Saturday, January 31, 2009

Evolution of exports and output in Nepal

Fig: Log of GDP per capita 2006 (constant 2000 US$) vs. log of exports per capita (current US$), Nepal

I was looking into the evolution of exports and output in Nepal and was trying to figure to how much drag does exports have on GDP. It seems that beginning 1991, increase in exports has definitely dragged GDP per capita in its direction. This stopped between 1995-1996, continued between 1998-2001, stopped between 2001-2003, and then…. Since 2001 even though exports per capita has declined, GDP per capita is increasing. Before 1991, exports did not have too strong effect on GDP. This shows that fluctuations in exports in Nepal does not substantially affect GDP per capita.

Does it mean that Nepal has no future in the exports sector? Well, it is difficult to grow at a rate of more than 5% just on the back of agricultural sector. Nepal has to find a way out to make a transition to export-based economy and home grown demand that is hinged on industrial production. This is the only way out to attain double-digit growth rate and some periods of growth acceleration.

This pushes one to think: so why is the export sector and the domestic demand for industrial output not increasing? Well, the main strongest constraints lie in poor infrastructure and increasing microeconomic risks (corruption, taxes, instability, property rights). More on these constraints on later posts.

Thursday, January 29, 2009

Financial crisis and the developing countries

Great debate about developing countries, global financial system, and financial crisis on VoxEU website ahead of G20 meeting.

Rodrik writes:

There is just possibly a silver lining for developing nations in the present crisis, and it is that they may well emerge collectively with a much bigger say in the institutions that govern economic globalisation. Once the dust settles, China, India, Brazil, South Korea, and a handful of other “emerging” nations will be able to exercise greater influence in the way that multilateral economic institutions are run. And they will be in a better position to push for reforms that reflect their interests.

In trade, the present round of global trade negotiations has already demonstrated that if rich nations want developing nations to play ball, they will need to let them shape the rules of the game.

He also talks about Tobin tax on global foreign currency transactions so that revenue generated from this source could be used in the promotion of global public goods (development assistance, vaccines for tropical diseases, and in green technologies). Great idea! But, wouldn’t it reduce G8’s and IFI’s clout on the developing world? Is it politically feasible?

The idea about giving ‘policy space’ to developing countries in WTO agreements is essential if Doha Round is to pass in the coming days. It was precisely because of this shortcoming that the last WTO negotiation failed after India and other developing countries demanded SSMs facility amidst global food crisis.

I think donors and IFIs should also focus on harmonizing foreign aid allocation and assistance to developing countries so that competing donor interests do not collide and doubling of projects is avoided.

Here is Subramanina on ‘policy space’ for developing countries:

Dani’s view is that these openness levels can be maintained by a bargain around “policy space.” Developing countries would then use this space to figure out the best development policies. In return, industrial countries would be allowed to use this space to push for some kind of global harmonization of tax and regulatory policies that would help buy off middle class anxieties about globalization that might otherwise lead to outright protectionism.

Nancy Birdsall’s take on the issue:

Dani’s agenda – a global trade regime allowing for “policy space”, a climate change agreement that is just as well as enforceable, credible deployment of the proceeds of a Tobin tax, an IMF with the resources to respond to crises – none of these has any legs if the developing countries have minimal influence at the international financial institutions. And one thing is clear to me: Those institutions will not only enjoy fundamental governance reforms until and unless the developing countries collectively assert themselves to get it done.

Duncan Green adds more:

Policy space is a two-way street. [President Obama's] chief economic advisor Larry Summers has also been vocal of late on globalisation’s adverse impact on workers. It will not do much for good for developing countries to raise the spectre of protectionism each time such concerns are voiced. They should say no to trade protectionism straight and simple. But they should be willing to negotiate with advanced nations on avoiding regulatory races to the bottom in such areas as labour standards or tax competition.’

Wednesday, January 28, 2009

Food crisis revisited!

LeMelle and Stulman on Africa Policy Outlook 2009:

The World Trade Organization's Doha Round mistakenly attempted to fix global food challenges by liberalizing agricultural markets. Poorer producers have been left without government support and developing countries have grown increasingly dependent on imported food. Even given the enormity of the financial crisis, the U.S. government continues to perpetuate failed solutions for Africa. More must be done to protect the poor. Fair, not free trade must be adapted immediately as a part of creating a new global economic system.

The food crisis is largely overshadowed by the financial crisis and ensuing global recession. At times, development policy becomes one dimensional!

Meanwhile, the Kerala model (state-sponsored land reform, education, infrastructure, and social services initiatives), which is largely insulated from the current financial crisis.

The southern state of Kerala boasts nearly universal literacy — 91% as opposed to the Indian national average of 65%. It's also one of the fastest growing states in India, second only to the tourism-rich state of Goa…In addition to its tremendous literacy rate, Kerala boasts one of the nation's finest healthcare systems, even for those who can't afford to pay user fees and therefore depend on government hospitals. Kerala's infant mortality rate is about 16 deaths per 1,000 births, or half the national average of 32 deaths per 1,000 births.

Aside from the social development indicators, Kerala's growth rate is nothing to sneeze at. In the last few years it averaged between 6-10%, not only keeping pace with the national average but at times ranking among the fastest growing states in the country. The sectors that are doing well are largely those that are thriving across India — IT, services, and tourism — but agricultural production and small-scale manufacturing are also succeeding.

