Friday, January 22, 2016

5 points about the low oil prices and one point about the Nepalese economy

Five main points from an article in The Economist about the low oil prices, plus one additional note on the Nepalese economy.

Over the past 18 months oil price has decreased by about 75%, from $110 a barrel to below around $25. 

1. Oil importers are gaining and exporters losing as reflected in their trade balance and fiscal numbers. India has used this occasion to boost revenue by increasing excise duty on fuel without altering much the retail price. Meanwhile, Gulf countries are cutting down subsidies and other countries like Russia are slashing public spending to maintain fiscal prudence to some extent. Venezuela has already declared an economic state of emergency (partly got to do with the political and economic mismanagement).

2. All oil producers are maintaining or increasing their output share in the market. Despite OPEC being a cartel it is unable to dictate prices. Some of its members are pumping out oil below average cost (at times even below marginal cost). Iran is entering the market (with potential output of about 3 million to 4 million barrels a day). The shale gas boom has boosted oil output in the US from 5mb/d in 2008 to over 9mb/d in 2015. Oil glut is here to stay according to latest estimates. 

3. OPEC members such as Saudi Arabia (top producer) want to continue pumping oil to suppress prices with hopes of driving shale producers in the US out of the market. However, innovations and efficient production lines have lowered marginal cost of shale gas producers to about $15 a barrel.

4. Overall commodities prices are falling and investment is also declining or put on hold. The slowdown of Chinese economy (about 6.9% growth in 2015 after almost a quarter of a century) is further depressing global demand and investment. Corporate debt is increasing, especially those of state-owned and private companies operating along the oil supply chain.

5. With low commodity prices, stock market volatility edging on the upper side, and lower private investment, the major worry for advanced economies struggling to accelerate growth is lower sticky general prices, i.e. prices are struggling to go higher and hence inflation remains subdued. It means economic growth is also low. Interest rate rise in the US (first time after 2008) will potentially slow down the initial momentum in heating up prices and will make USD stronger. It means currencies of other countries will depreciate somewhat relative to the dollar. Global growth forecast for 2015 is not that great, although the US and India stand out as exceptions. 

6. Meanwhile, in Nepal, the supplies blockade at Birgunj/Raxual (the most important custom point) and other places continues. An acute fuel and supplies shortage is ruining the economy. Mismanagement by state-owned companies, mainly NEA and NOC, is further adding woes to the already depressed situation. At present, the Nepalese economy is beyond the point where you would typically categorize as being in an emergency-- it is in a desperate situation and requires drastic measures to recover fast. Production and supplies networks are either dislocated or destroyed, and household and business incentives are transformed in a way that won't serve the economy well. Black-marketing and carteling are prevalent. Remittances (amounting to about 28% of GDP) are sustaining the economy despite all other numbers going south. Public expenditure performance remains horribly diminished (in the first half of FY2016 capital spending is about 6% of planned expenditure in FY2016-- politicians and bureaucrats can blame the earthquake and blockade, but how much have they done on their part honestly to accelerate public spending in infrastructure?), and inflation is edging even higher (will remain above 10% as supply-side constraints continue to exert pressures on prices of goods and services, and inflationary expectations edge up higher every month). Amidst all of these sits a coalition government (with a jumbo cabinet) that is failing to realize and accept the magnitude and severity of the problem. Painful, deep institutional and governance reforms are required now. This primarily includes strengthening institutions by overhauling them (including labor reforms)-- reforming NEA (with its present governance structure, it is the biggest hurdle after lobbyists & politicians, to Nepal's energy future), NOC, NA, establishing PPP office, passing a plethora of reforms without putting many hooks (the parliamentarians are unnecessarily doing this at the committees these days-- and without much study on its ramifications later on), procurement reforms, public service delivery, etc. These are very tough reforms and political parties have a lot to lose given the links between employee unions, corporate houses, lobbyists, intellectuals and politicians. Cosmetic reforms ain't gonna cut it now.

Thursday, January 7, 2016

2016 growth outlook for South Asia

The latest Global Economic Prospects 2016, the World Bank's flagship publication, has revised downward its growth forecast for India, Nepal and Pakistan and revised upward by 0.2 percentage points for Bangladesh (in fiscal year basis). 

Indian economy is expected to grow by 7.8% in FY2016 (ends 31 March 2016), the highest in South Asia, followed by Bangladesh (6.7% in FY2016 that ends on June 30), Pakistan (5.5% in Fy2016 that ends on June 30), and Nepal (1.7% in FY2015 that ends on 15 July). All numbers are at market prices.

