The Curionomist Podcasts | #3: Tea and Hoppers – Fixed Prices, Perverse Incentives

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In my latest podcast, I talk about tea and hoppers; two of my favourite food items, and indeed of most Sri Lankans. But the government now dictates how much shops can charge me for these – and its a pretty fantastic, lower price than ever before – milk tea at Rs 25, plain tea at Rs. 10, and plain hoppers at Rs. 10. As a consumer, I should be pretty happy right? “Not if it’s causing unintended consequences!”, the economist inside me is saying.

In this article titled ‘The Problems of Price Controls‘, The Cato Institute – a prominent libertarian think tank in the US, asserts that,

“price controls reduce quality, create black markets, and stimulate costly rationing”.

We are seeing this play out right here in Sri Lanka. Last month, we saw one of the most intrusive and bizarre examples of administered prices (or price controls) being introduced by a government in recent times. This was on tea, and hoppers, served anywhere in the country, to be enforced by the Consumer Affairs Authority. What this has done is cause perverse incentives among those making and selling these items. Using poorer quality ingredients, shaving off quantity, skimping on the add-ons. Government-imposed fixed prices not only completely violates basic economic freedoms enjoyed by firms – like the freedom (and ability) to use price to signal quality or differentiation – but it is also notoriously difficult for a government to enforce fully and fairly. We must do more to make policymakers and bureaucrats understand that badly thought out public policies cause perverse incentives by economic agents, and this helps nobody. Listen to the podcast by clicking play below, or visit it on Soundcloud Image courtesy http://www.adventure365.me

Why Didn’t a Cab Driver Think of Uber?

uber-tax-imageIsn’t it curious why a cab driver didn’t think of Uber? Why Barnes & Noble didn’t think of Amazon? Why Blockbuster didn’t think of Netflix? Or why Marriott didn’t think of AirBnB? Well, according to this article its because when a company is so focussed on the ‘cash cow’ that keeps delivering, you are less likely to be disruptive of your own biz model that works. It’s also harder to see the disruption that others could bring to your business, when you have ‘tunnel vision’ of your industry. The article also introduces the idea of hard trends (things that will happen) vs soft trends (things that might happen), and the importance of differentiating between the two, when tackling disruption.

The new digital disruptors have flipped on its head what people even mean by the sector in which they operate. Uber is the largest taxi service without owning a single car. AirBnB is the largest hotel service without owning or building a single hotel room. So the sense of what these industries even look like, has been disrupted.

According to the article by Daniel Burrus, a best-selling author and innovation expert,

“In order to thrive in this time of exponential change and rapid digital disruption, it is imperative to actively scan far outside of your industry looking for new ways to disrupt yourself, before others do it for you. When you do discover a new technology or technology-driven trend that could be used to disrupt you, it is important to separate what I call the Hard Trends that will happen from the Soft Trends that might happen.

When you can anticipate a disruption before it happens, you now have a powerful choice. You can either be the disrupter or the disrupted. You can use predictable Hard Trends to create the new cash cows that will disrupt your competitors and grow your future. It’s important to understand that disruption can either bring opportunity (if you get there early)—or disaster (if someone else does).”

Read more here – https://agenda.weforum.org/2015/04/why-didnt-a-cab-driver-think-of-uber/ 

Development Aid – UAE Giving More than USA?

The OECD has released the latest data on how donor countries fared in terms of giving development aid and there are some interested insights.

While the USA continued to be on top of the list with the most volume of aid – over U$ 30 bn – ranked 21st from over 30 of the top donor countries in terms of ODA (Official Development Assistance) as a percentage of GNI (Gross National Income). The USA’s ratio was 0.19.

The United Arab Emirates (UAE), on the other hand, has come out on top of the list with giving the highest ODA as a share of GNI. The UAE’s ratio was 1.17, exactly 9 times that of the USA!

