Monday, March 30, 2009

Contradiction: IMF’s push for stimulus and contractionary policies

On the one hand, the IMF is calling for fiscal stimulus that should last well beyond 2010. On the other hand, it is also imposing harsh conditionality on governments that borrow money from it. As in previous cases, the conditionality comes in the form of cutting social security spending, wages and other contractionary policies that could potentially disrupt political stability.

Kevin Gallagher argues that the IMF, in its emergency assistance plans for developing countries, is still imposing harsh conditionalities that limit rather than expand government spending. “If the IMF is to receive significantly higher lending authority, it should be forced to abandon its draconian austerity policies, which are more inappropriate than ever in the current crisis,” he argues.

Here is a survey of global stimulus and the IMF’s plans for the crisis.

Pakistan (getting US$7.6 billion):

  • Increase interest rates
  • Cut energy subsidies
  • Reducing fiscal deficit to a more manageable 4.2 percent in 2008/09 and 3.3 percent in 2009/10
  • State Bank Of Pakistan (SBP) will act on monetary policy to build its international reserves, bring down inflation to 6 percent in 2010.
  • SBP to eliminate central bank financing of the government.
  • Increase in expenditure on the social safety net through cash payment and electricity subsidies

Latvia (US$ 17.7 billion):

  • Policies centered around maintaining a pegged exchange rate (to the Euro).
  • Latvia has agreed to keep its budget deficit down in 2009 to below 5.0 percent of GDP and to bring it up to 3.0 percent of GDP in 2011.
  • (Without loans or new financial measures, the deficit would have been an estimated 12 percent of GDP in 2009.)
  • Further conditionalities: immediate 15% reduction in local government employees' wages
  • 30% cut in nominal spending on wages from 2008 to 2009
  • cut in government spending (equal that of 4.5% of GDP)
  • pension freeze and value-added tax increase

Ukraine (US 16.4 billion):

  • Capitalize viable banks, make credit available
  • Target inflation - 17% (2008 inflation was 30%)
  • Reduce budget deficit to 1% of GDP from 2% in 2007
  • Increase social spending with .8% of GDP, but increase energy tariffs
  • *Current account balance deficit is 6% GDP
  • Targets can be adjusted depending on economic evolution

Ten immediate measures for global recovery

This piece comes straight from Duncan Green’s post on a report by the UN/Stiglitz Commission for reforming globalization.

Ten immediate measures are essential for global recovery.

1. All developed countries should take strong, coordinated, and effective actions to stimulate their economies, dedicating 1.0 per cent of their stimulus packages, in addition to traditional official development assistance commitments.

2. Developing countries need additional funding. Such funding could be provided by an issuance of Special Drawing Rights…. In addition regional efforts to augment liquidity should be supported.

3. Mobilizing Additional Development Funds by the Creation of a New Credit Facility. Given the need for rapid response, the new credit facility might be more quickly established under the umbrella of existing institutions, such as the World Bank, where efforts are underway to remedy existing inadequacies in governance and lending practices, or in Regional Development Banks where developing countries have more equitable representation. [note absence of any role for IMF!]

4. Developing Countries need more policy space. There are asymmetries in global economic policies—countercyclical policies are pursued by developed countries, while most developing countries are encouraged or induced to pursue pro-cyclical policies.

5. The lack of coherence between policies governing trade and finance must be rectified.

6. Crisis response must avoid protectionism

7. Opening advanced country markets to least developed countries’ exports

8. Learning from Successful Policies to undertake Regulatory Reforms.

9. Coordinating the Domestic and Global Impact of Government Financial Sector Support

10. Improved coordination of global economic policies. Following the successful example of the Intergovernmental Panel on Climate Change (IPCC), a similar panel could be created to offer consultancy to the General Assembly and ECOSOC, but also to other international organizations to enhance their capacity for sound decision-making in these areas.

Live radio interview on March 28, 2009

This is a phone interview I gave for this radio station, based in Toronto, on March 28, 2009. The interview was about my study and research in economics, the awards I won in March, the Nepali economy and stuff like that!

Fyi, the interview is in Nepali language!!

Sunday, March 29, 2009

Energy from kites and moving out of poverty

In this brief talk, Saul Griffith unveils the invention his new company Makani Power has been working on: giant kite turbines that create surprising amounts of clean, renewable energy.

