Political dynasties versus development

September 1, 2015

Jan Frederick P. Cruz and Ronald U Mendoza look at this phenomenon of rising political dynasties. Not just in emerging world but in US as well where Clintons and Bushes dynasties have been at the helm since 1990s:

The possibility of a showdown between Hillary Clinton and Jeb Bush in the US Presidential polls may have some political pundits salivating, but perhaps many more Americans wondering. Is political power becoming too concentrated in the US? A Bush or a Clinton was President or Vice President in the US for almost 30 years between 1981 and 2009, a dynastic run that may yet be extended by the 2016 elections.

Elected politicians related by blood or by marriage are considered part of political dynasties, and their relevance to democratisation and economic development applies to both developed and developing democracies. Recent efforts to estimate the share of dynasties in various democratic parliaments indicate that they may range from as low as 6% in the US, to as high as 75% Philippines (Figure 1).

Research shows places where dynasties rule, there is underdevelopment:

Recent research on dynasties in the parliaments of India and the Philippines turn to extensive data on political clans at the local government level, enabling an empirical analysis of the links across dynastic patterns on the one hand, and development indicators on the other.

First, the share of dynasties in the Indian Lok Sahba is around 24%, compared to 75% in the Philippine Congress. When one examines how dynastic incidence at the state level (for India) or provincial level (for the Philippines) is linked to socio-economic indicators, the results seem to confirm a negative correlation between political dynasties and economic development.

The dynastic share at the state level in India is negatively correlated with annualised state-level economic growth. Moreover, in India, the dynastic concentration is smaller in states where citizens are relatively better off and where the socio-economic standing of the average person is rising.

A similar analysis focused on political dynasties in the Philippines’ local government confirms similar patterns. There is also a negative correlation between Philippine provincial real per capita income and dynastic incidence among local government officials.

Hence, in both India and the Philippines the dynastic share indicator is positively correlated with a rising poor population. In other words, dynastic legislators persist in states where there is low human development and a large poor and vulnerable population.

There are various possible explanations here. Rising living standards could weaken patron-client relations that tend to sustain political dynasties. The more economically independent the typical voter is, the less reliant he or she might be to a local patron. Furthermore, rising incomes may also result in a growing middle class, more competitive options for candidates, and more resources that can be tapped for political campaigns by different groups.

In the end, political dynasties in today’s modern and developing democracies are a reminder of how personalities still dominate the political landscape, be it in Washington, DC or in Bombay and Manila. Democracies do not necessarily reflect a level playing field, when certain political clans wield disproportionately large influence and control over public resources. And in the worst cases, all that political power is not wielded to advance development or reduce poverty. They appear, instead, to be linked to underdevelopment and rising inequality, particularly in countries and regions with relatively weaker democratic institutions.

Whoever said that during elections is the only time the vote of the richest citizen is equivalent to that of the poorest needs to start rethinking whether this still holds true in many democracies.

Hmm. Something which has been known for a while. But power of politics is such that if dynasty politics is possible, they will not just be created but all efforts to sustain it shall remain too..

Cautionary histories of US monetary tightening

September 1, 2015

Brad Delong has a piece on the same.

He actually questions the famous Volcker episode which created its own problems:

The US Federal Reserve has embarked on an effort to tighten monetary policy four times in the past four decades. On every one of these occasions, the effort triggered processes that reduced employment and output far more than the Fed’s staff had anticipated. As the Fed prepares to tighten monetary policy once again, an examination of this history – and of the current state of the economy – suggests that the United States is about to enter dangerous territory.

Between 1979 and 1982, then-Fed Chair Paul Volcker changed the authorities’ approach to monetary policy. His expectation was that by controlling the amount of money in circulation, the Fed could bring about larger reductions in inflation with smaller increases in idle capacity and unemployment than what traditional Keynesian models predicted.

Unfortunately for the Fed – and for the American economy – the Keynesian models turned out to be accurate; their forecasts of the costs of disinflation were dead on. Furthermore, this period of monetary tightening had unexpected consequences; financial institutions like Citicorp found that only regulatory forbearance saved them from having to declare bankruptcy, and much of Latin America was plunged into a depression that lasted more than five years.

