GDP/GNI Per Natural: New way of measuring development!

Michael Clemens from CGD and Lant Pritchett from the KSG have come up with a new measure of development to reduce bias emerging from using income per capita (which only focuses on the nationally resident population) measure for economic analysis and policy design.

In a CGD working paper series titled "Income Per Natural: Measuring Development as if People Mattered More than Places," the authors argue that calculating national statistics by taking in consideration all the citizens (both living inside and outside the country) gives a clearer and an unbiased (regarding the policy prescriptions arising from such calculation) picture of the actual income of a person of a certain country.

They use income per natural, which is the annual income of persons born in a given country, regardless of where that person now resides. So what's the advantage of using this measure instead of just GDP or GNP per capita? The authors argue that it will give a systematic source of information on the average income of a person, irrespective of which country s/he resides  i.e. average income of a Turk, or a Nepali, or a Salvadoran.

One policy implication of this approach would be to look critically the way we fund poverty reduction initiatives in the developing countries. For instance, formulating a  wholesale  poverty reduction policy considering that 80% of Haitians live below the poverty line might be a bit misleading and out of touch of the reality because "26 percent of Haitian naturals who are not poor by the two-dollar-a-day standard live in the United States." Poverty reduction policies that take this new factor into account would be more realistic and may be effective as well. This is my wild guess! I really want to know more about the policy implications of designing development and poverty reduction strategies using this approach.

...If income per capita has any interpretation as a welfare measure, exclusive focus on the nationally resident population can lead to substantial errors of the income of the natural population for countries where emigration is an important path to greater welfare. The estimates differ substantially from traditional measures of GDP or GNI per resident, and not just for a handful of tiny countries. Almost 43 million people live in a group of countries whose income per natural collectively is 50 percent higher than GDP per resident. For 1.1 billion people the difference exceeds 10 percent. The authors also show that poverty estimates are different for national residents and naturals; for example, 26 percent of Haitian naturals who are not poor by the two-dollar-a-day standard live in the United States. These estimates are simply descriptive statistics and do not depend on any assumptions about how much of observed income differences across naturals is selection and how much is a pure location effect. Our conservative, if rough, estimate is that three quarters of this difference represents the effect of international migration on income per natural.

...The bottom line: migration is one of the most important sources of poverty reduction for a large portion of the developing world. If economic development is defined as rising human well being, then a residence-neutral measure of well-being emphasizes that crossing international borders is not an alternative to economic development, it is economic development.

Top remittance receivers in 2007

According to a WB report on Migration and Remittances Factbook 2007, the top five recipients of migrant remittances in 2007 were:

1. India ($27 billion)

2. China ($25.7 billion)

3. Mexico ($25 billion)

4. the Philippines ($17 billion)

5. France ($12.5 billion)

The top emigration countries were:

1. Mexico (11.5 million)/Russia (11.5 million)

2. India (10.0 million)

3. China (7.3 million)

4. Ukraine (6.1 million)

5. Bangladesh (4.9 million)

In 2007 alone recorded remittances flows worldwide are estimated to be $318 billion, of which $240 billion went to the developing countries. Here is the world's standing on migration and remittances. Nearly 200 million people (3% of the world population) live outside the country of their birth.

FAST FACTS ON MIGRATION & REMITTANCES

• The top immigration countries, relative to population are Qatar (78 percent), the United Arab Emirates (71 percent), Kuwait (62 percent), Singapore (43 percent), Israel (40 percent), and Jordan (39 percent). The average share of immigrants in population is under 10 percent in high-income OECD countries.

• The Mexico–United States corridor is the largest migration corridor in the world, accounting for 10.4 million migrants by 2005. Migration corridors in the Former Soviet Union— Russia–Ukraine and Ukraine–Russia —are the next largest, followed by Bangladesh–India. In these corridors, natives became migrants without moving when new international boundaries were drawn.

• The volume of South–South migration is almost as large as that of South–North migration, which accounts for 47 percent of the total emigration from developing countries. South–South migration is larger than South–North migration in Sub-Saharan Africa (72 percent), Europe and Central Asia (64 percent), and South Asia (54 percent).

• Smaller countries tend to have higher rates of skilled emigration. Almost all the physicians trained in Grenada and Dominica have emigrated abroad. St. Lucia, Cape Verde, Fiji, São Tomé and Principe, and Liberia are also among the countries with the highest emigration rates of physicians.

• In 2007, the top recipient countries of recorded remittances were India, China, Mexico, the Philippines, and France. As a share of GDP, however, smaller countries such as Tajikistan (36 percent), Moldova (36 percent), Tonga (32 percent), the Kyrgyz Republic (27 percent), and Honduras (26 percent) were the largest recipients in 2006.

