Monday, January 26, 2015

Why is global poverty so intractable?

World Bank Chief Economist Kaushik Basu explains:


[…] it remains largely out of sight for those who are not living it, safely somebody else’s problem. The fact that most participants in discussions about global poverty – the readers of this commentary included – know few, if any, people who live below the poverty line is an indication of the extent of the world’s economic segregation. If poverty were communicable, its incidence would be far lower by now.

[…]Another reason poverty endures is persistent – and, in many places, widening – inequality. The current level of global inequality is unconscionable. […]To be sure, there will always be a certain amount of inequality in the world; in fact, as with unemployment, a limited amount is desirable as a driver of competition and growth. But the deep and pervasive inequality that exists today can only be condemned. […] Extreme inequality is, ultimately, an assault on democracy.


On employment for all agenda for post-MDG framework (SDGs):


This is an impossible target. All economies of any reasonable size will have some unemployment. In fact, a limited amount of unemployment can help to promote development. To declare “employment” a right is to divest the word “right” of its meaning.


On macroeconomic impact of micro-interventions:


[…]a government policy in which subsidies, funded with newly printed money, are handed out to residents of 1,000 villages. This will not necessarily be a boon for the economy as a whole. Injecting money might improve the living standards in the villages receiving the funds, but doing so may well drive up the cost of food throughout the country, causing residents of non-subsidized villages to fall into poverty. The macroeconomic impact of micro-interventions is an important reason why poverty has persisted, despite well-meaning interventions to combat it.


Thursday, January 15, 2015

Very large electricity losses in Nepal (34% of total output)

Electricity losses in Nepal (transmission and distribution) are really large in Nepal (over 34% of total output in 2011). The chart below is extracted from the latest World Bank update on economic prospects.

Nepal faces a double whammy (low generation leading to large and growing gap between demand and supply, and large transmission and distribution losses further exacerbating the shortages) due to (i) low investment as well as low capacity to fully execute/utilize available budget productively, and (ii) shoddy construction and substandard appliances increasing inefficiency of the system, and low operations & maintenance budget and capacity. Fortunately, a large number of hydropower projects are ongoing and are expected to generate enough electricity to bring load-shedding to almost zero during wet season. The economy will likely continue to face electricity rationing during dry season in the absence of storage-type hydropower projects.

More on hydropower condition in Nepal here and on the potential demand for electricity in India here.

Below is a chart showing the top ten countries with the largest electricity losses. Nepal comes at number 4 in the world. Electricity losses are increasing (signals massive inefficiency)— 28% in 2005 and 34% in 2011.

Wednesday, January 14, 2015

Modi-nomics explained in one paragraph

The one paragraph from an article in The Economist that appropriately describes “Modi-nomics” and differentiates it from those of Thatcher and Regan:


A focus on basic infrastructure and public goods; a drive to make civil servants honest and accountable; a penchant for IT; a flair for marketing to business investors. The elements of Mr Modi’s brand of economics are not obviously those of Margaret Thatcher or Ronald Reagan, to whom he has been compared by some commentators. Thatcher wanted a small state. Reagan is held to have said that “the nine most terrifying words in the English language are: ‘I’m from the government and I’m here to help.’” Mr Modi, by contrast, believes government can be made to work better.


Wednesday, January 7, 2015

Why are oil prices falling globally?

Net oil importing countries (including those who import only) are enjoying the low petroleum prices in the international market as it helps them to manage public finance by lowering fuel subsidies and strengthening balance sheet of state-backed petroleum suppliers and distributors. In the case of Nepal, Nepal Oil Corporation is seeing net losses narrow down (there is still loss in the sale of LPG cooking gas) and consumers are enjoying the declining fuel prices. Non-food inflation seems to be cooling down as well. The government recently allowed the NOC to adjust fuel prices based on international prices (basically the price IOC charges to NOC plus taxes, interest payment on past loans, transportation losses and commission). Lets hope that domestic fuel prices is also increased when international fuel prices start to climb up.

