Links of Interest

Seven Questions: Paul Wolfowitz

The World's top 20 intellectuals (two economists make into the list--Mohammad Yunus and Amartya Sen)

From Poverty to Power: How Active Citizens and Effective States Can Change the World? (full book by Oxfam link here and interview with Head of Research at Oxfam GD, Duncan Green here )

Five steps to sustainable governance in Africa (interview with Paul Collier)

Does professor quality matter? (via Chris Blattman)

Gates' Misguided Capitalism (by Easterly...Check out this blog where heavyweights of economics ranging from Becker to Clark to Easterly to Reich to Posner blog)

Who demands reservation?

Indian inflation at record levels

Negroponte talks about OLPC once again

Nicholas Negroponte talks about how One Laptop per Child is doing, two years in. Speaking at the EG conference while the first XO laptops roll off the production line, he recaps the controversies and recommits to the goals of this far-reaching project.

Rising price level in Nepal

GDP growth rate is around 5% (for this year), population growth rate is above 2.1%, and now CPI is 9.2%. Nepalese economy is getting worse or better? It is affecting exports (fell by 2.1%) as Nepal lost price competitiveness in the international market. On a positive note, remittances grew by 35.3% (to Rs 108.64 billion), leading to increase in foreign exchange reserve by 19.3% to Rs 197.03 billion. Sterilization is in upward trend.

...Fresh data released by the Nepal Rastra Bank (NRB) shows that the inflation based on the consumer price index rose to 9.2 percent in mid-May, the tenth month of the current fiscal year, up from 4.6 percent of the same time last year.

The central bank said the rising prices of food items led to the rise. Still, the inflation based on wholesale price index increased to 10.1 percent. 

NRB officials said inflation would further rise in the coming months, as the recent price hike of petroleum products would have to be considered. 

On the import front, a rise of 21 percent was seen as people consumed more on the back of healthy inflow of remittance. 

NRB said there had been significant rise in import of petroleum products, MS billet, vehicles and spare parts, gold, telecommunication equipment, videos, television and parts.

...the government budget deficit was Rs 6.4 billion during that period, compared to a surplus of Rs 2.86 billion. To meet the growing requirement of Indian currency, NRB purchased the Indian units worth Rs 77.27 billion through a sale of US$ 1.21 billion.

Here is more.

Links of Interest

How to see world economy through two crises

The machine that spun the world around

Paths out of Zimbabwe's dead end

Ways to stem the drift into protectionism

Boy rescues toddler trapped in gorge; Professional rescuers unsuccessful

Lessons for Africa from China's success against poverty

China's success against poverty is probably one of the most important economic phenomena/developmental success in a period of three to four decades since the Industrial Revolution. There are many explanations for the success of China's fight against poverty (usually ascribed to household responsibility system, township and village enterprise, market-based incentive fostering policies, strong leadership, increase in FDI, etc). There is no doubt that China's economic system was the one with heavy public involvement in creating a market-based/incentive fostering system. While China has been able to decrease poverty by astounding figures, Africa's progress is dismaying. In 1981, China's poverty to Africa's poverty was 4:1, but by 2004, 500 million fewer Chinese lived under a dollar a day than in 1981, while in Africa, the number of poor people rose by 130 million in the same period. Why is there such a divergence? What lessons can we learn from the success of China's fight against poverty? Is similar model applicable in Africa?

Martin Ravallion, director of the WB's Development Research Group, in a policy research working paper titled "Are there lessons for Africa from China's success against poverty?"argues that despite differences in constraints faced by Africa, two lessons clearly stand out:

The first is the importance of productivity growth in smallholder agriculture, which will require both market-based incentives and public support. The second is the role played by strong leadership and a capable public administration at all levels of government.

He warns that advocating successful policies tested in the East for implementation in Africa without heeding to constraint would not produce the intended results. African now has different characteristics (higher income inequality, lower population densities, and higher dependency rates) than China had when it embarked on market-based economic reforms.

...China’s success illustrates the generic point that freer markets can serve the interests of poor people...Chinese farmers responded dramatically to market incentives, and African farmers are unlikely to be any different in this respect—but there’s far more behind China’s success than just letting markets do their work.

...With Africa’s levels of poverty and relatively abundant supply of land, and with today’s high food prices, an agriculture-based strategy must be at the center of any effective route out of poverty.

Ravallion rightly argues that Africa should learn from Chinese agricultural reform and focus on increasing productivity of small farmers by concentrating policies on fostering rural economy. Most people think that the Chinese success is due to increase in FDI and open markets. However, it should be noted that the boom in FDI occurred only after 1990s, i.e. after China substantially reduced extreme poverty though closely monitored agricultural policies centered at household responsibility system and TVEs (or decollectivization). In fact, Ravallion argues that growth in agriculture over 1981-2004 had about four times the impact on national poverty as growth in manufacturing or services. This should be sufficient to realize that Africa needs to develop small scale farming and increase productivity from these farmings to fight best against extreme poverty. This carries more weight in the wake of recent rise in global food prices. Small scale farming could earn higher income for households if policies are focused on fostering agricultural productivity.

While growth in manufacturing helped reduce poverty in the 1990s by absorbing surplus rural labor, it’s important to note that the “heavy lifting” in reducing poverty took place in the early 1980s, in the wake of China’s rural economic reforms.

...Impatient governments often try to “jump start” the (mostly urban) industrialization process, often by-passing the pressing needs of their rural poor. Arguably even China may have tried to industrialize too quickly. Here, there are useful lessons for Africa from Vietnam, which maintained a more enduring sectoral emphasis on agriculture and rural development than China.

Policy lessons for Africa:

• Freer markets can serve the interests of poor people.
• Market-oriented reform must be complemented by strong state institutions.
• Policies must avoid doing harm to poor people.
• Macroeconomic stability is crucial.
• Internal market integration should not be neglected.
• The agricultural sector should be given high priority.
• China can help Africa build up agricultural research and extension systems.
• Industrialization should not take precedence too rapidly.
• Rising inequality is not an inevitable outcome of higher growth and less poverty.