• Rich countries are the main source of remittances. The United States is by far the largest, with $42 billion in recorded outward flows in 2006. Saudi Arabia ranks as the second largest, followed by Switzerland and Germany.

And, here is how my home country, Nepal, stands in this global migration and remittance picture:

• Inward remittance flows: US$ 1453 million in 2006 (US$ 1600 million estimated for 2007)

• Inward remittance flows amounted to 18% of GDP in 2006

• Outward remittance flows: US$ 79 million in 2006

• Outward remittance flows amounted to 1.0% of GDP in 2006

• Top ten destination countries: India, Thailand, Saudi Arabia, United States, United Kingdom, Brunei, Republic of Korea, Japan, Germany, and Australia

• Stock of emigrants as a percentage of population: 2.8% in 2005

Rounds around the Doha Round!

This is continuation of the previous blog post about a conference I attended on Friday in D.C. The third panel dealt with current state of global trade relations. The panelists consisted of pretty well known economists and researchers: Kim Elliott, Oliver Griffiths, Gawain Kripke, Will Martin, Christine McDaniel, Devesh Roy, and Steve Suppan. The discussion on the current state of the Doha Round of trade negotiation was pretty stimulating and I was pretty impressed with Roy’s kind of different views on the issues floated by speakers who spoke before him.

First Secretary of the British Embassy at D.C., Oliver Griffiths presented the EU’s views on the Doha Round and made it absolute clear that the EU has given a mandate to its negotiators that the upcoming trade negotiation should not lead to further cuts in agricultural subsidies. Note that agriculture trade accounts for just 10% of global trade but it remains the most contentious issues because a small group of influential farmers are protected in the West at the expense of millions of farmers and farm productivity in the developing countries. Norway and the Netherlands have one of the highest subsides and taxes on agriculture trade. It is worth noting that 63% of the gains from trade will directly go to the developing countries, showing that openness of this sector alone would help the developing countries fight poverty, hunger, and other thorny dimensions of development. Griffiths argued that the EU would like to see further negotiations in three key fields in the future:

1. Future trade negotiation should move from goods to investment and service sector

2. Future trade negotiation should address climate change (tariff on high carbon imports)

3. Trade policies should be coupled with domestic policies to realize a larger effect

Then came the US view from Christine McDaniel, Deputy Assistant Secretary (Policy Coordination) in the Office of Economic Policy at the Department of Treasury, who argued that the US “cannot isolate our path to prosperity.” She argued that the Congress (particularly, the House Judiciary Committee) has been blocking a legislation on service liberalization abroad, especially from India (I think it is known as Mode 4 or 5, I am not sure though!). I was expecting to hear that the US would push forward for the success of the Doha Round sooner than later. However, she opined that we should expect some more years to make Doha Round a success (the Uruguay Round took 8 years of negotiation), and expected president of the WB, Robert Zoellick, to vigorously push forward this agenda as he did during the Uruguay Round. She made a honest remark by admitting that any passage of crucial multilateral bill depends on how well the US economy is doing. In other words, in today’s context- slump in the housing market, fears of recession, financial turmoil, sub-prime market crisis, high oil prices- the immediate success of the Doha Round is of just not possible. There also might be a high potential for investment protectionism (we’ve already seen in the case of Unocal). Also, she opined that given the way in which the global economy is locked in low tariffs, no future President would be able to turn that around unless there is a major economic shock!

Then Will Martin presented the World Bank’s views on the Doha Round and argued that the success of this round would mean a lot to the developing countries. Gawain Kripke from Oxfam America presented civil society view and Steve Suppan from Institute for Agriculture and Trade Policy presented some thorny issues on biopiracy (he constantly referred to ‘blue box’, but I don’t know what this exactly is!).

Interesting stuff came from Devesh Roy from International Food Policy Research Institute (IFPRI). He made four points that were completely different from what others panelist were arguing about the developing countries.

1. Subsidies and agriculture market distortion is not exclusively a North phenomena. There is huge amount of distortion and subsidies in the developing world as well ($15 billion farm support recently in India is a form of subsidy).

2. There are limits to what agriculture can bring to poverty reduction and growth. China’s success is attributable to off-farm activities.

3. There is huge domestic market price distortion in the developing countries because of geographical/topological factors. The developing countries are not homogenous geographically, so the mountain region in Nepal has 18 times higher prices of food than in the plains. Similar is the case in India and Bangladesh. It has nothing to do with trade and the Doha Round would have little impact on these prices unless we complement agriculture reform with investment in infrastructure to reduce transport and transaction costs.

