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. If this post was forwarded to you and you liked it, consider subscribing. It’s free. #251 Connecting the DotsElection Crystal-gazing, China's Chip Troubles, Kahneman on Biases, and a Framework for Bengaluru's Water Woes
Programming Note: We will be on summer break for three weeks. The next edition will hit your inbox on April 28th. If you are yearning for public policy gyaan in the interim, consider applying for Takshashila’s GCPP and PGP programmes. The intake for the next cohorts of both these courses is open. —RSJBefore I jump into this edition, I should point out that my last post on the Apple-DoJ lawsuit received a fair bit of criticism. Some of it is available in the comments section of that post, and others came via personal messages. The upshot is either I got it mostly all wrong or that they disagree with me, especially on Apple’s closed-garden approach to things. Thank you for the feedback. I need to go deeper into this subject, and I must apprise myself better before commenting on it in the future. I will do that, and I will write about it soon. I have taken the liberty to paste Mihir Mahajan’s comment here in case readers who only follow the newsletter by mail missed it. It is quite illuminating.
On to other matters. India Policy Watch #1: A ‘Point’-less ElectionPolicy issues relevant to India— RSJThe schedule for the Lok Sabha polls was announced a couple of weeks back - a 44-day, 7-phase affair that is more than twice the time the war in Kurukshetra lasted but almost half that of the war in Ramayana. Just to put these things in the context of today’s times. There are questions about the long, drawn-out schedule, the 7 phases in West Bengal, the arrest of Kejriwal, the freezing of Congress's bank accounts, or why Odisha is at the back end of the schedule. All are somewhat useful but besides the central mudda (point or issue) of these elections. And that is, what’s the mudda of these elections? To me, it appears like the most pointless LS election in living memory. The first general election that I followed was the 1984 one that took place immediately after the assassination of the sitting PM, Indira Gandhi. The eight-year-old me with limited political understanding could also see the ‘wave’ in favour of INC thanks in no small measure to growing up then in a highly political milieu. But even in those lopsided elections whose results PM Modi wants to replicate in 2024, I remember the pulse of an active opposition as I accompanied an older cousin to the rallies of Chandrashekhar and George Fernandes. They were 24x7 politicians, and I guess they knew nothing else but to fight when the elections were on hand. I barely sense that today. It is true that most elections tend to be fought locally but any attempt to unseat an incumbent government requires a framing of the narrative and a conception of a core message that resonates with the electorate at large. It is this central theme that candidates can then ride on to make their case locally. That is completely missing so far. It is either the failure of the political imagination of the opposition leaders or the relative success of this government that we might not have any overarching theme that serves as the connective tissue to the multiple state or local issues. And that’s a pity because, more than anything else, elections serve as a disciplining tool in a democracy. In the absence of a real threat of losing power in elections, that discipline of being moderate, seeking consensus and thinking rigorously on policy issues can be lost. You may gain decisiveness and the ability to take bold calls, but the jury is out on how well political parties fare when choosing such issues correctly. In any case, while I can foresee lots of drama and rhetoric in campaigns at the state level, this will be a ‘no wave’ election, which means it will be impossible to dislodge the incumbent. While that may be true, the actions of the incumbent (the BJP) on the ground belie this optimism. The eagerness to stitch alliances across states and political spectrums - JD(S) in Karnataka, PMK in Tamil Nadu, LJP in Bihar - and the easy ceding of seats to these allies, the wait for BJD in Odisha, the proactive strikes on the electoral machinery of AAP and Congress and the decision to not give tickets to a large proportion of sitting MPs all suggest some distress signals from the ground that might be at odds with the general sense of optimism the party is projecting at the moment. I’m not sure what that could be because almost every opinion poll in the past month has shown a 350+ tally for the NDA combination, and going by past experience, this trend only consolidates itself further. So why the supposed paranoia? It is likely that the BJP has taken the 400+ seats target for its alliance to its heart and wants a record-setting mandate as a parting gift to PM Modi, who might not be leading the alliance come 2029. Or, it might be preparing itself for a post-Modi scenario of 2029 where anti-incumbency could be a real thing and a stable set of alliance partners could be helpful. Both these explanations seem flakey and far-fetched at this moment. But who knows? Global Policy Watch: China’s Atmanirbhar Chips