These lessons come from the assumption that the African people would also respond to market-based incentives as the Chinese people did when their economy was opened up to markets and trade. Moreover, it also argues that the African states should implement supportive policies and invest in the economy (i.e. more public investment and a constructive role for the state). An informative paper...good to read!

Global food crisis and the Doha Round

Jagdish Bhagwati and Arvind Panagariya write in FT (always for trade liberalization, no matter what!):

[...]instead of our being able similarly to exploit the food crisis to push for trade and globalisation, many people and some governments wrongly blame the crisis itself on trade and globalisation.

[...]Agricultural liberalisation in the European Union and the US is good for several reasons, but it will not help moderate the food crisis. A key component of the proposed Doha agreement is a substantial reduction in agricultural subsidies. This would reduce the supply of grains from some countries that subsidise them and increase it from other countries, especially in the Cairns group. The net effect on supply would be negative.

[...]But now that food prices have risen dramatically, the payouts to US farmers will be almost negligible since they vary inversely with market prices. High prices are expected to continue, so the need for subsidy will also remain negligible. It should therefore be possible to soften significantly US opposition to restricting post-Doha agricultural subsidy payments to lower levels, making it likely that India would respond and making Doha success possible.

Pariah for couple of days:Taboo that needs abolition

A Maoist worker in menstruation, from Bhairavsthan VDC in remote Achham district, living in isolation in a makeshift tent near her house, Friday. This practice known as Chhaupadi is widely condemned by women’s rights groups as inhuman. In this part of Nepal, women are considered impure for 11 days after childbirth and four to seven days during menstruation and kept in isolation. (Source: The Kathmandu Post, June 21)

Easterly ranks aid agencies

Always critical of aid agencies, Easterly has now come up with his own raking of aid agencies. Starting his assumptions from a distrust on aid agencies, of whatever nature they are, he focuses on the difficulties faced by aid agencies because "they are typically not accountable to their intended beneficiaries." He considers dimensions of aid practices like transparency, specialization (the degree to which aid is not fragmented among too many donors, countries, and sectors), selectivity (the extent to which aid avoids corrupt autocrats), use of ineffective aid channels such as tied aid, food aid, and technical assistance, and the overhead costs of aid agencies.

Among the 48 aid agencies he looked at, the World Bank's IDA, of which he is always critical of, is in the first place. Here is the full ranking

The first five on the list are: International Development Assistance (IDA), Department of International Development (DFID), African Development Bank, Asian Development Bank, and Inter-American Development Bank. The IMF is ranked in 26th position, which is worse than USAID's 16th position.

Easterly said that he was surprised by the performance of the World Bank: “The World Bank is seen as professional and staff is chosen on the basis of merit." Meanwhile, the UN agencies have performed poorly in his list. I am surprised that UN WFP is third from the last in his list. UNHCR is in the last. Easterly argues that this happened because these agencies are considered "bloated and politicized." He is also unhappy with limited information disclosure from WFP. This might have skewed the results further because it is unbelievable that WFP and UNHCR are in the bottom of the list. These agencies conduct targeted aiding in the most difficult places in the world. And, the outcome is generally positive. Food aid directly given to the most affected people, be it in an in a country run by an autocrat or in a democratic country, should not be viewed differently. Targeted food aid is for survival and WFP's work in the despot states should not be viewed negatively, thus affecting its ranking. Easterly explains that the data are incomplete, which means that the ranking is just another ranking with doubts in its findings.

The main conclusions of our paper appear somewhat contradictory: (1) the data are terrible, and (2) the pat- terns the data show are terrible. If the data are terrible, how do we know the patterns they seem to show hold true? Still, we remain convinced that some data is better than no data. Also, we hope that as researchers publish findings based on the currently available fl awed data, additional data collection and quality improvement will take place. The data situation among aid agencies, such as the murky data available on operating costs of aid agencies and the non-reporting of essential items like aid tying and sectoral shares of aid spending, would be unacceptable in most areas of economics in rich country democracies. It is particularly sad in an area where the objective of these agencies is helping the poorest people in the world, and where one of the few mechanisms for accountability is for outsiders to check what they are doing.

Our findings on aid best practice tend to confirm a number of long-standing complaints about foreign aid. The aid effort is remarkably splintered into many small efforts across all dimensions—number of donors giving aid, number of countries receiving aid from each donor, and number of sectors in which each do- nor operates. A lot of aid still goes to corrupt and autocratic countries, and to countries other than those with the lowest incomes. Aid tying, the use of food aid-in-kind, and the heavy use of technical assistance continue to persist in many aid agencies, despite decades of complaints about these channels being ineffective. In addition, some agencies have remarkably high overhead costs. The broad pattern that emerges from our evidence is that development banks tend to be closest to best practices for aid, the UN agencies perform worst on these dimensions, and the bilaterals are spread out all along in between. Explaining why each of these patterns persists over time raises an interesting agenda for research in political economy

 

Collier in favor of coups!

Paul Collier argues that, in light of international incapacity and unwillingness to deal with dictators, in order to topple tyrant regimes like that of Mugabe of Zimbabwe and General Shwe of Burma, the West needs to support coups by the country's own army. Quite disturbing argument at least for those who always drumbeat the virtues of democracy. But, as Collier argues, this is essential because if tyrants cannot be toppled by international pressure while they continue to plunder on domestic resources at the cost of starving/dying citizens, then it is better to support domestic coups, which might provide a glimmer of hope when there is none. He favors coups because the existing system of governance would simply get worse without change in power/leaders. However, coups, which are "unguided missiles," should be provided with a guidance system so that governance is better than in a tyrant's rule.

So how can the grossly excessive powers of the Mugabes and Shwes of the world be curtailed? After Iraq, there is no international appetite for using the threat of military force to pressure thugs. But only military pressure is likely to be effective; tyrants can almost always shield themselves from economic sanctions. So there is only one credible counter to presidential power: the country's own army.

Realistically, Mugabe and Shwe can be toppled only by a military coup. Of course, they are fully aware of this danger, and thus have appointed their cronies as generals and kept a watchful eye on any potentially restless junior officers. Such tactics reduce the risk of a coup, but they cannot eliminate it: On average, there have been two successful coups per year in the developing world in recent decades. A truly bad government in a developing country is more likely to be replaced by a coup than an election: Mugabe will presumably rig the runoff vote scheduled for Friday by intimidation. Or he could follow the example of the last Burmese dictator, who held an election, lost and simply ignored the result.

