the United States, Philippines, Egypt, Brazil, Thailand, Myanmar and the Netherlands, in descending order. Land use and building regulations can regulate further construction in the areas to adapt infrastructure to the likelihood of being inundated. But as the recent Chennai disaster shows, government and citizens are not sensitized to this threat.

Taxing land use appropriately can boost local government revenues whilst also optimizing land use, resulting in more energy efficient cities and villages. A 360⁰ approach to sustainable development, as embedded in the Sustainable Development Goals adopted earlier this year, is the way to go.

Compensate for the conservation of natural resources

Just as forests are a carbon sink, coal or oil reserves, left unexploited in the ground, are also voluntary economic sacrifices. Compensating the public or private owners could incentivize conservation. Of course there are political economy issues associated with compensatory transfers. Natural resource rich countries may be non-democratic and dictatorial. Some oil rich regimes in West Asia use oil wealth to indirectly support the political use of terror. Empowering such governments with fiscal transfers may cross humanitarian and security “red lines”. But the principle can be applied selectively to freeze the threat of incremental carbon emissions.

New institutional arrangements

Effective institutions raise the benefits of cooperative solutions or the costs of defection, to use game theoretic terms

Douglass C. North, Nobel Laureate and Institutional Economics Guru.

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Institutional change imposes costs. But it can be the game changer for getting results by aligning incentives with outcomes. We would do well to recall this central thesis of Nobel Laureate Douglass C North, Institutional Economist, who passed on last month. Changing the institutional framework within which foreign aid works and international cooperation arrangements are structured can have similar outcomes.

Incentives for improving cooperation

Unless shifts in the international economic fundamentals are explicitly recognized and factored into the architecture for cooperation, useful outcomes become prisoners to the asymmetry between intent, capacity and authority of individual countries. Implementation of the long sought for reforms in the governance of multilateral institutions could be one option to signal the need for emerging economies to play a more substantive role.

Going beyond voluntary pledges of finance

Additional finance is critical for mitigation. The existing arrangements seek to funnel additional funds provided by developed countries into the Green Climate Fund. But only $10.2 billion has been pledged against the targeted annual receipt of $100 billion by 2020. Dwindling growth, ageing populations and a reducing share of the rich countries in the world GDP are unlikely to create the political economy drivers for making them more generous.

“India is pulling above its weight to contain climate change. But without similar additional effort from the legacy economic powerhouses, achieving the target of 2⁰C is tough. No developing country should be pushed into having to trade-off growth for environment.”

Ashok Lavasa, Secretary Environment. Government of India, November 27, 2015

Lavasa

A universal “carbon tax” is an alternative, straight forward approach. But it raises implacable issues of equity based on differential natural endowments and differential access to technology across countries.

Show me the money!

A better proxy of wealth to tax is cross-border investment. Imposing a tax on international capital flows, at a time when liquidity needs to be enhanced, does not make intuitive sense. But the distortionary impact can be minimized by keeping the tax at low levels making it too fractional to inhibit individual transactions.

The annual flow of cross-border private investments (debt, portfolio and foreign direct investments) has reduced significantly since the downturn of 2008 but the IMF still estimates it at US$ 4 trillion. Capital exporting countries also tend to be those which are growing well. Green bonds are already in the market. One driver of cross-border investments is the search for higher returns abroad or risk diversification. These drivers are unlikely to be diluted by a marginal tax on private capital outflow. The green tax could be a significant and buoyant source of green finance.

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Time is running out. The existing clunky climate arrangements are broken. A new institutional framework is needed to integrate growth, development and environmental preservation. Improving the science of climate change is critical for a nuanced least-cost assessment of the balance between mitigation and adaptation. “Value for money” must replace today’s environmental theology to make people willing to pay for change.

Adapted from the authors article in http://swarajyamag.com/world/beyond-the-paris-meet

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