Desicritics Category: BizTech: Economics

IT Outsourcing Can Actually Increase a Firm's IT Spend

Dr Bhaskar Dasgupta — Sat, 6 Mar 2010 17:40:55 EST

I have learnt the hard way that trying to outsource on the basis of “manage my mess for less” is a sure fire way of crashing and burning at worst and being more expensive at best. Anything that is crucial to your firm’s success, you do not outsource. In other words, only outsource which is a commodity and it is easy to switch suppliers such as perhaps storage management, electricity supplies, sewage, catering, cleaning, etc.

Lo and Behold, here’s a paper which provides some more data to back up the idea that outsourcing actually pushes up your costs. The data used is crucial and I quote:

ITOS and IT spending data were obtained from InformationWeek magazine, a weekly print magazine aimed at business technology professionals. Since 1991, InformationWeek has conducted annual surveys to gather current year IT budgets from a variety of the largest US public and private firms and government entities that use IT. It has supplemented this with firms demonstrating innovative use of IT. In 1999, InformationWeek began asking firms what percentage of their IT spending is outsourced. InformationWeek recently provided the additional firm-level data for the 1998 to 2005 time period for this study with strict disclosure restrictions on the authors precluding the sharing of specific firm responses. Data are used from respondents who provided both IT spending and ITOS information for one or more years between 1999 and 2005. Observations for non-public firms were eliminated and merged with corresponding Compustat financial data to calculate the various control variables shown to affect IT budget levels in Kobelsky et al. (2008b). This reduced the overall sample to 1959 firm-year observations for 647 firms in the period 1999 to 2005

The model comprises of variables:

• itb/sls = firm IT budget for each year per InformationWeek data divided by sales for that year (Compustat data12);

• itos dummy = 1 if IT outsourcing percentage per InformationWeek data is positive in Current Year, 0 if not;

• size = log of Current Year sales;

• ind_conc_ratio = four-firm concentration ratio for four-digit SIC;

• uncertainty = standard deviation of earnings before extraordinary items for previous 5 years scaled by sales;

• rel_divers = related diversification (within 2 digit SICs);

• unrel_divers = unrelated diversification (across 2 digit SICs);

• op_ros = operating return on sales, before depreciation (compustat data13/data12);

• debt_ratio = debt ratio (Compustat data9/data6);

• ave_sales_growth = average sales growth for last two years;

• automate = 1 for firms in automate industries, 0 otherwise;

• transform = 1 for firms in transform industries, 0 otherwise;

• hi_tech = 1 if high-tech firm, 0 otherwise

• lo_tech = 1 if low-tech firm, 0 otherwise.

• year = 1 for each year 2000-2005, 0 otherwise.

90% of the sample companies partake of outsourcing some or all of their IT activities. The authors find that while on a project level, they might see a reduction in the IT costs and spend, on an aggregate firm level, the IT spend actually goes up. Note that they do control for scope and volume changes by looking at the sales growth. Within two years of outsourcing, the IT cost level of firms who have outsourced is correspondingly higher than firms which have not outsourced. While the authors suggest that this is because of capabilities are enhanced, I have my doubts. One cannot improve IT capabilities in 2 years, it is simply not possible to evolve the business and IT side so quickly that a statistically significant improvement in productivity and quality can be observed. It is, in my opinion, clearly aimed at the fact that the business case is frankly wrongly specified and outsourcing doesnt really help as far as cost control is concerned.

Business cases are rarely expressed in terms of ratio’s, in other words, you will very rarely find that the managers concerned or the IT outsourcing firm are quoting you IT costs as a ratio to say the sales revenue or operating costs or profits of the firm. This is why I am very nervous whenever I hear that outsourcing is happening which is going to drive down costs.

There is a good argument to outsource to improve efficiencies, drive a centre of excellence, to improve productivity, but for cost purposes, the figures do not bear out the benefits.

India and Pakistan - Future Scenarios

Sandeep Bansal — Tue, 2 Mar 2010 07:46:17 EST

Sixty three years ago, the two countries started their journey, torn by bitter memories of partition. The relations between the two nations have been troubled right from the start. Two similar examples from around the world the come to mind - West Germany and East Germany, and the two Koreas.

There are some basic similarities. These countries too had to go through a bitter partition. They followed different political systems and were bitter rivals of each other. One essential difference is that they essentially were one country - i.e. both East and West Germany claimed that they represented the entire Germany. Same is true in case of North and South Korea. In case of India and Pakistan, their rivalry is essentially over Kashmir. Though India was earlier a united country, it is extremely unlikely that partition can be reversed.

The German Story

After the Second World War, both East and West Germany were essentially poor and devastated. But West Germany under the allied influence, introduced free market reforms. It also benefited by large scale aid by the US. By the 1960's and 70's, there was large and visible difference in conditions on the two sides of the border. People in East Germany wanted to move to the West in search of a better life. The Berlin Wall was constructed to stop this. The difference in living standards continued to increase. Perhaps it was the aid from Soviet Union that was keeping things just about together in East Germany. In late 80's, Soviet Union was badly battered in Afghanistan. As a result, it could not continue its aid to the East. The Berlin Wall collapsed.

The Korean conundrum

The story between North and South Korea is somewhat similar. Both countries have remained bitter rivals since the end of the Korean War in 1953. Both countries have contrasting political and economic systems. While North Korea is a totalitarian dictatorship with centralized economy, South Korea is a democratic country with free markets. North Korea implemented land reforms, introduced free health care and education. At one point of time, its HDI indicators were better. However, gradually South Korea's export led economy has moved way ahead. Today its HDI indicators are much better. Its per capita income is $20,000 as compared to a minuscule $1100 in North Korea.

