Tuesday, December 05, 2017

Innovations from Big firms vs small firms and creative destruction

V Ananthnageswaran has a short blogpost titled Schumpeter and creative destruction where he made the following comment:

Public policy must be relentlessly focused on enabling firms to start reasonably ‘big’ and to be able to grow bigger. Subsistence entrepreneurship is romantic but will not move the economic growth needle much at all. It is disguised unemployment.
I think I understand what he means when he says "subsistence entrepreneurship will not move the economic needle." But here are my comments.
  1. Innovation has moved to big corporations because of the "gridlock" created by these large corporations using patents. [Referring to Micheal Heller's Gridlock Economy book] It is not naturally so. So I agree firms should be able to get "reasonably big" but how big?
  2. Other reason why big companies are innovating is because cost of capital spread between big and small firms has become wider with bigger firms being able to access ultra-low cost capital while smaller firms unable to match them. As readers will know I think too low interest rate over long times have led to development of automation technologies.
  3. Most new innovation coming from large corporations is not disruptive in true sense. But that coming from smaller start-ups occasionally is. I refer to the scale of disruption from these corporations rather than number of such innovations.
  4. Public policy should allow even smaller companies to disrupt established employers thus creating creative destruction in job market as well. How many policy makers will live with that idea when there is labor surplus remains to be tested.





Wednesday, November 29, 2017

Law and Order - The missing reform

Manas Chakravarty has an article in Mint title IBC Ordinance a blow against the Promoter Raj. It talks about new Insolvency and Bankruptcy Code reform.That raises some prospects of execution problems.

I think Modi government faces lot of execution problems because it has not acted to root out corruption. Here is my solution I wrote for Moneylife. Do have a read and leave a comment.



Notes:


Thursday, November 16, 2017

Tax - Analysis of Banking Transaction Tax

Arthakranti, an organisation credited with the proposal for demonetisation, had another proposal in their toolkit - Banking Transaction Tax (BTT). This BTT was part of overall economic reforms including demonetisation, etc. proposed by Arthakranti. 

You readers will know that I was not opposed to the idea of Demonetisation. Demonetisation is like first step of a process. The success of the process depends on how well the rest of the parts are executed. 

But BTT is a different beast all together. The logic of BTT is quite simple, not totally fool-proof but it is not implausible. Yet, India is too big a country to try it out. The case for BTT has to be built from many sides and none of them are in place. 

Few months ago, however, we have got the first step of that process. NIPFP released a report evaluating the arthakranti proposal. I got to know of it through a tweet by Niranjan Rajadhyakshya [ @CafeEconomics ]. I downloaded the report and read it.

The report was a good first step. The analysis was more academic and I thought they tested some arguments for and against demonetisation. NIPFP however stuck to academics as rebuttal for BTT. It was a good first effort but a college kid could have done that. 

I think to analyse BTT you must look at a feedback-looped simulation of the economy or a industry chain at least. The allowance for adjustment of behaviour cannot be tested directly without accounting for feedback loops.  Some parallel thoughts should be given to Flat tax proposals and their impact on tax compliance.

Nevertheless, it is a good read.


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Friday, June 30, 2017

Farmer suicides and loan waivers - can we solve it?


Farmer suicides have brought the problems facing the farmers to the fore. Indebtedness has been highlighted as one of the dominant problems for suicides. As a corollary, governments have taken populist turn towards loan waivers. This is not the first time the farm loans have been waived. But can we do something to make it the last?

I reviewed the research on this topic and summarised them in my paper. I found there are a lot of problems facing agriculture. To put it succinctly, Indian agriculture suffers from: i) poor productivity, ii) falling water levels, iii) expensive credit, iv) a distorted market, v) many intermediaries who increase cost but do not add much value, vi) laws that stifle private investment, vii) controlled prices, viii) poor infrastructure, and ix) inappropriate research. 

These are basically symptoms of two fundamental issues with agriculture. First, farm risk management has gone wrong. Second, there is lack of coordination between various parts of agricultural value-chain. Thus, farmers do not respond to changing prices and market dynamics pro-actively. They also bear higher costs for post-harvest coordination in the value-chain like transportation, packaging, etc. 

