Monday, October 27, 2008

Larry Summers argues for activist policy

Larry Summers argues that policy activism, especially in the fiscal side, spurs growth (well, at least it did after the WW II). He agrees that investment in interstate highway system, air travel and electronics led to such growth rate.

The most plausible explanation is that an array of transforming investments and technologies – the interstate highway system, widespread air travel and the expansion of electronics – were spurs to growth during the postwar period.

And, he also argues for selective policy intervention—identification of investments that stimulate demand in the short run and positively affect productivity in the long run. Does not this sound familiar, like industrial policy, to which Summers is so opposed to. See this as well.(This is exactly what Senator Obama has been arguing for in his campaign speeches).

So there is a need to ensure that the pressure to increase spending is directed at areas where it will have the most transformational impact. We need to identify those investments that stimulate demand in the short run and have a positive impact on productivity. These include renewable energy technologies and the infrastructure to support them, the broader application of biotechnologies and expanding broadband connectivity, an area where the US has fallen behind.

All of these considerations suggest that the pendulum will swing – and should swing – towards an enhanced role for government in saving the market system from its excesses and inadequacies. Policymakers need to be attentive to potential government flaws as well. For example, they need to recognise that, even as events compel larger deficits in the short run, they reinforce the need for longer-term measures to keep government finances on a sound footing. They must also be wary of measures that have a short-term superficial appeal, yet have adverse long-term consequences.

Nepal at a loss of $256 million due to financial crisis

$256.16 million is the amount of loss the Nepali manufacturing sector will have to incur because of the global financial crisis (and ensuing economic slowdown). This estimate comes from the Confederation of Nepalese Industries (CNI). Though not a huge sum in terms of the scale of bail out package in the West, this means a lot to an economy with GDP amounting to US$ 42 billion. Also, this number accounts for just the manufacturing sector. The main sectors to be hit hard will be tourism sector, and possible hydropower—the two most prioritized sectors that could lead to stimulation of economic growth in the short and medium term. Moreover, melting purchasing power of customers in the West mean less demand for exportable products from Nepal. This loss will be much more higher and severe than the number CNI came up with. In Nepal, the effect will be seen in full scale in late 2009/early 2010 if the financial meltdown in the West reaches its nadir by this end of this year.

The industries that are hit hard now are iron, plastic, edible oil, metals an other manufacturing industries. It is also expected to affect tourism sector, FDI, housing and financial transactions and remittance inflow. This will pose a challenge in meeting the expected revenue for the current fiscal years, as was outlined by the Finance Minister in his budget speech.

The recent decision by the central bank to increase reserve ratio from 10 to 20% has worried investors because of potential tightening of credit market. Due to series of collapse of banks in recent months in the US and EU, the Nepali government increased reserve ratio by 10 percentage point to avert bank failures in Nepal. However, it seems that it comes with high opportunity cost of high cost of borrowing/finance for the private sector, the engine of growth for the economy.