  • the state had a matrilineal and even a matriarchal society, with a line of forward-looking queens that still ruled much of Kerala in the early days of the British Empire…A single party, the Communist Party of India (Marxist) or CPI(M), has ruled Kerala for much of the past 50 years. The CPI(M) successfully pushed for three major reforms in the 1960s and 1970s. The first and most important was land reform.
  • the CPI(M) deliberately and methodically invested in education, setting goals so popular with the electorate that even when the Communists lost power, new governments did not dare modify education policies.
  • Kerala invested heavily in government-financed healthcare. The state now boasts 160 patient beds per 100,000 people, the highest rate in the country.

…With the end of this ideology, Kerala represents a real alternative. Investing in people — whether through breaking the oligarchy of big landlords (or perhaps investment bankers) or providing social services including universal education — will ultimately lead to the development of a meaningful middle class.

Thursday, January 22, 2009

Dwindling export sector and SEZ in Nepal

Bedeviled by rising losses and slacking competitiveness on export sector and hence its direct negative impact on the growth rate, the government had been mulling over establishing SEZs for the past several years. This is supposed to enclave the export-oriented industries from labor disputes, complex tax issues, and other exogenous problems related to supply of energy and labor.

Finally, the government has ratified establishment and implementation of SEZs act in the country. Under the WTO, low income country like Nepal are allowed to take initiatives to prop up their flagging export sector, which basically supports the manufacturing sector and high wage jobs apart from the agricultural sector. I argued for more incentives for export-based industries in past opinion pieces here and here.

Nepal has been doing very bad in the export sector recently (see the figure below), thus affecting the growth rate. The end of MAF in early 2005 has proved to be detrimental to the Nepali textile and garment industry, the main component of export portfolio. Read this opinion piece for more stuff.

Exports (% of GDP), Nepal

Fig1: Exports as a % of GDP. Notice steep decline in exports after 1997, a shock probably emanating from the declining competitiveness of garment and textile industries and a series of phase out of quotas under the MFA.

The Act allows workers to unite and practice collective bargaining, but prohibits them from undertaking activities that affect production and normal operations of industries…

Terms of recruitment, facilities and lay off will be governed by the agreement the worker and management will sign while accepting the job. Initially, the draft had incorporated the ´hire and fire´ provision as demanded by entrepreneurs…SEZ Authority and the SEZ regulations will determine the extent of workers pay scale, medical and insurance facilities, among others…

In order to lure investors in SEZ, the Act has provided them with facilities such as duty-free import of raw materials, exemption of value added tax (VAT) and free them from excise duty and other local taxes. The industries in SEZ have been provided with income tax holiday for five years…After five years also, they will continue to enjoy 50 percent discount on income tax…In order to ensure investors, the Act says industries already into operation would continue to enjoy all the facilities, even if later amendments changed the structure and extent of facilities.

Going by the Act, only export-oriented industries can be set up in SEZ. Nevertheless, the government has allowed them to make domestic sales not exceeding 15 percent of their transactions. Interested investors now can acquire land in the zone in lease for 30 years from the SEZ Authority, which will be led by an independent expert. Also, they will receive 50 percent, 40 percent and 25 percent discounts respectively on the lease rent for the first three years of investment. After 30 years, lease agreement can be renewed in every 5 years.

Way to go before the crippling export-based sector revives its previous position as the driving force of growth!

Tuesday, January 20, 2009

Links of Interest (01/20/2009)

Education quality and economic growth: rather than just increase in school attainment and enrolment, higher cognitive skills matter for economic growth.

The aftermath of financial crisis

Shoot the bankers, nationalize the banks, writes Philip Stephens in FT

Monetizing the value of life, happiness, HIV/AIDS and deaths in Africa

David Gergen weighs in development in Obama administration

Extra incentives (monthly take-home rations) to lure girls to primary schools and to decrease gender equality

Widening credibility gap on aid

Economists, ideology, and stimulus

Monday, January 19, 2009

Samuelson, Hayek and the ‘inevitability’ thesis

Historical debate between Hayek and Samuelson about mixed economy and welfare state  revived by two of my econ professors in their new paper (Hayek, Samuelson, and the logic of the mixed economy?).

Professors Farrant and McPhail analyze Hayek’s ‘inevitability’ thesis (“each step away from the market system and towards social reform of the welfare state is inevitably a journey that must end in a totalitarian state”) and argue that the confusion surrounding this thesis is attributable to Hayek himself, despite Hayek’s strong disagreement with the way Samuelson explained this topic in his textbook Economics (11th edition).

...Much of the apparent confusion over the inevitability thesis, we suggest, is largely attributable to Hayek himself (with the water muddied further by the secondary literature on the Hayek–Samuelson exchange), with Samuelson having ready cause to read Hayek as making an ‘inevitability’ claim about the situational logic supposedly inherent to the mixed economy since Hayek often suggested that the logic of the mixed economy and redistributive welfare state ultimately and inevitably resulted in a totalitarian polity.

...Hayek repeatedly appears to consider the mixed economy and welfare state practices to have their own inherent logic, which, once set into play by government policy to redistribute income and attain social justice, apparently necessitates ever-further government intervention, the government perhaps ultimately finding itself inexorably “driven to establish an essentially totalitarian system” (Hayek, 1978, p. 301). Again, the above illustrates the immense importance Hayek placed on his oft-repeated statement that “if you don’t mend your principles you will go to the devil”’(1978, p. 105).

