Quotulatiousness

October 28, 2014

Facebook‘s UK tax picture

Filed under: Britain, Business, Economics — Tags: , , , , — Nicholas @ 07:17

Tim Worstall explains why it’s not a scandal that Facebook doesn’t pay more taxes in the UK:

In fact, it’s actually rather a good idea that Facebook isn’t paying UK corporation tax. For the standard economic finding (also known as optimal taxation theory) is that we shouldn’t be taxing corporations at all. Thus, as a matter of public policy we should be abolishing this tax: and also perhaps applauding those companies that take it upon themselves to do what the politicians seem not to have the courage to do, make sure that corporations aren’t paying tax.

That isn’t how most of the press sees it, of course

[…]

That’s an extremely bad piece of reporting actually, for of course Facebook UK did not have advertising revenue of £371 million last year: Facebook Ireland had advertising revenue of that amount from customers in the UK that year. And that’s something rather different: that revenue will be taxed under whatever system Ireland has in place to tax it. And this is the way that the European Union system of corporate taxation is supposed to work. Any company, based in any one of the 28 member countries, can sell entirely without hindrance into all other 27 countries. And the profits from their doing so will be taxed wherever the brass plate announcing the HQ of that company is within the EU. This really is how it was deliberately designed, how it was deliberately set up: it is public policy that it should be this way.

We could also note a few more things here. The UK company itself made a loss and that loss was because they made substantial grants of restricted stock units to the employees. And under the UK system those RSU grants are taxed as income, in full, at the moment of their being granted. Which will mean, given those average wages, at 45% or so. And we should all be able to realise that a 45% tax rate is rather higher than the 24% corporation tax rate. The total tax rate on the series of transactions is thus very much higher than if Facebook has kept its employees as paupers and just kept the profits for themselves. Further, those complaining about the tax bill tend to be those from the left side of the political aisle: which is also where we find those who insist that workers should be earning the full amount of their value to the company which is what seems to be happening here.

Civil service pensions

Filed under: Cancon, Economics, Government — Tags: , , , — Nicholas @ 07:12

In City Magazine, Steven Malanga looks at Canada’s civil service pension problems, which may not be quite as bad as some US state problems, but are still going to be a source of conflict going forward:

Governments throughout the country are grappling with as much as $300 billion in unfunded government-worker retirement debt. In a country of just 38.5 million people, that’s a pension problem roughly equivalent to the one that California faces. And it’s widely shared.

Municipalities throughout Quebec, for instance, owe some $4 billion in retirement promises that have yet to be funded, prompting the province’s new Liberal government to demand this summer that workers pay more to bolster the system. A new report on the finances of Ontario’s government-owned utilities revealed their pensions to be unsustainable without deep subsidies from Canadian electricity customers. For every dollar that workers contribute toward their retirement, government-owned utilities now spend on average about four dollars, raised through electric bills—though the cost is even higher at some operations. The news is even bleaker at the federal level, where Canada faces more than $200 billion in total retirement debt for public workers, when the cost of future health-care promises made to public-sector workers is combined with pension commitments. One big problem is pension debt at Canada Post, whose budget is so strained that the federal government gave the mail service a four-year reprieve on making payments into its pension system, even though it’s already severely underfunded.

At the heart of Canada’s pension woes are some of the same forces that have helped rack up several trillion dollars in state and local pension liabilities in the United States. For years, Canadian governments have provided generous pensions at low costs to employees. Workers could earn full benefits while retiring in their mid-fifties, even as they lived longer. Politicians relied on optimistic assumptions about stock-market returns to justify those benefits. Governments were quick to grant additional benefits to politically powerful employee groups, but they underfunded pensions when budgets got tight.

October 25, 2014

Destroying the “too big to fail” meme

Filed under: Britain, Economics — Tags: , , , — Nicholas @ 10:09

In the Telegraph, Allister Heath makes a case for the looming end to the economically disastrous notion that certain entities are “too big to fail”:

Bank bail-outs have been a cultural catastrophe for those of us who support free markets, low taxes and enterprise. During the 1980s and 1990s, much of the British public came to accept and even embrace capitalism, in return for a simple deal: profits and losses would both have to be privatised. Clever entrepreneurs, savvy traders or brilliant footballers would be encouraged to make money; but companies and investors that placed the wrong bets would be allowed to fail, with no pity.