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Meanwhile, as has been the case for many years, very few DAC countries (Development Assistance Committee members – the richest donors) managed to reach (or exceed) the UN target of maintaining ODA at 0.7% of GNI – just 5 (Sweden, Norway, Luxembourg, Denmark, UK)

For a more detailed look, check out this report by the OECD and the interactive charts in it – http://www.oecd.org/newsroom/development-aid-stable-in-2014-but-flows-to-poorest-countries-still-falling.htm

‘Structural Reforms’ Only Help in the Long Run? Apparently Not.

Economists often argue for the need for ‘structural reforms’. Especially in Sri Lanka right now, this phrase is often used, to indicate that the Sri Lankan economy cannot hope to attain a fast growth trajectory and sustain it without undertaking tricky but essential ‘structural reforms’ in education, trade, industry, labour markets, taxation, agriculture, transport, etc. But one of the key issues that often makes such structural reforms unattractive for politicians to undertake is that the pain of the reforms vs the gains from them are simply out of sync with a politician’s electoral horizon. The widely held view is that structural reforms only reap rewards in the long term. In the ongoing crisis in Europe, the debate on the need for vs pitfalls of structural reforms is raging. A recent article by an economist in the Brussels-based think tank Breugel aimed to debunk this, in so far as Europe is concerned.

This article presents new evidence to show that the widely held view might not be entirely accurate. Yes, much of the gains do occur in the long term and there are likely to be dampeners in the short term, but there are some clear positive impacts in the short-term as well. The article observes,

“The crucial takeaway is that reforms – either directly through business restructuring and temporary layoffs, or indirectly through the real interest rate – are indeed expected to dampen consumption. However, a counter effect is expected to stem from a boost in short-term investment based on prospects for higher productivity, real wages, and incomes in the future. […] the pick-up in investment and, to a smaller degree, an expanding current account will more than off-set the adverse dynamics of consumption, refuting the “short-term pain before long-term gain” principle at aggregate level. This however does not imply that individual categories will not be severely affected by policy changes, and hence the complexity of the politics of reform adoption”

The author also puts forward three key observations on factors that need to be considered when implementing structural reforms – 1) sequencing of reforms, 2) access to credit, and 3) role of fiscal policy. I agree with all three.

The sequencing of reforms is crucial to get right to ensure there isn’t too much shock to the system too quickly, potentially controversial reforms may need to be done after those that demonstrate ‘quick wins’. Meanwhile, access to credit is important not only to aid with financing adjustment costs but also help unlock funding for new investments looking to take advantage of the prospect of a more productive and competitive economy in the future. It is particularly crucial to ensure access to credit is there for SMEs, as I argue here. As for fiscal policy, the tax revenue that the government has (essentially fiscal space) to provide a welfare cushion for the biggest losers of reforms, can really help prevent backlash against the reform agenda owing to difficult adjustment costs.

But amidst all of this I think it’s imperative that economists remain keenly aware that structural reforms are inherently tricky, politically. The gains are not always easily understood by the wider public in general, and affected sectors in particular. The gains may not be immediately visible, while the immediate losses may be more conspicuous. There will always be a strong ‘political economy of reform’ dynamic at play. Governments need to demonstrate early success of reform in order to garner public support to sustain broader reform programmes over several years. As the article rightly concludes,

“Understanding the dynamics and time profile of structural reforms may ultimately increase the political feasibility of reform packages”

Read more at: ‘The Pub Economics of Structural Reforms: Can Reforms Only Be Expected to Pay Off in the Long Run?’ http://www.bruegel.org/nc/blog/detail/article/1600-the-pub-economics-of-structural-reforms/

A New Outlook for Provincial Economies: From ‘Lagging Regions’ to ‘Secondary Growth Hubs’

For too long now, regions outside Sri Lanka’s Western Province have been characterized as “lagging” and in need of a boost. But has the terminology itself contributed to the problem? The term “lagging regions” entered the lexicon of Sri Lankan development-speak in the early to mid-2000s as the idea of regionally balanced development came into prominence and gained further traction through a report titled ‘Reshaping Sri Lanka’s Economic Geography’ by the World Bank. Since then, the term “lagging regions” was heard used by nearly all development agencies, private sector chambers, government officials, and of course, academics and development experts.