...we note that Hayek repeatedly suggests that attempts to achieve social justice ultimately tend towards full-blown command planning and a totalitarian polity....Samuelson correctly understands Hayek to oppose any welfare state practices that involve income redistribution because they apparently lead, in Hayek’s view, to political serfdom...Many are called as prophets. . . few are chosen as seers by the scorekeeping historian. . . [f]orty years after Friedrich Hayek wrote down his nightmare of the welfare state leading remorselessly to the totalitarian murder of freedom, Scandinavians enjoy freedom second to none that the world has ever seen (Samuelson, 1983b, p. 59).

The journal also has an essay by Samuelson, who argues that he stands by his initial assessment of The Road to Serfdom and the ‘inevitability’ thesis. Samuelson tries to formally settle the unresolved intellectual bicker he and Hayek had back in the 70s and 80s.

...Hayek over-praised the optimality of individualistic spontaneity. Charles Darwin’s genius long earlier had eclectically enumerated both the pluses and minuses of individualistic natural selection...Having spent a lifetime near libertarians, I can confirm that they are an individualistic idiosyncratic bunch. For example, my conservative mentor Gottfried Haberler was defined by Mises to be  “communist.” The number of Mt. Pelerin resignations never quite reached the number of its new members.)..Anthropological experts in “content analysis,” focusing their microscopes on the Hayek text (1944),might score its impact to be traceable to both (1) its version of history and (2) its projection of the future.

…If Hayek believes that the spending of newly printed currency on employment and consumption will worsen our current terrible depression, then Hayek is a nut. Alas, one fatal error eclipses a few elementary true truths รก la Mises and Hayek: Easy money now often does entail tighter money later which will come as a surprise to uncompleted projects and new contingent contemplated investment projects.

...Two-thirds of a century after the book got written, hindsight confirms how inaccurate its innuendo about the future turned out to be. Consider only Sweden’s fig-leaf middle way. As I write in 2007, Sweden and other Scandivanian places have somewhat lowered the fraction of GDP they use to devote through government. But still they are the most “socialistic” by Hayek’s crude definition. Where are their horror camps? Have the vilest elements risen there to absolute power? When reports are compiled on “measurable unhappiness,” do places like Sweden, Denmark, Finland and Norway best epitomize serfdoms?

...No good deeds go unpunished! Never then, or before, or later did I have reason to think or to say: Yes, I have misunderstood you. Yes, I have incorrectly quoted from you. Mea culpa. Exactly what I have written above evaluating The Road to Serfdom is precisely what I believed about it in the 1940s and continued to believe about it up to the present 2007.

Consider this by Hayek (Foreword to the 1956 American paperback edition of The Road to Serfdom, pp44 in the definitive edition of The Road to Serfdom):

The hodgepodge of ill-assembled and often inconsistent ideals which under the name of the Welfare State has largely replaced socialism as the goal of the reformers needs very careful sorting out of its results are not to be very similar to those of full-fledged socialism. This is not to say that some of its aims are not both practicable and laudable. But there are many ways in which we can work toward the same goal, and in the present state of opinion there is some danger that our impatience for quick results may lead us to choose instruments which, though perhaps more efficient for achieving the particular ends, are not compatible with the preservation of a free society. The increasing tendency to rely on administrative coercion and discrimination where a modification of the general rules of law might, perhaps more slowly, achieve the same object, and to resort to direct state controls or to the creation of monopolistic institutions where judicious use of financial inducements might evoke spontaneous efforts, is still a powerful legacy of the socialist period which is likely to influence policy for a long time to come.

Apparently, Hayek overstretched his warnings and considered that economic planning and reforms would lead to (ultimately result in) a totalitarian state. For the sake of justifying freedom, he blinded himself to the possibility of having a managed mixed-economy. See the success of the Nordic countries. Also, it is hard to believe that  the US (and other Western countries) would end up being  totalitarian states, especially after the financial crisis (with all those bail-out interventions and activist government policies).

I remember having these discussions in Professor McPhail’s senior seminar class (History of Economic Thought) in Fall 2007. The original scanned letters between Hayek and Samuelson were pretty interesting! Btw, the first economics book I purchased (while I was doing A levels economics) was written by Samuelson and Nordhaus. Their book is probably the best introductory textbook in economics. Also, every time I read Hayek’s pieces (apart from The Use of Knowledge in Society), I find it hard to believe him (realistically speaking) despite the persuasive arguments he presents.

Here is a popular video about the road to serfdom.

More discussion about the topic here.

Friday, January 16, 2009

Marginal Propensity to Consume and Invest

The marginal propensity to consume (MPC) of poor people is high. Similarly, the marginal propensity to invest of a small scale enterprise with good prospects of future return is relatively high. Fiscal stimulus geared towards propping up these two measures would be more effective than tax cuts to the rich, argues Stiglitz. Moreover, investment in infrastructure, education and technology also helps stimulate the economy. In short, follow Keynesianism!

Tax breaks for business may prove to be a sink-hole as bad as the troubled assets relief programme.

Some of the spending in the stimulus serves multiple ends. Increased unemployment benefits have the largest multiplier effects – cash-strapped families spend every cent given – and meet vital social needs. It is imperative to provide health insurance to the unemployed: without that, a single serious incident can push a family into bankruptcy. Helping the unemployed meet house payments reduces foreclosures, addressing one of the underlying causes of the crisis. There are thus triple benefits.