We are told of a very different version of Volcker history. It is easily one of the most celebrated (if not the most) episode of monetary history where a central bank curbed inflation due to tight policy. So much so, it has become the benchmark for anything in monetary policy. We are also told how Volcker episode was finally a victory of monetarism over years of evil Keynesian policies since 1945. But here Prof Delong says the final outcome of declining economic activity was a victory of Keynesian models! Economics is all over the place as so many interpretations are there. We need to know econ history and from many different perspective as there is no single narrative.

He points to further episodes:

Then, between 1988 and 1990, another round of monetary tightening under Alan Greenspan ravaged the balance sheets of the country’s savings and loan associations, which were overleveraged, undercapitalized, and already struggling to survive. To prevent the subsequent recession from worsening, the federal government was forced to bail out insolvent institutions. State governments were on the hook, too: Texas spent the equivalent of three months of total state income to rescue its S&Ls and their depositors.

Between 1993 and 1994, Greenspan once again reined in monetary policy, only to be surprised by the impact that small amounts of tightening could have on the prices of long-term assets and companies’ borrowing costs. Fortunately, he was willing to reverse his decision and cut the tightening cycle short (over the protests of many on the policy-setting Federal Open Markets Committee) – a move that prevented the US economy from slipping back into recession.

The most recent episode – between 2004 and 2007 – was the most devastating of the four. Neither Greenspan nor his successor, Ben Bernanke, understood how fragile the housing market and the financial system had become after a long period of under-regulation. These twin mistakes – deregulation, followed by misguided monetary-policy tightening – continue to gnaw at the US economy today. 

So, it seems most monetary tightening episodes since 1980s have had their undesired consequences as well.

The tightening cycle upon which the Fed now seems set to embark comes at a delicate time for the economy. The US unemployment rate may seem to hint at the risk of rising inflation, but the employment-to-population ratio continues to signal an economy in deep distress. Indeed, wage patterns suggest that this ratio, not the unemployment rate, is the better indicator of slack in the economy – and nobody ten years ago would have interpreted today’s employment-to-population ratio as a justification for monetary tightening.

Indeed, not even the Fed seems convinced that the economy faces imminent danger of overheating. Inflation in the US is not just lower than the Fed’s long-term target; it is expected to stay that way for at least the next three years. And the Fed’s change in policy comes at a time when its own economists believe that US fiscal policy is inappropriately restrictive.

Meanwhile, given the fragility – and interconnectedness – of the global economy, tightening monetary policy in the US could have negative impacts abroad (with consequent blowback at home), especially given the instability in China and economic malaise in Europe.

The author thinks one reason why Fed might be moving to rate hike is because of pressure of banks:

It is tempting to conclude that the Fed’s eagerness to tighten monetary policy – despite unfavorable historical precedents and ongoing economic uncertainty – is driven by commercial banks with excessive influence in official policymaking. After all, commercial banks’ business model works only when the banks can earn (via passive and relatively safe long-term investments) at least 3% a year more than they pay depositors. And that is possible only if US Treasury rates are higher than they are now.

If this is true, it would reflect a failure by bankers to understand their industry’s material interests. What would most benefit commercial banks is not an immediate increase in interest rates, but a monetary policy that contributes to ensuring that the economy is capable of supporting higher interest rates in the future. If history is any guide, tightening monetary policy in the near term will only lead to further economic turbulence, followed by a rapid retreat to low interest rates. Embarking on that path should be a cause of concern for everyone.

Not sure about this. Banks are made the scapegoats for thinking on both sides. Low rates also mean treasury profits continue for banks. This idea of higher rates imply banks keep treasuries till maturity which is not true. Higher rates are likely to hit banks portfolios..

Macro narratives all over the place..

Blanchard could have highlighted the role of knowing economic history..

September 1, 2015

Oliver Blanchard, the outgoing chief economist of IMF gives this interview on lessons learnt (both for himself and IMF) and way going forward.

He is joining the Peterson Institute for doing more serious research on the lessons he has learnt over these years. This is really interesting to see. How most US based economists actually look forward to doing more research after holding such high offices. They just join the thinktanks/univs and devote more time to research. In most other countries, we usually see such experts shuttling from one high office to the other. The econs in US wished to be known for their academic contribution and not just some policy hogwash.