For now, what are the main causes of lower fuel prices? It has to do with a combination of demand and supply forces, along with lower cartel power of OPEC, at play. The Economist lays down the main causes as follows:

  1. Low demand arising from low economic activity, increased efficiency and a switch to alternative sources of energy
  2. Turmoil in Iraq and Libya has not affected their output.
  3. The US has become the world’s largest oil producer (it is importing less oil now).
  4. Saudi Arabia and some Gulf countries are unwilling to lower supply (and hence their share in total world output) to put upward pressure on prices.

The combined effect of these forces are lowering oil prices since the high of $115 a barrel in June 2014.

Friday, January 2, 2015

Seven years of blogging

First, Happy New Year 2015! Stay happy, healthy, wealthy and wise! Maximize and optimize = A wonderful 2015!!

Second, I started blogging on this platform (www.sapkotac.blogspot.com) on 3 February 2008. Cumulatively, I wrote 1,611 blog posts over 2008-2014. Due to workload and other time-varying interests, the number of blog posts is going down each year, registering an average annual decrease of 35.9% over the last seven years. I hope the rate of decrease will stabilize in the coming days. Furthermore, I hope that the blog posts were and are helpful to some visitors.

Blog posts have evolved drastically over the years. Initially, they were mostly a collection of articles and interesting papers (sort of extended bibliography for my own reference). Now, blog posts are analytical as well as informational. They are mostly related to contemporary as well as historical development, economic growth and trade issues. The labels next to the figure show the major topics covered (larger text indicate more number of blog posts related to the topic).

Region-wise, a large part of the blog posts are related to Nepal and South Asia (Sub-Saharan Africa as well during the initial years). Thank you for visiting the blog!

Sunday, December 28, 2014

Does low public debt signal prudent fiscal management in Nepal?

A latest FCGO report shows that cumulative public debt is consistently decreasing in Nepal, reaching an estimated 28.7% of GDP in FY2014 (down from about 52% of GDP in FY2005). Total external and domestic debt stood at 18.0% and 10.7% of GDP in FY2014, respectively.

Generally, a declining public debt is a good sign of a sound/prudent macroeconomic situation in an economy. Recall how high level of debt in the EU and the US after the financial crisis (post-2007) resulted in harsh fiscal measures, including austerity measures, to bring down spending. Quite contrary to that Nepal’s public debt is declining rapidly.

If Nepal cannot mobilize enough revenue to finance its expenditure (both recurrent and capital), then the gap is bridged by domestic as well as external borrowing. Each year the country borrows money equivalent to about 2.0% of GDP from the domestic market. External borrowing is limited to long-term loans at concessional rates from multilateral and some bilateral donors. Overall, total stock of public debt is influenced by economic growth, which then affects revenue mobilization (positively) and jobs creation (positively).

Consider the following trends in recent years:

  • GDP has been growing at below 5.0% (above 5.0% just twice in the last decade).
  • Tax revenue averaged 20.9% in the last decade, reaching an estimated 16.2% of GDP in FY2014.
  • Actual capital expenditure averaged just 71.3% of planned capital expenditure in the last decade. Actual  expenditure averaged about 92% of planned recurrent expenditure in the same time period.
  • Fiscal balance (expenditure and net lending minus revenue and grants) averaged just minus 1.6% of GDP in the last decade. In FY2013, the country ran a fiscal surplus equivalent to 0.7% of GDP.

It is fair to deduce the following from the above four points:

  • GDP growth is largely supported by monsoon-fed agricultural growth and remittance-backed services growth (mainly wholesale and retail trade, which is sustained by imported goods). Industrial sector growth has been chronically sluggish. There is hardly any discernible impact on employment generation (about 1,500 workers leave each day to work overseas). So, the prudent/sound macroeconomic situation/fiscal management as indicated by low and declining public debt (also low fiscal deficit) has little to do with economic growth and jobs creation. Structural transformation is unusual and labor productivity growth is dismal (more here and here).
  • Revenue growth is largely dependent on taxes on imported goods, which are financed by remittances (reached about 28.2% of GDP in FY2014— also, merchandise trade deficit reached 30.9% of GDP in FY2014). Tax revenue on consumption and imported goods account for about 70% of total tax revenue mobilization.
  • Low capital expenditure and high revenue mobilization have resulted in a large treasury surplus and the need to borrow less from domestic and external sources (grants are always welcome!). For a country like Nepal with a tremendous financing needs to plug the severe infrastructure deficit, running such a low fiscal deficit is not an optimum fiscal policy stance. Annual  infrastructure financing requirement over 2011-2020 is estimated between 8% and 12% of GDP. The country could afford to easily borrow more to finance higher capital expenditure in critical infrastructure projects. However, this option is constrained by the low and receding expenditure absorption capacity. (Lets not even touch on the quality of such spending in this blog post).

It is leading to two unreasonable developments on public debt front (based on the level of income per capita of Nepal):

  1. The low fiscal deficit means less borrowing, and hence accumulation of low outstanding debt. External borrowing is declining even when generous concessional terms are being offered. Lately domestic borrowing is mainly used for managing liquidity in the economy (this should not be treated as a monetary instrument to manage liquidity!)
  2. The high revenue growth and low expenditure have also resulted in substantial government savings, which are being used to service debt payments. Total debt service payments averaged 17.9% of total revenue over FY2007-FY2014. Not only interest payments, the country is rapidly repaying principal amount as well. Over the same period, principal and interest payments averaged 12.4% and 5.5% of total revenue, respectively. External debt service payments averaged 10.3% of total exports of goods and non-factor services in the last decade.

Note that low fiscal deficit means slowdown in the accumulation of public debt, and high principal and interest repayment means fast offloading of debt payment obligations. Consequently, this leads to lower stock of outstanding public debt, which in turn is interpreted as a sign of sound/prudent macroeconomic situation/management (despite sluggish GDP and income growth rate, and high unemployment).

The low public debt also affects the debt sustainability analysis, which showed Nepal faced a low risk of debt distress in 2014. In 2012 DSA, Nepal was categorized as facing moderate risk of debt distress. The DSA is used mainly by multilateral development banks to determine if a low income country needs either concessional/soft loans only or grants only or a combination of both. They conduct country economic, social, policy and institutional reform and capacity assessments independently and the resulting composite score (threshold) is ultimately evaluated against the various debt scenarios/simulations and the corresponding debt distress classification. Now that Nepal has been categorized as facing low risk of debt distress, multilateral development banks are more inclined to providing concessional/soft loans only (and the allocations/commitments may increase depending on the public expenditure performance of the country).

So, there is no point boasting about sound/prudent macroeconomic situation and at the same time whining about losing grants by multilateral development banks. Nepal has to efficiently and optimally manage fiscal and macroeconomic situation.

HAPPY NEW YEAR 2015!

Thursday, December 18, 2014

New paper: Inclusive Economic Growth in Nepal

Below is the abstract of a recent paper published in Journal of Poverty Alleviation and International Development, Vol.5, No.2, pp.77-116 (authored by yours truly!) :) 


Inclusive economic growth is one of the most prominent development agendas. However, a systematic evaluation of progress toward greater inclusivity in the developing countries, and the required strategic foci for the future, remain largely absent from debates in both the academic and policymaking spheres. This paper applies and complements the Asian Development Bank’s inclusive economic growth framework by including an intra-country analysis, and in particular, the convergence and divergence across a range of relevant indicators among consumption quintiles in Nepal. It finds three stark disparities: (i) Nepal’s GDP growth and per capita growth remain the lowest in South Asia; (ii) the slow growth rate has failed to create adequate job opportunities, resulting in large-scale out-migration of workers from all consumption quintiles; and (iii) despite the overall inclusive pattern of growth over the last decade, there remains large disparities in the reach and utilization of social services and economic opportunities among the poorest quintiles. In addition, the pattern of growth could be made more inclusive by creating new opportunities and ensuring that the existing ones are shared more proportionately with the bottom quintiles.