Not only did this trigger an explosion in prosperity, it also helped shift the British mindset towards a much more pro-enterprise position. The rules of the game felt fair: risk and reward went hand in hand. The government would serve as an umpire, not a supporter of vested interests.

But the crisis of 2007-09 put an end to this implicit bargain, at least in the eyes of vast swathes of the public. They saw large institutions bailed out at great public expense, and with substantial amounts of taxpayer money put at risk. It started to look as if — when it came to the banking industry at least — risk had been socialised while profits remained private. To many members of the public, it was a case of heads you win and tails we lose. Profits were retained by a small elite, while losses were spread much more broadly — or so it felt.

Needless to say, the reality was more complex. Shareholders of bailed-out banks often lost everything. But bondholders were rescued, institutions survived, staff contracts were not ripped up and the process of creative destruction was severely derailed. And while big beasts were kept afloat, many smaller firms went bust and many ordinary folk lost their jobs. This is one reason — together with an incorrect narrative of the causes of the crisis which wrongly absolves governments and central banks — for increased support for punitive tax and government meddling in prices and wages.

So why did governments turn their back on capitalism and suddenly refuse to let market forces do their work? The uncontrolled failure of a major financial institution has a much broader, system-wide impact than the uncontrolled failure of a hair salon. Under traditional bankruptcy law, however, both would be treated in the same way, which simply makes no sense. One needs a different approach to tackle the failure of major banks or insurers — a proper Plan B. With the right institutions in place, there need not be such a thing as “too big to fail”. With the correct planning and tools, even the largest of financial firms can be dismantled sensibly without wiping out millions of depositors and triggering another Great Depression.

October 24, 2014

QotD: Poverty in the West is not like poverty in the rest of the world

Filed under: Economics, Quotations, Technology, USA — Tags: , , , — Nicholas @ 00:01

What is it, in terms of physical goods and services, that we wish to provide for the poor that they do not already have? Their lives often may not be very happy or stable, but the poor do have a great deal of stuff. Conservatives can be a little yahoo-ish on the subject, but do consider for a moment the inventory of the typical poor household in the United States: at least one car, often two or more, air conditioning, a couple of televisions with cable, DVD player, clothes washer and dryer, cellphones, etc. As Robert Rector and Rachel Sheffield report: “The home of the typical poor family was not overcrowded and was in good repair. In fact, the typical poor American had more living space than the average European. The typical poor American family was also able to obtain medical care when needed. By its own report, the typical family was not hungry and had sufficient funds during the past year to meet all essential needs. Poor families certainly struggle to make ends meet, but in most cases, they are struggling to pay for air conditioning and the cable-TV bill as well as to put food on the table.” They also point out that there’s a strong correlation between having boys in the home and having an Xbox or another gaming system.

In terms of physical goods, what is it that we want the poor to have that they do not? A third or fourth television?

Partly, what elites want is for the poor to have lives and manners more like their own: less Seven-Layer Burrito, more Whole Foods; less screaming at their kids in the Walmart parking lot and more giving them hideous and crippling fits of anxiety about getting into the right pre-kindergarten. Elites want for the poor to behave themselves, to stop being unruly and bumptious, to get over their distasteful enthusiasms, their bitter clinging to God and guns. Progressive elites in particular live in horror of the fact that poor people tend to suffer disproportionately from such health problems as obesity and diabetes, and that they do not take their social views from Chris Hayes — and these two phenomena are essentially the same thing in their minds. Consider how much commentary from the Left about the Tea Party has consisted of variations on: “Poor people are gross.”

A second Xbox is not going to change that very much.

Kevin D. Williamson, “Welcome to the Paradise of the Real: How to refute progressive fantasies — or, a red-pill economics”, National Review, 2014-04-24

October 22, 2014

What would Milton Friedman do?