We are in uncharted territory in this crisis. But household tax cuts, except for possibly the poorest, should have no place in the stimulus. Nor should business tax breaks, except when closely linked with additional investment. The one tax cut that should be included is a temporary incremental investment tax credit; it provides a big bang for the buck, encouraging companies to invest now when the economy needs the spending. Increased investments in infrastructure, education and technology, relief to states, and help to the unemployed need pride of place.

Thursday, January 15, 2009

Why government intervention works?

Here is Jeff Madrick:

However, it is possible to look at the question of regulation empirically rather than theoretically. One useful area is cross-country analysis, whereby economists look at how countries with bigger governments and higher taxes fare. In recent years, Peter H. Lindert, a leading economic historian from the University of California, Davis, has comprehensively analyzed the literature. One argument against government is that public spending is unproductive and crowds out private spending. But, time and again, he found that studies claiming that high taxes reduce economic growth simply did not hold up.

Lindert’s exhaustive statistical analyses were based on eighteen countries over ninety years. No matter how he juggled the data, he found no relationship between the growth of GDP per capita and productivity and the level of taxes or the extent of social spending. There is a dramatic “conflict between intuition and evidence,” he writes. “It is well-known that higher taxes and social transfers reduce productivity. Well-known—but unsupported by statistics and history.” And he goes on: “Neither simple raw correlations nor a careful weighing of the apparent sources of growth shows any clearly negative net effect of all that redistribution.”

These days we all know how easily statistical analyses can be rigged. But if the case against big government were open and shut, then there would not even be a debate among economists. As Lindert notes, if a dollar of social spending reduces GDP by, say, sixty cents, then why are so many European nations doing well? They spend 25 to 35 percent of their national income on the poor, the elderly, the sick, and the unemployed, which therefore means, according to anti-government economists, they must have reduced their GDP by 15 to 20 percent. In other words, if they simply eliminated this spending, they would all be as rich or much richer than the United States, even as their people work many fewer hours.

Very interesting article. Read the full article to get some Kurgman and Stiglitz flavor!! Madrick is the author of a new book The Case for Big Government

On a similar note, here is what 2009 looks like for international development:

Markets and the State are already being rebalanced to fit these new times. It is time to say exactly who governs what, why, when and how. This will not be easy, but those who have been clamouring for more state involvement in development will also have to deliver better state involvement. This will be a big debate in 2009 with questions around (a) the appropriate balance of regulation, stimulus, and the provision of missing goods and markets, (b) how the balance is identified and (c) how the activity will be paid for. These debates must yield concrete actions very quickly.

...2009 will see: new ways of thinking about how the state and market can work together to encourage sustainable behaviour; new ideas influenced by the idea of wellbeing and what constitutes ‘consumption’; new ways of coordinating donor financing to generate new technologies; fresh perspectives on justice and accountability; novel ways of listening and reconciling ideas from around the world; and a more serious effort to understand everyday attitudes to international development.

Wednesday, January 14, 2009

Trade in South Asia: So open yet so closed

South Asia has opened its door to the rest of the world but it remains closed to its neighbors. Poor market integration, weak connectivity, and a history of friction and conflict have resulted in two South Asias. The first South Asia is dynamic, growing rapidly, highly urbanized, and is benefiting from global integration. The second South Asia is rural, land locked, full of poverty, and lagging.

That is from a WB policy research working paper Making Regional Cooperation Work for South Asia’s Poor.

SAARC is probably the least integrated regional blocs in the world. Moreover, SAFTA, the proposed free trade bloc, has not made any headway despite years of talks. It is a market of more than 1.3 billion people and an emerging one with increasing purchasing power. All talks on SAFTA or any regional development initiatives are clouded by off-and-on dispute between India and Pakistan.

Tuesday, January 13, 2009

Acemoglu on the financial crisis

Daron Acemoglu argues:

…Free markets are not unregulated markets. Well-designed institutions and regulation are necessary for the proper functioning of markets. Institutions have received more attention over the past 15 years, but focus was on understanding why poor nations were poor – not on understanding which institutions are necessary as the basis of markets and for continued prosperity in advanced economies.

…The first point is that fixing the short-run problem with policies that harm long-run growth is a bad option from a policy and welfare perspective. Innovation and reallocation are the keys to long-run growth, but potentially powerful groups tend to resist such changes. In developing nations, it is easy for impoverished populations suffering from adverse shocks and economic crises to turn against the market system and support populist, anti-growth policies. These threats are as important for advanced economies, particularly in the midst of the current economic crisis.

…A comprehensive stimulus plan, even with all of its imperfections, is probably the best way of fighting these dangers. Nevertheless, the details of the stimulus plan should be designed so as to cause minimal disruption to the process of reallocation and innovation. Sacrificing growth out of our fear of the present would be as severe a mistake as inaction. The risk that the belief in the capitalist system may collapse should not be dismissed.

Finally, wrong notions that led economists to ignore the impeding problems:

  • Astute policy and new technologies had ended the era of aggregate volatility.
  • The capitalist economy lives in an institutional-less vacuum where markets miraculously monitor opportunistic behaviour.
  • We could trust the long-lived large firms to monitor themselves because they had sufficient “reputational capital”.

