Better execution of complex IT systems in government

The TAGUP report has been released. For the background, see the creation of the group and this blog post. The ideas of the report could give a quantum leap in the execution quality of five projects of tremendous importance -- the Goods and Services Tax (GST), the Tax Information Network (TIN), the Expenditure Information Network (EIN), the National Treasury Management Agency (NTMA) and the New Pension System (NPS). In all these areas, political consensus has been achieved but the execution has floundered. More generally, these recommendations add up to an important fresh look at how to modify the ground rules of public administration in India, so as to better cope with the sorts of challenges that are now being faced.



Update (5 May 2011): Movement on implementation of TAGUP. 

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C. B. Bhave's 3 years at SEBI

I first met C. B. Bhave when I walked into his office in September 1993. I was a freshly minted Ph.D. at the time. Speaking with him made a huge difference to my thinking about finance and markets.



He had clearly figured out the key building blocks of a revolution in the Indian capital market: electronic trading, clearing corporation, demutualisation, derivatives trading, depository, etc. Most Indian bureaucrats would have visited the trading floor of the LSE and the NYSE and replicated it. He had the strength of mind to look beyond `global best practices'. And from 1994 to 2001, the revolution went from ideas to action. It is hard to find an area of the Indian economy where the reforms were more successful.



The governance problem in finance spans two rather distinct problems: regulation (the making of rules) and supervision (the enforcement of rules). The best rules in the world are pointless if they are not backed by teeth. SEBI has shaped up as one of the best success stories in India's economic and commercial law, in the way rule of law has come to prominence. SEBI's orders are on their website. They are appealed at SAT. SAT processes cases rapidly. SAT is tough and competent. It's a great arrangement.



I remember, in the dark days where accusations about the `IPO Scam' were being bandied about, Bhave said to me that he remained confident that over the years, SEBI would sort itself out, thanks to the checks and balances that come with the rule of law. It is a message that we need to apply to all other financial regulators in India.



Bhave's SEBI made significant progress on strengthening the enforcement process leading up to good quality orders. On one hand, this required improvement of staff and processes. This is, of course, work in progress. A lot of work remains to be done before SEBI consistently writes high quality stuff. But the best orders of Bhave's SEBI are much superior to anything that came before. In addition, a strong enforcement process at SEBI required political toughness in not buckling under pressure.



It is, hence, not a surprise that his time at SEBI has been an exceptional one. Here are a few retrospectives on his time at SEBI:

• Editorial in the Financial Express, 21 February 2011.


• Old challenges, new Sebi chief: an editorial in Mint, 17 February 2011.


• When a top regulator asked C. B. Bhave to stop margining FIIs... by Sachin Mampatta in DNA, 18 February 2011.


• How Bhave transformed SEBI, by N. Sundaresha Subramanian, Anirudh Laskar & Pramit Bhattacharya, in Mint on 17 February 2011.


• Impartiality will be his legacy, by Ashish Rukhaiyar, in the Business Standard, 15 February 2011.


• An interview with C. B. Bhave with Gautam Chikermane, in the Hindustan Times, 13 February 2011.


• A show on CNBC Awaaz, featuring Sanjay Pugalia, S. P. Tulsian and me, mostly in Hindi: One, Two, Three.


• C. B. Bhave sets the bar high for SEBI's new Chairman UK Sinha in the Economic Times, 7 February 2011.
  
  


• Bhave's great service to the Indian securities market by Mobis Philipose in Mint, 31 January 2011.
  
  


• Bhave, a silent warrior for retail investors by Rajesh Abraham in Financial Chronicle, 31 January 2011.
  
  


• Great job, Mr. Bhave by Shobhana Subramanian in Financial Express, 15 December 2010.
  
  


• C. B. Bhave: In the eye of the storm by Tamal Bandyopadhyay in Mint, 8 August 2010.

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India: a nascent social democracy?

As India embarks on the early stages of middle income, there is interest in a more expansive outlay of expenditure for the government. This motivates the question: Can India now embark on constructing an array of welfare programs, which would ultimately add up to an approximation to a welfare state or a social democracy?



