Sunday, September 21, 2008

New global poverty line: Ravallion replies to Reddy

The IPC has a one pager on Ravallion’s reply to Reddy objections to the methodology used in the calculation of the new global poverty line ($1.25 a day at 2005 PPP prices). This is a much condensed version of a long reply by Ravallion to various objections to the new paper, its methodology, and the new poverty line.

...As Reddy notes, $1.25 is lower than the value in the US of our old poverty line, which works out to be $1.45 in 2005 prices. This has nothing to do with Reddy’s claimed faults in our methods, but stems from the revisions to the PPPs in the light of the better price data from the 2005 ICP; naturally, with higher PPPs in poor countries, the $US value of their national poverty lines falls.

Reddy thinks $1.25 a day is “…far too low to cover the cost of purchasing basic necessities,” He asserts that: “A human being could not live in the US on $1.25 a day in 2005 (or $1.40 in 2008), nor therefore on an equivalent amount elsewhere, contrary to the Bank’s claims.” I have no idea how Reddy reconciles this view with the fact that one quarter of (say) India’s population manages to live below the country’s official poverty line, which is about $1.00 per day in 2005 prices—even lower than our international line.

The (misplaced) role of markets

Here is a piece from the NYT about how the head of the Treasury and the chairman of the Fed- both proponents of liberal, free market idea-, fearing further negative repercussion in the economy emanating from the sub-prime mortgage crisis, changed their the administration’s economic ideology!

…Just like that, Mr. Bernanke, the reserved former Ivy League professor, and Mr. Paulson, the hard-charging former Wall Street deal maker, launched what would be the government’s largest economic rescue operation in modern times, one that rivals the Iraq war in cost and at the same time may redefine Washington’s role in the marketplace for years.

The plan to buy $700 billion in troubled assets with taxpayer money was shaped by two men who did not know each other until two years ago and did not travel in the same circles, but now find themselves brought together by history. If Mr. Bernanke is the intellectual force and Mr. Paulson the action man of this unlikely tandem, they have managed to create a nearly seamless partnership as they rush to stop the financial upheaval and keep the economy afloat.

…Along the way, they have cast aside the administration’s long-held views about regulation and government involvement in private business, even reversing decisions over the space of 24 hours and justifying them as practical solutions to dire threats.

…For Mr. Bernanke, the current crisis is the culmination of a lifetime of figuring how the system works from a theoretical viewpoint…Mr. Bernanke’s research into Japan’s financial crisis in the 1990s reinforced his view that the government had to be aggressive in intervening during market crises.

Interesting discussion about the causes of this crisis here. Intellectuals’ discussion about the crisis here.

Comments on Nepal's budget for FY 2008/09

In my earlier blog post, I said I was partially happy with the way the budget has prioritized sectors like hydro power and tourism. And, I raised some concerns about the potential rise in price level, which is already close to double-digit number.

Now, that I have read the whole budget speech delivered by the Finance Minister, I have some issues with the earlier confidence about the quality of the budget.

Here is a quick glance at the budget:

  • Total budget: Rs 236 billion 15.9 million
  • Recurrent expenditure: Rs 128 billion 516.5 million ( up by 40.6%)
  • Capital expenditure: Rs 91 billion 311 million (up by 64.5%)
  • Repayment of loans: Rs 16 billion 189.3 million (down by 1%)
  • General administration: Rs 111 billion 824.9 million
  • Development programs: Rs 124 billion 199 million
  • Current sources of revenue: Rs 129 billion 215 million
  • Total foreign assistance: Rs 65 billion 793.8 million (Foreign grant Rs 47 billion 93.2 million, Foreign loan Rs 18 billion 700.6 million) Net budget deficit Rs 41billion 11.6 million
  • GDP growth 7%
  • Agricultural growth 4.5%
  • Non-agricultural growth 8.3%
  • Inflation 7.5%
Some good stuff: sectoral priorities, increase in taxes in tobacco and alcohol, subsidy on micro-credit and import of machinery and equipment used for milk processing, emphasis on agriculture, irrigation, poverty alleviation, employment generation, ICT, research, rehabilitation, bail out of poor farmers who own money to banks, etc...

Some bad stuff:
  • Socialist slogans and very populist budget
  • Extremely inflated budget...revenue target very unrealistic...
  • Investment Board and Cooperative Board (to promote private and cooperative sectors) under the Economic Council (which coordinates the two boards' activities and align them with national priority)...this might be easier said than done...what if the interest of these two boards clash? What if the cooperative sector crowd out private investment? Less regard to individual and private sector incentive mechanism...
  • Deficit financing sure to put upward pressure on price level
  • Efficiency and productivity are compromised by plans to revive moribund, sick state-owned enterprises like Hetauda Textile Mills, Gorakhkali Rubber Industry, Agricultural Tools Factory of Birgunj, fresh injection of funds to Nepal Airlines Corporation to buy two large aircraft...the problem with these sick policies to revive sick firms is that it just looks at the supply side, completely forgetting demand aspect. It is said that the security forces would buy textiles from these Mills, and agricultural tools would be purchased in the domestic market. However, the demand from the security forces is limited, which means that growth prospect of these sick companies is being compromised. Also, why would people buy agricultural tools manufactured in Nepal at a high prices when they can get the same products at a cheaper price across the border? We might end up making stuff no one uses (recall the wasteful resource investment in the Soviet Union)
  • Ambitious electric railway a time when there is more than 30 hours a week load shedding in... from where will the country get electricity to run electric rails?
  • Lots of loopholes for corruption, especially in social security reforms and debt relief scientific methodology revealed so far
  • too many commissions without plans for solidifying and consolidating the existing ones
  • As argued earlier, how can Nepal attain double-digit growth rate in just three years. It is very impractical given the institutional and financing constraints to the economy.
  • No plans to tackle very rigid social, political, and economic political institutions that have been constraints to economic growth
In general, this budget might please the public but is not friendly to the private sector. In a way, this was expected as the very foundation of the budget is based on socialist ideas of ending feudalism and feudal means of production. Read a related Op-Ed here.

The biggest hurdle, however, would be in implementation of the projects and coordination among numerous new and old commissions. I would be modest and not be too optimistic and too pessimistic! I will try to write an Op-Ed in detail along these lines this week, provided that there won't be too much pressure from the classes I am taking this semester!

Read the full budget transcript in English here.

More reactions here, here (Bhattarai defends the quality and quantity of budget)

Listen the whole budget speech is here (sorry it is in Nepali):