4. Unless we check the current state of high commodity prices, which has been skyrocketing by almost 200%, the Doha Round, even if it succeeds- would mean little because the developing countries like India has already banned rice exports, which will hurt poor neighbors like Nepal and Bangladesh.

Okay, this is getting longer than I thought. I would like to point out my earlier perspectives on the recent Indian farm bail outs. I think what the Indian government did was good (think historical injustice backed by feudal society and caste-based discrimination) and was needed because the market in that particular sector was in stalemate and poor farmers were in a ‘debt trap’. Obviously, the market created the trap (adverse selection and moral hazard) and it was unable to break it ; so, we need an exogenous force to break the trap for once and set appropriate conditions for the credit market to work for the poor farmers. Can't we view this debt write offs similar to the US stimulus package of about $150 billion? See here for extended discussion about the Indian debt write off in the farm sector.

Chinese Marshall Plan in Africa

Today I attended a conference on “South-South Cooperation and Global Trade: Bypassing the Hegemon?” – organized by GMU’s Center for Global Studies- at the Carnegie Endowment for International Peace, Washington D.C. The first two panels were pretty lame, at least for me because more political and cultural arguments were being discussed (which do not interest me, though they are significant in their own place)! The third panel was about the current state of global trade relations, especially the fledging Doha Round and its implications to the developing countries. This round was pretty interesting (may be because I am more interested in economics than in politics)...(interesting stuff from the third panel will appear as a separate blog topic)...

One particular speaker during the first panel made some interesting points about Chinese interest in Africa and Chinese strategy in controlling African resources through its financial grants/loans and coaxing foreign policy. Before proceeding further, I have to say that Mark Katz’s presentation on the Russian geo-economic vision and their intent in appearing “strong” in the international arena was also pretty good.

Joshua Eisenman argued that China follows three strategies in its dealing with Africa:

1) Bilateral asymmetry: China deals with each nation separately and tries to bring strategic policy coherence among the nations its deals with, however individual African nations are not able, or they do not have the ability, to comprehend long term strategic plan of Chinese interest on their soil. China is particularly concerned with securing economic resources in these countries and it engages through the Chinese Communist Party International Department. The long term vision and vested interest in securing resources from Africa gives China a strategic advantage over the African nations, which are unable to fathom the depth, scale, and scope of Chinese interest in the region.

2) Political resources: China does not care where and to what type of leaders its money goes as long as its interests are secured. China gave $42 million to Mugabe last week to make/renovate his palace. This is hardly been out in the news because secretive dealings, bribery and coaxing is high in China’s engagement with Africa. Additionally, China does not anymore care about ideology, i.e. trying to deal with domestic communist parties in the African countries. It deals with all political parties (party-party ties) to ensure that its economic and vital interests are secured. Since 1997-2006, China had 200 exchanges with the African political parties and it feted 60 African party chiefs in China itself. This is a strategy to morally, financially, and politically bind African leaders so that there is no objection at all to Chinese interests.

3) Financial resources: The whole aid world was shaken when China $15 billion aid to Africa during African-China conference in China last year. However, Joshua argues that it is not aid but an investment for profit. The total grants are specific and low and is incomparable to Western aid/grant. China is trying to bind African nations in financial debt because while it gives debt relief on one hand and it signs more interest-bearing loans, despite knowing that the poor African nations would default on its loans once they mature, in the other hand (one example is China gave debt relief of some $65 million and sanctioned $1.2 billion new loan to the same country). Importantly, the allotted money never go out of Chinese banks. For instance, China announced billions of dollars of aid to Angola, which never received the money. What the Chinese did was that it deposited a cheque in Angola’s name in its EXIM bank and for any new project to be executed in Angola, it transferred money to one of the predetermined five bidders for investment projects. Funds were in fact transferred from one bank to another in China itself. It never made its way to Angola, though infrastructure or whatever project was intended for was started or done. Meanwhile, Angola paid off China's loan from oil exports. This ensured that Chinese money stayed at home, it earned profit, and extremely vital oil flow was guaranteed for a long time.

What a shrewd strategy to dupe the African nations! The conditions for Chinese dealings with African countries are: employ Chinese firms and not recognizing Taiwan. The dragon is marching and widening its mouth slowly and steadily. Welcome to the Chinese Marshall Plan for Africa!

What Makes Growth Sustained?

This is a title of a recent paper from the IMF Research Department authored by Anthony Berg, Jonathan David Ostry, Jeromin, Zettelmeyer. They explore what keeps growth going, not what matters for getting growth going.