Vijay Kelkar and I wrote a paper Indian social democracy: The resource perspective on this question, for the 10th `Indira Gandhi Conference' which took place in New Delhi recently.

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When Egypt cutoff the world

by Sanjeev Gupta.



At about 2215 UTC (that is GMT to you guys in the corner) on Thursday the 27th, the Egyptian Government pulled out its plug to the Internet. Here's the picture of google search traffic from Egypt:

Without going into the bigger picture of discontent in the Arab world, some background. Throughout the Color Revolutions, outside support, from Human Rights campaigners to emigres, has been critical. The world is watching, the world will remember heartens those where civil society has collapsed. But times have changed, and Radio Free Europe no longer strikes fear. Blame is now laid at the door of Twitter and Facebook.



And so, for example, during the "Green Revolution" in Iran, the Government interrupted links to traditional media sites, and to social media. Over the last year, Twitter et al have had repeated slowdowns in Tunisia, including reports of activists accounts hijacked. YouTube access had been spotty too. The problem, if you are the censor, is that people are creative. Mirror sites spring up, new domain names are registered, bystanders set up proxies ... . The blockage makes it harder, but not impossible, to communicate, and may even draw non-participants in. It is like putting up barricades to prevent crowds marching to the Plaza de la Revolucion. The crowds treat this as censorship and route around the barricades.



And so the Egyptian Government (or at least some part of it) decided to do things right. If you wish to stop people communicating, stop them!. Instead of blocking access to YouTube, Twitter, and an ever-increasing list of newly registered domain names and web sites, they just applied shears to the cables (metaphorically, see below).



Within 4 minutes (as I see my logs in Singapore), over 4000 networks in Egypt went dead. Stone cold dead. Effectively, the ISP routers on the Internet were told "bye" by Egyptian ISPs.



To come back to the barricades analogy, it is like the Egyptian Government abolished all street names and even streets. Good luck deciding to gather for a protest. Actually, this is still the wrong analogy.

Imagine all phones exchanges switched off. Oh wait, Bangladesh has done that before.



The Internet "works" on various levels, and censors target these levels. At the highest level, you may decide to block certain videos on YouTube (eg, China). This is finely targetted, and collateral damage is low. Or you may decide to block YouTube entirely (Pakistan in 2010). Or you may restrict all social media and user content (if you can define "all"), eg, China, Iran. You can go further, and effectively ban all web access except at Govt-monitored Internet kiosks, with no home accounts allowed, as Cuba does (there are 6 locations in Havana, with week-long waiting lists to use a 30 minute slot). However, all these methods have leakages. Which is what makes the Egyptian example instructive. They just switched off the Internet!



Before the event, there were, at my count, about 50 ISPs announcing networks from Egypt. 24 hours later, there are only 2 with any networks announced, Etisalat-Misr (down from 676 to 113), and Noor Data Networks (up from 83 to 85(!)). Everyone else seems gone. For a dramatic view of the reduction in the total number of networks on the Internet, see this graph, courtesy Renesys:

Throughout Friday, my view was that the links were disappearing because routers were being switched off. However, a more detailed view (again courtesy Renesys) (shown ahead) shows that the ISPs switched off one-by-one, probably as instructions were authenticated, and support staff told to start withdrawing routing announcements. The slow decay seems more indicative of staff logging into equipment one-by-one, and turning links off.

Noor Data Networks (NDN) is the odd case here. Throughout Friday, the speculation was that this was due to the Egyptian Stock Exchange being hosted via NDN, and that someone had allowed the markets to stay open. But Friday, and Saturday, are closed on the Egyptian stock exchange, so that makes little sense. What has been speculated is that NDN is owned by Ayman Nour, ex-MP and presidential candidate, who spent over 3 years in prison after challangeing Mubarak in 2005. Both Ayman Nour and his son, Noor Ayman Nour, have been involved in this week's protests. But as, 24 hrs later, NDN is still alive, either the Government is unwilling to drive up and pull the plug, or there are internal dissensions. Both bode well, in the sense that someone is asking questions.