I find it a little awkward to be writing in praise, however faint, of coups. They are unguided missiles, as likely to topple a democracy as a dictatorship. But there is still something to be said for them.

Since the fall of the Soviet Union, the international community has taken the rather simplistic position that armies should stay out of politics. That view is understandable but premature. Rather than trying to freeze coups out of the international system, we should try to provide them with a guidance system. In contexts such as Zimbabwe and Burma, coups should be encouraged because they are likely to lead to improved governance. (It's hard to imagine things getting much worse.) The question then becomes how to provide encouragement for some potentially helpful coups while staying within the bounds of proper international conduct.

Good article! Read the full article in the Washington Post on June 22.

New country ranking on trade facilitation/enabling

The World Economic Forum (WEF) has published a report titled The Global Enabling Trade Report 2008, which ranks countries by looking at four issues/indexes: market access, border administration, transport and communications infrastructure, and the business environment.

The first subindex measures the extent to which the policy and cultural framework of the country welcomes foreign goods into the country. Once goods have been allowed in to the country, the second subindex assesses the extent to which the administration at the border facilitates their entry. Once goods have made it over the border, the third subindex takes into account whether the country has the transport and communications infrastructure necessary to facilitate the movement of the goods from the border to destination.

These "pillars of enabling trade" are further divided into ten subindexes: tariffs and non-tariff barriers, proclivity to trade, efficiency of customs administration, efficiency of import-export procedures, transparency of border administration, availability and quality of transport infrastructure, availability and quality of transport services, availability and use of ICTs, regulatory environment, and physical security.

The index basically measures the factors, policies, and services facilitating the free flow of goods over borders and to destination. The top ten countries based on the index are:

 

The results bear witness to Hong Kong and Singapore’s openness to international trade and investment as part of their successful economic development strategy. Both countries have put into place customs administrations that are highly efficient in getting goods over borders. They are also endowed with well developed transport and telecommunications infrastructures ensuring rapid transit to final destination. These attributes are further supported by business environments that are conducive to the logistics and transport industry.

The report describes China's trade position as:

China occupies the 48th position.This fairly low position for one of the world’s most successful exporters highlights a number of underlying weaknesses in China’s economy and its trading regime.Above all, China is a fairly closed country. Although its economic success relies heavily on exports, imports are still severely inhibited by tariff and non-tariff barriers, despite the country’s accession to the WTO.The country ranks 108th out of 118 economies on tariff barriers, which amount to almost 15 percent.The country’s border administration is fairly efficient; importing products is not costly, although it can be quite time-consuming. A particular concern when exporting and importing is the lack of transparency of border administration, which can be particularly heavy for foreign businesses. Because of large export volumes, the country is well connected to international markets, yet its transport infrastructure is not on a par with the world’s best. In particular, airport density and the quality of air transport infrastructure are fairly low.The quality and availability of transport services, however, are among the best in the world, ranked 17th overall. Improvements to the regulatory and security environment would further enable trade. In particular, greater encouragement of FDI and more openness to foreign air transport service providers would help.

About India:

Further down the rankings we find India, at 71st place. India’s weak position reflects a mixed performance on the four pillars of the ETI.While it boasts fairly good border administration and an acceptable business environment, market access continues to be severely restricted. Indeed, India ranks 105th on the relevant component with, unlike most other countries, tariff barriers representing a more serious impediment than nontariff barriers. Only a small share of goods is imported duty-free. India’s border administration meets many needs of importers and exporters. Ranked 55th on this indicator, a vast number of customs-related services is available in India and clearance entails low pecuniary costs, although it is time-consuming. Border administration continues to be affected by corrupt practices, however, hampering an efficient transport of goods across borders.Trade-related infrastructure and the relevant services are equally fairly well developed in India, ranking 52nd in the overall sample. However, although the country is well connected through maritime routes, it needs more airports and high-quality roads. India’s business environment is in line with the country’s overall assessment, with the regulatory environment ranked 64th and security assessed at 56th among the countries assessed.

Highlights of the report is available here. It needs to be seen how representative the results are because it is an outcome of "Survey data" and "hard data". The Survey data was collected by surveying the opinions of CEOs and top business leaders in all economies covered by their research. It just reflects the views of the owners of big companies and their opinions are highly subjective, probably giving bad score to things that increase their cost of business/procurement. The report claims that trade openness is associated with higher growth and poverty reduction. This is quite a claim in light of stagnant poverty and growth figures of countries that are fairly open to trade. In most of the cases the countries with low rankings suffer from corrupt custom administration, lack of transparency, limited market access, bad quality of communication and transport infrastructure, and insecurity.

What about my own country, Nepal? Well, it is in third position from the last! Nepal's overall ranking is 116 (with a score of 2.70), just above Burundi and Chad. In the individual subindexes, Nepal's rankings are 106 (with a score of 2.77) in market access, 94 (with a score of 3.14) in tariff and non-tariff barriers, 115 (with a score of 2.41) in proclivity to trade, 108 (with a score of 2.70) in border administration, 117 (with a score of 1.92) in efficiency of customs administration, 101 (with a score of 3.37) in efficiency of import-export procedures, 103 (with a score of 2.83) in transparency of border administration, 113 (with a score of 2.34) in transport and communications infrastructure, 111 (with a score of 2.45) in availability and quality of transport infrastructure, 97 (with a score of 2.97) in availability of transport services, 115 (with a score of 1.61) in availability and use of ICTs, 118 (with a score of 2.98) in business environment, 116 (with a score of 3.14) in regulatory environment, and 117 (with a score of 2.82) in physical security.

Here is a video where Robert Lawrence, Albert Williams Professor of Trade and Investment at the John F. Kennedy School of Government, Harvard University comments on the results of the World Economic Forum's Global Enabling Trade Report 2008.

Links of Interest

The expected benefits of trade liberalization for world income and development  (it is much more lesser than previously expected/claimed...using the MIRAGE model, the authors estimate that full trade liberalization would increase world real income by US$100 billion (+0.33 percent) after 10 years of implementation....a different study had found that full trade liberalization would increase world welfare between 0.2 to 3.1 percent only.)