Farmers needed to become better at risk management. They should use futures prices at the crop planning stage itself. At harvest stage a mix of contracted sales, and spot sales to can maximise realisations. They also needed more reliable availability of inputs, of credit etc. All this meant we need information – different types and large quantum of information like futures prices, weather forecasts, demand estimations, pesticide usage guidance, seed knowledge, planting knowledge, etc. AND, this information had to be available to farmer when he/she needs it.

But information is only ONE part of the problem. Farmer also needs physical inputs to reach at his remote farm. So, fertilizers should be delivered on time. Farm insurance should approved. Seeds, pesticides should reach the farmer on time. It means the value-chain partners must be available and acting reliably consistently. It meant the value-chain participants need the farming process to be visible.

There is universal agreement about risk associated with dealing with commodities. It means despite much effort many times farmers will fail. The question is then – can they fail safely? 

The corporate world has solved this issue through use of limited liability vehicles. So can we apply that to the farmers? I believe, a limited agricultural bankruptcy mechanism should act like a safety net for farmers. However, we don’t want farmers to hide personal failures within agricultural risks. Hence, we want farmers to separate personal and agricultural assets for this purpose of limiting liability.

I think we can fix these using an information system –an ERP-like solution for agriculture to help assist the farmers. Such system will reduce the coordination costs, improve information availability and increase the scale of operation allowing formal economy to step in and help farmers. With ring-fencing of risks, low cost collaboration, timely information, we can help farmers into a positive spiral of profits-investment-productivity. I sketch out the schematic of such a system called Smart Agriculture Management System (SAMS) in my paper.

This issue is important. Please read the paper, I tried to keep it as short as possible. Please make suggestions for improvement. If you think SAMS will work then do spread the word.


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Friday, March 10, 2017

World War 3 watch 03 - The North Korean challenge

North Korea has suddenly become active. In the past few years, it has acquired missile technology, nuclear technology and is making and weaponizing missiles with nuclear warheads. Now Japan, a nation whose constitution calls for peaceful, non-aggression is developing first strike capabilities.

First, I doubt North Korea got this technology by itself. I suspect China behind the rise of North Korea. It could also be Pakistan at the prodding of China. I include Pakistan because of the noise in US circles for a radical reset with Pakistan. Ignore the reasons cited in that article for some time. It appears that Pakistan, China and Russia are forming closer ties. That is primary reason US may be considering a radical reset. In 2004, China applied for MTCR membership, but its membership was rejected due to concerns that Chinese entities continued to provide sensitive technologies to countries developing ballistic missiles, such as North Korea.

Second, China may be using North Korea as a strategic piece to test US and its intent in the Pacific, particularly closer to China. China may have used the Philippines for this purpose earlier this year. China is sea-locked and is intent on breaking that stranglehold. 

Third, it is possible US knows this. The THAAD deployment cannot be simply for North Korea. South Korea already has enough arsenal to obliterate North Korea two times over. Further, South Korean forces already possess Patriot systems for point defense and Aegis destroyers capable of stopping ballistic missiles. Huffington Post highlights a possible reason why China is wary of THAAD deployment
The United States and South Korea have repeatedly asserted that the deployment will be “focused solely on North Korean nuclear and ballistic threats” — not Chinese missiles. The possibility remains, however, for THAAD’s radar to be covertly switched into a longer range mode that feeds into the broader U.S. missile defense — giving Washington earlier notice of Chinese launches.
In countering the THAAD deployment to South Korea, two existing Chinese missile programs are likely contenders for accelerated development — hypersonic glide vehicles and multiple, independently targetable re-entry vehicles known as MIRVs. 

Fourth, Japan, a nation protected by the US with a full defence presence needs no protection. Yet, Japan last year inducted a pseudo-aircraft carrier, raised constitutional limitations on its armed forces and now is developing first strike capability.

This is a power game between China and US. The strategic pieces used are North Korea, South Korea and Japan. In south China sea, the US did not have a piece in play after Philipines sided with China. These developments do not bode well. But these are the facts.

From the perspective of India and Singapore, China remains a threat. Singapore has conclusively sided with the US and it is the best possible backstop against Chinese domination. India however, has not been decisively in favour of US. It may help to side with the US clearly and unequivocally. At the same time, given the US policy, both Singapore and India need to ramp up their self-defence protocols. Indian missile defence shield is completely inadequate in comparison with what Chinese are capable of. It is time to ramp up the Missile Defences.