Monday, January 12, 2009

Maoists (ridiculous) definition of capitalism

So the left-wing Finance Minister Bhattarai of Nepal has his own distorted definition of capitalism:

Industrial capitalism or productive national capitalism caters to the market within the country and utilises the labour and resources of the country. We are in favour of that sort of capitalism. Bureaucratic capitalism involves very unproductive capital and is parasitic. It takes advantage of state power and tries to make an easy, quick profit. But it doesn't produce goods and it doesn't provide employment. Comprador capitalism involves trading in goods and producing a profit in between. It doesn't produce goods or create jobs within the country. Historically in Nepal, we've had comprador and bureaucratic capitalism. We may also call it crony capitalism. Instead of that we want to have national or industrial capitalism which has roots within the country, will produce goods required by the people, and provide employment in the country.

The capitalism the Maoists favor is inward-looking and is distant from the usual model of capitalism through which developed countries became developed. Essentially, he thinks that FDI is a form of bureaucratic capitalism, which are “very unproductive capital and parasitic” because all they care about is profits. But, he also wants investors (especially foreign ones) to be confident and invest in the country. Isn’t this a contradiction??

Investors, regardless of their origin, invest when they see prospect for profitable investment. It is not the government’s business to regulate profits. It can regulate the way of doing business but not profits. This creates an environment where there is lack of appropriability on returns on investment, leading to shortfall of required investment. This is precisely what is happening right now in the Nepali economy. Industrial sector is going downhill. Domestic investors are losing large retail customers abroad. See this article and this blog post.

Fyi, this is capitalism in econ literature:

Capitalism is an economic system in which wealth, and the means of producing wealth, are privately owned and controlled rather than publicly or state-owned and controlled.In capitalism, the land, labor, capital and all other resources, are owned, operated and traded by private individuals or corporations for the purpose of profit,and where investments, distribution, income, production, pricing and supply of goods, commodities and services are primarily determined by private decision in a market economy largely free of government intervention. A distinguishing feature of capitalism is that each person owns his or her own labor and therefore is allowed to sell the use of it to employers. In capitalism, private rights and property relations are protected by the rule of law of a limited regulatory framework. In the modern capitalist state, legislative action is confined to defining and enforcing the basic rules of the market, though the state may provide some public goods and infrastructure.

Btw, currently the finance minister is reading Confessions of an Economic Hit Man, by John Perkins. I hope he understands how crucial it is for the country to not borrow excessively to fund politically motivated projects and resuscitate sick, moribund industries! The government is expecting foreign assistance of Rs 65 billion 793.8 million for this fiscal year. This is composed of grants and loans, which comes with multiple strings (often unpleasant ones) as bonus attachment. I hope Bhattarai comprehends the core thesis of the book!! It is a good book.

Sunday, January 11, 2009

No value of paper money in Zimbabwe

So the Reserve Bank of Zimbabwe has introduced ZW$50 billion note. The hyper inflation has collapsed the economy and it is reported that this new note is enough to purchase just two loaves of bread. This week the exchange rate was US$ 1= ZW$25 billion.

Hyperinflation in Zimbabwe at present is estimated to be at 231 million percent. Unless the whole economy (and hopefully Mugabe and his juntas) collapse, it will be hard to revive the economy using the same currency, whose cost of printing is slightly lower than the true worth of note. A classis case of economic and political mismanagement, indeed! On top of this, the country is facing Cholera outbreak, whose cause Mugabe blames on the West.

Meanwhile, a note from Zimbabwe:

It is just after midnight in Harare. I have just returned from a midnight tour of the ATMs in Harare with a cousin. There are queues of people still waiting to get their weekly cash withdrawal limit of $100,000,000,000 (US$2.50). I saw the queues this morning when I went for my first meeting at 7.45am. I did not know then that I would be seeing them throughout the day. Most of the ATMs had run out of money. Rather than go home, people saved their precious place in the lines by lying down where they stood and taking a nap. Covering themselves with sacks, newspapers and whatever warming clothing they had. Those ATMs that were still paying out cash had queues of policemen and soldiers…

Photo source here

…There was a power outage from 6 p.m. and it had taken us two hours to find a house I last visited 20 years ago as a boy. But I did ask how she was coping in Harare; and to her nephew she poured her heart out. No clean water for weeks on end, no food in the shops and constant power cuts. She drives an hour and half across the township in search of clean drinking water, which she brings back in plastic containers. When the city council water does run through the taps in the house, the water is discolored with sewer water. The shops in the neighborhood are empty of basic necessities including mealie meal.

…With civil service wages eroded by hyperinflation, people necessarily spend more time in the parallel economy trying to make ends meet. Interestingly, there are no runs on banks. The value of the withdrawals is so meaningless that the banks will be able to meet depositor demands with ease.

More here.

Friday, January 9, 2009

Links of Interest (01/09/2009)

  1. Reservation policy, which gives voters the ability to observe the effectiveness of women leaders, does work in improving women’s access in politics and reducing discrimination, argue Duflo, Pande, Topalova, Chattopadhyay, and Beaman. Paper here. (I wrote an opinion piece (The Economics of Reservation) supporting reservation policy in government scholarships and public sector jobs in Nepal. Nepal has one of the highest women representations in parliament in the world- a product of this positive discriminatory policy.)
  2. Keynes advocated regulating the economy through investment, not consumption, combined with a low and permanent rate of interest, writes Peter Clarke.
  3. The importance of great managers
  4. It is wrong to assume that emerging markets won’t recover until America rebounds.
  5. The meager benefits of the Doha Round, trade and development

The authors argue that this failure is largely attributable to a lack of understanding of the Sri Lankan context characterised by:

  • a multi-party system with governments often held together in fragile coalitions
  • strong cultural values attached to water
  • a vocal civil society fearful of water privatisation, and
  • a politicised media willing to exploit controversies

The guiding principle of the projects was that Sri Lanka’s water resources management should be holistic and efficient. This new policy introduced a number of unfamiliar approaches to the sector, some of which were highly controversial, including the idea of entitlements (ownership rights to water) and water tariffs to introduce demand management.

