#12 When State Governments Want to Fix Soap Market Failures

State PSUs, US-China Trade Deal, and Wilson's Matrix

Jan 12, 2020

This newsletter is really a weekly public policy thought-letter. While excellent newsletters on specific themes within public policy already exist, this thought-letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. It seeks to answer just one question: how do I think about a particular public policy problem/solution?

PolicyWTF: Divestments Less Discussed

Divestments of Union Government Public Sector Undertakings (PSUs) are discussed quite often even if that by itself is no guarantee that divestment will ever materialise. However, what’s often overlooked in this debate are State Public Sector Undertakings (SPSUs) — companies owned by state governments.

Now, did you know that there are more than 1,100 SPSUs? By itself, this number might not be problematic as it includes corporatised transport corporations, and power generation & distribution companies. In fact, corporatisation is one of the first steps in public sector institutional reform. Many service delivery functions run by government departments are now corporatised entities with their own balance sheet and governing body. Still, one wonders if state governments really need over 35 SPSUs on average (Kerala - 120+, Karnataka - 102, Maharashtra - 88).

But here is the real punch in the gut. A quarter of these 1,100+ SPSUs are “non-working”, meaning that they have ceased to carry on their operations. Not just that, winding these companies down takes decades! Sample this table from the latest CAG report on Karnataka’s PSUs:

Over the last five years, just two “non-working” companies have been revived or closed. By selling the land and assets owned by these “non-working” companies, state governments can potentially boost their revenues in these times of economic distress.

PS: For more on this subject, look up Devesh Kapur’s brutal takedown of SPSUs here. I couldn’t help but LOL at this line:

Tamil Nadu State Marketing Corporation Limited (TASMAC), which has the monopoly of liquor wholesaling and retailing in the state gives it a high turnover (Rs 30,542 crores in 2015-16). But surprisingly, it still makes a loss (Rs 125 crores in 2015-16). It takes considerable skill to make a loss on a liquor monopoly.

PPS: One of the revived PSUs in Karnataka is Karnataka Soaps and Detergents Limited which manufactures Mysore Sandal Soap, agarbathis, and handwashes. Go figure the market failure that the government is trying to plug here.

A Framework a Week: Wilson’s Interest Group (IG) Matrix

Tools for thinking about public policy

The IG Matrix is a powerful tool for policy analysis. It seeks to answer this question: why are some policy changes easier than others?

To answer this question, the IG matrix divides the actors involved on two axes: groups against a policy proposal (opponents) and groups supporting a policy proposal (proponents). Further, both the groups can either be effectively organised for politics (“organised”) or not effectively organised for politics (“not organised”). And voila, we have a 2x2!

Source: Charles Cameron, The Political Analyst’s Toolkit

The ability to organise depends on how concentrated or dispersed the benefits from opposing or supporting a policy are. A policy proposal for selling a PSU, for example, will result in concentrated costs for its employees. As a result, they tend to organise easily.

The odds of success for policy proposals are as follows:

Client politics is the easiest to do — the proponents are organised and the opponents are dispersed. No wonder, we have so many subsidies for agriculture or tax sops for organised sector employees.
Next comes interest group politics — both proponents and opponents are organised and hence the probability of success is lower.
Policy proposals which lead to dispersed benefits (right side of the matrix) are less likely to succeed. Defence Pensions reform is an example of “Entrepreneurial Politics”. GST reform is an example of “(inaptly named) Majoritarian 'Politics”.

How to increase the probability of success for policies where benefits are dispersed? For some intuitions on that question, check this paper out.

Matsyanyaaya

Big fish eating small fish = Foreign Policy in action

Given that the US and China are about to sign a trade deal on Jan 15th, the question arises: is the tide turning? Are we transitioning to a newer world order where things are more hunky-dory? To answer that question, we had imagined 20 new world order scenarios, at the intersection of key geopolitical and geoeconomic trends.

The black arrows indicate my intuition of the changed trajectory over the last ten years. In 2008, we entered a global recession but the US was still the unchallenged superpower. Even as the recession changed into a secular stagnation over the next couple of years, the US supremacy subsided while that of China grew and the two powers briefly explored cooperation (“Slow and Steady” scenario). That cooperation quickly changed to coopetition (“Staying on the Rails” scenario). By 2016, the battle lines had hardened and we entered “The Great Walls” scenario where the political differences between the US and China seemed structural and long-term.

So does the recent trade deal mean that we are stepping back from “The Great Walls” towards “Slow & Steady”? Unlikely. If anything, more and more nation-states are becoming more sceptical of China’s ambitions. The Economist also has an article on similar lines:

Don’t be fooled. This modest accord cannot disguise how the world’s most important relationship is at its most perilous juncture since before Richard Nixon and Mao Zedong re-established links five decades ago. The threat to the West from China’s high-tech authoritarianism has become all too clear. Everything from its pioneering artificial-intelligence firms to its gulags in Xinjiang spread alarm across the world.

For more on the new world order framework, read our discussion document.

HomeWork

Reading and listening recommendations on public policy matters

Bursting the “Efficient China” myth: The entire China Myths dialogue on EchoWall is an interesting read.
Who's Paying for the US Tariffs? A Longer-Term Perspective: The recent US tariffs continue to be almost entirely borne by US firms and consumers.
[Conceptual clarification] Do imports subtract from GDP: Do read this simple yet powerful post clarifying why imports are not the villains they are perceived to be.
[Podcast] Tyler Cowen’s conversations with Esther Duflo and Abhijit Banerjee: Two episodes on a wide range of issues from RCTs to economics of Indian classical music.

That’s all for the week. Happy New Decade, folks. If you like this newsletter, please do read and share.

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