Filed under: Economics, Environment, Politics, Science — Tags: , , — Nicholas @ 07:20

David Friedman, who we can safely assume has a better sense of the late Milton Friedman’s thoughts and beliefs than most people, disagrees with a recent Forbes article asking WWMFD:

A recent Forbes article is headlined “What Would Milton Friedman Do About Climate Change? Tax Carbon.” It reports on a forum at the University of Chicago at which several economists, including Michael Greenstone, described as the “Milton Friedman Professor of Economics at the University of Chicago,” argued that Friedman would have supported a carbon tax. The evidence for that claim was a 1979 clip from the Phil Donahue show where Milton Friedman argued that if the government is going to do something about emissions, they should use an effluent tax rather than direct regulation. He does not actually say that government should do something about emissions, only that there is a case for doing so and, if it is done, the best way to do it is by a tax on emissions.

To get from there to the conclusion that he would have favored a carbon tax requires at least one further step, a reason to think that he would have believed that global warming due to CO2 emissions produced net negative externalities large enough to justify doing something about them. The problem with that claim is that warming can be expected to produce both negative externalities such as sea level rise and hotter summers and positive ones such as longer growing seasons and milder winters. The effects will be spread out over a long and uncertain future, making their size difficult to estimate. My own conclusion, defended in past posts here (one example), is that the uncertainties are large enough so that one cannot sign the sum, cannot say whether the net effect will be positive or negative.

I do not know if my father would have agreed but I have at least a little evidence on the subject, more than offered in the Forbes article. The same issue arose in the earlier controversy over population. Just as it is now routinely assumed that warming is bad, it was then routinely assumed that population increase was bad. Forty years ago I wrote a piece on the subject for the Population Council in which I attempted to estimate the externalities associated with population. I concluded that they were too uncertain for me to tell whether the net effect was good or bad. My father read the piece and commented on it. If he had disagreed he would have said so, and he did not. It is possible that he would have felt differently in the case of climate change, but I can see no reason to expect it.

October 21, 2014

QotD: Hipster economics

Filed under: Economics, Humour, Quotations — Tags: , , — Nicholas @ 00:01

Hipster economics are standard economics because hipsters are everything the US economy has ever wished for in one convenient package. It’s a group consisting largely of young, upper-middle class people with very little conviction, who will spend large amounts of money to maintain their own comfort and the appearance of diversity and rebellion. They are activists as long as it’s easy, poor as long as it doesn’t involve dirt or hunger, and selfless as long as they don’t stand to lose anything. They represent the sanitizing of national issues so that they can be discussed without being addressed. And all you have to do to control them is use some reverse psychology. They’re not rebels, they’re not even malicious, because they’re not anything except a bunch of kids playing pretend. They’ll eventually grow up and become bankers, lawyers and politicians, just like their parents…

“Robert” commenting on “The peril of hipster economics: When urban decay becomes a set piece to be remodelled or romanticised“, by Sarah Kendzior, 2014-05-28.

October 16, 2014

Italian recession officially ends, thanks to drugs and prostitution

Filed under: Economics, Europe, Italy — Tags: , , , , — Nicholas @ 10:21

As Kelly McParland put it, it’s “another reason to legalize everything nasty“:

Italy learnt it was no longer in a recession on Wednesday thanks to a change in data calculations across the European Union which includes illegal economic activities such as prostitution and drugs in the GDP measure.

Adding illegal revenue from hookers, narcotics and black market cigarettes and alcohol to the eurozone’s third-biggest economy boosted gross domestic product figures.

GDP rose slightly from a 0.1 percent decline for the first quarter to a flat reading, the national institute of statistics said.

Although ISTAT confirmed a 0.2 percent decline for the second quarter, the revision of the first quarter data meant Italy had escaped its third recession in the last six years.

The economy must contract for two consecutive quarters, from output in the previous quarter, for a country to be technically in recession.

It’s merely a change in the statistical measurement, not an actual increase in Italian economic activity. And, given that illegal revenue pretty much by definition isn’t (and can’t be) accurately tracked, it’s only an estimated value anyway.