In all this, the Egyptian Government's own sites have also become inaccesible. This does not bode well; it suggests that the authorities hit one big red button indiscriminately. That means we can no longer read official Press Releases, and we will never know the official version of events. Ah, well.



A small side-effect is that Egypt was a booming location for Arab websites to host their content. It was seen as a cheap, neutral, business-oriented hosting location. All these are also now non-reachable, so that is one less industry where Egypt can be a successful exporter.



There is probably a good note in all this for those who monitor freedom: we can look at ISP withdrawals of networks as a proxy, perhaps, of clampdowns. Probably not for China, where huge investments have been made in the Great Firewall of China, but other countries which may have to resort to blunt measures like this. And yet, does the next President of China, Xi Jinping, a known hawk, plan to have buttons next to his pillow? Press 1 and the Net goes dead, press 2 and the phone system? Imagine what Twitter, or YouTube, could do for the next man who stands up to a tank in Beijing. Now imagine if you were the strong man of China. What do you have nightmares about?



By Sunday lunch, Egypt time, the impact on business of this blackout will start being felt, and we may see some networks either returning, or some official communication from the authorities.



Till then, perhaps, the old headline from England describes it best: Fog in Channel, Europe cut off.



(Update, 1500 GMT Saturday: AP reports, via Al Jazeera, that the biggest blog site in China, Sina.com, is restricting searches on the world "Egypt". Searches bring up the message: According to relevant laws, regulations and policies, the search results are not shown. If it wasn't so serious, it would be funny.)



It's a great time to be alive. It gives a whole new meaning to the word `contagion'. A research project idea for all ye economists: Measure the contagion which each of the revolutions triggered off for the stock markets of the dictatorships.



On a related note, see: Obama 'Internet kill switch' plan approved by US Senate panel by Grant Gross on TechWorld and Should Obama's 'internet kill switch' power be curbed? by Daniel Nasaw on BBC.

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Globalisation: the glass is half empty

One of the many fascinating facts that you see in Economic History and Modern India: Redefining the Link by Tirthankar Roy (Journal of Economic Perspectives, Summer 2002) is about India's trade/GDP ratio. The trade/GDP ratio rose dramatically from 1 to 2 per cent in 1800 to 20 per cent in 1914.



By 1970, the trade/GDP ratio had dropped to 8 per cent. It was only in the mid 1990s, the trade/GDP ratio had got back to the 20 per cent value seen in 1914.



Most people in India today are not aware of the pre-War world, where goods and services flowed freely across the boundary, when people in India diversified their portfolios across the globe, travelled freely within the British Empire, etc.



After the War, there was a big push worldwide to reduce trade barriers. Governments, then, made the call that agriculture was not worth fighting for (since it was a fading share of world GDP but a large number of votes), and focused on manufacturing. By and large, this worked. Trade in manufacturing is pretty free worldwide.



But world GDP shifted away from manufacturing. Today, world GDP is dominated by services. World GDP is now 5.8% agriculture, 30.8% manufacturing and 63.4% services.



Crudely speaking, if we have full free trade in goods, but zero trade in agriculture or services, then 69% of World GDP is submerged in autarky.



Over the last 20 years, manufacturing trade liberalisation has continued, but the share of services in world GDP has risen. I suspect that overall, this has made the world less hospitable to trade.



An interesting article on voxEU by Sebastien Miroudot, Jehan Sauvage and Ben Shepherd points out that in the aggregate, the costs of trade have dropped sharply for goods from 1995 onwards, but not for services.



We need to work harder on removing a variety of barriers to trade in goods. But we need to work much harder on removing the barriers to trade in services. I don't actively follow the WTO process, but my sense is that there is too much of a focus in the WTO process upon goods, and upon agriculture, while not enough attention is being paid to trade in services.



