Tuesday, April 22, 2008

Re: Maoists, price distortion and economy

I have received a couple of emails regarding my previous blog on Maoists, price distortion, and economy. I am completely surprised by the outcome of election recently held in Nepal. This has forced me to once again rethink on voter rationality and the depth of change desired by the people. I am now trying to fathom the Maoist's take on the economy and direction (more right, more left, or in between) of their reform policies.

One of the responses from one of my blog readers (name censored) was:

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"Dear Chandan,

I have been receiving your blog for some now. I enjoy reading them. I like your clear and simple way of presenting facts and views based on a conceptual framework.

I want to make a quick comment on your blog below titled “Maoists, price distortion and economy”. While I agree with most of the points you have raised regarding the fuel shortage and need to raise the price. I can not agree with your second para ‘why should NC and UML remain …………………..’. It is the time, all political parties as well as people like you and me work together to solve the problems of this country. It is not the time we bicker with each other and disprove or ‘expose’ someone. Yes, the Maoists will have to live with a lot of contradiction, specially, when they have to run the government. May be, they will be forced to increase the price in future against their own policy in the past. I will welcome that decision as a pragmatic approach of Maoists.

I look forward to receiving your blog in future too. Good work, keep it up."

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The second paragraph was a quote from an editorial published in The Kathmandu Post. See here. As the reader rightly argued, I also do not completely concur with the arguments published in the editorial. It is definitely not a time to point finger on each other and give 'chance' to one party or the other to run the government.  (Technically, based on the results of recent election, the people have given the Maoists a chance to run the government.) But I would be hesitant to label this victory a 'chance' for the Maoists.

After years of instability and bloody insurgency, we now have an opportunity to unify together and restructure the state. No doubts about it! We should not squander this golden opportunity. All Nepali should work together to propel the country out of the economic and political quagmire which have been plaguing our progress for a long time. I believe that the decision by UML to stay away from the government is completely irresponsible because it is one of the parties responsible for the mess in the past years, and when their help is needed now to restructure the state, it are drifting away quite irresponsibly.  The next government, guaranteed to be led by the Maoists, should be represented by all the major parties so that major policy reforms are passed with minimal bickering and tension. I would strongly detest past political practice of opposition parties in the parliament, where all the opposition did was to oppose almost all the policies, irrespective of its quality, of the government. I hope the parties, especially the UML, would part away from this practice!

However, what I am concerned about is the direction of the economic policies that the Maoists would undertake. They are the ones who were always against rectification of price distortion in the economy. I am wondering how would they convince the people that fuel prices increase is necessary and the state can no longer provide subsidies. Given careful policy maneuvering, it is doable but the NOC is in such a fragile condition that either it needs an infusion of cash in large amount to just keep it alive (from where to get this one is still a big question!) or the whole fuel market needs to be privatized/liberalized (which would then mean that we cannot really predict, at least in the initial stages, the direction fuel prices...too much of uncertainty here could lead to another set of riots, closures, and crisis). I would expect a clear cut answer on these issues because burgeoning deficit and debt the country has right now is going to have an impact on general price level sooner or later. This reminds me of the crisis in Bolivia during 1970s and the economic instability brought about by huge state subsidies to ailing state-owned companies.

Moreover, the Maoists also need to be clear-cut on their economic policies. I have heard about medium and long term policies here and there. But, the specific nature of policies is still not clear yet. There are so many outstanding issues: land reforms, agricultural productivity (this worries me much given the rise in global food prices and the prediction by the FAO that 1/3 of the population are starving), fuel prices, restructure of inefficient state-owned companies, drinking water management, rehabilitation of IDPs, foreign policy (especially with the US, India, and China), liberalization of hydropower sector, judiciary reform, NPLs and defaulters, reintegration of unruly militias in the Nepali Army, and so on...There is a huge task ahead.

I would root for an industrial policy carefully designed to rectify price distortions in the economy and set in motion the activities that would be experimental in nature in order to identify few sectors that would provide a good foundation for the Nepali economy- a process what Harvard economist Dani Rodrik calls is "self-discovery". To my mind comes the tourism sector (see example from Dominican Republic), hydroelectricity (see example from our bitter neighbor, Bhutan), garment sector (yes, I know this sector is in mess but through a good industrial policy we can take advantage of cheap, surplus labor from the agricultural sector), remittances from both low-skilled and high-skilled Nepalis working abroad (see examples from India, China, and Dominican Republic, among others), urban agricultural reform to fulfill satisfy specific urban demand (see example from Cuba), slowing rapid population growth (expected to reach 35.68 million, an increase by 46%, by 2020- population density would go up from 166 in 2000 to 242 in 2020), and promotion of sectors  (mostly low investment oriented during initial stages) that can effectively take advantage of the huge market (around 300 million people) in the neighboring Indian states, where the Indian government has reduced import taxes substantially.  Meanwhile, we need to urgently take advantage of the privileges given by the WTO to low income countries (especially in the promotion of EPZs and export-subsidies to key industrial sectors). There are many things we can do to spur economic growth (by finding alternative ways to go tackle the most binding constraints) and take advantage of our accession to the WTO regime.