Business

Are EU Markets More Competitive than Those in the U.S.?

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In a really interesting paper in NBER, authors Germán Gutiérrez and Thomas Philippon argue that US markets have gradually become less competitive and markets in the EU have seen the opposite trend.

In many cases, the EU markets exhibit lower levels of industry concentration and excess  profitability, as well as fewer regulatory barriers to entry.

They suggest that divergence in market competitiveness between the U.S. and Europe is related to the powers granted to EU regulatory institutions at their inception. They note that both the European Central Bank and the Directorate-General for Competition were given more political independence than parallel institutions in the United States and thus have been able to pursue more aggressive antitrust enforcement in recent years.

In almost areas of competition law, they find that there was increasing enforcement in the EU and decreasing enforcement in the US, which has also seen more number of cases registered and higher penalties imposed in the EU. This has had a direct impact on consumer welfare in terms of prices. Prices for many products and services (such as broadband internet) which are under the scrutiny of the anti-trust authorities are significantly higher in the US than in the EU.

A large reason for this is also the lack of political independence for the regulatory authorities in the EU. They note that there is “higher levels of both lobbying and campaign contributions in the U.S. than in the EU. Political campaign contributions are 50 times higher in the U.S. than in the EU”. 

Another important trend here is the level of profits for EU and US firms. US firms have had significantly higher profits, on average, than EU firms. My question is this: does the excessive regulation in the EU prevent profits for firms? Will this have a negative effect on innovation and new firms starting up?

Employment Elasticity of Growth in India

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Recently, there have been a spate of articles on employment elasticity of income in Indian newspapers and how important that is to job creation in India. The Hindustan Times has a series on India’s job challenge, Mint’s editorial discussed quality of jobs created, and the Economic Times cautions against India mimicking China’s strategy in creating jobs.

But what exactly is employment elasticity? And why is it important?

According to an RBI working paper by Sangita Misra and Anoop K. Suresh, employment elasticity is a measure of the percentage change in employment associated with a 1 percentage point change in economic growth. It indicates the ability of an economy to generate employment opportunities for its population as a per cent of its growth or developmentprocess.

An employment elasticity of 1 denotes that employment grows at the same rate as economic growth. Elasticity of 0 denotes that employment does not grow at all, regardless of economic growth. Negative employment elasticity denotes that employment shrinks as the economy grows.

This is crucial as it is commonly believed that economic growth alone will increase employment. However, as we examine the data, we see that despite India’s impressive economic growth, employment has not grown alongside. Ideally we would like to see an employment elasticity >=1, but, from the Misra and Suresh paper, we see that employment elasticity in India declined from 0.44 in the first half of the decade 1999–2000 to 2004–05, to as low as 0.01 during second half of the decade 2004–05 to 2009–10.

YearsEmployment Elasticity
1999-2000 to 2004-050.50
2004-05 to 2009-100.01
2009-10 to 2011-120.18

Similar trends have been witnessed at the sectoral level. In agriculture and manufacturing, employment elasticity between 2004-05 and 2009-10 has been negative.

Sector1999-2000 to 2004-052004-05 to 2009-102009-10 to 2011-122004-05 to 2011-121999-2000 to 2011-12
Agriculture1.09-0.39-0.44-0.41-0.08
Manufacturing0.80-0.271.740.100.33
Mining & quarrying0.870.20-1.76-0.140.34
Utilities0.67-0.277.601.421.17
Construction0.881.63-0.251.121.01
Trade, transport, hotels0.45-0.020.540.130.25
Finance, real estate1.400.34-2.32-0.450.06
Other services0.46-0.112.960.480.47
All sectors0.500.010.170.060.20

The negative employment elasticity in agriculture indicates movement of people out of agriculture to other sectors where wage rates are higher. This migration of surplus workers to other sectors for productive and gainful employment is necessary for inclusive growth. However, the negative employment elasticity in manufacturing sector was a cause of concern particularly when the sector has achieved 6.8 per cent growth in output during Eleventh Plan. It did bounce back during 2009-10 to 2011-12, but the average employment elasticity in manufacturing between 2004-05 and 2011-12 was still only 0.10.

 

References:

Misra, S., & Suresh, A. K. (2014). Estimating Employment Elasticity of Growth for the Indian Economy. Reserve Bank of India.

Planning Commission, India. (2013). Twelfth Five Year Plan, 2012-2017. Sage Publications, India.

Making flying viable for everyone

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To successfully provide affordable air travel, government needs to ensure economic viability of its policies.

This year the Indian government decided to connect 56 unserved airports, under the Ude Desh ka Aam Naagrik (UDAN) scheme. The aim of the entire scheme is to make air travel affordable. Although the intentions of the scheme are noble, the steps taken have limited the scope of implementation. One of the key failures lies with the inability to understand the repercussions on the economic viability of airlines.