 

Workers at a new factory in the revamped Atchuvely Industrial Zone, Jaffna, Northern Sri Lanka. The 25-acre facility, built with Indian aid, has slowly begun to attract new investors from the region.

Workers at a new factory in the revamped Atchuvely Industrial Zone, Jaffna, Northern Sri Lanka (March, 2015). The 25-acre facility, built with Indian aid, has slowly begun to attract new investors from the region. (Image by Author)

Changing Perspective

The GDP dominance of the Western Province has been steadily declining (from 50% less than a decade ago to around 43% today), giving way to several other provinces like Southern and North Western. While none of these other provincial economies are half as large as the Western Province (given the unparalleled connective infrastructure and industrial agglomeration that the capital Colombo offers), it is well recognised that they offer immense economic potential that needs to be cleverly harnessed. During a recent visit to the Northern Province as part of visioning a SME project, I travelled with an international expert, Thomas Finkel, who has vast experience with consulting on private sector development projects. Through his work in Asia and Latin America he had seen many efforts aimed at boosting growth in provincial economies. He and I began talking about this idea of “lagging regions” and why it is such a terrible name to give provinces that are eager to attract private sector investment, spur new business activity, generate new sources of growth, and provide new economic opportunities for the people living there. He suggested a new terminology was needed – ‘Secondary Growth Hubs’. Finkel argued, “Calling these regions ‘Secondary Growth Hubs’ instead of ‘lagging regions’ gives these regions an optimistic outlook, which is needed if you want to foster growth there. Which investor, be it local or international, feels attracted by a term like lagging regions. Who would want to go there?”

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The Curionomist Podcasts | #2: “Cow-dropping” vs Entrepreneurship in the North

It’s been a while since my last podcast, over 2 months ago. In this 2nd podcast, I share some reflections from recent visits to Jaffna, Vavuniya and other parts of the Northern Province.

Processed with VSCOcam with f2 presetMore needs to be done to support entrepreneurship in the North. I feel that years of donor interventions may have hurt entrepreneurship here. Successive rounds of donor projects have “gifted” assets to people, but paid little attention to help them make productive use of these assets. For instance, some projects have given machinery and training, but not thought about helping with access to markets to sell what they make. Diary projects have similar problems. A colleague I was travelling with jokingly called this the “cow dropping syndrome”. So many donors have given free cows to families and hoped that this would improve livelihoods and incomes. Little attention had been paid to help them become ‘dairy entrepreneurs’ instead.

Listen to the full podcast below, or go to Soundcloud

 

The Curionomist is now on Flipboard!

If you’re a Flipboard user, do consider subscribing to the new Flipboard Magazine by The Curionomist. It features a curated selection of articles from across the web, on economics, innovation, and competitiveness that I’ll be clipping daily. These are articles that I find interesting, informative, insightful, or simply curious, and I would like to share with you. If you have articles that you think should be included, which I may have missed, do leave it in the comments below and I’ll be checking back regularly.

View my Flipboard Magazine.

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Without Coherent Policies and Consistent Signals, Sri Lanka Will Continue to Struggle in Attracting Good FDI (‘Smart Future’ Article #8)

Nearly six years since the end of the war, Sri Lanka is struggling to get any impressive increase in FDI. The only notable increase in FDI has come in the property, leisure, mixed development and real estate sector, evidenced by projects like Shangri-La, Altair Tower, JKH Waterfront, ITC Hotels, etc. FDI targets have been falling sharply short of targets. The targets are already fairly conservative in my view, considering Sri Lanka is a post-war economy with plenty of green-field opportunity. The ‘good’ FDI that Sri Lanka desperately needs – the type that brings in technology, that helps boost Sri Lanka’s exports, and that links Sri Lanka to new markets has not really come to post-war Sri Lanka. But this is exactly the type of FDI for whom policy coherence and consistency matters.

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