South-South FDI rising

Though South-South FDI is rising in recent years (particularly massive investment plans of China and India, China more so), a new report points out that political risks is a principal constraint to doing business in emerging markets. It is argued that South-based companies have higher tolerance than North-based companies to political risks.

...Foreign direct investment (FDI) originating in developing countries and destined for other developing countries is on the rise, but the growing development potential of this so-called “South-South” investment is inhibited by political risks, according to a new report by the Multilateral Investment Guarantee Agency (MIGA).

...Political risks are cited by South-based investors as a principal constraint to doing business in emerging markets. The MIGA review—“South-South FDI and Political Risk Insurance: Challenges and Opportunities”—looks at perceptions of political risk by companies based in emerging markets that are seeking to invest abroad, as well as challenges in mitigating those risks.

...FDI flows going to emerging markets are expected to reach US$535 billion in 2007, decline somewhat in 2008, and continue growing in the subsequent three years at an annual rate of 3-4 percent.

...FDI flows from emerging markets increased from US$12 billion in 1991 to US$99 billion in 2000,6 and are estimated to be around US$210 billion as of 2006.

...“South-South” FDI (investment outflows from emerging markets to other emerging markets) has been growing even faster, increasing from under US$5 billion in 1994 to over US$50 billion in 2000.

Remittances, poverty, and employment in South Asia

An interesting paper, authored by Prof. Sudhir K. Khatri, on the role of remittances in poverty alleviation and employment in South Asia. He argues that remittances have played a crucial role in lifting people out of poverty in Nepal, Sri Lanka, and Bangladesh, despite conflict and insurgency. Particularly, noteworthy is the discussion on who migrates and through which channel? He argues that the very poor people, who lack migration information and cannot pay the cost of migration, are usually left out of this cycle. So, despite poverty reduction is taking place due to increasing inflow of remittances, the incidence and intensity of poverty among the poorest is still as rigid as it was before. Also, he argues that workers who go to the Gulf countries remit almost 100% of their savings back home, while workers who go to the USA, the UK, and Australia, among others do not remit in the same proportion. More on remittances by Prof. Khatri here. Interestingly, this pessimistic-sounding paper from the IMF concludes that higher remittances has a negative impact on the quality of institutions in a country.

Notable stats and observations:

...a 10 percent increase of migrant flow from the sending country will lead to 1.6 percent decline in the share of people living on less than $1 a day.

...10 percent increase in the share of remittance in a country’s GDP can lead to a 1.2 percent reduction in poverty.

...the households receiving remittances increased from 23 to 33 percent in the same period, and the share of remittance in total household income increased from 26 to 35 percent during 1996 to 2003 in Nepal.

...migrants in Pakistan avoid investing in areas that they do not know (such as business) in favor of committing their resources to what they know best (namely land).

...restrictions on migration can increase inequality, as has been the case of the unskilled female migrants from Bangladesh who have been forced to use ‘illegal’ methods to migrate and thus become vulnerable to exploitation and subjected to gender income inequality.

...The group going to the Gulf States and Malaysia are the ones that remit the money back home since they cannot keep the money there indefinitely. They are the ones that sustain Nepal’s economy since they send back home 100 percent of the money they save. Those going to UK, USA, Canada, or Australia do not usually remit the money to Nepal.

...In Nepal also the poorest of the poor (20 percent of the population) are not in a position to migrate. Labour migration has taken place from areas that are relatively richer, because it also requires investment.

...One study on Sri Lanka suggests that out of the total income, remittance recipient families spend 56 percent on foods and 18 percent on education, which meets the basic needs of the families trying to move out of poverty.

Better outcome through targeted nutrition programs aimed at changing behavior

What happens when nutrition programs are just not aimed at filling hungry or malnourished stomach but are aimed at changing general nutrition behavior like feeding and hygiene practices? Well, obviously the outcome would be much more better and optimal than a simple feeding program. This is corroborated by this new research brief, based on an experimental nutrition program in Madagascar, from the WB research institute.

In a new research brief, Galasso and Umapathi describe a recent impact evaluation study of a community-based nutrition program in Madagascar which targeted the country’s most malnourished and vulnerable districts. The study highlights links between maternal education, knowledge, and community infrastructure that can help achieve improvements in child nutrition. Results show that malnutrition can be improved over the short- and long-term when mothers participate in community nutrition programs that promote behavioral change in nutrition, feeding, and hygiene practices. However, the gains from this program were higher for better-educated mothers and households in the relatively advantaged areas. While knowledge is a necessary condition for achieving progress, direct interventions on the nutrition front, bundled with complementary assistance in other sectors (health, infrastructure, and water and sanitation), is the best way to maximize effectiveness in the neediest areas, the authors say.

The figure to the right shows that communities participating in the program bridged the weight gap with respect to non-participating communities in terms of short-term nutritional outcomes (weight for age z-scores reduced by 0.15-0.22 standard deviations and the incidence of underweight children reduced by 5.2-7.5 percentage points).