Moving to the lessons learnt:

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Knowing about 2 factor authentication using tales from Ramayana, Aladdin and Alibaba

September 1, 2015

Prof JR Varma has a terrific post on the topic. I hardly had any idea about this 2 factor authentication model (didn’t care for it either) used for payments. This post not just helped clarify what 2FA is all about, but also connected it via stories which will be difficult to forget.

As the name suggests 2FA means you need two things (factors) to identify yourself:

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Flawed mental model and investing

August 31, 2015

Dhirendra Kumar of Value Research has a superb piece on this topic.

Starts with this story:

Here’s a joke that has a great pedigree in the investment world. The father of value investing, Benjamin Graham, apparently used to narrate this story to his students and draw a parallel to the behaviour of stock market punters.

So this oil prospector dies and goes to heaven. At the gate, St Peter reads the account of his life and tells him that he’s qualified for heaven, but there was a problem. “See that crowd over there? They’re all oil prospectors who’ve arrived before you. And the way things work here, you can’ get in until after them. So I’ afraid this looks like a long wait for you.” “Not a problem”, replies the man, “I know how to get rid of that crowd.” So he turns towards that crowd of oil prospectors and shouts out, “Hey, did you hear? Oil has been discovered in Hell.” And sure enough, as soon as they heard him, every single one of them ran off towards hell. Looking at this, St Peter reluctantly said, “Well, it seems your way is clear. You can enter heaven now.” But the oil prospector had his doubts. “You know what? I think I’ll follow the guys. The rumour could be true.”

As Graham used to point out, the oil prospector’s behaviour has much in common with what passes for investment research nowadays. As sophisticated commentators would point out, their mental model of how the market works probably leads them to believe that if a lot of people believe in something, then it must be true. A mental model of something is our idea of how it works internally.

He points to a few more mental models..

Stock market investments have captured human minds for a very long time. There is no other area which can make you both rich and pauper overnight. The former likelihood keeps bringing people to the investing world only to be trapped in some mental model or the other..

Sad state of Sanskrit scholarship in India

August 31, 2015

Swarajya magazine has an extract from Chamu Krishna Shastry’s book sāvadhānāḥ syāma on state of Sanskrit scholarship.

It is not just sad but pathetic too:

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How Nashik Kumbh mela is leading to tech innovation..

August 31, 2015

Going back to as early a history as possible. Interesting article in BS on how the Nashik Kumbh mela is leading to tech innovations. It has actually leading to formation of certain startups:

Thanks to initiatives taken by a few like Professor Ramesh Raskar, who heads the camera culture research group and MIT Media Lab in Boston, the quiet city along the river Godavari has for the first time institutionalisedwith the so-called ‘Kumbhathon’, which kickstarted in January last year. The basic objective was to address the various problems faced during the festival, which spans several months, with the use of technology. The initiative included crowd management, patient monitoring, controlling epidemic, and sanitation, besides many other things.

The idea to leverage Kumbh for encouraging local innovation took shape at a time when Raskar was on a private visit to his hometown for Diwali in 2013. While brainstorming with a few friends on what they could do for the city, Sachin Pachorkar, a management professor at a local college, proposed leveraging Kumbh Mela for bringing a culture of innovation to Nashik. The discussion was carried forward and by January they were ready with the first innovation camp, with the help of Raskar, who also brought in some innovators from MIT Lab for support.

“We, together with Dr Raskar, realised cities could not get smarter… citizens could (get smarter) and then make the cities smarter,” says Ashwin Kandoi, co-founder & director of Winjit, a Nashik-based IT services company.

They received around 850 applications from different engineering colleges in and around the area which came up with some 1,000 proposals to solve various challenges. After careful scrutiny, around 200 innovators were selected for the first innovation camp conducted in January 21-24 last year.

Since then, they have organised five camps, or Kumbhathons; and about 10 of the ideas that came up are being implemented during this year’s Kumbh Mela. Many of the ideas that germinated during the Kumbhathons have now given birth to a number of start-ups in the holy city.