Coming after controversial attempts to institutionalise land reforms in Sri Lanka, and high profile cases of water privatisation elsewhere in the world, these moves were seen by some civil society groups as steps towards commodification and privatisation of water resources.
The focus on efficiency and increasing tariff were seen a threat to paddy cultivation and small farmers, causing public anger, while endogenously-designed strategies for water conservation were ignored as possible alternatives to entitlements and demand-management. (Source: Eldis)

Thursday, January 8, 2009

Are unions and youth wings constraining industrial sector growth in Nepal?

There are questions about whether and how YCL's and unions' activities affect appropriability. The article in question is here. I am trying to flesh out more below:

YCL is the problem! Why?

  • It confiscated property and is threatening businesspersons of death threats (actually, it is alleged that it first tortured and then murdered at least two businessmen).
  • It has opened extralegal camps in major industrial districts. Why business a militant youth wing  has in an industrial district?  It is for the sole purpose of bullying businesspersons and to collect forced donations.
  • This means companies are having trouble retaining earned profits and property. This is  a case of poor appropriability, the chief cause not being absence of law but because of the YCL's activities, which are quietly and deliberately ignored by the governing party.

This  is a direct blow to smooth functioning of the private sector and economic activities in the economy. They have tried to destabilize private property- one of the crucial institutions for economic growth. See this paper by Acemoglu, Johnson, and Robinsion about how Botswana progressed simply because it had a very strong institutions of private property. See this article (Red tapes under the red flag) as well.

Maoist-affiliated trade unions are the problem! Why?

  • They have closed down many industries (jute industry, manufacturing plants, garment and textile sector, cement factory, paper factory to name a few).
  • They have even been in dispute over wage and hiring practices with multinational companies and joint ventures, the major source of FDI in the country. Remember what happened to Dabur Nepal and Colgate Palmolive recently!?!
  • They have been pressuring the private sector to hike wages and to hire staff permanently.

This is a direct blow to the contract enforcement process in an economy. If there are differences, corrective and judicial institutions take care of them. This is a constitutional process facilitating a rule of law. This helps existing investors and potential investors to make investment decisions with high degree of certainty and encourage them to invest with little doubts. However, the unions have scared them away as they have been trying to bypass the legal procedure and take matters on their own hand, often resorting to vandalism, threats to life and property, and closing down factories. This sends a signal of bad investment climate. Nepal ranks at the bottom of Doing Business rankings and the Global Enabling Trade rankings. See this article as well. Note that Nepal has the most cumbersome hiring and firing regulations in the World. This is a direct result of the activities of the YCL and unjustified diktats of trade unions.

It is not the YCL's and Maoist-affiliated trade union's job to force companies to accept a minimum wage. Leave that to security forces and judiciary. It is the job of the lawmakers and government to fix minimum wage. The minimum wage act was revised recently, jacking up minimum wage in three different sectors. The private sector has complied accordingly. Given this, why does the unions have to vandalize companies and close down factories.

Regarding hiring and firing practices, it is up to a company's management to offer temporary or permanent jobs to its employees. The Employment Act stipulates that companies hire staff permanently after just over 240 days of regular work. The private sector has been complying with this provision. Some have gone roundabouts by firing workers after some months- a decision based on their own discretion and is largely dependent on profits. The private companies are not charity organizations. They operate on the basis of profits earned from the sales of goods and services.

Right now the industrial output and productivity are declining. Profits are razor thin and some companies are falling short of the minimum demand required to keep up their operation costs. Global recession is expected to hit with full force Nepal in mid-2009. Even if there are genuine concerns of the unions (apart from minimum wage and working conditions), this is not a time to put pressure on the private sector, create unfriendly business climate, and pull down factory shutters. If companies go bankrupt, then there will be no employment, forget about minimum wage and working conditions! The best for now is to let the companies stabilize and engage in negotiation to reach a sustained solution.

Oh, about the usage of the word "appropriability", I did define the word in the article. I did not fully explain this jargon because the article was supposed to be below 950 words (good if it is below 800 words). I became familiar with poor appropriability issues from this paper by Hausmann, Rodrik, and Velasco. I do understand that I should have fleshed out a little bit more on what appropriability really means in layman's term! But, space issues constrained me! About low salary, I worked in Kantipur Publications for more than a year and I did feel the salary was too low! It was fairly competitive!! [I don't know how fair it is for a low skilled worker to demand a wage rate fetched by high skilled workers!?!]

Also, poor appropriability of returns to investment is one of the two main constraints (the other is power crisis) on industrial productivity and output, at present (stress on the word, at present). Poor appropriability is definitely a constraint on the economy but it might not be the most binding one. However, poor appropriability and power crisis are the two most binding constraints on the industrial sector. No doubts about that! I think for the whole economy, the most binding constraint to growth is coordination failures in the movement to new tradable activities. More about this in my upcoming research paper. So wait!