The overall share of observed improvements in nutrition nationwide (reduced malnutrition rates) between 1997/98 and 2004 attributable to the program (using the estimates above) ranges between ¼ and ⅓.

The figure to the left on height shows the protective effect of the program on longer-term nutritional outcomes (reversing the trend in stunting). This result is particularly important in light of the fact that program communities had a higher incidence of shocks and experienced higher food insecurity.

The observed program effects were obtained through significant improvements in feeding practices (exclusive breastfeeding, timing of weaning, and proactive and responsive feeding) and hygiene practices (appropriate disposal of garbage and toilet use, and improved methods of water purification).

Two expected, yet significant, results from the study:

1. More educated mothers and households living in better-off areas gain more from the program
2. Knowledge is a necessary but not sufficient condition for improving nutritional outcomes for households with limited access to complementary resources

Are remittances a curse?

An interesting, and surprising, paper from the IMF shows that remittances have a negative effect on the quality of institutions. It is pretty surprising to see that "a higher ratio of remittances to GDP is associated with lower indices of control of corruption, government effectiveness, and rule of law." I am interested in knowing the mechanism through which this negative effect works. Additionally, I would like to know policy implications of this conclusion.

This paper addresses the complex and overlooked relationship between the receipt of workers' remittances and institutional quality in the recipient country. Using a simple model, we show how an increase in remittance inflows can lead to deterioration of institutional quality - specifically, to an increase in the share of funds diverted by the government for its own purposes. Empirical testing of this proposition is complicated by the likelihood of reverse causality. In a cross section of 111 countries we document a negative impact of the ratio of remittance inflows to GDP on domestic institutional quality, even after controlling for potential reverse causality. We find that a higher ratio of remittances to GDP is associated with lower indices of control of corruption, government effectiveness, and rule of law.

A cursory look at the paper hints that the authors start with a mistrust in government, especially by assuming that remittances act as a buffer between government and the people, and the former finds that corruption is less costly for individual households. This assumption is not too realistic, at least for me, because even if households become purchasers of public good (again, I do not totally concur with this idea) due to increased income from remittances, it is not guaranteed that they would not seek accountability and transparency in government's expenditure and activities. Moreover, how can one assume that the public would be purchasers of public goods when household income rises due to remittances. Why won't the public enjoy the commons, I.e. public goods, when they get it for free. Household would not like to pay for public goods if it is provided free, irrespective of the change in income.

The authors also find that remittances have no robust effect on economic growth. However, I would like to know why Nepal experienced decrease in poverty and increase in household income between 1994-2001?  The WB says that this effect was brought about by remittances. And, the IMF says something different; the only difference is technical definition of economic growth and poverty reduction.

Uganda and Nepal: Two different tracks in utilizing natural resources

Good news that Uganda is trying to harness its own natural resources to spur economic growth rather than relying on foreign aid and assistance. The country has allowed private companies to start produce electric plants and it is estimated that within one generation Uganda will become a middle income country and will be self reliant on energy and, importantly, export energy to neighboring countries. Currently, Uganda's GDP per capita is $360 and it aims to make it between $1000 to $6000 within one generation. Good news that the country is well in its path to its goal.

Resource rich poor countries like Nepal should be proactive in harnessing its natural resources to spur economic growth and reduce poverty. A case in point is the wrangling going on in the country regarding awarding contracts to companies. Corruption and petty political interests always come into foray and political leaders are not insulated from rent-seeking activities. Nepal should proactively award contract to credible and committed international companies or domestic companies to start generating hydropower electricity. It loses nothing but gains a lot of things. The country is already is reeling under 8 hours of load-shedding per day and is set to lose one-third of the estimated revenue due to factory closures and scaled down activities as a result of power shortage.

It is heartening to see that Nepali leaders are ignoring the importance of natural resources in spurring growth and they are increasing relying on foreign aid to bridge budget gaps. Meanwhile, in Uganda the leaders have realized the importance of natural resources and are set to exploit them to benefit its people. This way Uganda is well on track to becoming a middle income country, ceteris paribus, and unfortunately Nepal is way off track. It is not even thinking of raising per capita income. All the leaders are doing right now is wrangling on political modality for upcoming CA election, which has already been postponed two times. Nepali leaders should proactively award contracts to credible international and domestic companies so that the current of our raging running rivers is harnessed to lit not only the country but neighboring states of India.

Shanta on the effects of sub-prime crisis on South Asia

Shanta Deverajan argues that the US sub-prime crisis would have minimal impact on the South Asian economy because of "little exposure to US mortgage securities, availability of liquidity in the domestic markets, and the possibility that lower capital inflows could help countries such as India with macroeconomic management.".  He argues that the "impact will be mild because of the structure of the region’s trade and financial flows, and partly because of compensating effects". More from his blog.

Not all happy news though:

"The Indian IT industry, which derives about 65% of its revenues from the U.S. market, will also be adversely affected if the subprime crisis leads to a recession in the United States."

And given the scale of sub-prime crisis, rising oil prices, pessimism in the stock market, and receding consumer spending, a recession is more than likely in the US market. More here, here, and here.