 
Overall, growth in India will drive the regional outlook. Investment will pick up as exports may slightly recover and remittance inflows will likely moderate as oil-rich GCC countries witness slower growth. Domestic demand will remain strong. 

Higher public spending in infrastructure, the recent hike in public sector wages and pick up in exports following amendments to labors will support higher growth in Bangladesh.

The slow reconstruction work after the earthquake and the supplies disruptions will lower growth in Nepal

Bhutan's growth will remain strong on account of progress in major hydropower projects (three are expected to come online by 2017, boosting exports to India and fiscal revenues).

Regional growth (at market prices, constant 2010 USD) is expected to be slightly better than last year: 7.3% in 2016 versus 7.0% in 2015 (calendar year basis).

UPDATE (2016-01-08): The IMF team has produced an excellent set of charts depicting fiscal, external and monetary sectors developments (especially relevant to see the developments since the earthquake and the trade disruptions along the border).

Tuesday, January 5, 2016

Nepalese economy in 2015: Triple whammy of earthquake, blockade and bad politics

Triple whammy2015 was a notably bad year for the economy on three fronts

The April earthquake destroyed physical infrastructure and livelihoods, the trade embargo has disrupted economic activities, and finally Prime Minister Oil-led government is undermining already weak institutions of the country. Among these natural, economic and governance shocks inflicted on the Nepali people and the battered economy, the impact of tinkering with institutions for political gains may potentially turn out to be more debilitating for the nation in the long term.

Catastrophic earthquake

The earthquake and its subsequent aftershocks killed more than 9,000 people, damaged property and public infrastructure, lowered economic growth and per capita income, and thus, increased poverty. Gross Domestic Product (GDP) growth of Nepal dropped by over 1.5 percentage points to 3.0 percent from an estimated 4.6 percent in a no-earthquake scenario. Similarly, nominal per capita income was lowered by about $23. An additional 700,000 to 982,000 people were pushed below the poverty line. The monetary value of the damage was estimated to be about $6.7 billion, almost half of it attributed to housing and human settlement. This natural disaster disrupted and dislocated production networks and distribution systems, whose impact on the economy will linger for years to come unless they are quickly rebuilt following more resilient standards.

The international community liberally launched an unprecedented scale of humanitarian assistance, most notably led by India, Japan, China, and the United States. Equally generous were the financial commitments for reconstruction—to the tune of $4 billion—by bilateral donors and multilateral institutions like Asian Development Bank, World Bank and International Monetary Fund. The 2016 budget anchored on these financial commitments and appropriated about $910 million (3.8 percent  of GDP) for rehabilitation and reconstruction work.

Understandably, expectations were high and there was consensus on accelerating reconstruction with the accepted ‘build back better’ principles. However, the delay in decision making by the government, the seemingly sluggish bureaucracy, and the egotistic political infighting for the National Reconstruction Authority (NRA) frustrated the quake victims and international community. The NRA bill was passed eight months after the earthquake and key decisions of the previous government overturned to suit political interests. While the political apparatus appeared colder and callous than expected when it came to accelerating the reconstruction, the increasingly lethargic bureaucracy seemed inept in swiftly handling normal bureaucratic assignments. Consequently, actual public capital spending is barely above 75 percent of planned spending. Worse, despite the availability of resources, relief distribution and reconstruction are slow and painful.


The blockade

The blockade came immediately after the promulgation of the constitution on September 20. Given that almost 60 percent of Nepal’s trade is with India and it is the only supplier of petroleum fuel and cooking gas, the disruptions at major custom points are virtually stalling and derailing economic activities. It will have far-reaching consequences on the economic potential, production linkages within and among sectors, employment generation, and stability of capital flows.

The Tarai region accounts for about 51 percent of agricultural output, 52 percent of industrial output and 40 percent of services output. It houses about half of the population, which is quite heterogeneous in terms of ethnicity, class, culture, language, literacy, income profile, and employment opportunities. The trade and transportation disruptions in this region have a knock-on effect on production and distribution networks throughout the country. The lack of fuel and cooking gas is crippling household as well as business activities. The uncertainty over market demand and supply has either delayed or destroyed agricultural harvesting, depleting an important source of employment and income source for about 75 percent of the population who depend on agriculture for livelihood.