In this sense, the globalisation project is far from done. By and large, the world has done well on removing barriers to the movement of goods and capital (though India is as yet a laggard on both fronts). The two great frontiers are now trade in services and the movement of people. Given the huge footprint of services in world GDP, it is not even the case that we are exposing the world economy to as much global competition as was the case a few decades ago, when manufacturing was a big part of world trade and there was a lot of trade in it.

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Interesting readings

One of the important mistakes that India is making, in terms of
integration into the world economy, is in visa rules. A key element
of progress there is the new `Visa on Demand' program, which
has now
been expanded. The list of lucky countries now stands at: Japan,
Singapore, Finland, Luxembourg, New Zealand, Cambodia, Laos, Vietnam
and Philippines. This needs to now cover the G-20 countries. Another
big frontier is setting up convenient access to work visas in order
to support the burgeoning need for skilled foreigners who are needed
in the Indian labour force.

Russell
K. Nieli on the power of meritocracy as seen in Caltech. The
IITs are similar to Caltech in two respects: No concern for how
`well rounded' the background of an applicant is, and no concern
in the admissions process for parentage or donations. The IITs do
care about caste to some extent in the admissions process, while
Caltech cares about nothing other than brainpower.

Materials
of the 2010 Neemrana conference organised by NCAER, NBER and ICRIER.

Sigh. Building
a clean environment is hard!

Materials
from the recent IGIDR finance conference.

Annie
Lowrey on Slate on the role of prizes in public funding
for research.

Mobis
Philipose on competition against Nifty options at NSE by Nifty
options at SGX,
and on
the problem of transaction taxes and exchange competition.

A
household survey by CMIE tells us something about how ordinary
households see the debate about the Bimal Jalan committee.

Sindhu
Bhattacharya has an article in DNA about foreign
airlines who are being prevented from operating in India. We need
a treaty framework that would render such things unlawful.

A. D. Miller
in the Guardian on why Western authors like Mother Russia.

Interesting
developments in the freedom of speech.

I
guess they noticed that if you take the first word on every
seventeenth page, it spells out "Death to the Shah". That's
nothing, I have a blog that is banned in China!

A great story about
how grain and oil led to the collapse of the USSR. By Yegor Gaidar.

Joe
Keohane on boston.com on the odd feature of forecasting: The
guy who gets the huge event right is often likely to fare badly in
ordinary times.

Lant
Pritchett says that the notion of an `ethics code' for
economists is a silly idea.

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Three new papers

The first is href="http://nipfp.blogspot.com/2011/01/indias-financial-globalisation.html">an
entry titled India which is forthcoming in Elseviers
Encyclopaedia of Financial Globalisation, edited by Gerard
Caprio. It's our attempt at a bird's eye view of what is known, and
not known, about India's financial globalisation.

The second is a treatment of exchange rates and monetary policy and
inflation. There are two well understood phenomena: the `exchange rate
passthrough' (or how prices in India go up when the rupee depreciates)
and the `monetary policy transmission' (or how prices in India go down
when RBI raises rates). href="http://nipfp.blogspot.com/2011/01/monetary-policy-transmission-in.html">This
paper views these two in a unified fashion. The main finding is
that the channel through which monetary tightening influences domestic
prices is mainly through the consequent exchange rate
appreciation.

The third is about explaining the process of firms becoming
multinationals. The conventional story told (the Helpman-Melitz-Yeaple
model) is one where firms self-select themselves to become MNCs, where
more efficient firms export and the most efficient firms become
MNCs. This story is well suited for manufacturing, where costs of
transportation are important, where it's efficient for an Indian firm
to make widgets in the UK so as to avoid the costs of transportation
of shipping to the UK. But this story does not help us think about
services which are `weightless'. We think href="http://nipfp.blogspot.com/2011/01/export-versus-fdi-in-services.html">we
have a story which helps us understand MNCs in services, and when
we go test this with data for Indian software companies, it seems to
work. Our approach yields the opposite prediction: that less
productive software companies are more likely to become MNCs.

Our stock of papers is at: href="http://macrofinance.nipfp.org.in/papers.html">http://macrofinance.nipfp.org.in/papers.html.

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