How imbalances led to credit crunch and inflation 

A fair Zimbabwe poll is not enough 

How best to manage global imbalances 

Mohamed El-Erian writes: "...the fact that the system has ended up eschewing the superior policy solution speaks to the urgency of learning from them. An increasingly interconnected world cannot maintain high growth and low inflation without a bold modernisation of the mechanisms for international policy co-ordination, starting with the G7. Governments must continue to refine their policy instruments and pay greater attention to the secondary and tertiary consequences of their actions. The private sector must assume greater responsibility for ­forward-looking risk management. In the absence of these changes, the inevitable adjustment of the global imbalances will continue to entail a serious cost in global welfare."

Does money transcend cultural identity?  

Lessons from Latin America: Donors, democracy and development 

How a Kenyan village tripled its corn harvest (thanks to Sachs's Millennium Villages Project)

Georgy Dyson at the TED: The birth of the computer

Time to look for new patterns of consumption and production

Joe Stiglitz argues that the scale of food and fuel crisis right now is an indication for the need to look at new patterns of consumption and production.

The world needs to rethink the sources of growth. If the foundations of economic growth lie in advances in science and technology, not in speculation in real estate or financial markets, then tax systems must be realigned. Why should those who make their income by gambling in Wall Street's casinos be taxed at a lower rate than those who earn their money in other ways? Capital gains should be taxed at least at as high a rate as ordinary income. (Such returns will, in any case, get a substantial benefit because the tax is not imposed until the gain is realised.) In addition, there should be a windfall profits tax on oil and gas companies.

Given the huge increase in inequality in most countries, higher taxes for those who have done well – to help those who have lost ground from globalisation and technological change – are in order, and could also ameliorate the strains imposed by soaring food and energy prices. Countries, like the US, with food stamp programmes, clearly need to increase the value of these subsidies in order to ensure that nutrition standards do not deteriorate. Those countries without such programmes might think about instituting them.

Two factors set off today's crisis: the Iraq war contributed to the run-up in oil prices, including through increased instability in the Middle East, the low-cost provider of oil, while biofuels have meant that food and energy markets are increasingly integrated. Although the focus on renewable energy sources is welcome, policies that distort food supply are not. America's subsidies for corn-based ethanol contribute more to the coffers of ethanol producers than they do to curtailing global warming. Huge agriculture subsidies in the US and the European Union have weakened agriculture in the developing world, where too little international assistance was directed at improving agriculture productivity. Development aid for agriculture has fallen from a high of 17% of total aid to just 3% today, with some international donors demanding that fertiliser subsidies be eliminated, making it even more difficult for cash-strapped farmers to compete.

Rich countries must reduce, if not eliminate, distortional agriculture and energy policies, and help those in the poorest countries improve their capacity to produce food. But this is just a start: we have treated our most precious resources – clean water and air – as if they were free. Only new patterns of consumption and production – a new economic model – can address that most fundamental resource problem.

Links of Interest

Tanzania: An African success story?

Nepal Maoist chief to get top peace award

The paralysed and inefficient institutions of Kosovo

Is Ethiopia really enjoying economic development?

A theory of military dictatorships

Singapore: The Global Schoolhouse

This is what the state can do to create a high-value knowledge based economy. Singapore, which is considered as a state that successfully engineered its economy to the path of sustained economic development by reforming itself into a global commercial hub (obviously, following the unorthodox policies to create the orthodox outcomes), has now drawn up plans to transform itself into a global hub of education and medical services. It has formulated the Global Schoolhouse, a policy (with an initial funding worth US$8 billion) designed to attract top notch international students to Singapore based public and private institutions, remodel education system, and establish high class universities in Singapore. It is reported that elite universities like MIT, Yale, John Hopkins, Duke, etc were funded to run graduate-level programs and research activities. Similar policies were implemented by Saudi Arabia, Romania, Ireland, and Malaysia.

Singapore's government formulated the Global Schoolhouse, a policy platform based on three pillars: investing financial support with an identified group of "world-class universities" to establish operations in Singapore; attracting 150,000 international students by 2015 to study in both private and state-run education institutions; and remodel all levels of Singaporean education. The Global Schoolhouse articulates with policy reforms in education, research, urban redevelopment, taxation, immigration, and intellectual property.

Bringing in foreign expertise to contribute to Singapore's knowledge-economy agenda resonates with earlier state-led industrialization policies. The government's aphorism, "build it and they will come," was translated into the provision of state-of-the-art facilities and tax concessions and grants for foreign companies. This enabled Singapore to build capacity in key industries and integrate itself into the capitalist economy, at a time when the newly independent states were deeply suspicious of capitalism. The prime minister noted that Singaporeans were "learning to do a job" from foreign companies, something they may not have otherwise learned. The issue of "whether or not we were exploited" was less relevant to him.

This is yet another example of how the state can play a crucial role in promoting economic growth, engineer such growth methodologies, and provide incentives to achieve the growth goals.

By the way, this is how the Singaporean government support the education system:

The government offers resources and opportunities to do less administration and more research, including scientifically proactive research unencumbered by short-term commercial imperatives. Expatriate faculty also express appreciation for the professional freedoms provided by a forward-thinking, scientifically literate leadership that prizes intellectual achievements and a setting without any urban violence. Despite the limitations in democratic freedom for its citizenry, Singapore is not considered a police state. It is described as well governed, with impressive public-good achievements in infrastructure, health, education, and redistribution exceeding those of its neighbors.

...Singapore continues to use foreign companies, universities, and knowledge institutions to build capacity in key knowledge industries and to exploit new and emerging expressions of knowledge capitalism.

 

Lessons from the South African electricity crisis

In a one pager published this month by the IPC, Kate Bayliss from the Center for Development Policy and Research argues that the South African electricity crisis is a result of the failure of the private sector to respond to an ambitious electricity restructuring and privatization program beginning early 1990s and the lack of public investment in this sector. Bayliss maintains that though power sector is open to the private sector in other countries as well, there has been a decline in investment, implying that just making arguments on investment gap by following the orthodox restructuring economic models of the 80s and 90s would not work.