We identify structural breaks in economic growth in 140 countries and use these to define "growth spells:" periods of high growth preceded by an upbreak and ending either with a downbreak or with the end of the sample. Growth spells tend to be shorter in African and Latin American countries than elsewhere. We find that growth duration is positively related to: the degree of equality of the income distribution; democratic institutions; export orientation (with higher propensities to export manufactures, greater openness to FDI, and avoidance of exchange rate overvaluation favorable for duration); and macroeconomic stability (with even moderate instability curtailing growth duration).

____________________________________________

Our main findings confirm some previous results in the literature—in particular, that external shocks and macroeconomic volatility are negatively associated with the length of growth spells, and that good political institutions help prolong growth spells. We also have some more surprising findings. Trade liberalization, seems to help not only in getting growth going, as emphasized by previous authors, but also in sustaining it—particularly when combined with competitive exchange rates, current account surpluses, and an external capital structure weighted toward foreign domestic investment.Consistent with the findings of Johnson, Ostry, and Subramanian (2006, 2007), Hausmann, Hwang, and Rodrik (2006) and Hausmann, Rodriguez, and Wagner (2006), we find that the manufacturing share in exports, and more generally, export product sophistication tend to prolong growth. Most strikingly, we find that the duration of growth spells is strongly related to income distribution: more equal societies tend to grow longer. On the whole, these results share some of the flavor of recent work on the political economy of growth and development, as briefly discussed in Section III and in our conclusions.

Top econ research universities in 2007

1 Princeton U.

2 Massachusetts Institute of Technology

3 U. of California at Berkeley

4 Harvard U.

5 Cornell U.

6 Yale U.

7 Harvard U.

8 U. of Chicago

9 U. of Illinois at Chicago

10 U. of California at San Diego

* An institution may appear more than once if the discipline is related to more than one department.

Source: The Chronice of Higher Education (HT: The Bayesian Heresy)

Is population growth holding back Africa?

May and Guengant, in a commentary (Africa's greatest challenge is to reduce fertility) in today's FT, argue that reducing fertility in Africa is the key to Africa's development and its prospects for full integration into the global economy.

Sub-Saharan Africa -- Population Projections

...The persistent high fertility levels imply that population growth will continue despite the Aids epidemic. In mid-2007, sub-Saharan Africa had 788m people – 12 per cent of the world’s population. This share will increase to 18 per cent in 2050, or 1.8bn people. This assumes that African women would then have 2.5 children on average, against 5.5 today, according to the United Nations 2006 population projections. However, these projections imply rapid declines in fertility levels that are far from guaranteed, except in southern Africa. Higher 2050 population figures, potentially reaching 2bn or more, are plausible if fertility declines more slowly.

...slower population growth will help reduce the pressures countries face with food security, land tenure, environmental degradation and water supply...It will also ease the security problems that are often the result of conflicts over scarce resources, which are exacerbated by unsustainably high rates of population growth and widespread youth unemployment.

...growth rates in the order of 6 per cent per year translate into only half that level per capita because of the current pace of demographic growth...Unless fertility declines, attainment of the millennium development goals will remain an ever-receding mirage.

Doesn't this resonate old-school Malthusian arguments? Greg Clark makes similar kind of arguments in his book A Farewell to Alms. Though true that population increase impacts poverty reduction efforts, especially if fertility is high among poor neighborhoods, I do not think that it is a sticking bone to Africa's development. Does this mean that we should abandon all our livelihood generation and economic development efforts and focus on reducing fertility rates? With more than 24.1% of the population suffering from HIV/AIDS and population growth rate of around 1.4% in Botswana, I don't think fertility is a hinge to Botswana's development. We have clearly seen that improvements in political and economic institutions led to an impressive growth rate of over 5% in almost three decades in Botswana, which is seen as an example of how good institutions lead to high growth rate and development. Putting the whole blame on population growth for stagnant development is not fair to the African continent. The continent lacks (also fails) development because of political instability, HIV/AIDS, bad institution, natural resource curse (chiefly oil and diamond) followed by widespread corruption, low level of education, bad infrastructure, lack of rule of law, and adverse climatic conditions, among others. Also check out Paul Collier's book The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done about It and the development traps (conflict, natural resources, landlocked with bad neighbors, and bad governance). If you can't get hold of Collier's book, then check out this review- the blogger does a good job summarizing the book.

P.S.: For those who are interested in the role of institutions and how it shapes economic policies, plus the top-down and bottom-up approach, see this recent paper by William Easterly: Institutions: Top Down or Bottom Up

Rule of Law, Institutions, and Economic Growth

The Economist has an interesting and insightful article about how the "rule of law" argument evolved and made its way into the mainstream economics, especially development economics. Also see what Rodrik feels about The Economist magazine and this recent article!