Sung Yoon Lee in his article in ForegnPolicy says,

In contrast, beyond North Korea's southern border lies a free and affluent Korea, one that claims sovereignty over the entire peninsula and to which millions of Northerners would move if given the choice. By its mere existence, Seoul poses an omnipresent existential threat to Pyongyang.

In his article, Lee predicts that North Korea like East Germany cannot survive forever. It will collapse at some point of time. It must be noted that it currently receives aid from China (just like East Germany did from Soviet Union) and South Korea without which vast proportion of its population would die of hunger.

Comparing India and Pakistan

Can such an eventuality occur in the Indian Subcontinent? On one side we have India, a democracy (with its own flaws), an rapidly growing economy and rising living standards.But it is also the home the largest number of poor, there is growing rich-poor divide and a growing Naxal violence. On the other side of the spectrum is Pakistan, at best is a military controlled democracy, a country that is battling with an identity crisis, is a nuclear weapon state, is said to be source of terrorism worldwide.

Small signs of such a thing are present. Pakistanis today are worldwide seen with suspicion. They are lined up and frisked separately at airport. Many Pakistanis abroad claim themselves to be of Indian origin in order to escape this. Some Pakistanis artists like Musicians also want to get hold to an Indian Passport. Of course, these people are a small minority.

But is such a thing really possible. My answer to that will be for the moment, NO. The difference in prosperity in the two countries isn't that huge. India's rank according to HDI index is 134 while that of Pakistan is 141. As per Wiki, India's per capita income $1022 while that of Pakistan is $1017. Our Gini ratio is actually higher at 36.8 as compared to just 30 for Pakistan. Historian William Dalrymple too writes that there is little difference.

On the ground, of course, the reality is different and first-time visitors to Pakistan are almost always surprised by the country's visible prosperity. There is far less poverty on show in Pakistan than in India, fewer beggars, and much less desperation. In many ways the infrastructure of Pakistan is much more advanced: there are better roads and airports, and more reliable electricity. Middle-class Pakistani houses are often bigger and better appointed than their equivalents in India.

However, he goes on to point out some major differences - landholdings. democracy and education. Soon after independence, land reforms were introduced in India. This was promised the Congress. In fact, this is often referred as one of the reasons of creating Pakistan, (protecting the interests of Zamindars). In Pakistan, this feudal system still exists and as a result there is inequality and social tension. Pakistan has seldom enjoyed Democracy. However, often freedom is difficult to directly quantify when it comes to measuring prosperity. Regarding education in Pakistan, he writes

No problem in Pakistan casts such a long shadow over its future as the abject failure of the government to educate more than a fraction of its own people: at the moment, a mere 1.8% of Pakistan's GDP is spent on government schools. The statistics are dire: 15% of these government schools are without a proper building; 52% without a boundary wall; 71% without electricity.

This education gap is the most striking way in which Pakistan is lagging behind India: in India, 65% of the population is literate and the number rises every year: only last year, the Indian education system received a substantial boost of state funds.

But in Pakistan, the literacy figure is under half (it is currently 49%) and falling: instead of investing in education, Musharraf's military government is spending money on a cripplingly expensive fleet of American F-16s for its air force. As a result, out of 162 million Pakistanis, 83 million adults of 15 years and above are illiterate. Among women the problem is worse still: 65% of all female adults are illiterate. As the population rockets, the problem gets worse.

Currently, India's literacy rate is 65% and should increase to 80-85% by 2030. One obvious concern here is what is the quality of this education and are these people employable. And I am sure even in India, there are schools that don't have proper building or electricity(particularly in the Naxal belt).

Nevertheless, India is way ahead of Pakistan in terms of education. But another concern is that a large proportion of the population receives education through the outdated Madrassa system.The so-called secular forces are merely promising reservations for them, even though in 60 years, reservations haven't made enough impact on SC's and ST's. Reservations were supposed to be an instrument that removes the caste identity. Instead it has only strengthened it. A divide based on religion is even more dangerous. Ironically, it has been the so-called communal party that has talked about reforming the madrassas, something that has been looked with suspicion by the community.

Future Scenario:2030

Where will India and Pakistan be in 2030 economically, this is an important question. Will there be any difference in the level of Indian prosperity with respect to Pakistan change?

Over the last 20 years our economy has grown consistently. In the last five years, we have grown by nearly 8%. There are rumors that we are capable of achieving 9-10% growth rates. Let us assume that we will grow at an average of 7% over the next 10 years and at 5.5% in the subsequent 10 years. The growth rates will come down because of base-effect. Despite these highly conservative estimates, India's GDP would be at least 4.2 trillion dollars. Our rate of population growth has been coming down consistently and present it is roughly 1.55% (Source). Assuming an average growth rate of 1.45% over the next 10 years and an average of 1.35 over the subsequent 10 years, our per capita GDP should be roughly 2700$ in 2030.

What would the number be for Pakistan? Under Musharraf, from 2002 to 2007 Pakistan did post impressive growth of 6-7%. But such stability in the country is rare. In 2009, the growth rate was just 2%. Assuming an average growth rate of 4% over the next 10 years and 6% over the subsequent 10 years(highly optimistic considering the frequent bomb blasts and terror attacks), in 2030 Pakistan's GDP would just be $436 billion. Assuming its population grows at 2% and 1.8% as against present figure of 2.2%, its per capita income would in 2030 would only be around $1800.