Jacqueline Novogratz tells a moving story of an encounter in a Nairobi slum with Jane, a former prostitute, whose dreams of escaping poverty, of becoming a doctor and of getting married were fulfilled in an unexpected way.

Friday, March 27, 2009

Brookings’s recommendation for the G20 summit

The Brookings Institution has published an interesting collection of articles (recommendation for the upcoming G20 Summit in London).

Here is Eswar Prasad:

The crisis is likely to encourage emerging markets to export and save even more in order to build up larger stocks of foreign exchange reserves and thereby protect themselves from future financial turmoil. Self-insurance through reserve accumulation is costly, but emerging markets see little choice; borrowing from the IMF carries a stigma and remains a toxic proposition for emerging market politicians. In tandem with rising US government borrowing, this could result in larger imbalances and greater risks. Thus, the world economy again faces the classic collective action problem of how to align countries’ incentives so they take into account the effects of their policies on global financial stability.

Greater coordination of macroeconomic stimulus measures would increase the global bang for the buck of individual countries’ policies. Such coordination would not only have a direct effect by preventing leakage of any one country’s stimulus measures, but would also bolster confidence.

Here is Paul Blustein on revitalizing trade:

So the principles guiding the G-20 should be these: Make sure that the rules-based trading system survives. Don’t try now to open markets more than they already are; rather, focus on keeping protectionism, and quasi-protectionism, from becoming long-lasting features of the international economy, so that globalized trade can help the world recover and prosper anew. To the extent that anti-market policies are adopted, aim to keep them temporary and limited in scope.

One way the G-20 could give a shot in the arm to the WTO would be to declare a moratorium on new bilateral and regional pacts.

I said this, Finance Minister Dr. Bhattarai says this!

I said this on my latest opinion piece:

… the economy does not even have the necessary conditions and institutions to sustain growth rate of over five percent even for two years. This would require a vibrant private sector, entrepreneurial citizenry, business-friendly fiscal policy, less red tape, and more importantly, infrastructure required for unleashing the entrepreneurial spirits in the economy.

The finance minister, who has so far been obsessed with revenue collection rather than focusing on achieving development and growth objectives outlined in his budget, is making overly optimistic and unrealistic claims about growth rates without fully assessing the strongest and binding constraints on economic activity in the economy.

Nepal’s Finance Minister Dr. Bhattarai says:

The Finance Minister, who reached Birgunj early Thursday to inspect Birgunj customs, the largest trading and revenue-generating point, said that the government was not just concentrating on enforcing tax laws and collecting revenue, but was also working for creating an industry-friendly environment.

I am waiting to hear what exactly are the rescue plans, if any, for the beleaguered Nepali industrial sector. It has been almost six months I am hearing such assurances, but in reality I have not seen a single executable plan so far!

Wednesday, March 25, 2009

What should a new global risk assessor look like?

Nick Stern writes:

Any forthright, disinterested assessment of the global economic system’s stability requires two sorts of independence. First, the institution making the analysis and judgments must not have anything other than its own reputation riding on its assessment; in particular, its own policies or lending should not be shaped in any way by its judgment. That means it should not have any policy or lending facilities. Thus it cannot be part of the existing international financial institutions (IFIs), all of which are policymaking, governmental or lending institutions.

Second, the institution must be independent of the big countries or parts of the global economic system that might contribute to future instability. Therefore it cannot be subject to interference by the board of the institution. That means that its assessments cannot be part of the IFIs in their current form, or indeed any form that may emerge from reform proposals. The fact is, main shareholders, through their board membership, always interfere in any statement that they think might be interpreted as critical of their country.

Reality about Nepal’s GDP growth rate

If you don’t like numbers and econ jargons, then you’ll probably not enjoy this article! Anyway, I wanted to write about the trend in GDP growth rate in Nepal and if the economy can attain a double-digit growth rate, which the Maoists government likes to trumpet over and over again. Nothing wrong with that but my point is that growth projections has to be realistic. Given the loss in price and quality competitiveness in the international markets, labor disputes, unfriendly fiscal policies, downward slide in foreign employment, and question mark on the soundness of the monetary situation, the economy is not even in a position to sustain 5% growth rate for three consecutive years. For how and why, read the opinion piece here.