While the capital invested in buying and maintaining even a single airplane is already high, fuel cost and hiring the crew to keep an airline going add to the expensive affair. To give a ball park figure, domestic airlines in the U.S. spends a combined $2 to $5 billion on just jet fuel every month. Keeping the costs in in mind, it is important for the airline industries to ensure that the flight routes are economically viable. One of the ways this is ensured is by connecting less frequented routes with the major stops in order to cross subsidise the cost. In India, we follow a hub and spoke model where the major cities are the hub or the centre of the wheel and the all the traffic is connected to the centre and passes around the spokes. This helps increasing connectivity while keeping the flight routes viable. This heavy traffic is the the primary reason why most major cities in the world have two airports. The traffic going to and fro from these metropolis does not only keep the city running, but the airlines too.

It is in light of this distribution between traffic that the government policy to connect underserved airports can be questioned. That said, the current scheme tries to provide Value Gap Funding to certain routes for first few years to cover for the additional cost incurred. VGF is an economic tool that includes tax redemptions and financial support provided by the government to make the project viable. For instance for UDAN, the union government contributes 80 per cent of the VGF amount, while the remaining comes from the state governments concerned and in the case of north-eastern states and union territories, the sharing ratio is 90:10.

Although, the funding does provide incentives for flight to opt for the routes till they are being subsidised, it does not create enough incentives for the routes to remain viable after. The inherent flaw in the policy move, therefore, make it unsustainable. The grimness of the possible outcome is captured best in an article in  The Economist :

“High per-passenger costs on seldom-used routes will force Mr Modi to draw the line somewhere. Inevitably, he will conclude that not every commoner deserves the gift of flight.”

To make the airports truly viable, union government needs to look at making the cities more attractive for regular travellers or tourists. Hence, to bring a ghost airport to life it is important for the government to put some life into the host city.

Delhi government bans recorded music in bars

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Yet another example of the capricious nature of doing business in India is the Delhi government announcement today that all restaurants serving alcohol should stop playing “recorded music”. They are only allowed to have “live singing” or “instrumental music”. What sense does this make? Probably not much to us, but the Excise commissioner has this enlightening explanation:

When asked how live music was less noisy than recorded music, Delhi’s excise commissioner Amjad Tak said that live performances were “softer” and “controlled”, without giving reasons or data for how he had arrived at the conclusion.

Of course, this makes no sense. Music volume is easily controlled in the 21st century, and we have sound mixing technology that can reduce deep bass if that’s a problem. But the important part of this is just how difficult running a business in India can be, especially in the hospitality sector given that “without giving reasons or data” is often the standard operating procedure for government diktats.

This new rule was introduced in a circular only on 16 May 2018, so it was not even the case that anyone who acquired a liquor licence earlier knew this was going to happen. Which bar owner would have thought recorded music would be outlawed? Similarly, in 2016, the Delhi government halted issuing of fresh liquor licences, even to those who had already paid for it. Imagine being a bar owner who had invested eight figure sums to set up a bar, paid for a licence, who then got told it wasn’t forthcoming.

(If you’re interested in more such fun facts about the restaurant business, check out my podcast with Amit Varma in The Seen and the Unseen on Pragati, where we talk about the unseen effects of regulations.)

It’s possible that this could go to court and be ultimately resolved in favour of the pubs, but like most such cases, businesses suffer both in terms of lost revenue as well as the cost of litigation. How many restaurants and pubs can afford to have live bands playing every night? Would you go to a dead pub without any music?

There are better alternatives to this “hammer, not scalpel” approach to problems. The government could have involved bars in a discussion to come up with options. Or it could have implemented a rule specifying the maximum sound level in decibels for music inside a restaurant. I’m no fan of government regulation in general, but given our current situation, either of these is more reasonable than “no data for how he had arrived at the conclusion”.

If India needs to stimulate its economy, it needs to make doing business easier. And a big part of that is having a stable business environment where disruptive rules are not introduced on a whim without industry consultation. Unfortunately, that’s just daily life for most businesses in our country.

PS: Did you know that you cannot have more than 9 litres of booze in your house as per Delhi Excise law?  Most states have similar limits. Don’t believe me? It’s right there on the Delhi Excise portal. So if you have more than a few bottles of the good stuff, you should drink it all ASAP to stay legally compliant.

Delhi excise personal alcohol possession limits

How you Could Have Made Money From the Karnataka Election Coverage

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Elections throw up a dizzying number of possible coalitions and outcomes. In the recently concluded Karnataka assembly elections, many newspapers, TV channels and political analysts learnt it to their dismay. Based on the initial leads, they declared BJP the winner, only to realise later that the political script was unfolding in a very different way.

Around 10:30 AM yesterday, there was a strong consensus on my twitter timeline that BJP had ‘bagged’ Karnataka. Convinced of the ‘verdict’, commentators moved on to ‘explain’, ‘analyze’ and ‘draw lessons’ from the verdict! It puzzled me to the extent that I put out the following tweet:

Wrong to call Karnataka right now. If BJP doesn’t cross halfway mark, a Congress/JDS alliance may not be ruled out.

Why one should have anticipated the possibility of Congress and JD(S) coming together? To see the logic, begin with a basic tautology: a politician covets political power. Politicians, while forming a coalition, wish to form government. This is partially correct; but, not the whole story. Otherwise, what prevents the whole legislative assembly from coming together and forming a ‘super alliance’?