These are highly conservative estimates and the real picture might actually to be much much better than this.For example, considering current education levels in Pakistan it is highly unlikely that they can sustain such growth rates of 6% over such long periods. Despite this conservatism, India's GDP would be 10 times that of Pakistan while per capita GDP would be 1.5 times. More likely figures are that our GDP will be 14-15 times that of Pakistan and per capita GDP will be around 2.5 times that of Pakistan.

Impact of this growth

India's GDP would be at least 10 times that of Pakistan. In another five years time, India's economy would overtake China as the fastest growing economy. This should translate into enormous leverage for us. Around 10-15 years ago, China's human rights record was severely criticized everywhere. But one hardly hears that today. China's influence was very much visible at Copenhagen.

India is bound to enjoy similar influence by 2030 or even before that. By 2030, India would have almost certainly hosted the Olympics. We are not even sure whether Pakistan could host even the Asian Games by then

I do not foresee a Germany like situation which led to the reunification of Germany. But I do expect that if there is appreciable difference in prosperity and if this grow is inclusive, domestic support for terror is should come down appreciably.

Another important thing is that if there is an appreciable and visible difference in prosperity, it shall become increasingly difficult for the Pakistani Military to continue with its astronomically high defense expenditure. Presently India spends around 2.5% of the GDP on defense while Pakistan spends around 3.5-4%. Hence, in 2030 our defense budget should be close to 100 billion dollars ( 2.5% of 4.2 trillions). This would be 25% of the Pakistan GDP in 2030. Naturally Pakistan would try and match India's defense expenditure by increasing its defense to atleast 8-10% of the GDP.

There would be increasing public pressure against this and unrest among the people would rise. This would result to much more Army control over the civilian Govt and military highhandedness. Thus most probably by 2030 Pakistan would under direct Military control.Furthermore, the increasing military asymmetry would force Pakistan to lower its nuclear doctrine. Thus the sub-continent would actually become a much dangerous place in 2030.

Limitations of this analysis

The methodology of this analysis is just too simple to cover everything. First, the GDP figures are based on nominal values rather that PPP. Using purchasing parity method, the comparative figures would actually improve significantly for India.

Secondly, India has been lucky to have stable Govts. at the centre since 1999 and increasingly governance is becoming the sole criteria that is used by the people while voting. What if there is a hung Parliament. India has previously witnessed this during the 1989-91 and 1996-98. During this period, the growth was minimal and reforms were stagnant.

Thirdly, merely achieving these growth rates are not sufficient. Whether this will translate in improve in prosperity. Whether this growth will be inclusive. Whether all communities including the Muslims who are currently lagging behind in all social indicator be a part of this growth. Will the Maoists be suppressed. Will the development reach the Naxal belt.

Finally, will there be any war either with Pakistan or with China. War could change the above numbers. Of course any resolution with either of the two will also improve the numbers vastly.

These are extremely difficult questions and only time tell. However, if India plays its cards well, great glory is awaiting us. For Pakistan, it is important to understand that India's rise is inevitable. It will be their choice whether they would like to be a part of this growth or not. It is therefore important for Pakistan to understand that going forward, they will not be able to compete whether militarily or economically.

The Robin Hood Tax - A Crock of Brown Organic Matter

Dr Bhaskar Dasgupta — Wed, 24 Feb 2010 17:04:37 EST

Look at the Robin Hood Tax website. See the main statement:

This tax on banks – not you or I - has the power to raise hundreds of billions every year. It could give a vital boost to the NHS, our schools, and the fight against child poverty in the UK – as well as tackling poverty and climate change around the world.

Let's unpack this, shall we? And in the interests of disclosure, I am a banker and I am talking about this in my personal capacity, nothing to do with my current or past employers.

Thisis tax on banks, not you and I. Banks obviously live on another planet. So that taxes on banks have no impact on you and I. Here’s the first example that the authors don't know their head from their toes. Banks are intermediaries between you and I, who place deposits and it is you and I, who take loans to purchase a house or buy a pension. When you place a tax on the intermediary, you are reducing the interest rate that I get paid as a saver and increase the interest rate that I have to pay to get a house. See the economic illiteracy of not understanding how basic financial and economics work?

Secondly, why are they claiming to have big power to raise hundreds of billions every year? I mean, that is a silly statement, Why not raise trillions by imposing 100% tax on all earnings? You will raise even more. What’s the point of this silly statement?

Thirdly, give a vital boost to the National Health Service. Very good. Why? What happened to the taxes that you already levy on us? Is that not enough? Obviously it is not enough. So why don't you boost that tax? Oh!!!!!, let me see if I understand. You do not like to boost income tax, because somebody might get pissed off enough to fly the plane into the tax building or throw out the blood sucking people out of government. There is a word for this, Stealth Tax.

Fourthly, haven't you realised that the UK public sector is already showing a debt of 56% of the GDP and could reach 93% in 4 years? Instead of taxing more, shouldn't you be thinking about reducing spending? How about the fact that more than 2/3rds of the 1.2 million extra jobs created in the UK cities were in public administration, education and health. Don't you think this is a tad top heavy? And then you want to impose a tax on savers, job creators and intermediaries to increase the number of jobs even more? Same thing applies to school funding. Oh, fight against child poverty!

Then they obviously throw in poverty and climate change as well. I think they missed out making apple pies for pensioners, helping lollipop ladies with better shiny vests and feeding nuts to squirrels!!!

And this is a highly regressive tax, which will proportionally impact the poor even more than the rich. For example, if this applies to all financial transactions, then a poor man will have to pay 1 pound in tax (for example) for every 10 quid he withdraws, versus say a 100 quid for a richer man who withdraws 1000 quid. When you are faced with the choice of eating beans on toast, then that 1 pound makes more of an impact than the 100 quid when you are eating caviar and drinking champagne. So this tax is actually going to exacerbate poverty.