The blockade-induced shortage of chemical fertilisers is turning fertile agricultural fields into barren lands, and the lack of raw materials and fuel has delayed almost all development projects that are critical to not only accelerate existing economic growth, but also to expand the boundaries of potential growth and employment opportunities. Consequently, for the first time in over two-and-a-half decades, the economy may probably grow at a negative rate. Meantime, prices of general goods and services will stay high, public capital spending may be even lower, more youths may seek employment opportunities overseas, and more households will be pushed below the poverty line.

Political gains

Finally, there is an institutional shock inflicted by the present government that will probably have far reaching financial and operational consequences. The government is scrambling to contain the fallout of the delayed reconstruction and blockade on the economy and the population. However, without political resolution to the Tarai issue and easing of the blockade, economic recovery is almost impossible. So far, the government’s steps to address these are not up to the mark.

The rhetoric does not match the unfolding reality. First, the supplies blockade has abetted black market transactions, and distorted household and business incentives. Smuggling and black marketing of goods and fuel are now considered more lucrative than farming and other productive means of livelihood. Cartels, syndicates, unions and lobbyists are running the show more freely than before, affecting decision-making and operations at key state-owned enterprises and in almost all sectors.

Meantime, the prime minister is expanding the Cabinet and hastily dividing ministries in a way that defies logic. These institutionally damaging steps are taken for political survival, which unfortunately has again superseded concerns about the economy, employment and development. Normally, in order to add one more office, a detailed organisation and management survey is conducted and properly vetted at various layers of bureaucracy and government. By ignoring this process and creating confusion in an already lethargic bureaucracy, the government is further weakening its performance, eroding bureaucratic capacity, creating more layers of bureaucratic maze, and affecting public spending and services delivery. It does not bode well for the economy.

Overall, it was a year of triple whammy of delayed reconstruction, supplies blockade and a bad precedent of tinkering institutions for political gains.


It was published in The Kathmandu Post on 04 January 2015.

Friday, December 18, 2015

The quality of politicians and economic growth

The quality of growth depends on the quality of politicians you elect! 

That’s the main point of a working paper by Prakash, Rockmore and Uppal, who summarized their findings in a VoxEU column. Apparently, the findings are based on their working papers, but a link to it is not provided yet in the column. Anyway, intuitively the results do not seem surprising if you look at the developing countries that have weak institutions and the same politicians or their associates being elected repeatedly.

Excerpts from the article:


Despite a history of widely contested and transparent elections, and the presence of a vibrant and open media, India is electing an increasing number of politicians facing criminal charges. This share has risen from 24% of members of the Indian Parliament in 2004 to 34% in 2014 (New York Times 2014). While the election of criminally accused candidates to public office is concerning in any context, it is especially so for India. Large quantities of funds are distributed by the government through a wide variety of interventions and programmes, which have been plagued by costly scandals with losses in the hundreds of billions of dollars (Sukhtankar and Vaishnav 2015). A severely understaffed judiciary and police force, resulting in an extremely slow judicial system, exacerbate this problem. Taken together, these realities create a context in which an influx of criminally accused politicians could be especially costly for an economy.
Using information on the charges filed against candidates, we estimate the causal effect of electing criminally accused politicians to the State Assembly on the subsequent economic activity in their constituency. In particular, we focus on elections in 20 Indian states during the 2004 to 2008 period. Since economic data are not systematically available for constituencies, we rely on satellite data on the intensity of night-lights. These data have been increasingly used to proxy for economic growth, as studies find a strong relationship between GDP and night-light intensity at the sub-national level (Bleakley and Lin 2012, Henderson et al. 2012, Hodler and Rashky 2014, Storeygard 2014). 
[…]We find that the election of an accused politician leads, on average, to roughly a 22 percentage point lower yearly growth in the intensity of night lights. Based on conversions between GDP and night lights, this is roughly 5.61% to 5.86% GDP growth per year (as compared to the 6% otherwise). Overall, these results highlight the high aggregate economic costs of electing lower quality politicians (i.e. criminally accused) and point to likely significant individual costs in foregone access to public services.
[…]We find a strong negative effect of electing politicians accused of financial or serious charges. In contrast, politicians who are only accused of either non-financial or non-serious charges do not have a negative impact on economic outcomes. We also find that the size of the negative effect increases with the number of underlying accusations. These results show that the specific accusations and charges matter, and the costs increase with the severity of the accusation.
[…]When we examine the accumulation of these costs, we find that the effects only appear in the later years of the politician’s term. There is no apparent effect in the initial years. We believe that this is explained by the need for politicians to collaborate with local bureaucrats to engage in corrupt activity (Iyer and Mani 2012). After elections, bureaucrats frequently change positions so it takes a certain amount of time for corruption politicians and bureaucrats to identify each other. Additionally, the effects of neglected public infrastructure, such as roads, may take some time to slow down economic activity.
[…]we find that the number of incomplete road projects increases in constituencies represented by criminally accused candidates. Once again, the negative impact is driven by candidates who are accused of serious and financial charges throughout India.
[…]we convert our estimates into rough measures of GDP costs and find estimates ranging from 2.3 to 6.5 percentage point lower GDP growth per year for our main result. 
[…]instead of focusing on the overall outcomes (such as the delivery of public goods), voters focus on whether politicians can deliver targeted transfers to their specific group or caste. Not only are voters perhaps more likely to overlook accusations, but these accusations might serve as a signal of the politician's willingness to use the office to reward fellow group members (Chauchard 2014, Wade 1985).