Such an alliance is guaranteed to rule forever.

The reason why such ‘super alliances’ never get formed is not because they are unethical or ideologically incongruous. The real reason is that politicians worry about ‘intra-alliance’ power too. They dislike being a small player in a large coalition. That is why a ‘typical’ political coalition is medium-sized: big enough to cross the halfway mark, but not big enough to make each slice of the pie too small.

Following this general principle, it was obvious from the initial leads that Congress and JD(S) combine was the most natural post-poll alliance. A BJP-JD(S) combine would have been too big to be stable, given the numbers. In a way, the initial bounty of MLAs that BJP harvested also diminished the probability of BJP-JD(S) coming together! BJP had to cross the halfway mark on it’s own, possibly aided by independents and/or poaching.

Looking at the election this way totally changed the interpretation of the emerging scoreboard. Except may be for a brief period, BJP never crossed halfway mark on it’s own. And from 1.15 PM onward, they were firmly trailing behind the combined strength of the Congress and JD(S). And then around 2.00 PM came the bombshell announcement: Congress had offered unconditional support to JD(S) which wasted no time in accepting it.

And this was not merely an academic speculation. Since stock market was bullish on the BJP victory, there was a narrow window in which you could have capitalized on the misleading headlines: you could have shorted NSE benchmark index and made some quick bucks.

I am still regretting the missed opportunity.

Closure of Bars on Election Day Reflects Failure of Democracy

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The Election Commission in Karnataka has been overzealous in enforcing the model code of conduct, with special regard to sale of alcohol. Election times are generally a pain for owners of liquor stores and bars, but this year seems to be a whole lot worse.

The EC has issued directives and guidelines for owners of bars and other establishments selling liquor. They must maintain diligent accounts of every sale of alcohol. The specific order that has many bar owners worried states: “If there is more than 10 per cent difference in sales compared to the previous year, such outlets will have to face inquiry”. This is ridiculous.

The 20th of April in 2018 was a Friday, when sales generally tend to be high and in 2017, the date fell on a Thursday. The discrepancy could easily be 10 percent.

There will also be a flying squad constituted by the excise department which will patrol the city. It can visit any shop at any time and ask the owners to produce the accounts and sale details. This makes it ripe for rent seeking and discretionary abuse of power. Consider this:

Till Tuesday afternoon, 303 excise licenses have been temporarily suspended in the city alone, and a total of 793 establishments have been temporarily shut till the polling day for various violations across the state.

Further, there has been a lot of seizure of alcohol stock by the excise department, the flying squads and the Election Commission’s vigilance units. In less than a month, these entities together have managed to seize a total of 3,65,388 litres of alcohol seized since March 27.

There are also restrictions on how much alcohol a retail store can sell to an individual: no individual can be sold more than 2.2 litres of beer, or 750 ml of hard liquor. Again, these limits are ridiculous. Is it impossible to imagine a person buying two full bottles of alcohol for a private party he is hosting at home?

Finally, the biggest problem I have with all of this is that it curbs economic freedom. How is it fair to restrict the business of one type of commercial establishment? How is it fair to close down bars and disrupt business on election days? The election day closures are a feeble compensation for state failure and on a larger scale, failure of our democracy. If people vote based on liquor they receive, the problem is not with whether bars are open or not. Finally, I would argue that it is on the election day and the day of results that I could really use a drink.

Banning Cryptocurrency is a Terrible Idea

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The RBI released a notification recently on virtual currency. In essence, the central bank is trying to ban cryptocurrency in India:

In view of the associated risks, it has been decided that, with immediate effect, entities regulated by the Reserve Bank shall not deal in VCs or provide services for facilitating any person or entity in dealing with or settling VCs. Such services include maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them and transfer / receipt of money in accounts relating to purchase/ sale of VCs.

For those who are already engaged in the practices mentioned above, the RBI has given them three months to exit it.

This form of blanket ban has been feared for sometime. There were whispers that such a daft move would be done and the RBI didn’t want to disappoint. They have carried out the ban in order to protect consumer interests, market integrity and to prevent money laundering.

There are several problems with this:

  1. Ineffective: Such a ban will be completely ineffective. By its very nature, and as the name suggests, cryptocurrencies are hard to track and provides anonymity for its users. How does the government actually plans to ban it?
  2. Loss of control: By not banning it, RBI had a better chance of regulating some aspects of cryptos. Now, it has lost all control and all the transactions will go underground. Those who want to use Bitcoins will continue doing so by using cash, or other discreet financial instruments to trade. And as Rahul Matthan says in his editorial, “The only people who abide by the terms of a ban are those who always intended to use the service for legitimate purposes”.
  3. You can’t have one without the other: The government, it seems, is quite keen on developing and using blockchain technology for various public purposes, such as maintaining land records, public health records, etc. However, the best use case of blockchain is cryptocurrencies. By banning one, there will be no innovation and test cases of blockchain in India.

It will be interesting to see how this pans out. My guess is that RBI will soon realise that it has no control over this and will backtrack on this move. However, it might have already set a bad precedent and the narrative that these are inherently dangerous and risky.