Finally, if you say that taxes help improve behaviour of the banks, then why don't we start imposing taxes on government departments who do not perform? How about imposing taxes on train companies whose trains are late? How about charities who spend more than say 5% on administration and marketing? Talking about charities. Here is a list of charities who have signed up to this interesting idea. Charities are supposed to rely on the philanthropy of ordinary people. They rely on the good nature of people who contribute towards society. But this bunch of charities are asking for forcible contributions. In other words, they are demanding, under force of law, for everybody to contribute to them. This is theft!

Robin Hood, after all, was a thief and a robber. And for all his noble efforts, his thefts effectively lead to the authorities actually increasing the amount of taxes levied on the common man. In this particular case, if you increase the level of taxes, then you are in effect increasing the public sector and then you will need more taxes to support them in the end, leading to the public sector taxing itself to spend on itself, a snake eating its own tail.

Also look at the list, quite a lot of unions are in there, and most of them are public sector unions. Hmmm, very good indeed, I like the way you want me as a taxpayer to give you more money so that you can have more employees. And the churches got into the act as well, thank you for robbing us! Robin Hood also robbed the public authorities and churches who were grasping, thieving, robbing clerics. It’s nice to see that they haven't changed a wee bit. So I like how confused they are by saying that they are like Robin Hood, when they are exactly like the enemies of Robin Hood. How about charities also paying tax then on their earnings? Oh? What you get are gifts, unlike us money grabbing taxpayers who get our money after squeezing just whom? We earn our money and you are asking the government to tax us and then you will come to us again for more money. Money grubbing and theft combined with chutzpah and hypocrisy.

Then they say this is only going to be applied to speculative banking transactions. Just how they will define speculative is unclear. Will this involve people who take out mortgages for buy to let? Or how about me taking out money from my bank account to buy shares? How about taking out money from my bank account to speculate on horses? No? Yes? What?

This really bugged me. I don't mind paying taxes because we get services in return. But to go about actively proposing taxes without making the case for it reminds me of the Boston Tea Party. And when people think that they are being unfairly taxed, they start protesting or committing suicide bombing terrorism. So here we have a campaign, they don't know what it is for, they don't know what previous tax amounts were used for, they don't know how it will be applied, they dont know what the implications will be, they don't know who will get charged, but everybody is having a big song and dance about it.

The Children of India: A Volunteer Travel Experience

Shelley Seale — Tue, 23 Feb 2010 11:36:36 EST

The idea of volunteering in another country has long been considered the province of students and recent graduates; images of intrepid twenty-year-old Peace Corps workers in a remote Sierra Leone village might spring to mind. Today, however, the idea has reached far beyond that to become accessible, and highly popular, among travelers of all types and ages.

Even the Peace Corps itself has changed dramatically – from an average age of 24 in its beginning in the 1960s, to 28 as of 2002. Many early retirees and those seeking mid-life career changes are joining up – the oldest Peace Corps Volunteer ever was 86 when he completed his service. Volunteer travel has grown so popular that a term has even been coined for it: Voluntourism.

Companies and websites specializing in voluntourism have sprung up by the hundreds, and volunteer vacations can be found in all parts of the world, doing all kinds of activities – from digging wells for clean water in South America, to working with children living in orphanages. It was this last type of volunteer vacation that hooked me. In 2004, I became involved with a nonprofit based in Austin called The Miracle Foundation, which manages orphanages in India and recruits sponsors and donors to support the children living there. By 2005, I was traveling to India myself, to volunteer in the orphanage.

The children are everywhere in India. They fill the railway stations, the cities, the shanty villages. Some scrounge through trash for newspapers, rags or anything they can sell at traffic intersections. Others, often as young as two or three years old, beg. Many are homeless, overflowing the orphanages and other institutional homes to live on the streets. I had no way of knowing just how much they would change my life.

India was everything I had imagined it would be – only more so. More colors and smells, more noises and people, more everything. It was an assault on all the senses at once. The cacophony that greeted me was jarring after the peaceful countryside I had gazed down on from the airplane. There seemed no still or quiet space. Instead there were throngs of people everywhere, living and working and sleeping; hundreds of street vendors lined every available inch of sidewalk, while mangy dogs and cows nosed at piles of trash around them.

Rickshaw drivers pedaled through traffic alongside schoolgirls with their braided hair and backpacks. The smell of curry and incense hung thick in the air along with soft chanting from nearby temples. The dusty roads peppered with potholes were filled with a constant stream of buses, bicycles, rickshaws, cars and cows and rising over it all was the constant, blaring beep-beep of the horns. It was the most alive place I had ever been. India is too big to describe adequately, too big perhaps to absorb in a single lifetime. The country simply wrapped itself around me and refused to let go.

There was also what everyone, including myself, expected of India – despair, filth, destitution. The trash that lined the roads and the beggars that tapped at car windows. The deteriorating buildings, the ragged street hawkers, the shanty village along the river banks. The frantic poverty that would not let me rest.

At home, these things are hidden neatly away as much as it is possible to do so. But in India, everything is in full view; nothing is hidden. Its rawness of life strips away the unnecessary - distractions, superficial attachments, trivial worries. Without this safety net life becomes fundamental, only the essentials of being, and causes you to be fully present in your own existence. You become lost, in order to find.

