Economics

Pragati: India has tremendous advantages as a producer of tourism, but its tourism sector is far too small. India is underperforming and in the process giving up tens of billions of dollars in foreign exchange revenue that could lift millions out of poverty.

IndiaTourists

Nearly nine million tourists visited India in 2016 generating foreign exchange revenues of about $23 billion USD annually. At first glance, the figures are impressive. Tourism is one of India’s largest export sectors, beating out such leading sectors as apparel ($17.4 billion, 2014) and medicinals and pharmaceuticals ($13.9 billion, 2014). A more careful examination, however, reveals that India’s tourism sector is small compared to its potential.

The table below shows the top ten countries by international visitors. France leads the list with 84.5 million visitors a year, about ten times the number of visitors to India. The European countries, France, Spain, Italy, Germany and the UK benefit by being close to one another which generates significant mutual tourism. Mexico, Russia and Turkey, however, all have approximately three to five times as many tourists as does India. China has more than six times as many tourists as does India.

Although India underperforms on the number of visitors it does very well on earnings per visitor…Remarkably, India earns more per visitor than does China and almost as much as does the United States, a whopping $2,610. In fact, despite the small number of tourists, India’s revenues per tourist make it 9th in the world for total tourism revenues, just above Mexico. Visitors to India spend a lot of money which makes it all the more remarkable that India has so few visitors.

That’s me writing in Pragati, an Indian journal of ideas. India could increase its earnings from tourism by tens of billions of dollars with just a few simple reforms–see how at the link and some additional ideas for increasing tourism are in a podcast that I did with Amit Varma.

And, of course, even without reforms on the supply side there should still be more tourists in India as there are a great number of things to see!

Temple at Chittorgarh Fort.

Chittorgarh Temple
Udaipur (Sahelion Ki Bari) with early 18th century fountains that work entirely by gravity.
Udaipur Alex
Ajanta caves.
Ajanta1

Cuban president Raúl Castro is preparing to step down next year, Venezuela has cut millions of dollars in aid and Donald Trump’s election has cast a shadow over the nascent US-Cuba detente. Unnerved by the changes, Havana has allowed its domestic reform drive to grind to a halt as the Communist party battens down the hatches. Marino Murillo, the senior official leading Cuba’s reforms, has not been heard in public for almost a year.

And:

The slowdown in domestic reforms suggests the orthodox wing of the Communist party is strengthening, says Carmelo Mesa-Lago, professor emeritus of economics at Pittsburgh University and a long-time Cuba watcher.

And:

Some US businesses have scaled back their initial euphoria about opportunities in Cuba. Although 615,000 Cuban-Americans and US tourists visited the country last year — of a total 4m foreign visitors — Frontier Airlines and Silver Airways cancelled scheduled US flights on March 13, citing lack of demand and market saturation. American Airlines and JetBlue have also reduced their schedules.

Here is the full FT piece by Marc Frank and John Paul Rathbone.  Here is my earlier Bloomberg column on Cuba.

That is a new NBER working paper from Ed Glaeser and Wentao Xiong.  Here are a few things I learned from it:

1. “As agglomeration size doubles, wages rise by approximately five percent in the U.S. and Brazil, but the link is much larger in India and China.”

2. “Soichiro Honda began his remarkable career as a car mechanic.”

3. Per capita gdp is three times higher in Shenzhen than in the rest of China.  Bangalore per capita gdp is 2.5 times higher than the rest of India.

4. In the United States, urbanites earn 30% more, and this gap does not disappear with controls for human capital attributes.

5. The urban to rural earnings gap is 45% in China, 122% in India, and 176% (!) in Brazil.

6. In the U.S….”as area size or density doubles, wages increase by…about five percent.”  But agglomeration economies are much stronger for India or China than for the U.S. or Brazil.  Brazil is a city vs. countryside effect, not so much about size of the city per se, Sao Paulo aside.

7. “In 1961, Benjamin Chinitz argued that New York City was more resilient than Pittsburgh during the 1950s, because New York City had a culture of entrepreneurship that meant that its business leaders were good at adapting to industrial decline.  In modern language, we might describe New York as having a healthy endowment of entrepreneurial capital because its dominant industry, garment production, had limited-scale economies and few barriers to entry.  In contrast, Pittsburgh had U.S. Steel, and the steel industry had large-scale economies, which meant that Pittsburgh trained company men instead of entrepreneurs.”

Overall I found this a very good paper for stimulating thought.  There is also a new paper by Joan Hamory Hicks, Marieke Kleemans, Nicholas Y. Li, and Edward Miguel on agricultural productivity gaps, it is receiving high praise on Twitter.  I have not yet had a chance to look at it.