...Economists became fascinated by the rule of law after the crumbling of the “Washington consensus”. This consensus, which was economic orthodoxy in the 1980s, held that the best way for countries to grow was to “get the policies right”—on, for example, budgets and exchange rates. But the Asian crisis of 1997-98 shook economists' confidence that they knew which policies were, in fact, right. This drove them to re-examine what had gone wrong. The answer, they concluded, was the institutional setting of policymaking, especially the rule of law. If the rules of the game were a mess, they reasoned, no amount of tinkering with macroeconomic policy would produce the desired results.

..."300% dividend"...a country's income per head rises by roughly 300% if it improves its governance by one standard deviation (Daniel Kaufmann and Aart Kraay)...

Economists have repeatedly found that the better the rule of law, the richer the nation...Every rich country with the arguable exceptions of Italy and Greece scores well on rule-of-law measures; most poor countries do not.

The World Bank is now running such projects (narrowly defined) worth almost $450m; on a wider definition, almost half the bank's total lending of $24 billion in 2006 had some rule-of-law component (for example, advice on conflict resolution in village-development projects, or on bankruptcy law in privatisation programmes). In roughly a decade the rule of law has gone from a specialist political and legal topic into a staple of economic thinking and the subject of a vast aid-giving effort.

...Among other proponents of a thick definition (of rule of law) are Friedrich Hayek, an Austrian economist, and Cass Sunstein of the University of Chicago. In their view, the rule of law includes elements of political morality.

...Thin definitions (of rule of law) are more formal. The important things, on this account, are not democracy and morality but property rights and the efficient administration of justice. Laws must provide stability. They do not necessarily have to be moral or promote human rights.

...One account of growth—associated with Douglass North of Washington University in St Louis, Missouri—is “institutional”. It focuses on the importance of property rights, transaction costs and economic organisation. On this view, stable, predictable laws encourage investment and growth. Thin definitions of the rule of law fit this well.The other—associated with Amartya Sen of Harvard—says that if you expand people's “capabilities” (Mr Sen's term), they will do things that help countries grow rich. Freeing people to take advantage of their capabilities usually means lifting the oppressive burden of the state and guaranteeing certain basic rights—a much thicker concept.

...But as a generalisation, the efforts of the past few years have thrown up mixed messages. They suggest the rule of law can be improved sharply; that rule-of-law reform is at root a political not a technical undertaking; and that it is linked to growth, if weakly in the short term. But they do not really bear out the assertion that the rule of law is an underlying prerequisite for growth. Rather, the more economists find out about the rule of law, the more desirable it seems—and the more problematic as a universal economic guide.

One-Egg-Per-Child Program in Uganda

The Poultry Association of Uganda (PAU) has proposed the government of Uganda to introduce One-Egg-Per-Child (OEPC)program in all the primary schools in order to increase child nutrition and reduce child poverty caused by undernutrition or malnutrition. The other rationale for this program is to stimulate local rural economy, which depends on small-scale production (agriculture). It seems to be a perfectly feasible program to at least pump up demand for eggs and spur lagging rural economy because this industry does not require sophisticated capital or large scale investment. Chickens can be raised in individual household, with investment and space ranging from small to medium scale, and household surplus/wastes can be used as to feed chickens. This reduces wastages (or say transferring deadweight loss from an inefficient activity to a all-gain activity!!). Eggs hatched by chickens could then be sold to a government agency responsible for distribution to primary school all over the country. 

This could be a perfectly viable and effective government investment to: (a) reduce the level of child malnutrition/undernutrition, (b) help reduce child poverty arising from hunger/malnutrition, (c) spur local rural economy, which could form a solid base of the economy for the meantime, (d) help increase household income, thus reduce income poverty, and (e) encourage SMEs to invest in this sector. The final multiplier effect would be large and consumption level for the whole economy would go up (remember, poor have more marginal propensity to consume) as a marginal increase in income of poor households would encourage them to invest or save more than well-off households. What a 'win-win' situation for all the parties concerned!

The name sounds like OLPC program but OEPC would be less costly, stimulates local economy, helps reduce poverty, and increase school enrollment rates (remember, scores of school nutrition programs in the US have led to increase in enrollment rates in schools in marginalized communities!).

This is how the "egg multiplier" would work:

...The proposal is to start with at least three eggs per week for every child. Each egg will cost sh150, adding up to sh5,400 for a full term. Basing on 7.3 million children under the Universal Primary Education programme, assuming there are 250 school days in a year, 61,284,608 trays of eggs would be required. To meet this demand, 8,457,300 layers would be needed from local hatcheries. "This will raise the market for layer chicks," says Dr Flavio Oliviera of PAU. At the moment, there are around 3 million hybrid chicken, inclusive of layers and broilers.