Friday, December 11, 2015

For Japan, raising inflation target and increasing wages by 5-10 percent may be better

While some countries are grappling with high inflation, Japan (and in relative terms the developed countries) are struggling with persistent low prices, stagnating wages, low economic growth despite massive monetary stimulus for the last few years, and unemployment. Monetary easing is considered more palatable compared to fiscal stimulus because of the latter's impact on fiscal deficit and public debt. But then when monetary sector has little traction on the real sector during these depressed times (low demand as well as cautious credit flows), the most effective antidote to persistently low prices and growth is fiscal stimulus as the multiplier tends to be higher (in the case of government spending in productivity-enhancing investment projects). So, when GDP grows (faster than fiscal deficit and public debt growth), things may look a little less scary. In some countries this requires policies to deliberately raise inflation, which may eventually stabilize fiscal situation!

Here is a nice piece by Blanchard and Posen of the Peterson Institute for International Economics (PIIE) on what Japan should be doing now to prop up prices and then GDP growth. In a nut shell, Japan may consider raising wages by 5-10% (wage growth has been pretty much insignificant for many years in Japan and it follows the inflation rate).

Excerpts from the article published in FT:


Japan needs inflation, and more inflation than the 0.5 percent achieved with its quantitative easing (QE) program. The need is not for the usual countercyclical reasons, even if the economy is flirting with technical recession. Rather, the country needs meaningful positive inflation for reasons of fiscal stability.
[...]Together, Abenomics and the Bank of Japan's commitment to a 2 percent inflation target were intended to encourage a virtuous cycle from positive inflation to wage increases to greater consumption and so on. The central bank's large-scale asset purchases (Y80 trillion a month of Japanese government bonds) have helped: Inflation has fluctuated between 0.5 and 1.0 percent, an improvement over the deflation of the preceding two decades, and the yen has declined in two stages to Y120-plus to the dollar.
But that decline has proved insufficient to start an inflation cycle in the face of falling energy prices and the recent Chinese slowdown. Nominal wages rose only a little more than 1 percent in 2014 and 2015. For the average Japanese investor and consumer, inflation expectations have not budged.
Japan needs to jump-start a wage-price spiral of the sort feared from the 1970s, but that Abenomics rightly aspired to after 20 years of deflation. Such a cycle should be started by increasing nominal wages by 5 to 10 percent in 2016. Tripartite bargaining is practiced in Japan—i.e., annual nationwide wage negotiations for the unionized part of the Japanese labor force with government participation. A third of the country's workers are covered by these bargains, and many more (including management) have their wage adjustments set accordingly. Even part-time worker pay is correlated with this process. Such bargaining with government input can push wages up, just as in the past it has kept them down. In the 2014 and 2015 wage rounds, the Abe administration publicly advocated a rise in wages but did little else.
[...]The point is not to redistribute income from business to labor. If anything, employers and other price setters should be encouraged to pass on the increased costs from wages to consumer prices and try to maintain their profit margins. The Bank of Japan should maintain QE to accommodate this general price and wage increase until the cycle takes hold over a three-year period. This means replacing the current 2 percent inflation target with something much higher—such as 5 to 10 percent—for several years. This would be unlikely to cause accelerating double-digit inflation, but if it did, the Bank of Japan could easily stop that spiral. In parallel, the central bank should also aim for an exchange rate depreciation proportional to inflation, so as to keep the real exchange rate roughly constant.