For example, one of the ideas that took shape was on controlling with the use of technology the spread of epidemics that are a usual problem at events where huge congregations are involved. The solution proposed by one of the participating teams was to develop epidemic tracker Epimetrics, an app that helps store patients’ data on a central server. The data could then be analysed by experts to see if an epidemic was about to spread, and take necessary steps, such as stocking of medicines and informing hospitals in that area. The authorities could also know where the patients were coming from and the sources of their diseases.

Similarly, the local innovators have developed Meditracker, a fast aid and emergency health care app aiming to supplement emergency rescue operations. When one taps on the emergency button in the app, the nearest ambulance and medical crew find the person on the basis of his or her geographical location.

“The idea is that these should not stop after Kumbh; the innovation culture has to continue. Of the 200 ideas that generated during the Kumbhathons, 10 were taken to the next level on the basis of ease of implementing. These have actually become start-ups,” adds Kandoi, whose company is rendering all tactical support, including providing office space out of his campus, to Kumbhathon volunteers.

Superb stuff.

A brief peek into Chettiar Banking system

August 28, 2015

One realises how much of economics and finances one has to undo as you keep going through material. It is amazing really.

Came across this interesting piece by Prof Malvika Nair of Troy University. She is a supporter of free banking and has written a few pieces on  free banking in India.

In free banking literature, there are these debates on whether banks should have a 100% reserve system or a fractional reserve banking system? Fractional reserve is when banks just keep a fraction of deposits as reserves and lend the rest. 100% reserve system is when banks maintain the entire amount and do not lend anything. The former ones are often credited as responsible for the crisis as depositors cannot get their full deposits at anytime. The latter one are seen as safer and do not have any such problems with deposits.

This piece is on how Chettiars operated their banks following a fractional reserve system:

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Book Review: History of Corporate Finance

August 27, 2015

With a title of a book like History of Corporate Finance, the expectations are running high even before one starts reading. It is written by Jonathan Barron Baskin and Paul J. Miranti Jr. It was started by Baskin but due to his untimely death was completed by Miranti Jr. 

The book was released in 1997 and could easily have been a finance classic but somehow does not hold the reader’s attention. The essays do not connect seamlessly and one does not get a complete picture. It ends up being a mesh up of history of firm, money, governance and so on.

Having said that, it is still a compelling read and tells you a lot about how different financing mechanisms emerged – debt, debetures, common stock, preference stock and so on. Then one also understands how for finance to work one has to look beyond finance. Things like law, information flow etc are as critical. The initial essays especially point to the role of information asymmetry. There was hardly any information on the firm wanting to raise finance. This was problematic in large scale and risky projects like railways and canals. How information asymmetry was curbed by various entities and government guarantee is quite a read.

Above all, it tells you how finance and its various arrangements are as old and historic as it can get. All this talk of financial engineering. modern finance, finance/banking revolutions are just bunkum really compared to what was achieved back then. The way these ideas were shaped and difficulty with which they were sold to public was the real revolution.

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What does the public know about monetary policy?

August 26, 2015

Carin van der Cruijsen, David-Jan Jansen, Jakob de Haan have a piece on how central banks can improve their communications with the public.

Case of Ecuador, Kazakhistan etc..

August 26, 2015

Where decline in oil/commodity prices is a huge boost for Indian economy, it is leading to serious troubles for others:


Discussing the not-so-glamorous under-belly of India’s e-commerce system

August 26, 2015

One big problem of analysing what makes a sector/company successful is that the analysis leaves the very people which are behind the success. Much of the credit goes to some CEO/leader who has shaped the organisation. But the real people are broadly ignored.

This is much like the literature which looks at empires and kings as well. Certain emperors are eulogized over others for their grand plans and victories. But no one looks at the conditions of foot soldiers during the rule. And when these details are looked into, we realise none of the great emperors/kings were as great as they were made out to be. Most of them even ignored the basic human conditions of their armies.  Wars were won over the cost of many such people who either did not have voices or were crushed.

Just a few days ago, there was this article which investigated the crazy work culture of Amazon. They seem to have surpassed the Wall Street culture which one thought was impossible to beat. Reading such pieces makes you wonder the behind the scene activity of this highly efficient e-commerce enterprise.

And then Amazon is not alone in the game.