During the recent power cuts, a very high proportion of generation capacity was out of service. During January 2008, for example, this reached 23 per cent, mostly due to unplanned maintenance.

The Eskom plant is under severe strain due to factors such as poor coal quality, staff shortages and a high load on its capacity. A vicious circle has developed: a high proportion of plant is out of action, so further strain is placed on the existing plant, which becomes even more likely to break down.

Because of this additional strain on the system, frequent outages are inevitable. Similar reform packages have been repeated in much of sub-Saharan Africa. But the ‘unbundling’ of the electricity supply industry to facilitate private sector participation has failed to elicit the critically needed investment.

Across all developing countries, private sector investments in the power sector declined from US$ 47 billion in 1997 to US$ 14 billion in 2004. However, international advisors have continued to adhere to the orthodox package of restructuring policies, claiming that obtaining private sector investment is unavoidable because of a widening ‘investment gap’ in the power sector.

Bayliss concludes that in the wake of private sector's failure to tap into the opportunities in the power sector, the state must fill in the tap by investing more in the sector.

The electricity crisis of South Africa demonstrates that the widespread efforts across developing countries to encourage private sector investment in the electricity industry are unlikely to succeed. So the government and state utility must continue to scale up public investment in order to maintain and expand electricity capacity.

Of course, concerns against corruption and malgovernance in the public sector, where ever it might be, would run very high. This does not mean that the state should completely privatize power sector. Both the state and the private sector need to work together to harness untapped resources and opportunities. The state can kick-start the process through initial lump sum investment while keeping in mind that crowding out of private investment is eschewed. Keeping this balance in investment requires good policy work.

Growth Acceleration and Deceleration in Africa

This one is from an article titled “Good and Bad Times: Volatility and Growth in Africa” by Jorge Saba Arbache and John Page. They look at long term growth episodes and reach interesting conclusions (well, at least to me!). See WIDER Angle newsletter 2008 for the article.

We find evidence that economic, social, governance, and institutional variables are significantly different during acceleration and deceleration episodes. The major changes in national accounts during growth episodes take place in investments and savings, rather than in consumption. Savings and investments are higher during accelerations as compared with normal times and substantially lower during deceleration episodes. Foreign direct investment during accelerations is six-times the figure for deceleration episodes. Trade is substantially lower during decelerations.

Surprisingly, the authors find that growth accelerations do not produce a significant improvement in education and health outcomes. Meanwhile, deceleration has a significant impact on these two development indicators. This means that preventing African states from failing is important. Nations with growth accelerations should devise other techniques to improve the development indicators as acceleration itself do not improve them substantially. For instance, Botswana is growing at an average of 7% but HIV/AIDS transmission and infection rate is pretty high.

We also find an important asymmetry between how growth accelerations and decelerations affect human development outcomes. While growth accelerations result in relatively small improvements in human development, decelerations have important negative impacts on education and health outcomes. Under 5 mortality and infant mortality, for example, are substantially higher during growth decelerations than in normal times, but they do not improve during growth accelerations. These results suggest that preventing growth collapses is essential should Africa want to attain the Millennium Development Goals.

The authors argue that it is easier to predict deceleration than acceleration by looking at key indicators, chiefly low savings and investment rates.

Countries that have low savings and investment have greater probability of a deceleration. Poor macroeconomic management appears to be an important factor in precipitating bad times. Decelerations are accompanied by high inflation and significant exchange rate misalignment; and countries that trade less are more exposed to growth decelerations. Governance indicators deteriorate during bad times. Avoiding conflict appears to be a major part of avoiding growth decelerations.

Red tapes under the red flag

Excerpt from my Op-Ed published today in The Kathmandu Post:

I wonder what route the economic system would take when the leaders of the red flag formally take over executive powers of a new federal democratic republic of Nepal. It seems a no brainer that the Maoists won't part away from their socialist roots because it is the same base from where they ascended to power.

But, the exact mode of economic system under the Maoist leadership is still ambiguous. Of late, the Maoists' second-in-command Baburam Bhattarai defined his party's economic slogan as “new transitional economic policy,” which essentially means development of industrial capitalism -- oriented towards socialism. This policy rests on two components: scrapping feudalism and bestowing more rights to the working class and landless people by following the Marxist bourgeois-proletariat principles. This sounds grand and scary!

Doing away with the “remnants of feudalism -- feudal production relations - and developing industrial relations oriented towards socialism - which would solve long-term demands of the working class” is easier said than done. Practically, this might lead to creative destruction of existing production capacity without compensatory creative creation of new and better opportunities. History shows that any drastic reform in this direction only exacerbates the situation, leading to far-reaching consequences in industrial relations, international relations, and capital investment both from domestic and foreign investors.

One of the main agendas of the Maoists is to abolish the feudal system and its production relations through land reform that is consistent with the Marxian/socialist views. To put it in Bhattarai's own words, the Maoists' interpretation of this policy is “revolutionary land reform based on the principle of land to the tiller.” Unfortunately, we can hardly find the mercantilist system, i.e. Zamindari and landlordism systems so entrenched and widespread that it requires a complete overhaul of the economic system to rectify the problems in land ownership.

Arbitrary enforcement of failed principles of “absenteeism landlordism” and “land to the tiller” would be plainly inconsistent with the present state and evolution of our economic system. Of course, the system is far from perfect and is flawed in some aspects.The reason is not because of the tussle between bourgeois and proletariat classes but because of the absence of political consensus on a specific long-term economic plan for the country, fragile and capricious industrial relations often battered by union strikes, weak governance, political instability, and deeply entrenched corruption in almost all levels of bureaucracy, among others.

Reforming the economic system requires improving existing inefficient institutions and creating new ones in case of deficiency of appropriate institutions, not revival of failed and antiquated Marxist ideas.

Continue reading the Op-Ed here

GDP per capita of Nepal rises to $470

This is a good news but I am too busy too comment on it. So the whole blog is outsourced to Prem.

By Prem Khanal

Propelled by the a strong growth in both the agriculture and non-agriculture sectors, the long-ailing economy has bounced back to record 5.56 percent growth in the current fiscal year, highest economic expansion in last the seven years.