Update: Good news is that the Maoist prime minister says he is going to dissolve the YCL's militant structure and return back confiscated property within three weeks and three months, respectively. I hope their action matches rhetoric this time!

Wednesday, January 7, 2009

Feldstein on fiscal policy

Even Martin Feldstein says Keynesian economics work when the credit market is distressed badly:

In a paper, Mr. Feldstein noted that the usual method of reviving the economy — lower interest rates — was failing to work because of “a dysfunctional credit market.”

That left fiscal stimulus to offset what he described as a decline of $400 billion a year in consumer spending. “While good tax policy can contribute to ending the recession, the heavy lifting will have to be done by increased government spending,” Mr. Feldstein said.

He pushed for big spending, carried out quickly. Among his proposals: replace depleted military supplies and equipment and step up financing for “useful research.” He also said that the shortage of “shovel ready” projects should not be a deterrent in a recession that is likely to last long enough to plan and execute new projects.

“It is of course possible that the planned surge in government spending will fail,” Mr. Feldstein said. But he expressed the “hope that the new program of fiscal spending in combination with mortgage market reforms will be sufficient to return the economy to full employment.”

Constraints to industrial sector growth in Nepal

At present, the major constraints to growth of industrial sector in Nepal seems to be poor appropriability of returns to investment and power crisis. Poor property rights and contract enforcements caused by the extralegal bullying behavior of the politically indoctrinated and militant youth wings and unions are falling heavy on the already ailing industrial sector. Meanwhile, more than 12 hours of power cuts has brought industrial activities to a grinding halt. Due to power crisis, productivity in the industrial sector has decreased by 50%. So the bust factors for the industrial sector at present in the Nepali economy are poor appropriability and load-shedding. That is the main point of my latest opinion piece.

Bust factors: Poor appropriability and load shedding

…Broadly speaking, at present two problems – low private appropriability of returns to investment and load shedding – bedevil the industrial sector in particular and the economy in general. The first one is the direct result of the ruling party’s inability to discipline its militant youth wing (YCL) and trade union that are headstrong in waging an all out war against the private sector under the pretext of labor rights and better working conditions. The second problem is engendered by the previous government’s visionless energy policies and withdrawal of investment in hydropower due to senseless sabotage of projects by the Maoists during their rebellion. Despite earning high returns on investment, as indicated by the eagerness of new firms to secure contracts, one wonders why private investment is still low in the potentially lucrative hydropower sector.

…All these are issues related to lack of property rights and contract enforcement, which have fuelled uncertainty over retaining profit and return to investment. Illegal occupation of industrial districts and manufacturing plants by politically motivated, militant youth wings is an encroachment on private property rights. Furthermore, incessant pressure (often threats to life and property) on the business sector to permanently hire temporary staff is a mockery of contract enforcement mechanism in the economy. The unjustified demand for increasing wages at a time when the industrial sector is going bust is beyond sound economic reasoning. Worse, some lawmakers are encouraging the extralegal acts of the militant youth wings and trade unions by eulogizing their terror campaign as a war against the oppressive and exploitative bourgeois class, a wrong-headed belief hinged on the outdated Marxist philosophies.

…On top of the poor appropriability problem stays the load-shedding issue. Power outage, which is expected to exceed 15 hours daily from next month, is severely crippling the industrial and service sectors. Businesspersons complain that power outage in every six hours is negatively affecting efficiency and productivity of the industrial sector. Already, productivity has slowed down by 50%. More worrisome is the fact that several small and medium-size enterprises (SMEs) are going out of business. These SMEs not only produce final goods but also supply intermediate goods to big firms. A sudden halt in this process means that the industrial sector will soon be in short supply of intermediate goods which would then affect final industrial output. It is impossible for the private sector to increase wages and hire staff permanently at a time when both production and demand are declining and profits are razor thin. These factors will not only decrease domestic investment but also scare away foreign investment, a sign already visible in the economy. Already, several domestic jute mills, local FM radio stations, cyber business, paper factories, and tourism sector are going bust.

Read the full opinion piece here.

Oh, did I mention that I wrote this piece while in Amtrak train ride from NY to my college! For some reason, I love writing (and thinking) while traveling!!

Sub-Saharan Africa fact of the day

Sub-Saharan Africa has just over 10% of the world’s population, but is home to more than 60% of all people living with HIV—25.8 million.An estimated 1.9 million people were newly infected with HIV in sub-Saharan Africa in 2007, bringing to 22 million the number of people living with HIV. Two thirds (67%) of the global total of 32.9 million people with HIV live in this region, and three quarters (75%) of all AIDS deaths in 2007 occurred there.


Tuesday, January 6, 2009

Links of Interest (1/3/2009)

Easterly on The Poor Man’s Burden

Today, just when we were getting over the long, toxic legacy of the Depression and its misguided emphasis on statist plans to fight poverty, this financial crash threatens to take us back to the bad old days. To avoid such a return, we must keep some principles in mind.

First, we must not fall into the trap of protectionism—neither unilaterally nor multilaterally, neither in rich countries nor poor. Protectionism will just make the recession spread further and deeper, as it did during the Depression.