October 15, 2014

The pay gap issue, again

Filed under: Business, Economics — Tags: , , , — Nicholas @ 09:28

There’s been a lot of moaning on about inequality recently — some are even predicting it will be the big issue in next year’s Canadian federal election — but the eye-popping figures being tossed around (CEOs being paid hundreds of times the average wage) are very much a case of statistical cherry-picking:

Before retiring to their districts for the fall, the House Democratic Caucus rallied behind the CEO/Employee Pay Fairness Act, which would prevent a public company from deducting executive compensation over $1 million unless it also gives rank-and-file employees raises that keep pace with the cost of living and labor productivity.

Meanwhile, the AFL-CIO and its aligned think tanks have made hay of the huge difference between the pay of CEOs and employees. One of the most widely cited measures of the “gap” comes from the AFL-CIO’s Executive Paywatch website.

  • The nation’s largest federation of unions laments that “corporate CEOs have been taking a greater share of the economic pie” while wages have stagnated for the rest of us.
  • As proof, it points to a 331-to-1 gap in compensation between America’s chief executives and the pay of the average worker.

That’s a sizable number. But don’t grab the pitchforks just yet, says Mark J. Perry, economic professor at the University of Michigan-Flint and resident scholar at the American Enterprise Institute, and Michael Saltsman, research director at the Employment Policies Institute.

The AFL-CIO calculated a pay gap based on a very small sample — 350 CEOs from the S&P 500. According to the Bureau of Labor Statistics, there were 248,760 chief executives in the U.S. in 2013.

  • The BLS reports that the average annual salary for these chief executives is $178,400, which we can compare to the $35,239-per-year salary the AFL-CIO uses for the average American worker.
  • That shrinks the executive pay gap from 331-to-1 down to a far less newsworthy number of roughly five-to-one.

QotD: The value of economics

Filed under: Economics, Politics, Quotations — Tags: , — Nicholas @ 00:01

Having taken a stab at sociology and political science, let me wrap up economics while I’m at it. Economics is a highly sophisticated field of thought that is superb at explaining to policymakers precisely why the choices they made in the past were wrong. About the future, not so much. However, careful economic analysis does have one important benefit, which is that it can help kill ideas that are completely logically inconsistent or wildly at variance with the data. This insight covers at least 90 percent of proposed economic policies.

Ben Bernanke “The Ten Suggestions”, speech at the Baccalaureate Ceremony at Princeton University, Princeton, New Jersey. June 2, 2013.

October 14, 2014

A new view on cosplay – as a symptom of a seriously weakened economy

Filed under: Economics, Japan, Media — Tags: , , , , — Nicholas @ 15:06

A certain amount of this rings true:

Imagine you’re a college graduate stuck in a perpetually lousy economy. That’s a problem Japanese twenty-somethings have faced for more than 20 years. Two decades of stagnation after the collapse of the 1980s real-estate and stock bubbles — combined with labor laws making it tough to fire older workers — have relegated vast numbers of Japanese young adults to low-paying, temporary contract jobs. Many find themselves living with their parents well into their twenties and beyond, unmarried and childless.

Then again, they do have plenty of time to dress up like wand-wielding sailor girls and cybernetic alchemist soldiers from the colorful world of anime cartoons and manga comics. Indeed, Japan’s Lost Decades have coincided with a major spike in “people escaping to virtual worlds of games, animation, and costume play,” Masahiro Yamada, a sociology professor at Chuo University in Tokyo, recently told the Financial Times. “Here, even the young and poor can feel as though they are a hero.”

It’s hard to blame them. After all, it’s not that these young adults in Japan are resisting becoming productive members of the economy — it’s that there just aren’t enough opportunities for them. So an increasingly large number of them spend an increasingly large amount of time living in make-believe fantasy worlds, pretending they are someone else, somewhere else. This is a very bad thing for the Japanese economy.