With the growth, the total size of Nepali economy in producers' price has scaled up to Rs 828.8 billion (US$12.80 billion) while the per capita income has also increased by around 11 percent to Rs 30,361 per year (470 US$). However, with the creeping inflation, which is around 9 percent, the real purchasing capacity of Nepali consumers is estimated to grow marginally in the year.

According to a preliminary estimate of national accounts prepared by the Central Bureau of Statistics (CBS), agriculture sector, which contributes 32 percent to national economy, grew by 5.65 percent while the growth of non-agriculture sector was around 5.52 percent.

Finance minister Dr Ram Sharan Mahat said that the growth which has been encouraging, was made possible due to prudent and tactful management of the economy even at the most difficult period.

The big push for this year's growth came from the long-yeaning agriculture sector, which witnessed a record 5.65 percent growth in 14 years, thanks mainly to almost 17 percent growth in production of paddy, the heavyweight of the agricultural sector.

Likewise, the wholesale and retail sector that holds the second largest contribution to national economy after agriculture expanded by 6.43 percent whereas its expansion last year was negative. Increasing purchasing power of consumers mainly due to a double-digit growth in remittance inflow fueled the growth.

Similarly, despite a strong growth in communication sector, the lengthy transport disturbances took a toll on the sector, resulting in a slowest growth of 6.6 percent in transport and communication sector, the third largest contributor to national output.
The most impressive growth came from the financial intermediation sector, which
mainly represents banking and insurance businesses. According to CBS estimate,
annual growth of the sector recorded at 13.8 percent from last year's around 9 percent.

Robust rebound in tourist arrivals also propped up the long-ailing hotels and restaurants sector to grow by 7.5 percent, the highest growth in years. Likewise, construction sector that represents nearly 7 percent in the overall economy also showed a moderate growth of 4 percent compared to 2.5 percent last year.

However, the most pessimistic development came from the manufacturing sector, which recorded a nominal growth of 0.18 percent, lowest since it recorded negative in 2001/02 mainly due to deteriorating industrial relations and political uncertainty.

Worst places to be a woman

The FP magazine lists the world's worst places to be a woman: Haiti, Yemen, Sierra Leone, Nepal, Papua New Guinea, and Moldova. (HT: Chris Blattman)

I am surprised that my country, Nepal is also in the list. Never thought it was so bad! Actually, it is the worst place to be a woman in South Asia, according to the ranking.

NEPAL
Worst in South Asia

Share of women in Constituent Assembly: About 32 percent

Female-to-male income ratio: 50:100

Female literacy rate: 35 percent

Marriage comes early in Nepal: Women born in the late 1970s married at a median age of 16. And motherhood is particularly dangerous. Nepal is the “deadliest place in the world to give birth outside Afghanistan and a clutch of countries in sub-Saharan Africa,” according to a 2006 report by the International Federation of the Red Cross. That’s because only about 1 in 5 births is attended by trained health personnel. But the government is taking steps to improve women’s lives: A quota system for women and minorities resulted in a third of the Constituent Assembly seats going to women in the April elections.

Market failure and the need for government intervention

Ken Lewis, chairman and chief executive of Bank of America, argues that for a secure energy future markets alone would not bring solutions; government intervention is needed as well. Markets always do not work and hence government intervention is needed to rectify market failures or to keep the markets in track. This article from one of the bigwigs of the financial markets calling for government intervention shows how far we can rely on the markets, despite all its failures arising from coordination problems and spillover effects. Markets are the supposedly the most efficient economic model but it is always not true because of several missing elements arising from coordination failures and externalities/spillovers.

In 1859, one economic player had a notably small role: the government. The oil industry was free to develop as the market dictated. Today we do not have time to depend solely on the market to drive change. Our desire to balance economic growth with protection of our climate, to reduce our dependence on global oil markets and to account for the long-term costs fossil fuels impose on our economy requires action not only from the private sector but from policymakers as well.

It should sound strange to hear the chief executive of a global bank calling for government intervention. It is not a position I take lightly. But it is also not unprecedented. The government played a significant role in electrifying the rural US and building our transport infrastructure. Landmark legislation such as the clean air and clean water acts have been environmental and econ­omic successes. And state governments often encourage the development of new industries.

Good economic news for Nepal

Finally, after some years of stagnation, Nepali economy is set to rebound. The central bank predicts that GDP would grow by 4% this fiscal year, thanks to a 6% expected increase in agricultural outputs and a 14% rise in tourism. However, inflation still poses a challenge.

"The Nepal Rastra Bank (NRB) has predicted national output to grow by 4 percent in the current fiscal year, thanks mainly to a record agricultural growth of 6 percent, the highest in 13 years.

Despite a wonky manufacturing sector, the impressive rebound by the agriculture sector along with an almost 17 percent growth in tourist arrivals contributed to the economic expansion, according to the central bank's economic report that covered the first nine months of the running fiscal year.

However, a record high inflation, which looks to be marching toward double digits, has painted a bleak picture of the economic outlook. The year-to-year consumer inflation stood at 8.9 percent in mid-April 2008 compared to 5.6 percent in the corresponding period last year, said the report."

Implications of rising global food prices

Here is a good summary of the implications of rising global food prices:

Inflation: It sounds tautological to suggest that higher food prices are contributing to inflation, but the importance of this relationship cannot be overstated. In virtually every major country and region, inflation is approaching dangerous levels. In the Euro-zone, it has already notched a 15-year high. In China, a 12-year high. In Vietnam, the inflation rate has soared to 21.4%, and in Zimbabwe, prices are rising at a whopping annualized rate of 1,000,000%! Even in the US, where food represents only 15% of the CPI basket, consumers are feeling the squeeze. The CPI currently stands at 3.9%, well above the Fed’s comfort zone. Furthermore, the minutes from the Fed’s April meeting suggest that economists are not confident that inflation will return to an acceptable level prior to 2010.