And even still, there was beauty in the midst of it. The vitality of life teeming all around, the jangling of bangles and ankle bracelets, the colorful saris, the carved temples with swaying trees surrounding it all. The tremendous scale of the monuments, palaces and art from one of the first great civilizations left me stunned, as did the strange way there was a deep-seated peace even in the midst of tumultuous movement and clamor. The wonderful and the abject co-exist side by side. Though the country struggles with the indigence of large numbers of its population, it is far from a poor place.

And in the children this beauty seemed to come alive, almost making me believe it was a living entity I could capture in my hands. I arrived at the orphanage expecting it to be a sad place, an emotionally wrenching experience. But those expectations were turned on their head. Yes, there were stories behind each of the children – many of them painful and tragic. Stories of death, abandonment, abuse, poverty. They all had a past.

Yet the couple who ran the home, the house mothers and teachers there, the other volunteers, all made these kids their own in a community of sharing and acceptance. They were poor in wealth but not in spirit; limited in resources but not in joy and laughter. An interior peace shown from inside them that was unknown – unsought even – by many people rich in resources. Their hope and resilience amazed me time and time again; the ability of their spirits to overcome crippling challenges inspired me.

Even in the most deprived circumstances they are still kids – they laugh and play, perhaps far less frequently than others; they develop strong bonds and relationships to create family where none exists; and most of all they have an enormous amount of love to give - for nothing more than showing up. The very existence of these children forever altered both the person I was and my view of the world. India shows us where our suffering lies, and in this way becomes more than anything else a teacher, if only we are open to learn from her.

Book Review: Complicit by Mark Gilbert

Blokesablogin — Mon, 22 Feb 2010 22:09:40 EST

Mark Gilbert, the Bureau chief for Bloomberg UK writes this lucid account of how the latest economic mess we saw unravelled in the past few years happened. Complicit: How Greed and Collusion Made The Credit Crisis Unstoppable is worth a read.

The journalist shines through. The book breaks down the smokescreen of big finance into small bytes of information that can be digested by the average reader without a degree in finance. It is topical, and as the tentacles of fiscal mess continues to wrap around and squeeze more people and countries dry, it is a good idea to get educated as citizens.

When we consider the power we have as voters and investors, it behooves us to take the responsibility to understand how messes like these came to be and how indirectly we were responsible. It was not a single person's greed. Rather, as a society, we wanted more. We wanted our cruises, our cars. We wanted astronomical returns. We wanted larger homes with a smaller paycheck.

However, Gilbert does not point the finger at us, the electorate and the investors. Rather, he shows the ropes of corporate finance and banking systems. He explains the smoke and mirror schemes adopted by "reputable" financial institutions that encouraged "savvy investors" (that is us) to trust our nest eggs with "gold-rated stars". Soon, the gold turned to dross and even countries were left with pyrite in their vaults.

The old adage of not putting all our eggs in the same basket was thrown out with yesterday's trash. The monopolistic financial institutions created "new" baskets but they were all smaller sections of the one larger one. That was one aspect of the "plot".

This was furthered by raters who ensured that these baskets were woven so tight and lined with sufficient padding to ensure the safety of the eggs. The eggs did not crack, they crashed. They could not even be redeemed to make scrambled eggs.

Have we learned our lessons or will we continue to shirk our responsibilities as shareholders and voters? Or will we educate ourselves and have the wisdom to distinguish the chaff from the grain and protect our hard earned assets?

Do read this book and decide.

My Name is Khan Mumbai Release - Free Speech or Free Market?

Ruchi — Wed, 17 Feb 2010 08:23:10 EST

The release of Shahrukh Khan's latest movie, My Name is Khan (MNIK) eclipsed all news for about a week. The biggest story in Saturday's newspapers was without doubt its enthusiastic reception. The story was covered on the front page, various back pages and of course, the op-eds. The general tone was celebratory and unanimously supportive of SRK. The act of watching a movie was extrapolated to taking a stand for independence and free speech. And SRK's refusal to apologize deemed heroic, the one act that would serve as a tipping point for restoring democracy in Mumbai against Shiv Sena's regressive xenophobia and hooliganism. A la, Rosa Parks if you will, whose refusal to give up her seat on the public bus sparked the civil rights movement.

The real story though is not about freedom of speech or democracy or Shiv Sena's violent jingoism. At the heart of this episode is good business - and a little demo of the shape of things to come in an increasingly neo-liberal India.

SRK is a consummate businessman expanding his financial interests from film actor to producer to television, panoramic endorsements and now privatized sport. In 2008, Newsweek named as one of the 50 most powerful people in the world, one of the only two from India (Sonia Gandhi being the other). Despite this, time and again when asked of his political opinions his stock response has been that he wants only to "make people smile". For an intelligent, informed individual with significant money and influence and an alleged believer and proponent of democracy to be so consistently and overtly apolitical has to be a calculated economic decision. In this light, his refusal to retract his IPL statement too has to be deemed a personal economic decision. And the consequences would only have been economic - the money lost due to its limited initial release in Mumbai (no one expected Sena's theater vandalism to extend to the movie goers), akin to the losses incurred by traders/shopkeepers when a political party calls for a bandh against some government policy or inaction.

And yet our national news rallied behind SRK with multiple sympathetic interviews, clips and broadcast of his vaguely messianic tweets. Rajdeep Sardesai, editor of CNN-IBN exhorted every Mumbaiker to "go watch MNIK in the theatres, its a small, but important way of taking a stand" and Barkha Dutt (NDTV) earnestly claimed that "im [sic] standing up for a belief". Mumbai government deployed over 21,000 policemen to guard theatres screening MNIK and preemptively arrested over 900 Shiv Sainiks. Nary a squeak from any of our news networks about this shocking display of state repression and targeting based on political affiliation.