Farmers who produce raw materials used for making chicken feed will also benefit. For this project, feed mills will have to produce 21,143 tonnes of chick and duck mash, 54,972 tonnes of growers feed and 14,407 tonnes of layer mash per year. "Over 490,522 tonnes of locally produced materials are needed. Maize alone at an inclusion rate of 30% in feed would be 147,156 tonnes," Oliviera says.

...If an average farmer rears at least 200 layers, a total of 42,286 people across the country will be directly employed in the poultry sector. Each of these farmers would be producing three trays of eggs per day, earning around sh10,000...

In nutrition content, an egg has 13.2% protein, 11.1% fats, 0.65% energy and 0.9% minerals. The largest advantage of eggs is that they cannot be contaminated. An egg is also easy to store and can last much longer.

Past, Present, and Future of NAFTA

On Wednesday I attended a conference on Linking Agriculture, Development and Migration: A Critical Look at NAFTA Past, Present and Future in D.C. It was organized by a host of organization working on trade related issues. The conference was pretty interesting in the sense that almost all the speakers showed some form of discontent with the current NAFTA deal, which was crafted in 1994. The main reasons for discontent was that NAFTA has not been deliver what it was supposed to as per the initial agreement. It was hoped that NAFTA would bring prosperity and increase trade volume in all the three countries but evidences from all the three countries point to the other direction. Almost all the speakers were complaining about job loss, increase in poverty rates, internal and external displacement, destruction of countryside economy, widening inequality, and increasing poverty, among others.

US Congresswoman Marcy Kaptur (D-OH) was very critical of the current NAFTA deal. While arguing that since NAFTA was sealed the US trade deficit has soared to $1 trillion and shift of low-skilled jobs, she also argued that current model of trade agreement is clearly not working. She argued that renegotiation is essential to encompass genuine concerns about agriculture subsidies and cross-border migration. She did not sound protectionist but was arguing in a way to protect American interests, both agricultural and financial. I was wondering why she only mentioned trade deficit and did not talk about capital account surplus contributed by big US financial institutions operating in Mexico.

Meanwhile, Victor Quintana, deputy of the state of Chihuahua, Mexico was more vociferous and critical about the unfair NAFTA deal. He argued that NAFTA has done more harm than good to the Mexican economy. True, on the surface trade volume has increased by manifolds but this does not depict the true picture of the economy. He gave pretty objective and justifiable arguments against the unfair trade deal, which many argue was signed to benefit big corporate business and transnational companies. He was also arguing for renegotiation of the original deal keeping in mind the real dynamics rather than the ideological/theoretical issues forwarded by influential interest groups. His main points were that after NAFTA:

• Mexico lost food sovereignty; per capita food production was 11% lower than 20 years before

• There was no integration in real sense because there was no complementary investment (investment flowed from US to Mexico but benefits went back to the US)

• Trade has benefited a small number of companies and group of people; inequality is rising rapidly

• 80% of the agriculture business is controlled by big transnational companies; indigenous people are stripped off farming

• Lost two million jobs in the countryside- completely opposite results than what was expected

• Now 70% of the rural population lives in poverty

The most insightful stuff came from Peter Julian, MP from Canada. He provided a compelling argument for overhauling the current NAFTA deal to accommodate the ground realities facing all the three economies. He revealed that big corporate businesses were gaining in such an astronomical amount that they themselves found it difficult to divulge yearly earnings and profits from the deal since 1994. He said that his team in Canada had to fight for the information on earning earned by a handful of big businesses. It appeared that only big businesses were gaining from the deal. He constantly repeated Saving NAFTA from cheerleaders, which reminded me of Dani Rodrik’s popular paper “How to Save Globalization From Its Cheerleaders.” Also see this one. Some of the effects of NAFTA on the Canadian economy are as below:

• Decline in permanent jobs; increase in temporary jobs with no pension and health insurance…”non-family instability” in rise

• Rise in family debt (almost 150% since 1989)

• Farm income decline by 78%

• 20% of the wealthiest people earn half of all income earnings in Canada

• Upper middle class has seen status quo in income earning. Meanwhile, middle class has lost one week of income since 1989

• Lowe middle income group has last 2 weeks of income earning

• The poorest quintile has lost one and a half month of income earning

• 300,000 Canadians are homeless

The other speaker was a Mexican senator Yeidckol Polevnsky who was even more critical of the NAFTA deal. Since she spoke in Spanish, I had to use a microphone transmitter… it was not cool at all! She argued that since the trade deal, Mexico lost competitiveness (earlier its ranking was 31, now it is 58…source?), increased poverty level (48% before NAFTA, now it is 52%), increased illegal migration from Mexico, and benefits went to big companies only. She seemed to be the ultimate pessimist /nationalist among the speakers. She repeatedly argued that there is no playing field in trade right now and competitiveness is skewed in transnational companies’ favor.