Gulzar points to this interesting article on the underbelly of Indian e-commerce. We keep celebrating the founders of these companies. The attention is mostly on their branded degrees and the market valuation of these companies. But hardly probe deeper on what makes these places tick. In this case, delivery boys play a crucial role and like the Amazon people have a crazy work-life balance as well. Where Amazon people have to climb the wall  on hitting it, the delivery boys have to climb through Indian traffic.

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A unique nudge experiment from Hamburg to stop urination at public places

August 25, 2015

Gulzar points to this interesting nudge:

It has covered nine public walls with repellent paint which makes pee spray back on the person’s shoes and pant! Public urination on city walls by night revellers is a big problem in the city and has not been controlled despite a legislation banning it as well as fines of upto $500.

How a metro railways moved from a PPP to public sector control in UK

August 25, 2015

M Asher, S Sheikh and V Ramakrishnan have a piece on this shift of ownership.

How a large transport sector PPP (Public Private Partnership) in UK, a high-income country, with a reputation for good public financial management,  came to be restructured from a PPP to full public sector control in less than a decade, and the implications this episode holds for India, a middle-income country.

Interesting bit.

Infra is not just an ownership thing as we like to assume. Infact most infra worldwide has been built by public sector only. What matters more is the microeconomics and incentives around the sector. One has to think deeper through the contracts involved, pricing, scale and so on.


Why Rand Paul wants more thorough Fed audits?

August 24, 2015

Central banks in other countries should consider themselves really lucky that they do not have to deal with politicians like Ron Paul (and his son Rand Paul). Moreover, they do not have as troubled a central bank history or have higher number of scholars polishing their central bank history.

Central bankers in other countries can keep politicians quiet by just showing off their US university pedigree. It is just so easy really.  But these games do not work on US politicians as most themselves come from such univs. The grilling a Fed official goes through is way higher than what central bankers go through in other countries. In latter, there is no grilling really.

Here is Rand Paul writing on why he thinks Fed should be audited more thoroughly.

Birth, life and death of Development Finance Institutions in India..

August 24, 2015

Deepak Nayyar, Professor Emeritus, JNU has a piece on EPW.

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Kerala vs Uttar Pradesh: Why economic outcomes differed?

August 24, 2015

Pramit Bhattacharya of Mint has a piece on the topic. The article is based on a paper by Prof Prerna Singh.

The broad idea is that Kerala elites could promote sub-nationalism within the state and provide public goods in a more egalitarian fashion. UP elites were more nationalist in their approach and did not bother too much about the local population. The public goods provision was selective and narrow:

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The chequered history of Kolkata based banks..

August 24, 2015

Bandhan microfinance kickstarted its operations as a bank last weekend. The emergence of Bandhan is nothing short of a fairy tale story from starting as a small microfinance institution to becoming a large bank. It is even more interesting to see the bank emerge from Kolkata, capital of West Bengal. One has not seen any major activity from the eastern part of India. Moreover, this banking bit has been restricted to either Mumbai or Southern India.

Though, this is actually going back to history as Presidency Bank’s first base was at Kolkata and even the first bank in India- Bank of Hindoostan-  started operations in Kolkata.  But as Kolkata lost its importance in Indian economic geography, so did banks from the place as well.

Aniek Paul of Mint has this interesting piece on history of Kolkata/Calcutta based banks.  It has been a fairly chequered journey:

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The Authoritarian Temptation…Why more authoritarian regimes are being voted to power?

August 21, 2015

Interesting piece by Nina L. Khrushcheva of the New School in New York.

She wonders the reason why people are preferring more authoritarian regimes. She calls them soft dictatorships (or hard democracies?) where these authoritarian figures are voted to power:

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India’s deadly cities creating equally deadly work/life scenarios

August 20, 2015

Ajit Biswas and Kris Hartley of NUS have a piece. Despite all talks, we are still not realizing who grave the overall situation is becoming. It has perhaps moved beyond crisis stage and is just looking at imploding. Cities like Bangalore which had plenty of lakes long ago have either lakes drying or just become pollution graveyards. The lakes have foams instead of water.

Earlier growth/development in the country was about India vs Bharat with former growing over the latter. Now even the India part is just crumbling at an alarming place. With all focus on fancier things of life, the basics are just ignored.

So what does the duo say?

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