Here is part of Ezra’s description:

I had a simple plan: ask Cowen for his thoughts on as many topics as possible. And I think it worked out pretty well. We discuss everything from New Jersey to high school sports to finding love to smoked trout to nootropics to Thomas Schelling to Ayn Rand to social media to speed reading strategies to happy relationships to the disadvantages of growing up in Manhattan. And believe me when I say that is a small sampling of the topics we cover.

We also talk about Tyler’s new book, “The Complacent Class,” which argues, in true Cowenian fashion, that everything we think we know about the present is wrong, and far from being an age of rapid change and constant risk, we have become a cautious, even stagnant, society.

This as information dense a discussion as I’ve hosted on this podcast. I took a lot away from it, and I think you will too.

Here is the link.

It’s a paradox of kinds that in the United States we use markets more than in other countries but as a people we are less likely to participate in a market. Of course, when we buy things at the supermarket we Lasalgoan1are participating in a market but in posted-price markets it’s hard to see price formation and supply and demand in action. So when I travel abroad, I like to visit markets. (Tyler calls it GDP tourism).

The Lasalgaon onion market is Asia’s largest. It’s about four hours from Mumbai in Nashik district which is also well known for grape production. Twice a day during the season(s) onion farmers bring their small trucks and trailers filled with onions to auction. Farms in India are small, approximately 67% are one hectare (2.4 acres) or less and 99% are below 10 hectares. Thus, hundreds of trucks park in long lines that stretch into the distance. The farmers dump some of their onions onto the ground so the buyers can inspect for the type, size, moisture content and quality. An auctioneer then walks down the line and quickly auctions off the content of each truck. As we watched, one truck’s onion supply was bought for a buyer in Dubai, the next went to Malaysia, the next and highest quality went to France. The process is fast, fast, fast!

Lasalgoan2We were guided in our adventure by Nanasaheb Patil, a highly respected businessperson and the chairman of the Agricultural Produce Market Committee, a group that runs the market and ensures the honesty of the auction process.

Current onion prices are very low, below production cost, but high onion prices have brought down more than one national government so the farmers don’t get much of a hearing. When prices are high the government bans exports and blames farmers for hoarding (when prices are low as is true today, exports are allowed).

The onion crop from certain times of the year rots quickly. Lasalgoan3The government did build a very expensive irradiation facility to improve shelf life but the facility, which can process 10 tonnes of onions an hour, was only used for 3 hours of onion processing in a recent year! Although using the facility isn’t expensive it requires unloading, sacking and reloading tonnes of onions which renders it uneconomic (the facility is used for mango irradiation because mangoes exported to the US must be irradiated.)

One thing I hadn’t expected was that our presence at the auction market was something of an event and led to a story and photo (you can probably spot my wife and son) in the local newspaper.

We also visited some of the local grape farms. You can get an idea about wages by noting that on this farm, which was exporting grapes, every single bunch was wrapped in newspaper to prevent sunburn.

A special hat tip to Milind Murugkar, engineer, writer, and long-time reader of MR who invited me to Nashik and arranged for us to meet our wonderful host Nanasaheb Patil.

grapes1

Òscar Jordà, Björn Richter, Moritz Schularick, and Alan M. Taylor have a new and somewhat unsettling NBER paper on that topic:

Higher capital ratios are unlikely to prevent a financial crisis. This is empirically true both for the entire history of advanced economies between 1870 and 2013 and for the post-WW2 period, and holds both within and between countries. We reach this startling conclusion using newly collected data on the liability side of banks’ balance sheets in 17 countries. A solvency indicator, the capital ratio has no value as a crisis predictor; but we find that liquidity indicators such as the loan-to-deposit ratio and the share of non-deposit funding do signal financial fragility, although they add little predictive power relative to that of credit growth on the asset side of the balance sheet. However, higher capital buffers have social benefits in terms of macro-stability: recoveries from financial crisis recessions are much quicker with higher bank capital.

Here is Christopher Balding on whether China is deleveraging.

Wil Wade emails me some very interesting points:

As someone who has changed jobs a fair amount and recently, I thought I might be able to give some ideas on why better matching and results decreases mobility. Some of these might be fairly easy to set up tests for. (Note I am a programmer, someone with many job prospects in almost anywhere I could want, so salt as desired.)

1. You think you will find something. Everywhere has lots of jobs posted, so if feels like if you just wait until tomorrow, that job in your area will pop up. Why look at another city, when your city posts 100 new jobs a day (none of which will be good for you, but you don’t know that)

2. Perhaps especially in white collar jobs, you never get a job from a job posting. Never is a bit strong, but your network leads to most jobs. (of the 5 jobs I have had in the ~10 years since graduating, three of those were network based) The less mobile your network, the less mobile you can be.