Second, when changing financial regulations to repair the excesses of the past several years, don’t strangle the financial system altogether. You can’t have a Revolution from Below without it. This lesson is especially salient as Washington bails out Wall Street banks and failing industries and intervenes in the U.S. financial sector to an unprecedented degree. This bailout might turn out to be the bitter medicine that saves “finance capitalism” from a stronger form of anticapitalism, but in developing countries, open economies are still an open question.

Third, keep slashing away at the enormous red tape that is left over from previous harebrained attempts at state direction of the economy. Learn from the combined dismal track record of state-owned enterprises but also from the unexpected success stories: Private entrepreneurs are far better than the government at picking industries that can be winners in the global economy. Although fierce opposition will be inevitable, to adopt these policies would be to turn the bad hand we’ve been dealt into an outright losing one.

Fourth, don’t look to economists to create “development strategies,” and don’t back up such experts with external coercion like IMF and World Bank conditions on loans. Such efforts will be either a waste of local politicians’ time or positively harmful. Jeffrey Sachs alone can take partial credit for the rise of two xenophobic rulers hostile to individual liberty—Evo Morales and Vladimir Putin—after his expert advice backfired in Bolivia and Russia. If like-minded experts couldn’t get it done in the 50 years after the Great Depression, they can’t do it in the next 50 years. Nothing in the current crash changes these common-sense principles.

Five economists who gave prophetic warnings about the global financial crisis

Nafta’s unhappy anniversary

Monday, January 5, 2009

Rainfall and the probability of conflict

Antonio Ciccone argues that a 5% income shock (say by drought) raises the likelihood of civil conflict by 15 percentage points.

To see whether impoverishment causes the onset of civil conflict, I take a detailed look at data on rainfall levels in years before the outbreak of civil conflicts in Sub-Saharan African countries between 1980 and 2006. It is well known that living standards in these countries tend to be below trend in drought years and above trend when rainfall levels are above average. If civil conflict is triggered by sudden impoverishment, civil conflict onset in Sub-Saharan Africa should therefore have been more likely following drought years.

…If civil conflict onset is partly driven by sudden impoverishment, conflict outbreak in Sub-Saharan Africa should be more likely following below-average rainfall years. I find this to be the case. This result, combined with the effect of rainfall on income, allows me to estimate the effect of sudden impoverishment on the probability of civil conflict onset. My estimates indicate that a negative 5% income shock raises the likelihood of civil conflict by 15 percentage points.

More here

This is consistent with Fisman and Miguel’s argument that in Africa an income drop of 5% increases the risk of civil conflict in the following year to nearly 30%.

However, Simeon Djankov and Marta Reynal-Querol disagree by arguing that poverty does not have an effect on civil wars.

In Nepal, during the Maoists rebellion (1996-2006), the GDP growth rate averaged 4.1% which is barely different from the average growth rate of one decade before. However, head count poverty rate declined by more than 11 percentage points. This means that conflict did not substantially affect GDP growth rate. This can be explained by the rise in remittances inflow, even during peak time of conflict. This means declining poverty did not affect the likelihood of conflict in Nepal during 1996-2006. The effect of remittances far outweighed the negative effect of conflict on poverty and growth (though growth rate did plunged to –0.1% in 2001).

The figure below shows the increase in remittances:

Financial crisis in one package

Global financial crisis 2008: All the discussions and links summarized here

Saturday, January 3, 2009

Lobbying nomads in Nepal

The only “nomadic” tribesmen in Nepal, Rautes, are lobbying to keep their tradition and livelihood alive.

… The Raute tradition comprises of three salient features: they leave the forest looking for a fresh place to settle on immediately after someone in their tribe dies; they don’t cultivate land; and they hate education. The Rautes hunt monkeys for food. And, to get food grains, they fell trees to make wooden utensils that they then barter for grains in the villages near the forest where they live. They use wooden nails in their products and the tools they use to build the products are also very traditional.

… The Rautes, who are in Kathmandu, say they would like to live like that, but want state support as their livelihood is being threatened both by the popularity of plastic utensils, and by the hindrance posed by villagers with regards to their use of forest wood.

Thursday, January 1, 2009

Financial loss and best soccer goals in 2008

From the NYT:

All told, about $7 trillion of shareholders’ wealth — the gains of the last six years — was wiped out in a year of violent market swings.

Billionaire blowups of 2008:

More than 300 of the 1,125 billionaires we tallied on our annual list last March have since lost at least $1 billion; several dozen lost more than $5 billion. The 10 richest from our 2008 rankings dropped some $150 billion of wealth, dragged down by steel tycoon Lakshmi Mittal, estranged brothers Mukesh and Anil Ambani and property baron K.P. Singh, who together dropped $100 billion. America's 25 biggest billionaire losers of 2008 lost a combined $167 billion.

This video is quite amazing!


Now, the best 2008 football goals:


Nepali economy in 2009

My former colleague Prem Khanal writes:

The year 2008 ended further cementing historic changes in the political front but little enthusiasm the economy saw to turnaround deepening economic woes. Instead, topsy-turvy policy often contradicting with market-based economic principals, acute power shortage and shattered private sector’s confidence all have emerged as major headwinds that the Maoists-led government will be confronting to lay groundwork to achieve a ‘double-digit growth’ in 2009.

My main worries: gradual wiping off of the industrial base due to load-shedding, negative impact on the service sector, rising general price level (14% inflation rate is one of the highest in South Asia) and stalemate in hiring (low-skilled jobs abroad) by foreign companies. All could lead to social unrest!