Monday, November 16, 2015

Earthquake and Blockade: A wrecked Nepalese economy

Earthquake and economy

The catastrophic 7.8 magnitude earthquake on 25 April and subsequent aftershocks (two of them very strong) crippled the economy on all fronts: agricultural output as well as agricultural land was lost, and industrial and services sectors struggled to keep operation open amidst widespread disruption of production and distribution networks, especially on the main demand centers (urban areas including Kathmandu) and trade routes with China. Consequently, GDP growth came tumbling down to 3.0% from an expected 4.6% in FY2015 (unfavorable monsoon had already lowered GDP growth from 5.1% in FY2014). Meanwhile, the subdued market prices during the first three quarters more than offset the increase in prices of goods and services post-earthquake (which struck in the tenth month of FY2015), leading to inflation of about 7.2%.




External sector strengthened as lower import growth and higher remittance inflows immediately after the earthquake increased current account balance and balance of payments surpluses (5.1% of GDP and 6.8% of GDP, respectively). Fiscal performance remained dismal as estimated actual capital spending was just about 70% of planned capital spending, and revenue mobilization grew at 13.8% against 20.5% in FY2014.  Capital spending remains woefully low at around 3.5 to 4.0% of GDP. The low expenditure performance and relatively high revenue mobilization led to a fiscal deficit of around 0.2% of GDP (with primary surplus of about 1.6% of GDP in FY2015). Migration slowed down immediately after the earthquake, unprecedented scale of international assistance (primarily led by India together with PRC and the US) was mobilized, and the affected folks struggled to normalize household activity. About a million people fell below the poverty line.

The government estimated that the recovery cost would amount to about $6.7 billion (half of it needed for housing and human settlement), almost a quarter of FY2015 GDP. The international community pledged about $4 billion to finance post-earthquake rehabilitation and reconstruction (which is more than the share to be shouldered by the public sector). So, money was not an issue. The capacity to spend it effectively was. To give momentum to this, the government focused FY2016 budget (and monetary policy) on “building back better” and faster. To this end, an ordinance was promulgated to establish National Reconstruction Authority. The ordinance never made it to the parliament within 30 days and hence its life ended drastically. A bill on NRA is pending in the parliament. It has become a victim of political infighting, delaying post-earthquake reconstruction (urgently needed for short-term recovery and for long-term preparedness in this seismically active country). Initial euphoria about post-earthquake reconstruction has dampened. Pledged funds have remained idle (some may get cancelled if there is no progress), affected folks are still struggling to get by normal life, economy is weaker than before, and the lack of direction on reconstruction has raised frustration levels and the attrition of labor force. Meanwhile, political leadership has lost the sense urgency, hastened promulgation of constitution disgruntling some section of the population, and is still engaged in political infighting. Bureaucracy remains confused and increasingly looking for guidance from political leadership even in minor matters.





Now, that’s the story about post-earthquake economic tragedy triggered by the natural disaster that affected the upper and middle belts of western and mid-western administrative regions.



Blockade and economy

Enter the crisis in the Terai region and the debilitating impact on the economy. The crisis was brewing prior to the promulgation of the constitution as some Madhesh-based political parties objected to some provisions included in the draft constitution, which was passed by an overwhelming majority in the Constitution Assembly. The main point was the demarcation of federal states in the Terai region. With no flexibility (both sides) shown to settle the issue politically, the discomfort, disdain (not all but among some) and alienation increased. Consequently, protests and the state’s reaction to protesters (at times excessive on both sides) intensified. India came into the picture to influence changes to the constitution and many analysts allege that it is imposing an ‘unofficial blockade’ on the borders. Supporters of protesting parties picketed the border areas, virtually halting the movement of goods and services. What, how, who, when, etc narrative differ based on the ideological leaning (passion is overpowering reason and cool-headedness) of analysts, consultants, journalists, lawyers, politicians, etc (however ‘independent’ they are).

Anyway, the focus here is economy. Since Nepal is a landlocked country and trade with India accounts for about 60% of imports and exports (plus it provides access to its ports), the activities on the border have severely crippled the economy, which was already hamstrung by the impact of the earthquake and the government’s and the bureaucracy’s inability to initiate rehabilitation and reconstruction swiftly.