And guess what: America has a growing number of make-believe “cosplay” heroes, too. Many of the 130,000 people who attend the San Diego Comic Con every year invest big bucks in elaborate outfits as a way of showing off their favorite Japanese characters, as well as those from American superhero movies, comics, and “genre” televisions shows such as Game of Thrones. And this trend is growing — the crowd at Comic Con was one-third this size in 2000. In 2013, the SyFy channel even created a reality show about the trend, Heroes of Cosplay.

H/T to Ghost of a Flea for the link.

October 11, 2014

QotD: The economies (and dis-economies) of scale

Filed under: Business, Economics — Tags: , , — Nicholas @ 00:01

We are the heirs of the Industrial Revolution, and, of course, the Industrial Revolution was all about economies of scale. Its efficiencies and advances were made possible by banding people together in larger and larger amalgamations, and we invented all sorts of institutions — from corporations to municipal governments — to do just that.

This process continues to this day. In its heyday, General Motors employed about 500,000 people; Wal-Mart employs more than twice that now. We continue to urbanize, depopulating the Great Plains and repopulating downtowns. Our most successful industry — the technology company — is driven by unprecedented economies of scale that allow a handful of programmers to make squintillions selling some software applications to half the world’s population.

This has left us, I think, with a cultural tendency to assume that everything is subject to economies of scale. You find this as much on the left as the right, about everything from government programs to corporations. People just take it as naturally given that making a company or an institution or a program bigger will drive cost efficiencies that allow them to get bigger still.

Of course, this often is the case. Facebook is better off with 2 billion customers than 1 billion, and a program that provides health insurance to everyone over the age of 65 has lower per-user overhead than a program that provides health insurance to 200 homeless drug users in Atlanta. I’m not trying to suggest that economies of scale don’t exist, only that not every successful model enjoys them. In fact, many successful models enjoy diseconomies of scale: After a certain point, the bigger you get, the worse you do.

Megan McArdle, “In-N-Out Doesn’t Want to Be McDonald’s”, Bloomberg View, 2014-10-02.

October 9, 2014

“Japan’s high-speed rail system may end up being the victim of its own success”

Filed under: Economics, Japan, Railways, Technology — Tags: , — Nicholas @ 00:02

An interesting look at how the Japanese Shinkansen system has literally shaped Japan’s urban development pattern:

Photo by Wikipedia contributor Swollib (Source: Wikipedia)

Photo by Wikipedia contributor Swollib (Source: Wikipedia)

At 10am on 1 October 1964, with less than a week and a half to go before the start of the Tokyo Olympic Games, the two inaugural Hikari Super Express Shinkansen, or “bullet trains,” arrived at their destinations, Tokyo and Osaka. They were precisely on time. Hundreds of people had waited overnight in each terminal to witness this historic event, which, like the Olympics, heralded not just Japan’s recovery from the destruction of the second world war, but the beginning of what would be Japan’s stratospheric rise as an economic superpower. The journey between Japan’s two biggest cities by train had previously taken close to seven hours. The Shinkansen had made the trip in four.

The world’s first high-speed commercial train line, which celebrates its 50th anniversary on Wednesday, was built along the Tokaido, one of the five routes that connected the Japanese hinterland to Edo, the city that in the mid-1800s became Tokyo. Though train lines crisscrossed the country, they were inadequate to postwar Japan’s newborn ambitions. The term “shinkansen” literally means “new trunk line”: symbolically, it lay at the very centre of the huge reconstruction effort. All previous railways were designed to serve regions. The purpose of the Tokaido Shinkansen, true to its name, was to bring people to the capital.

[…]

In an interview in the Tokyo Shimbun newspaper last week, Takashi Hara, a political scholar and expert on Japanese railroads, said the policy of extending the Shinkansen was promulgated by Kakuei Tanaka, Japan’s prime minister from 1972 to 1974. “The purpose was to connect regional areas to Tokyo,” Hara said. “And that led to the current situation of a national Shinkansen network, which completely changed the face of Japan. Travel times were shortened and vibration was alleviated, making it possible for more convenient business and pleasure trips, but I have to say that the project just made all the [connecting] cities part of Tokyo.”