I was curious and asked a question about what exactly “renegotiation” means and whether the revision, if any to be done in future, would be a step backward from the current deal? Well, Congresswoman Marcy Kaptur went before the session was over, so I did not hear US lawmaker’s perspective firsthand. The MP from Canada directly addressed my question and argued that the rise in inequality, job losses and skewed results in favor of a select few big businesses was a testament of the fact that the deal was already a step backward. He was essentially saying that the deal made countries worse off than they were before the deal. So, he wanted to renegotiate NAFTA to accommodate these genuine concerns and realities and come up with a viable, pragmatic solution. Victor Quintana argued that renegotiation should accommodate protectionist policy space to stop exploitation and ensure that the livelihood of countryside is kept alive by aiding corn, rice, and beans production. The Senator from Mexico offered more gloomy arguments saying that NAFTA has been a disgrace and horrible to Mexican economy as a whole. She was critical of a deal which would allow secondhand vehicles to be sold in the Mexican market, irrespective of quality and safety standards.

The first session seemed as if the whole session’s purpose was to denounce NAFTA deal. I do share the feeling that NAFTA is not working but we also cannot brand that it is not totally working. But as a whole, it is true that inequality is increasing, select few are gaining astronomically, and the poorest are the hardest hit. A comfortable policy space should be left for domestic policy maneuvering in any future renegotiation. As always: to ensure fairness, we should protect the deals from the cheerleaders!

I will write about interesting stuff that emerged in other sessions when I am not busy. I will try to find some time during my internship tomorrow to write something more about the other sessions.

Building and strengthening institutions in MENA

This paper highlights the necessity for building and strengthening economic and political institutions to create as many as 100 million new jobs in the next decade to accommodate the increasing number of entrants into the labor force in the Middle East and North Africa (MENA) regions. Past inefficient institutions have now made it difficult to manage massive labor force in the region, raising concerns for potential social instability and high youth unemployment. Successful reforms are possible if we build a strong link between democratic governance and market economies, the paper suggests. This includes privatizing the inefficient state-owned monopolies, decentralizing political and economic power, strengthening democratic governance, reforming the increasing labor market and regulations, and stimulating small-level private initiatives, among others.

This reform paper from the Center for International private Enterprise states that for sustained growth and development, the region must reform its economic and political institutions. High on agenda are: responsive governance and vibrant private sector.

Highlights:

• Building market institutions

• Developing political institutions

• Strengthening the rule of law

• Empowering women and youth

• Creating space for the private sector

• Improving access to information

• Enabling private sector input

• Combating corruption

Something more on MENA from the paper:

• GDP growth rate was 6.3% in 2006

• FDI was $24.4 billion in 2007- a 40% y-on-y increase and 3x larger than in 2004

• Morocco experienced drought in 2007, the only country to suffer from drought in MENA in 2007

• The region ranks bottom in political freedom and governance indicators

P.S.: Today I am attending a conference on "Linking Agriculture, Development and Migration: A Critical Look at NAFTA Past, Present, and Future" in D.C. I already attended one session and will attend one more in the afternoon. Interesting stuff about NAFTA and how policy makers from the US, Mexico, and Canada feel about the current trade agreement. Check back later for a summary of the conference proceedings. Pretty novel and justifiable ideas have been floated. High on agenda and buzz words are: Inequality, and Renegotiation.

Farmer's debt relief in India

The Indian government has recently decided to cancel the entire debt of small farmers that will cost it around $15 billion (IRs 600 billion). The farm loan relief is to be offered to all farmers with less than two hectares of land. It is an ambitious program and if it works as planned, then it will provide a huge relief to the debt-crunched poor farmers in rural India, which will help stimulate the rural economy. It is going to be a long shot. It will help farmers free from grips of the feudal societies, reduce suicides rates, and most importantly stimulate rural economy and reduction in poverty. The newest budget has made a great leap forward in social welfare spending, with 20%  increase in education and 15% increase in health expenditures. Along with the loan waiver for the selected group, the government has also decided to  give a 25% rebate for all farm loans regardless of farm size or loan distress.

With growth rates at 8.7% and rising inflation, critics have labeled the new ambitious welfare program a "populist pre-election budget" and have speculated that it will put upward pressure in price level. Though this new move from the government has received some applause (including from me!), some economists are worried about rising fiscal deficit and inflation, competitiveness in the banking sector, and rising inflation. However, this program is supposed to be more effective than previous ones because rebates are to be distributed directly to the targeted groups. Unlike in the past when banks were used as intermediaries to achieve such socio-political goals, this time the exchequer would directly distribute rebates to the genuinely distressed ones.