3. Comparisons are really hard to make when cost of living varies so much. I do not know if the variance in cost of living has increased over the past 30 years, but I do know that it feels really high. As a programmer I easily could move to any of the large cities SF, LA, NYC. But the cost of living adjustment is really hard to make. And currently impossible to make at an I could move anywhere level.

We fight over health care policy because we focus on demand and redistribution. We could reach greater agreement if we focused on supply and innovation. What are the key areas where agreement is likely?

1) Cancer kills both Republicans and Democrats so more spending on medical research is likely to reach broad agreement.  As I said in Launching:

Looking at the future, if medical research could reduce cancer mortality by just 10 percent, that would be worth $5 trillion to U.S. citizens (and even more taking into account the rest of the world). The net gain would be especially large if we could reduce cancer mortality with new drugs, which are typically cheap to make once discovered. A reduction in cancer mortality of this size does not seem beyond reach, and the value of such a reduction in mortality far exceeds that of spending more on medical care today. Yet because the innovation vision is not central to our thinking, we overlook potentially huge improvements in human welfare.

By greater spending on medical research, I mean not only greater spending through the NIH but also a commitment to innovation policy more broadly. We know, for example, that price controls kill medical research so no price controls. We can also improve the FDA. I would favor less regulation but there are other methods to speed up the approval process which could command bipartisan support such as greater funding of the FDA. The FDA is also not monolithic, some departments are better than others, so we can reform the FDA by making it more like the better parts of itself.

In thinking about pharmaceutical regulation we also need to remember that 80-90% of prescriptions are for generic drugs and due to intense competition, generic drug prices are low and falling–so lets build on the parts of the US health care system that work well by keeping the entry barriers to entry in the generics market low.

2) Increase the supply of physicians. Despite an aging population and greater demand, the number of MDs per person has been trending downwards! Increasing physician supply could involve a combination of increased immigration of foreign physicians (skilled immigration is really a non-brainer that receives widespread support), increased slots at medical schools and in residency programs (via Medicaid), increased support for allowing nurse practitioners, dental hygienists and so forth and making occupational licenses portable across states. (In addition to making it easier for foreign physicians to come to US patients we should also make it easier for US patients to travel to foreign physicians–patients without borders). None of these things are easy to do, of course, but neither are they riven by ideological differences.

3) Demand price transparency from hospitals and other health care providers. In real markets, a price is a signal wrapped up in an incentive. With few exceptions, we don’t have real markets in health care and so “prices” neither signal nor incentivize. Thus, I don’t expect miracles from “price” transparency and this is a policy that could go wrong but transparency would still allow for some standardization, comparison, and computation of tradeoffs. Price transparency would also limit some of the worst forms of bill abuse. Even the Soviets found prices to be useful for these purposes.

Other supply side reforms that could find bipartisan support?

Growers who can afford it have already begun raising worker pay well beyond minimum wage. Wages for crop production in California increased by 13% from 2010 to 2015, twice as fast as average pay in the state, according to a Los Angeles Times analysis of data from the Bureau of Labor Statistics.

Today, farmworkers in the state earn about $30,000 a year if they work full time — about half the overall average pay in California. Most work fewer hours.

Some farmers are even giving laborers benefits normally reserved for white-collar professionals, like 401(k) plans, health insurance, subsidized housing and profit-sharing bonuses. Full-timers at Silverado Farming, for example, get most of those sweeteners, plus 10 paid vacation days, eight paid holidays, and can earn their hourly rate to take English classes.

But the raises and new perks have not tempted native-born Americans to leave their day jobs for the fields. Nine in 10 agriculture workers in California are still foreign born, and more than half are undocumented, according to a federal survey.

Here is the link, including further points of interest, via Anecdotal.

But it is also a question of history and, more specifically, of how welfare states in the rest of the world developed alongside warfare. European welfare states began in Prussia at the end of the 19th century, when war with France required the mobilisation of a large number of civilians. Britain’s welfare state has its origins in the discovery that many of the men who presented themselves to recruiting offices during the Boer war were not healthy enough to fight. Before the second world war, British liberals would have seen the creation of a government-run national health service as an unwarranted intrusion of government into private life. After 1945 it seemed a just reward for a population that had suffered.

In America this relationship between warfare and health care has evolved differently. The moment when the highest proportion of men of fighting age were at war, during the civil war (when 13% of the population was mobilised), came too early to spur the creation of a national health system. Instead, the federal government broke the putative link between war and universal health care by treating ex-servicemen differently from everyone else. In 1930 the Veterans Administration was set up to care for those who had served in the first world war. It has since become a single-payer system of government-run hospitals of the kind that many Americans associate with socialised medicine in Europe. America did come close to introducing something like universal health care during the Vietnam war, when once again large numbers of men were being drafted. Richard Nixon proposed a comprehensive health-insurance plan to Congress in 1974. But for Watergate, he might have succeeded.