And where the Shinkansen’s long tentacles go, other services shrivel. Local governments in Japan rely heavily on the central government for funds and public works — it’s how the central government keeps them in line. Politicians actively court high-speed railways since they believe they attract money, jobs and tourists. In the early 1990s, a new Shinkansen was built to connect Tokyo to Nagano, host of the 1998 Winter Olympics. The train ran along a similar route as the Shinetsu Honsen, one of the most romanticised railroads in Japan, beloved of train buffs the world over for its amazing scenery – but also considered redundant by operators JR East because, as with almost all rural train lines in Japan, it lost money. There were only two profitable stations on the line — Nagano and the resort community of Karuizawa — and both would be served by the new Shinkansen. A large portion of the Shinetsu Honsen closed down; local residents who relied on it had to use cars or buses.

Shinkansen series 0 and series N700 (via Wikipedia)

Shinkansen series 0 and series N700 (via Wikipedia)

Meanwhile, the bullet train has sucked the country’s workforce into Tokyo, rendering an increasingly huge part of the country little more than a bedroom community for the capital. One reason for this is a quirk of Japan’s famously paternalistic corporations: namely, employers pay their workers’ commuting costs. Tax authorities don’t consider it income if it’s less than ¥100,000 a month — so Shinkansen commutes of up to two hours don’t sound so bad. New housing subdivisions filled with Tokyo salarymen subsequently sprang up along the Nagano Shinkansen route and established Shinkansen lines, bringing more people from further away into the capital.

The Shinkansen’s focus on Tokyo, and the subsequent emphasis on profitability over service, has also accelerated flight from the countryside. It’s often easier to get from a regional capital to Tokyo than to the nearest neighbouring city. Except for sections of the Tohoku Shinkansen, which serves northeastern Japan, local train lines don’t always accommodate Shinkansen rolling stock, so there are often no direct transfer points between local lines and Shinkansen lines. The Tokaido Shinkansen alone now operates 323 trains a day, taking 140 million fares a year, dwarfing local lines. This has had a crucial effect on the physical shape of the city. As a result of this funnelling, Tokyo is becoming even denser and more vertical — not just upward, but downward. With more Shinkansen passengers coming into the capital, JR East has to dig ever deeper under Tokyo Station to create more platforms.

October 8, 2014

Megan McArdle – It’s time for that talk

Filed under: Business, Economics — Tags: , — Nicholas @ 10:50

I don’t know how I missed this when it was published last week…

All right, boys and girls, it’s time to have some real talk about efficiency wages.

I know, you’re older now. You’re starting to notice things that you never noticed before. Like the differences between Costco and Wal-Mart, differences that suddenly seem so … intriguing. Exciting. You suddenly want to explore those feelings, maybe post a few GIFs to Facebook. You hear other kids talking, and suddenly you wonder about this whole new world of labor relations that you never even knew existed.

I want you to know that what you’re feeling is completely normal. Efficiency wages — that’s the scientific term, and we’re going to use scientific terms, not that dirty talk about scabs and exploiters that you hear in the locker room — are very exciting. It’s only natural that you want to explore. Now, stop tittering. I said “explore,” not “exploit.”

But you need to explore safely. You can’t just plunge straight into advocating a $15-an-hour minimum wage; you need to know all the facts so you can make sound, educated decisions about your labor-policy activism. So let’s talk about efficiency wages and how they work.

When an employer loves his workers … OK, never mind. Straight to the real talk.

As they used to say, “read the whole thing“.

October 6, 2014

Winners and losers when Wal-Mart (and Amazon) came along

Filed under: Business, Economics — Tags: , , — Nicholas @ 18:33

William Shughart refutes the “dark side of Amazon” meme by pointing out what it was like before Amazon and Wal-Mart:

Before the advent of Wal-Mart, rural America was a retail desert. Small shops, limited product availability and, yes, “hometown service”. But the prices of most items were high because the only alternative to shopping locally was to drive to the nearest city or order through the Sears or JC Penney catalog and depend on timely delivery by the US mail in, it was to be hoped, an undamaged package. The downside of local retail shops (limited options and high prices) fell most heavily on low-income households, which may not have had an automobile or could not afford to take time off work to shop at larger urban retailers or even at local merchants, which typically closed at 5 p.m. Wal-Mart solved both problems in one fell swoop.