For Shiv Sena, this was a calculated political move - the churlish actions of a regional political party with a fragmented support base after Raj Thackeray's defection. Putting this party in its place requires not Mumbaikers flocking to the theatres to watch MNIK but media blackout. A party of this small size can't rely only on its little official mouthpiece, "Saamna" and needs the media platform for survival. However, the lurching illogic of the Thackerays is good drama, which always translates to good TRPs.

Ratings were the primary interest, not freedom of speech or taking a collective stand against divisive/undemocratic intimidation. There have been numerous other instances of clamps on freedom of speech and nowhere near this kind of sustained coverage to drive public behavior. 94-year old Husain is in exile in Dubai. Taslima Nasrin was expelled from India in 2008. Deepa Mehta's movies, Fire and Water both came under Sena and other Hindu right-wingers' ire. While the above have the right to free speech in common with MNIK's release, they lack easy marketability. And easy marketing is at the heart of this campaign: the effortless connection with India's two loves, cricket and Bollywood, a media savvy celebrity, polarizing Pakistan, a comic book goon and the perception of participation by painless retweets and mere consumption. The Save Our Tiger campaign is another example of a high gloss initiative to distract the public. Yes, there are 1411 tigers left in India and urgent measures are required - but the real solution does not lie in citizen involvement as manifested by the campaign's entreaty of "speak up, blog, sms - every little bit counts". Each is completely useless to curb poaching and/or manage sanctuaries. Neither is tiger conservation hampered by lack of funds since even the allocated funds have not been completely utilized by many sanctuaries.

The real fight for freedom of speech and democracy is the fight against our desperate poverty. Yet there is frighteningly little focus and interest in governance, the prioritization and allocation of the country's resources for its people. And there are serious issues at stake. The Food Security Act (FSA) is on the anvil. What does the FSA say about India? There are people in our country who don't even have enough food for basic sustenance. That their numbers are so large that the States and Center have spent months trying to figure out eligibility criteria and a sharing arrangement that they can afford. We also have the National Rural Employment Guarantee Act (NREGA), which entitles each rural household hundred days of unskilled work at minimum wage. This Act is testimony to the fact that we've taken an entire people of our country and thrown them out of the economy. These two legislations go at the heart of democracy and what it means to live in a just and humane society; both are going through serious upheavals. However, what is the percentage of airtime and column space afforded to either? Even worse, why is there no national passion for them?

We need to reevaluate our national priorities. Arts and sports are the underpinnings of the country's culture, and integral to national consciousness. We should rightly be passionate and proud of both. However, mere consumption cannot drive culture. And we cannot claim to be proud Indians, yet ignore Bharat.

Free Countries and Lower Cost of Debt

Dr Bhaskar Dasgupta — Sun, 24 Jan 2010 20:11:58 EST

Now here’s an interesting research paper which popped into my inbox. In short, the more the political rights, the more free the country, the level of property rights, free and fair elections, competitive political parties, important role played by opposition, minority group rights, a system of checks and balances across the legislature, judiciary and executive, etc, the lower are the costs of debt. To be precise, a one standard deviation in political rights is equivalent to an 18.6% decline in bond spreads. Now that is a serious chunk of change. The authors concentrate on Eurobonds and come up with the following main countries within their study: USA (799 issues), Japan (231 issues), Australia (214 issues), Germany (213 issues), and the U.K. (180 issues). India is also there which surprised me because the Indian bond market is generally anaemic but then the Eurobond market is slightly different. So what are the correlations like? Some very interesting results pop up:

	Log yield spread	Bond rating
Log yield spread	1
Bond rating	-0.65	1
Political rights	-0.25	0.3
SPI	0.08	-0.18
Freedom of the press	-0.31	0.37
Corruption	0.39	-0.46
Expropriation	0.33	-0.39
Creditor rights	-0.09	0.16
Log GDP/capita	-0.24	0.33
Sovereign rating	-0.34	0.42
Cross-list	0.03	0.02
Log total assets	-0.34	0.47
ROA	-0.13	0.06
Leverage	0.06	-0.05
Public	-0.46	0.48
Floating	0	0.08

Not going to go too deep into the analysis of each factor to each other and please bear in mind that correlations do not mean causality. But interesting results none the less. One can do couple of PhD's just on this :)

The researchers then do some rather complicated regression testing. One of their regressions is to analyse the joint impact of creditor rights and political rights on the bond yield spread. This is what they find out.

Pretty stunning visual results, eh? reduce the political and creditor rights and the surface starts to peak. And the gradient is pretty smooth, no lumps or bruises or troughs or peaks. The authors go about doing much more in terms of determining firm level impacts, checking cross listing implications, and other confusing things to me. So I am going to ignore them as the basic answer seems to be pretty clear. I quote 1 paragraph from their paper:

This paper examines the impact of country-level political rights on credit markets while controlling for legal institutions. Higher political rights are associated with significantly higher ratings and lower spreads for corporate bonds issued in both the Eurobond and the Yankee bond markets. A one standard deviation change in political rights is associated with an 18.6% decline in yield spreads on average; political rights impact international debt markets as much as creditor rights. We find that the interaction term between political rights and creditor rights is positively associated with yield spreads, thus, political rights and creditor rights partially act as substitutes.

We also consider the channels by which political rights impact bond markets. Freedom of the press appears to capture much of the effects of political rights, suggesting that part of the advantage of political freedom to credit markets may be due to greater information availability. Socio-political instability in the 25 years prior to the bond issue impacts the cost of debt, but does not capture the effects of political rights, suggesting that political rights are more important as a forward-looking measure of bondholder risk. Corruption and expropriation risk are also priced in bond yields; however, the effects of these variables appear to be more independent of political rights.