That is from The Economist.

Let’s say you believe that a flood of forthcoming warrior-entrepreneurs will create exciting new products and earn high rates of return on their capital; associated venture capitalists will benefit too.

That might sound quite optimistic, and in one regard it is.  But the high returns also indicate that the status quo ex ante is in some way deficient.  Had the earlier entrepreneurs done better, the opportunities for these new creators might have been less.  In a sense, the prediction is also an (implied) pessimistic take on the current world as it stands.  The overall state of affairs may be less positive than many others believe.

The mood states of “optimism” and “pessimism” are often misleading ways of classifying or thinking about people’s views on the economy, or indeed about other matters too.  Those descriptors do not distinguish between attitudes toward likely final outcomes, as opposed to attitudes about benchmarks and constraints.

That is the topic of my latest Bloomberg column, and it is assuming no major increase in supply in the megacities themselves.  Here is one bit:

We live in a special time where clustered activities are unusually important for economic growth. Some activities, such as dentistry and cement production, don’t cluster geographically very much, for obvious reasons. In contrast, finance (New York and London), information technology (the Bay Area), and entertainment (Hollywood and New York) are the most clustered. For whatever reasons, it makes sense to have many of the top decision-makers in one place.

Leading cities have become so expensive in large part because two of these clustering sectors — finance and information technology — have been ascendant. There is no particular reason to expect those trends to continue forever, and that will bind rents in affected cities.

Even tech will decentralize its gains over time:

If you think of a typical technology project, some of the gains go to the venture capitalists and the intellectual property holders, and some of the gains go to broader society, including consumers. Insofar as the gains are disproportionately reaped by the early project initiators, then yes real estate values in the Bay Area (and other tech clusters) will rise. But the most likely future for information technology is that it will spread its benefits more and more broadly into more and sectors of the economy. That scenario suggests a partial convergence of urban futures.

Another way to put the point is that intellectual property returns erode over time. In the early years of smartphones, a big part of the gain goes to Apple. As cheap imitators enter the market, prices fall and more of the gains go to consumers, or business users of the product, who are scattered across the country.

The article contains other points of interest.

If you recall, Robert D. Putnam, in his last book, expressed surprise that Chetty and Hendren, et.al. (2014) did not find evidence of a decline in intergenerational mobility.  Putnam predicted that researchers would find such evidence soon enough.  After all, it seems the returns to education have been rising, geographic mobility has been falling, market concentration is up slightly, life expectancy is behaving in funny ways, and regional disparities seem to have grown.  Chetty and Grusky, et.al. (2016) seemed to paint a more pessimistic picture than did his work from a few years ago, and now we have a new paper by Jonathan Davis and Bhashkar Mazumder:

We demonstrate that intergenerational mobility declined sharply for cohorts born between 1942 and 1953 compared to those born between 1957 and 1964. The former entered the labor market prior to the large rise in inequality that occurred around 1980 while the latter cohorts entered the labor market largely afterwards. We show that the rank-rank slope rose from 0.27 to 0.4 and the IGE rose from 0.35 to 0.51. The share of children whose income exceeds that of their parents fell by about 3 percentage points. These findings suggest that relative mobility fell by substantially more than absolute mobility.

So far this seems to be the current version of the final word.  The authors also argue, by the way, that Chetty (2016) is somewhat too pessimistic, though correct in suggesting mobility has indeed fallen.

By the way, this seems to be the best link for a download.

Here is part of the book summary:

This book examines SEZs from a political economy perspective, both to dissect the incentives of governments, zone developers, and exporters, and to uncover both the hidden costs and untapped potential of zone policies. Costs include misallocated resources, the encouragement of rent-seeking, and distraction of policy-makers from more effective reforms. However, the zones also have several unappreciated benefits. They can change the politics of a country, by generating a transition from a system of rent-seeking to one of liberalized open markets. In revealing the hidden promise of SEZs, this book shows how the SEZ model of development can succeed in the future.

Here is my blurb:

‘What do Special Economic Zones actually accomplish? And what are their drawbacks and limitations? Lotta Moberg’s The Political Economy of Special Enterprise Zones mixes theory and empirics to offer the very best available answers to these questions.’ ― Tyler Cowen, Professor of Economics, George Mason University, USA

Here is Lotta Moberg’s home page.  Here is a related article of hers on special economic zones.  Here is the Amazon link.