Sure, local retailers suffered losses of business and some were forced into bankruptcy, but consumers (the only group whose welfare matters in a free market economy) won big-time. Amazon has generated benefits for consumers many times larger than Sam Walton ever dreamt of.

But what about the jobs that disappeared in local retail outlets as Amazon and Wal-Mart drove costs (and prices) down by inventing markedly more efficient distribution networks and negotiating lower prices with manufacturers and other suppliers on behalf of millions of consumers with little bargaining power of their own? An economic system’s chief purpose is to create prosperity (wealth), not jobs. Creating jobs — at the point of a gun, as Josef Stalin proved, or as FDR did by drafting millions of men to shoulder arms against the Axis powers — is easy; creating wealth is not. Prosperity materializes only if existing resources (land, labor and capital) can be utilized more efficiently, squeezing out “waste” and redundancy so that resources can be released from current employments and redirected by alert entrepreneurs to the production of new products that consumers may not even know they want (an iPhone ten years ago, for example) until they become available.

Hightower bemoans the working conditions in Amazon’s warehouses, a few of which literally become sweatshops during hot summer months. I am willing to bet, however, that if the people employed in one of Amazon’s “dehumanizing hives” (his phrase) were asked whether they wanted to quit their jobs, not one hand would be raised, especially so in an economy with an unemployment rate still hovering around six percent and a rate of underemployment twice that figure.

September 28, 2014

This is why you rarely see “Made in India” on manufactured goods

Filed under: Bureaucracy, Economics, India — Tags: , , , , — Nicholas @ 11:13

At The Diplomat, Mohamed Zeeshan talks about India’s self-imposed disadvantages in manufacturing both for domestic and export consumption:

Indian Prime Minister Narendra Modi’s maiden Independence Day speech was laced with inspiring rhetoric. But of the many things he said, the one slogan that inevitably caught public attention was this: “Come, make in India!” With those words, Modi was trying to make the case for turning India into the world’s next great manufacturing hub. Understandably, the Indian populace was thrilled.

India is one of the world’s ten largest economies (and is third largest on a purchasing power parity basis), with a total annual output of nearly $2 trillion. As much as 57 percent of this output is produced by a service sector that employs just 28 percent of the population, largely concentrated in urban parts of the country. That is no surprise, because most Indians lack the skills and education to join the more knowledge-intensive service sector. What they need is what successful developing nations all over the world have had ever since the Industrial Revolution: a robust and productive manufacturing sector.

Yet India’s manufacturing sector contributes just 16 percent to the total GDP pie (China’s, by contrast, accounts for almost half of its total economic output). Victor Mallet, writing in the McKinsey book Reimagining India, recently offered an anecdote that was illuminating. “One of India’s largest carmakers recently boasted that it was selling more vehicles than ever and that it was hiring an extra eight hundred workers for its factory,” he wrote, “But the plant employing those workers belongs to the Jaguar Land Rover subsidiary of Tata Motors and is in the English Midlands, not in job-hungry India.”

Mallet goes on to make a point that has been made frequently by Indian economists: The world doesn’t want to “make in India,” because it is simply too painful. There’s bureaucratic red tape, a difficult land acquisition act, troublesome environmental legislation, a shortage of electricity, and a lack of water resources. The only thing India doesn’t seem to lack is labor, but that merely adds to the problem. As Mallet points out in the same essay, aptly titled “Demographic dividend – or disaster?”, “India’s population grew by 181 million in the decade to 2011 – and (despite falling fertility rates) a rise of nearly 50% in the total number of inhabitants is unavoidable.” But the number of jobs being added to feed that population is inadequate.

However, the labor dividend is still important. India doesn’t need to reduce the number of hands on deck. It needs to weed out the challenges that stop them from being productive.

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