Undergo AgniparikshaGlobal policy issues relevant to India— Pranay KotasthaneI characterise the Chinese State as a car with two accelerators and no brakes. Such a car outpaces others on its way uphill but will also get into major trouble downhill. Either way, it gets to the end before others. And so, observing Chinese economic policy is all the more important because it is a leading indicator of many trends—good and bad. The current wave of de-coupling and securitisation of the economy began in China with the Made in China 2025 plan. A significant milestone in this downhill journey came to the fore a couple of weeks ago when Bloomberg reported that the Chinese government is asking its famed EV makers to increase their purchases from local chip makers. Now, Tocqueville had written about the government, saying that it’s always hard to distinguish its counsels from its orders. That observation applies even more sharply to the Chinese party-state. Its seemingly innocuous ask is actually a local sourcing mandate. It might seem like a run-of-the-mill industrial policy with Chinese characteristics, but here’s the clincher: many of these chips are costlier to produce in China, and yet the government is imposing local sourcing on its EV makers. This is how Bloomberg describes it:
This, to me, is a leading indicator of the future. As the many planned semiconductor fabrication facilities come online to assuage national security concerns, we will end up with excess global capacity, even as the per unit cost of production of chips at the new facilities will be higher than what a comparative-advantage-led market would offer. The only way to bridge this gap would then be local sourcing mandates underwritten by taxpayers. JP Kleinhans and I had warned about this trend last year in a Nikkei Asia article:
So, while it’s not surprising to see local sourcing of chips becoming a reality, what’s interesting to note is that it’s China which has gotten to this move before others. The much-famed ‘China cost advantage’ has withered away, and customers have to pay a national security premium for chips that were earlier easily importable a few years ago. This will hurt Chinese firms’ competitiveness going ahead, especially in products where the semiconductor Bill of Materials (BoM) is a substantial portion of the product cost. Looks like the car with two accelerators is going downhill for the moment. Speaking of local sourcing mandates, I read another China-related news with keen interest. The Financial Times reported:
As it happens regularly nowadays, this sent observers into a tizzy. Those bedazzled by China posed this as proof that China’s industrial policy is working. To them, these guidelines indicate that Chinese chipmaking capabilities are closing the gap with those in the West. My takeaway was exactly the opposite. Because China has splurged massive subsidies to uphold an inefficient and not-so-effective local semiconductor industry, the only way to recoup that investment is to issue local sourcing mandates like this one. To me, these mandates indicate that local chipmakers aren't able to produce chips competitively. Because if they were, there would be no reason to issue such mandates. Moreover, many such mandates have failed in the recent past. A so-called "3-5-2" policy in 2019 had domestic substitution targets to replace foreign PCs and software in government offices. At that time, the goal was domestic substitution at a pace of 30 per cent in 2020, 50 per cent in 2021 and 20 per cent in 2022. Back then, we saw similar reports claiming that China would close the gap with the West. But none of those targets were achieved. Another reason for my scepticism is that had the CCP truly replaced Intel/AMD PCs; it wouldn't have quietly released this procurement directive; there would have been fanfare and chest-thumping. It is not that China has no domestic alternatives but that it faces an uncertain future after disrupting technology transfer streams that existed in the past. For instance, Hygon Information Technology can access an old version of x86 IP acquired through AMD. The AMD-China joint venture was added to the US Entity List in 2019, meaning that AMD could no longer work with its Chinese partners to develop newer x86 chips. The other Chinese company, Zhaoxin, is a joint venture between VIA and the Shanghai Municipal Government. VIA is a Taiwanese fabless company that has an x86 license. These companies have been trying to substitute Intel and AMD for a long time. But with the joint ventures hobbled by US export controls, they will find it difficult to keep pace with the West going ahead. Finally, even if they can succeed in design, Chinese fabless companies will have to rely on national manufacturing champion SMIC to produce these chips as the doors of TSMC are now closed to Chinese customers. So, SMIC's capabilities will remain a binding constraint. Overall, these two developments tell me that the Chinese semiconductor industry is not in good shape, despite oft-repeated perceptions that the US export controls have been ineffective in slowing China’s progress on this front. India Policy Watch #1: A Wicksellian DisconnectionPolicy issues relevant to India— Pranay KotasthaneThe Wicksellian