Monetary Policy: The spike in food prices could not have come at a worse time, since the global economy is struggling to deal with another crisis, this one related to housing and credit markets. As we reported in a previous article, inflation is hamstringing Central Banks, who would otherwise use monetary policy to soften the impact from the credit crisis. At the expense of price stability, the Fed has already cut its benchmark interest rate by 3% since August. It is unlikely to cut rates further. The bank of England has also probably stopped cutting rates, despite making only one rate cut, while the European Central Bank has resisted pressure to cut rates at all. Returning to China and Vietnam, both of their respective Central Banks have separately hiked rates and tightened lending restraints. In short, Central Banks throughout the world are prioritizing price stability over economic growth.

Famine and Civil Unrest: In the developing world, rising food prices have combined with famine to produce the proverbial “perfect storm,” in the words of development economist Jeffrey Sachs. “These places aren’t on the brink. They’ve gone over the cliff.” Dr. Sachs was referring specifically to the Horn of Africa, where the situation is especially dire because of continued civil war and political instability. Unfortunately, the same story is playing out in the darkest corners of the globe, sucking in a flood of aid experts and volunteers. Sadly, it has even been reported that devout Hindus no longer have enough food to make regular donations as part of their faith. Theoretically, the effect of rising food prices could be neutral on the developing world, where a signifcant portion of the population is still employed in the agricultural sector. Unfortunately, this has not been born out by reality. The World Bank surveyed the data and determined “that poverty increases are much more frequent, and larger, than poverty reductions. The recent large increases in food prices appear likely to raise overall poverty in low income countries substantially.” Rising food prices and shortages have predictably been met by anger and unrest in the developing world. “Food riots have erupted in recent months in Guinea, Mauritania, Mexico, Morocco, Senegal, Uzbekistan and Yemen.” Troops and armored trucks have been deployed in Pakistan, to guard and distribute a scarce food supply. In Haiti, the Prime Minister was forced to resign in response to catastrophic hunger and the Prime Minister of Malaysia seems destined for a similar fate.

Food Versus Fuel: The rapid rise in food prices has shone the spotlight on the nation’s energy policy, with regard to biofuels. Skeptics of biofuels, which are distilled from corn, sugar, and other plants, complain that not only is such fuel less efficient and equally environmentally harmful, but also that it is diverting increasingly scarce farmland away from more productive (edible) uses. According to The Economist, “This year biofuels will take a third of America’s (record) maize harvest. That affects food markets directly: fill up an SUV’s fuel tank with ethanol and you have used enough maize to feed a person for a year.” The price of corn has already risen to a record high of $6 a bushel, and will certainly climb higher if biofuels become a more entrenched component of US energy policy. Already, the US Congress has legislated that automobile fuel contain a certain percentage of biofuel. Producers of ethanol, the most common biofuel in the US, are scurrying about trying to secure enough corn for their dozens of new distilleries. A $3 Billion ethanol pipeline, the first of its kind, is already in the works, and a powerful new lobbying network has emerged to protect the interests of this growing industry. Thus far, corporations have erred on the side of the debate that is consistent with their business models, with corn farmers and producers of biofuel fending off criticism from poultry farmers, who are irked at having to pay more for chicken feed. In short, the rise in food prices is sure to intensify the heated food-versus-fuel debate.

Increased Efficiency: One upside of the food crisis is a renewed focus on the struggle to provide adequate and healthy food for the world’s poor. After the “green revolution” in the 1960s, food ceased to be an important political issue, and the ability of the world to feed itself was soon taken for granted. As a result, agriculture R&D budgets were slashed, crop yields plateaued, and food aidHealth experts have lamented cheap corn (syrup) and soybeans (oil) for their role in the American obesity epidemics. If hamburgers and soda (beef and corn syrup) witness a rise in prices, perhaps poor Americans will be incentivized to switch to healthier diets.

Forex Implications: High food prices have taken a toll on the world’s emerging markets, in the form of inflation. In addition to the previously cited examples of China and Vietnam, there are dozens of countries that have seen inflation skyrocket in the the face of soaring food and energy costs. The Philippines (6.4%) and India (7%), to name a couple. As a result, emerging markets collectively represent one of the few bright spots for the Dollar. Due both to inflation and a trend towards risk aversion, investors have transferred funds out of the developing world. Oddly, the Dollar has simultaneously fallen against most of the world’s major currencies. Since contracts for commodities (including oil) continue to denominated in Dollars, a fall in the Dollar is often accompanied by a rise in commodity prices. Some analysts fear the Dollar’s precipitious fall, because of its effect on commodity prices, threatens to destabilize the global economy. One of the solutions would be a coordinated act of intervention in the forex markets. While such an act would not be undertaken under the pretense of humanitarian reasons (i.e. to help feed the poor), an appreciation in the USD would almost certainly lead to lower food prices.

Conservation: There is a well-known US government program that pays farmers not to cultivate their land. In addition to helping farmers by depressing the supply of certain commodity crops, the program also represents a sop to environmental and hunting groups. However, in the last six months alone, 5% of the land has been removed from the program because the economics of the situation have changed. The world’s tropical rainforests have also been victimized by the rise in food prices. Brazil, for example, had begun to achieve limited success in fighting deforestation in the Amazon rainforest. According to the Amazon Director of Greenpeace in Brazil, however, “government measures had brought some success but that ‘what the government does not control is the economic reality. It is the economy that controls deforestation. Each time the prices of meat and soy rise so does deforestation.’

World Trade: The short-term impact of the food crisis vis-a-vis trade has been a rise in protectionism. Countries for which rice represents a staple crop, including Vietnam, Thailand, and India, have been quick to impose export bans. Other countries, such as the Philippines, have moved to criminalize “hoarding.” Their aim is simple: to ensure an adequate and affordable domestic supply of rice. In the long-term, the food crisis could provide the impetus to finally resolve agricultural negotiations as part of the next WTO agreement: “Arguably the rise in food prices should make it easier to persuade exporters to dispense with subsidies as farmers don’t need them and importers to lower tariffs as they want to dismantle barriers to letting in food.” Removing this protectionist infrastructure would theoretically alter the price signals that (poor) farmers receive, and help them to make more-informed decisions about which crops to plant. Despite the decline in cross-border movement of certain agricultural staples, though, the overall effect on world trade is projected to be minimal. Certain food-importing countries in the Middle East and Africa may experience modest increases in their trade deficits.