The supply disruptions (some allege it as official/unofficial blockade by India) have affected pretty much every economic activity. The Terai belt is considered an important agricultural and industrial hub, and it has all the major custom points along the major border crossings with India. The Terai region accounts for about 51% of agricultural output, 52% of industrial output and 40% of services output. The population of Terai (quite diverse in terms of ethnicity, class, language, income, vocation, etc) is about 50% of total population.

The subnormal monsoon was already affecting plantation and hence potential agricultural output. The disruption to household agricultural activities and shortage of chemical fertilizers along with uncertainty over timely harvesting have dented the outlook for agricultural output. Industrial activity has come to a grinding halt. Mining and quarrying, and construction works have not progressed much due to the delay in post-earthquake reconstruction. The shortage of supply of raw materials or intermediate goods (including petroleum fuel and LPG cooking gas) along with the closure of manufacturing plants have affected manufacturing and construction activities. Industrial sector will most probably grow at a negative rate.

Meanwhile, services sector, which is largely based on remittance-financed imported goods, has been severely crippled. Wholesale and retail trade (which is by far one of the most important and stable drivers of growth in addition to agricultural output) has been severely disrupted. Hotels and restaurants are struggling to cope with the acute shortage of cooking gas and diesel (fires up generator during load-shedding hours). Tourist arrival has plummeted. Real estate and associated businesses are in doldrums. Education institutions are shut down or are partially operational. Hospitals are running out of emergency as well as normal items. Services sector will also most likely grow at a negative rate.



So, the economic outlook looks very grim. As of now (with uncertainty over the resolution of the crisis), the growth rate in FY2016 will most likely be negative (it hasn’t happened so far and the lowest growth [0.2%] was registered in FY2002 immediately after the intensification of Maoist insurgency; services growth was negative 1.8%). My estimate is that GDP growth will plunge to around negative 0.8% in FY2016. Importantly, subject to the longevity of ongoing supply and production disruptions, the effect of the disruption to and dislocation of economic activities as a result of the earthquake and subsequently the crisis in Terai (including blockade) are going to linger on for the next few years if the response from the government is not swift (after the resolution of Terai crisis, which lets hope will happen sooner). The rate of exit from the labor force will be high and potentially migration for overseas work will increase. The existing growth rate is already too low. With the weak state of infrastructure supply and institutional fundamentals, the economic and employment potentials are further constricted. Not a good sign to bring back production and economic activities back to normal!

The food as well as non-food inflationary pressures will likely shoot up overall inflation above 10% and it might linger at higher levels in the following year(s). On the external front, trade deficit will come down along with the plunge in both exports and imports. Remittance inflows may remain strong and hence current account surplus may be remain at high levels. Lower lending compared to deposit will likely lead to liquidity surplus. Lower expenditure and lower revenue growths may result in not much deterioration of fiscal position. However, lower expenditure as well as lower revenue growth will mean some of the fiscal targets will be beyond the reach for this year and the next. Lets hope FY2017 will be better!

In a nutshell, tough times for the economy, the poor and the middle class throughout the country!

Finally, the issue about what needs to be done?
  • Economic outlook will continue to be bleak if the supply disruptions continue. Speeches about self-sufficiency right now are useless. The country cannot simply become self-sufficient [self-reliant(?)] in food and energy in one or three years. Hydroelectricity production is not going to be sufficient over the medium term (within 5 years). While some are awaiting repairs following the earthquake, others are struggling to accelerate construction. However, the issue here is of raw materials/intermediate goods, which need to be imported (ranging from fuel to nuts and bolts and cement to heavy equipment). With the blockade in place, all construction work is already delayed by many months because it will take more time to restore pre-crisis (plus pre-earthquake) pace of work, which will partially depend on the clearance at the border and transportation of inputs to construction sites. So, resolve the Terai issue pronto to rescue the economy. No other way out!
  • Rather than giving pompous statement about self-sufficiency and ending load-shedding, the government should bring out a time-bound strategy on how to achieve them. This would require taking tough decisions: taming unruly labor unions and interest groups hindering reform, enhancing productivity of workers, better community relations (think of obstruction caused due to the demand for shares by locals, etc), expedited construction of transmission and distribution lines (these have been trailing behind hydroelectricity construction affecting expected return on some of the investment), reforming NEA and NOC (and a slew of other moribund public enterprises), promoting the use of alternative sources of energy, updating the relevant Acts and implementing them in earnest, creating stable institutions and manning them with competent human resources, etc. The list is long and very challenging to do over the medium term given the will of political leaders and interest groups rallying behind them. See this piece on why Nepal is poor?
  • Enough has been said already about National Reconstruction Authority. Just pass the Act, appoint a competent CEO, bring all implementing ministries on board and do the reconstruction within a stipulated timeframe.
  • Boost public sector’s capacity to spend money. The availability of funds in the short-term is not an issue. The country is running a primary surplus already. Just use the funds wisely and in an accelerated way in productivity-enhancing investments (physical and social infrastructure).
  • Revitalize the private sector and provide it with adequate incentives to focus on domestic production as opposed to trading of imported goods. Here also comes in the strategy to diversify the production base to reduce dependence on a single country for export and import. Upgrade customs points located in the northern and southern borders. Promote value chain development (intra and inter sector) and facilitate supply chains.
  • Good governance is very important in all of these. Enough has already been said about it. Time to introspect and do the right thing.