Now here’s the interesting take which I took away. Now that firms are becoming more and more globally footloose and capital becoming more and more aggressive, it is but natural that people will try to move these types of firms to countries which have more political rights so as to raise cheaper finance. On the other hand, think about what governments go about doing. They actually give tax benefits and a whole host of other benefits to attract FDI and capital. Here’s a silly thought. Instead of going about offering these kinds of tax breaks, why not try to improve the political rights? That will kill two birds with one stone, improve the society as well as attract firms. Neato, no?

China - Censored Growth

sufferingsocrates — Thu, 21 Jan 2010 09:20:46 EST

I am extremely proud and happy to be in India. India could have multiple issues, both regional and religious. But that speaks volumes about the strong emotional bonding that India has enjoyed all through the 62 years of Independence. Notwithstanding hostile neighborhoods, India has continued to be peace loving, and sometimes even too docile for its own good. There is honestly no comparison of India with either Pakistan or China. While Pakistan has been the rogue nation, owing to a politically mismanaged nation and a nation with radicals lurking in every corner, China has been the nation trying to bully around, not only its own citizens, but other Asian nations as well.

Thomas Friedman noted in an article that China is at cross roads of whether to adopt a new age China, or get subdued under the Communist rule. He goes onto mention how China is grappling to come to terms with an increasing knowledge consuming world, which would force the nation to embrace and gain knowledge through multiple channels for its own development. What this would do is inhibit the stringent measures of the Chinese rule, because the exchange of knowledge information needs vast amount of transnational interactions. Human rights violation has been a long discussed issue in China, with executions for crimes being very common, and no freedom for citizens.

Not surprisingly, this is the very reason the Chinese officials are wary of the Web 2.0 revolution and want to monitor human rights activists' actions. One wonders what insecurities should the Chinese have, when it is in the cusp of becoming the second largest economy in the world. The Chinese government is increasingly insecure of uprisings which could arise out of their strict policies. Why else would it raise a cyber army just to track down, hack computers across the world and steal vital information ? Google is threatening to pull the plug from China for this very issue of China hacking into accounts of human rights activists. What China is not realising is, more the restrictions, more are the chances of uprisings and revolts.

In another very disturbing move, China is going to scan text messages to filter out unhealthy or ill-content in mobile phones. What this means is, a Chinese citizen, who may share some passionate messages with his/her spouse over mobile phone could well be jailed and may even be executed ! It is truly unfortunate that China is imposing restrictions in citizens' private lives as well. Already, the rule of a single child in China is coming back to haunt the Chinese. It is resulting in a rapidly aging population in several important cities in China, forcing Chinese to rethink the single child rule. If the single child policy wasn't interference enough in private lives of citizens, scanning text messages is outright intrusive.

For precisely such restrictions and rules that the Chinese employ, it is hard to understand if there will be any emotion or sentiment left in a Chinese citizen. Being patriotic is great, but who would want to be patriotic for a nation which does not allow freedom, even in personal lives ? Who would want to be patriotic to a nation which is always monitoring every single step of any and every citizen ? Which citizen would like to continue in a country, where they live more in fear than for the love of the land ? Consequently, it is not difficult to understand why, any Chinese trained individual would be more robotic than human. Devoid of any emotion or sentiments, be it sportsmen or the army, would automatically tend to be more machine like. Without true love for the nation.

Now think of India. A nation highlighted as being poor, winning Oscars for its slum dwellers. But what India has is, freedom of speech and expression. Sometimes, a little too much of it one would say. But India has stayed on for 62 years with an incredibly diverse populace, and also embracing liberalization along the way. Corruption maybe rampant in India. But pray, where is corruption not seen ? The Indian growth story has been quite remarkable, and more and more honchos in businesses are from India. The world has confidence in an increasingly globalised India, in spite of its infrastructure woes and red tapism. The simple reason is the freedom and the confidence that businesses can flourish in, and that India has the brain power as well as the manpower.

Unlike a Pakistan, India has continued to vote democratically. Though there have been fragile governments, no Indian citizen can complain about the freedom (s)he enjoys.Pakistan is struggling against foes they themselves fostered over the years. India has been the victim of terrorism from Pakistan, and is increasingly under threat from an insecure China. China's insecurity is understandable, with India's increased presence both economically and diplomatically. China is certainly miles ahead economically and militarily, but India and Indians have their hearts in place.

China - No More Gimmicks

Madhan Karthikeyan — Sun, 17 Jan 2010 04:39:05 EST

When a Company grows very rapidly outpacing its competitors and produces a balance sheet which is less transparent, an obvious suspicion will revolve around the company. The doubt arises as there is very less data to support the growth of such company and all that you can see is glowing number in the quarterly/Annual reports. This was the exact case of Enron, the biggest bankruptcy in the history of US. Now, replicate the same analogy for a country in the current economic scenario, which grows very rapidly at a time when other countries even hesitate to say that they are out of recession. This is China for you!

In recent days, a lot of voices are being heard warning about the Chinese Bubble. This started with the Hedge fund Investor James S. Chanos who predicts that China is headed for a crash, contrary to the popular belief that the country is growing at a faster pace. He is the person who predicted the fall of Enron and similar other Bankruptcies. So, nobody is daring to ignore him. After all, that is his job and he has an impressive track record for years. Chanos, a hedge fund Investor simply bets against a Company/Country, as he believes that it will go down in few months. If his prediction is right, it results in an insane amount of money. (Especially, when they bet against the popular opinion). Classic example is George Soros, whose betting against 'Bank of England' earned him $1b in a single night. This was in 1992.