Connection is a public policy framework that can help us understand the root cause of Bengaluru’s water problems. This term, coined by Albert Breton, describes an intuitive idea—the taxes you pay should be closely linked with the services you receive. Think of a Venn Diagram with three partly overlapping circles representing “those who decide,” “those who benefit,” and “those who pay.” These are called the three circles of budgetary policy. The intuition is that the higher the overlap between the three circles, the better the accountability and, hence, delivery. The stronger the Wicksellian Connections, the better the result. With this framework at hand, we can describe Bengaluru’s water system as a Venn Diagram in which the overlap between these three circles barely exists. The disconnections exist not at one but several layers. Consider a few. First, half of the city’s water supply comes from Kaveri, which is 90 km away and 350m lower. A WELL Labs report estimates that it costs the city’s water supply agency Rs 3 crores per day merely in electricity bills to lift this water. Before independence, Bengaluru, due to its elevation, relied largely on the rainwater stored in nearby lakes. But as the city population grew, the engineering marvel of pumping water up from the Kaveri was dreamed and realised. Many of its subsequent stages were financed through international aid by the Japan International Cooperation Agency (JICA). The lakes, now having little practical use, fell into disuse, turned into breeding grounds for mosquitoes, and became susceptible to encroachment. While the water pumped from Kaveri alleviated Bengaluru’s problems for a while, it created a Wicksellian disconnection — the state-level politicians decided, the old areas of Bengaluru benefited, and the state residents paid out the JICA loans through their taxes. Now consider another loop of the water system. The other half of the city’s water needs are met through groundwater. These are the new parts that have been subsumed in the city. These parts have apartment complexes and technology parks that made Bengaluru the global city it is today. These parts account for the lion’s share of the city’s economic activity and, hence, taxes, including property taxes. But they aren’t the ones that benefit. In fact, apartments must compulsorily do water treatment, operate rain harvesting systems, and refrain from letting any treated water flow outside their premises. Despite bearing all these costs, they aren’t the ones that get any water from the city government. In fact, the state government uses the tax money collected largely from these areas to subsidise the Kaveri-pumped water for residents of older areas of Bengaluru! My colleague Anupam Manur estimates that while a household of four pays Rs 172 as the monthly water bill on average, the cost to the city’s water pumping agency is Rs 1248-1560, a subsidy of over 80 per cent. Another stark case of the Wicksellian disconnection. This framework has a prescriptive dimension. The only way out of this water problem over the long term is to increase the overlap between the three circles, which implies:
These three measures will increase the overlap between the three budgetary circles and result in a sustainable solution for a chronic crisis. Global Policy Watch: Kahneman On Expertise & BiasesGlobal policy issues relevant to India— RSJDaniel Kahneman passed away this week. Kahneman was not a trained economist, yet he employed his training as a psychologist to question the fundamental assumption of humans as rational actors that forms the basis for modern economic theory. Along with Richard Thaler, he founded the field of behavioural economics, and his books and papers have helped us to question our biases and engage with the fallacies in our thinking while making decisions. In terms of impact and followership, he was among the most important economic thinkers of the past half a century. Over the years, those who have followed Kahneman have stretched the discipline of behaviour economics a bit too thin and used it as a convenient hammer to beat down every aspect of rational-actor economics. That’s wrong, of course. However, some of this adventurism led to a more critical appraisal of Kahneman and some undeserved scrutiny of his theories. That shouldn’t take away from his seminal contributions, his willingness to listen to the other side (evidenced in numerous interviews and podcasts), and his ability to demystify concepts in simple and clear language. I will close with one of my favourite Kahneman articles that he co-authored with Gary Klein, titled ‘Conditions for Intuitive Expertise: A Failure to Disagree”. At the heart of the article is that old question - does the intuitive judgement of experts work well, or do they tend to be overconfident in their abilities? How reliant should we be on experts and their intuitions as against using a ‘heuristics and biases’ (HB) approach? As their summary states -
So, what do they conclude? Coming from different starting positions (Klein favours expert intuition while Kahneman prefers the HB approach), they find quite a bit of convergence in their views. I have reproduced the conclusions below:
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