Friday, October 30, 2015

Poverty in Nepal and South Asia based on $1.90 a day poverty line

The World Bank recently updated its global poverty line, which is now re-estimated at $1.90 a day, up from $1.25 a day earlier. Accordingly, poverty estimates for all countries have been revised, mostly downward.

Nepal’s absolute poverty at $1.90 a day stood at 14.9% in 2010, a sharp decrease from 47.1% in 2003 and 61.7% in 1995. Compare this with the estimate based on $1.25 a day (2005 PPP): in 2010 absolute poverty stood at 23.7%, also sharply down from 53.1% in 2003 and 68.0% in 1995. The new poverty benchmark shows a marginal acceleration in absolute poverty reduction, but overall not much difference in rate of decrease over the last two decades.


The estimates based on national poverty line, which is fixed at NRs 19,261 (NRs 11,929 for food items and NRs 7,332 for non-food items in 2011 prices) are the same. The estimates based on NLSS III data show that about 25.2% of the people lived below the national poverty line in 2010/11. Consumption basket was changed in this round of estimate, so it cannot be strictly compared to the previous estimates. See this for more and this for poverty by district. The major contributing factors for poverty reduction are remittance income (see here and here), higher agricultural wages, urbanization (mostly propelled by rural-urban migration) and investment in public services (education and healthcare, financed mostly by donors) (see here). It has hardly anything to do with economic growth.

Poverty in South Asia

Now, lets look at how the other South Asian economies fare with the re-estimated global poverty estimate. India has the highest poverty rate (21.3%) in South Asia, followed by Nepal and Pakistan. Overall, all countries have managed to lower poverty save the Maldives.


Inequality in South Asia

Nepal lowered inequality (as measured by Gini index based on consumption) from 43.3 in 2003 to 32.8 in 2010. Similarly, Bangladesh, the Maldives and Pakistan have marginally also lowered inequality. The most progress is achieved by Nepal. Inequality seems to have increased in Bhutan, India and Sri Lanka.


Consumption share

The share in consumption of the lowest 40% of the population stood at 20.5% and the highest 40%’s share was 63.3% in Nepal in 2010. The share of consumption attributed to the lowest 40% has increased and the share of the highest 40% decreased during the last two living standard survey periods. India and Sri Lanka saw a marginal decline in the consumption share of the lowest 40% population.


Briefly about the re-estimated international poverty line

While the new poverty line is based on 2011 purchasing-power-parity (PPP), the earlier poverty line was based on 2005 PPP prices. The other methods of computing the poverty line remains the same (basically, the earlier global extreme poverty line was expressed in 2011 PPP values computed under the International Comparison Program in 2014).

The new global poverty line is computed by taking the average of national poverty lines of the 15 poorest countries (Chad, Ethiopia, The Gambia, Ghana, Guinea-Bissau, Malawi, Mali, Mozambique, Nepal, Niger, Rwanda, Sierra Leone, Tajikistan, Tanzania and Uganda) in 2011 and then converted into US dollars using 2011 PPP. So, starting October 2015 the new global extreme poverty line is $1.90 a day. About 987 million people globally (14.2% of global population) lived under this line in 2012 and it is projected to drop to around 700 million in 2015. More here and here.

A bit of timeline of the global poverty estimates:
  • $1 a day created in 1991 used 1985 PPP
  • Re-estimated to $1.08 a day using 1993 PPP
  • Re-estimated to $1.25 a day using 2005 PPP
  • Re-estimated to $1.90 a day (precisely $1.88 a day) using 2011 PPP