Coming back to China, Chanos suspects that "Beijing is cooking its books, faking, among other things, its eye-popping growth rates of more than 8 percent". He is planning to give a detailed speech about this at the Oxford University by end of Jan'10.

Here are a few factors which raise questions about China:

The Chinese economy is largely based on Exports to US and European countries, which means the Chinese currency 'Yuan' has to appreciate less against the dollar or Euros to continue the impressive GDP growth. China being a growing economy leads to appreciation of their currency, but the Chinese central bank has prevented the appreciation and has kept the exchange rate between dollar and Yuan almost the same for past few years. This largely helped them to maintain low prices for their goods in the foreign market and thus accumulating billions of foreign reserves. Now, you may think that it's plays to the advantage of Chinese economy. But, the economy at such a mass scale doesn't work this way.

When a country has huge amount of money among its people (in a manipulated market, the Chinese central bank prints loads of Yuans equivalent to the dollars), the value of the currency itself decreases. This triggers an increase in inflation, as the price of the domestic goods increases over the period of time. So, to prevent inflation the Chinese government should at least stop the surplous flow of Yuan. This can be broadly achieved by two ways:

1. Increasing the interest of the money that is been lent by the Chinese Central bank
2. Preventing the Consumer banks from lending out more money. This can be achieved by instructing the banks to increase the limit of cash reserves.

However, during the time of recession, the Chinese government infused a stimulus package of around $600 billion dollars into the economy to prevent any huge recession impact. So, this stimulus money along with the existing flows triggered a real estate boom in China, where the prices of lands/home rapidly increased every month and thus creating a 'Real estate Boom'. Now, the government is highly worried by this boom as they have just witnessed on how the US hosing market turned into bubble and got burst.

This is clearly evident from the fact that the government has just announced that they are backing off the stimulus package and have also announced few strict measures to bank on the lending policy.

Now, the Chinese have to control the interest rates, imports and exchange rate similar to adjusting the volume equalizer in a music player. They have keep adjusting the numbers as and when the other value changes.Since the market is in a bubble stage, a small miscalculation can result in disaster.

Moreover, there is more pressure on China from world countries to stop manipulating the Yuan against foreign currencies. Recently, when China surpassed Germany as the world's second largest exporter, Germany had put lot of political pressure against China to stop the currency manipulation. Apart from Germany, other countries are applying similar pressure, as the cheaper Chinese goods are flooding their markets which eventually slows down the growth of in-house industrial houses. Also, there are also threats from other countries that they will stop buying Chinese goods.

All one can conclude is, China will not grow at the same rate as earlier. If it continues to do so, it will not last long for even a few months before which the real-estate boom market will turn into a bubble. For sure, China can expect heavy backlashes from world countries for its continued currency manipulation.

BRIC Economics - Peering Into The Future

jay — Sun, 10 Jan 2010 09:37:15 EST

Predictions are powerful because when they are made by influential people they become self-fulfilling prophecies. Witness the result of the BRICs report by Goldman Sachs. That report published in 2001 set in motion a great flight of capital into the emerging markets of China, India and Brazil propelling them into the next stage of economic development. This report and its aftermath turned out to be such a big success that the projections are now being revised even more favorably towards these countries with China projected to overtake the US as the world's largest economy by 2031 several years earlier than the original predictions.

Now, the Carnegie Endowment, a reputed US-based think tank has put out its International Bulletin in November 2009 projecting the growth path of the major nations of the world up to 2050. The chart (G20 in 50: available here) effectively uses Google Motion Chart to tell the story of the rise of China and other developing countries, through the first half of this century.

According to this projection, again China is expected to surpass the United States as the largest economy in the world in 2031 with about $23 trillion in nominal GDP (a compounded average annual growth rate of 9.5%). India's GDP at that time is expected to be about $6.5 trillion - 6.65 times what we are today (a compounded average annual GDP growth rate of 9.3%). At around the same period, India is expected to overtake China as the most poulated nation on earth with about 1.47 billion people within our borders.

The story on the per-capita GDP numbers is quite dismal. The standard of living of the people in both China and India although would be far better than where we are today in 2010, it probably will not be good enough to pull a lot of people out of poverty especially in India. The per capita GDP of China is expected to be about $15,000 (up from $3,000 today) while that of India will be a dismal $4,500 (up from $1,000 today). This would mean that by generally agreed yardsticks, India would still not be a middle income country even by 2031 (A country is generally considered to have broken into the middle income category once it crosses the $5,000 threshold in per capita GDP).

One reason this is so is that China's climb is much steeper than India's when you look at how worker productivity is expected to change over the years. While the worker productivity of most countries - especially the United States and China - seems to climb appreciably through the years, India's still ambles along like the elephant that it is.

Economics 101 teaches us that the three factors that impact the economic growth of a country are capital, labor and productivity. Given that India will not be short of labor and perhaps will have sufficient capital chasing it, it is clear that increasing productivity will be the way to grow faster. In fact this is one area where India has done a really bad job. This has been our bane for decades until now and may continue to be so. Although technology is considered to be the biggest contributor to increasing productivity in developed countries, in India there are many other factors contributing to lower worker productivity. Its dismal infrastructure (power, roads, water, ports etc) is a major contributor to inefficiencies. So is its tardy implementation of any projects that it takes up. If we continue to keep the "chalta hai" attitude that we are famous for, then India will be condemned to remain a low income country for decades to come.