Critics have argued that it will hamper competitiveness in the banking sector and temper incentives in the market. If you are a farmer and you think that the government is going to give debt relief after some years, then naturally you will be less interested in paying off loans. A distressing form of moral hazard? Meanwhile, if banks know that their loans to farmers are going to be written off in some years, then the quality of the credit market would go downhill. More here, and here

This line of argument is completely valid but one has to consider historical factors and the ability of the farmers before arguing against these new reformative measures by the state. If you look at more than 800 million poor farmers from the rural areas, it is not difficult to realize that they have not been touched by rising economic growth Indian has achieved for the past two decades. The enormous revenue generation in recent years has to be redistributed efficiently so that the poor people do not feel left out. And, given the status quo, the poor farmers would in no way be able to pay off bank loans and loans from landlords (remember the age-old Adhi system, or sharecropping, in rural India). Without debt cancellation, the poor farmers would pass on debt (principal plus exorbitant interest) to their children, thus making debt servicing a generation phenomena. When will they get rid of this vicious cycle? Neither they can do it on their own nor the market would come up with a solution. The government has to step in to break the cycle and relive the farmers from long overdue debts that is holding their progress and keeping them and their families in poverty for years.

Though I believe that market is the best solution in the long run, in cases like this the state has to take a lead role to make sure that the real market forces work as they should in a level playing field. Without correcting the centuries old feudal system, including generation-passing debt structure in rural areas, it is hard to imagine that markets would find a solution to this issue. Markets did not work until now, and if the government plans to intervene then we should support it. I think it will have similar effect, though in varying proportion, as that of a stimulus package in the US. The rural economy needs to be freed from clutches of feudal regressive market structure, corrected immediately, and stimulated to help people fight poverty. There might be some problems and frauds cases of eligibility, but I don't think this move will seriously dampen market incentives. It is a corrective measure and this one is to be done in such a way that implementation bypasses the corrupt state administration.

We can find similar kind of problems in other South Asian nations, including Nepal. Recently, the Nepali government had decided to reserve jobs for marginalized groups in all state ranks. Considering the historical, cultural, and caste-based discriminated job market, I think it is a good move. Still wonder why? Read this article.

Collier on the bottom billion at the TED

What can we do to help the bottom billion? Prof. Paul Collier says, "a combination of compassion and enlightened self interest." More here.

Why compassion? Because the bottom billion are deprived of credible hope

Why enlightened self interest? Because economic divergence plus global integration would be "a nightmare for our children."

I have been particularly interested in Collier's work after reading his book The Bottom Billion. It is so simple, rich, and amazing with all the historical roots to the miseries of Africa and the present day bad governance designed by bad leaders- there are too many traps in Africa! I wish these simple ideas were translated into action in Africa. Also check out the Center for the Study of African Economies, which produces The Journal of African Economies.

...“It requires compassion to get ourselves started, and enlightened self-interest to get serious.”

...What happened the last time we got serious? Well, it was the reconstruction of Europe after WWII via the Marshall Plan. Why did the US get serious? We were worried about the spread of Communism. So what did we do?

...There’s a huge natural resource boom taking place - Uganda and Ghana have both discovered oil, and Guinea has a huge discovery of iron. “These new revenue flows dwarf aid.” In Angola, new oil revenues are $50 billion a year - total aid flows to the bottom billion nations is $34 billion a year.

“If your governance is good enough, there’s no resource boom.” That’s happened in places like Norway, Australia, and Canada. “The resource curse is entirely confined to a threshold of governance.” Nigeria is a great example of what can go wrong if you don’t have enough governance. You need a level of governance around where Portugal was in the 1980s.

..new democracies don’t have these checks and balances - they’re “instant democracies”.

Inequality in Nepal

By Kamal Raj Dhungel in The Kathmandu Post:

...Three years ago the government estimated that Gini coefficient of Nepal was 0.47. This was the highest among SAARC countries, with Pakistan having the lowest 0.31.

...The Nepal Living Standard Survey (NLSS, 2003/04) also stated that the bottom 80 percent of the population earned 47 percent of total income; the richest 20 percent of the population earned 53 percent while the poorest 20 percent earned only 5 percent of income. 

...This shows that there is an extremely unjust distribution of income where the richest 20 percent earns more than half of the total income. The annual mean and median income of the richest 20 percent of the households accounted to Rs 156,486 and 112, 962 respectively, while the same for the poorest 20 percent accounted to Rs 37, 243 and 31,147 respectively. The mean and median income of the richest 20 percent of the households is 4.2 and 3.6 times more than those of the poorest 20 percent.