US Agricultural Policy: On a related note, perhaps the food crisis will persuade the US to finally dismantle its massive system of farm subsidies. These subsidies principally benefit farmers of cotton, corn, soy, rice, and sugar, the prices have which have all surged over the last year. An elimination or reduction of such subsidies need not stem from a loss of altruism, but rather from the common sense idea that such subsidies are no longer necessary in a climate of rising commodity prices. Unfortunately, Congress is in the process of renewing these subsidies as part of the $300 Billion farm bill. Perhaps in five years, when the farm bill is up for renewal, logic will prevail.

Agribusiness: The world’s poor have clearly born the brunt of the food crisis, but surely some people are benefiting, right? Look no further then agribusiness, the loose collection of interests that vastly influence the production and distribution of agricultural products in the US. Grain processors, such as ADM, Cargill, and Bungee, have reaped windfall profits, with the latter’s most recent quarterly earnings rising nearly 2,000% from a year earlier. Chemical Companies such as Monsanto, DuPont, and Syngenta have all raised their profit estimates. Mosaic, a fertilizer company, earned $520 million in the latest quarter, benefiting from a 150% rise in the price of certain fertilizers. Of course these profits do not come without controversy: “Some observers think financial speculation has helped push up prices as wealthy investors in the past year have flooded the agriculture commodity markets in search of better returns.” Naturally, the agribusinesses have pledged to use a portion of their profits to help poor countries with their food problems. was curtailed. Higher food prices have brought researchers out of the woodwork to press their case that agricultural technologies could vastly boost productivity in the developing world. “Robert Bertram, who oversees the funding for the United States Agency for International Developmen….argued that research to improve crop yields was ‘like putting money in the pockets of poor people, and I mean billions of poor people.’ ” Similarly, researchers in India are working to implement efficient water use and storage technologies, in order to ease the dependency of Indian farmers on rain and limit losses in harvested crops. On the domestic front, the rise in prices for agricultural commodities and meat, makes basic fruits and vegetables seem more attractive.

(HT: Fiona King)

Also check this one out: Red Cross Raises Specter of Food Wars

Also, food crisis in Nepal here.

Angle newsletter from WIDER

New WIDER Angle newsletter features:

The Evolution of the World Economy 1000-2000 AD, by Ronald Findlay and Kevin H. O’Rourke

Can the Southern Engines Sustain their Growth?, by Meghnad Desai

Poverty–Growth–Inequality Triangle in China, by Guanghua Wan

Good and Bad Times: Volatility and Growth in Africa, by Jorge Arbach and John Page

The Ambiguity of Bureaucracy, by John Toye

Women’s Status and Child Health, by Basudeb Guha-Khasnobis and Gautam Hazarika

Mobilizing Talent for Global Development, by Andrés Solimano

Haven't read any of them though....will read it this weekend!

Wolf on Easterly's criticism of the Commission on Growth and Development's The Growth Report

Wolf says Easterly is kind of wrong in his assessment:

[...]Contrary to what Prof Easterly argues, the report makes useful contributions to policymakers’ understanding. The most important is the emphasis on growth itself, underplayed by many advisers and activists in the 1990s and early 2000s. Growth is not everything. But it is the foundation for everything. The poorer the country the more important growth becomes, partly because it is impossible to redistribute nothing and partly because higher incomes make a huge difference to the welfare of the poorest.

Yet the report goes beyond that. It is based on an analysis of 13 countries that have managed growth of 7 per cent a year over at least 25 years. They are diverse: Botswana, Brazil, China, Hong Kong, Indonesia, Japan, South Korea, Malaysia, Malta, Oman, Singapore, Taiwan and Thailand. India and Vietnam seem likely to join this group. These countries have not all sustained their growth: Brazil and Indonesia are important examples of backsliding. These countries are also different in many respects, notably in their size, resources and culture.

Yet, suggests the report, they shared five points of resemblance: they fully exploited the opportunities afforded by the world economy; they maintained macroeconomic stability; they sustained high rates of saving and investment; they let markets allocate resources; and they had committed, credible and capable governments.

These points are consistent with the so-called “Washington consensus” of the 1990s, which emphasised macroeconomic stability, trade and the market. Yet the report’s emphasis is different: it does not stress privatisation, free markets and free trade, while it does emphasise the role of the so-called “developmental state”

Beyond these principles, the report proposes “ingredients” of rapid growth. It says: “Just as we cannot say this list is sufficient, we cannot say for sure that all the ingredients are necessary. . . But we suspect that over 10 or 20 years of fast growth, all of these ingredients will matter.”

The ingredients include: investment of at least 25 per cent of gross domestic product, predominantly financed by domestic savings, including investment of some 5-7 per cent of GDP in infrastructure; and spending by private and public sectors of another 7-8 per cent of GDP on education, training and health. They also include: inward technology transfer, facilitated by exploitation of opportunities for trade and inward foreign direct investment; acceptance of competition, structural change and urbanisation; competitive labour markets, at least at the margin; the need to bring environmental protection into development from the beginning; and equality of opportunity, particularly for women.

The report also offers a pragmatic guide to some controversial debates: the role of industrial policy and export promotion; the pros and cons of deliberate undervaluation of the exchange rate; how far and how soon the economy should be open to capital flows; and the difficulties inherent in developing the financial sector.

[...]

Particularly welcome is the short list of policies to be avoided. Among them are: subsidising energy (particularly relevant today); using the civil service as employer of last resort; reducing fiscal deficits by cutting spending on infrastructure; providing open-ended protection to specific sectors; using price controls as a way to curb inflation; banning exports, to keep domestic prices low; underinvesting in urban infrastructure; underpaying public servants, such as teachers; and allowing the exchange rate to appreciate too far, too quickly.

This report, then, should be seen as a pragmatic guide to policies for accelerating growth in developing countries. What emerges is how tricky this has proved to be: it notes, rightly, how often growth has slowed once a country has achieved middle-income status. This is partly because policies and politics will, and must, change as the economy evolves.

Achieving sustained, rapid growth turns out to be very hard. Recognition of this is no objection to the report’s conclusion. It is an admission of how little we know about such a complex economic, social and political process. Yes, the report is humble. There is much for economists to be humble about. But humility should not be mistaken for total ignorance.