The economy has never seen a double-digit growth rate in the past five decades. The highest GDP growth rate (9.6 percent) was attained in 1984. This was not surprising given the fact that it was simply a recovery from three consecutive years of recession. The growth rate in 1983 was minus 2.98 percent. In no other years have growth rate touched this upper bound. More troubling is the fact that the growth rate has never been stable. Roughly, every increase in growth rate is followed by a decline. The economy experienced more bouts of growth decelerations than accelerations, i.e. more episodes of declining growth rates than increasing growth rates. Since 1960, the economy witnessed 19 instances of an increase in GDP growth rate and 25 instances of growth collapses. There are no instances of sustained growth rate of over five percent for three consecutive years. The average GDP growth rate in the past five decades was 3.57 percent.

Given this historical peek at GDP growth rate of Nepal, it appears that the growth projection for the next three years by the finance minister was very unrealistic in the first place. Unrealistic because even during the heyday of liberalization policies designed according to the Washington Consensus - pushed vigorously by international financial institutions and development agencies during the 90s - the economy did not witness sustained growth rate of over five percent for three consecutive years. Now, the economy does not even have the necessary conditions and institutions to sustain growth rate of over five percent even for two years. This would require a vibrant private sector, entrepreneurial citizenry, business-friendly fiscal policy, less red tape, and more importantly, infrastructure required for unleashing the entrepreneurial spirits in the economy. We severely lack all of these conditions right now. The populist talk of double-digit growth rate has no real substance on it.

There two figures say a lot about GDP growth rate in Nepal.

Fyi, this evening I am off to FEI Educator’s Night at the Hershey Company, Harrisburg, PA. I am getting this award :)

Tuesday, March 24, 2009

Education (human resources) sector in Nepal

As evidenced by the increasing enrollment rates among Nepali people, the supply of education among those entering the workforce has been increasing since 1991. A push for universal primary education has drastically increased enrollment in primary and secondary education.

Not only primary and secondary enrollment, net tertiary enrollment is also increase and is at its highest level. Since there is a free flow of labor between India and Nepal, any discrepancy in demand for and supply of labor in the market is compensated by importing labor from India. At present, 15% of the labor market demand in the skilled sectors is fulfilled by importing human resources from India, according to the ILO.

Despite being low, the quality of human resource is also improving in recent years. The labor productivity is consistently increasing in the domestic market and any shortfall in human resource is substituted by importing human resource from the Indian labor market.

Nepal’s youth and adult literacy ratio has satisfactorily improved since 1991. Though Nepal’s literacy rate is still slightly below the regional and LIC average, it is improving and the trend is encouraging.

Public spending on education (% of GDP) is satisfactory and is increasing in recent years. Based on income per capita and the size of the economy, Nepal’s expenditure on education is not that different from other low income countries. In fact, looking at the per capita income of regional counterparts like India, Bangladesh, and Pakistan, Nepal’s spending is pretty impressive.

Finally, the return to investment in education is low in Nepal. This is indicative of the fact that the economy is not suffering from a shortage of human resources because if it were so, then the wage rate of the existing employees should have been high. The shadow price of a binding constraint should be high and rising; if supply of skilled workers is binding, then firms would be offering them increasingly higher wages. This seems not to be the case in Nepal.

Source: Adapted from Patrinos & Psacharopoulos[1], 2002

These data and analysis are difficult to reconcile with a hypothesis that the provision of education (human resource) is a binding constraint on Nepal’s economic growth.

Note that I am not saying education (lack of human resources) is not a constraint on growth in the Nepali economy. As is seen above, it is definitely a strong constraint. However, I don’t think it is as binding a constraint as bad infrastructure is. Here is my take on bad infrastructure as the most binding constraint on economic activity in Nepal. I have expanded on it a lot and will post the whole stuff later on. So far, I have discussed these constraints: taxes, coordination failures, and a discussion of the evolution of the exports sector. Discussion on other constraints to follow soon.

[1] Data correspond to studies done in the year indicated in the table. Dilip Parajuli from the World Bank did the study on returns to investment in education for Nepal in 1999. Latest data available are used. Readers should be cautious in interpreting these data for comparative purposes because some of the data for countries correspond to the state of education sector two decades ago.

Who gets hit the most by slow growth and recession?

This one pager argues that the working poor (the bottom 20th percentile in the income distribution) are hit less intensely than regular workers. Why? Because “wages at the bottom of the distribution are already so low that there is little room for further cuts”. Moreover, a large portion of the poor workers do part-time work, which is a desired over full-time workers by employers in order to put down pressure on payroll.

Zepeda, Alarcon, Soares, and Osorio look at the effect of recession and slow growth on the working poor. They study slow growth in Chile (2000-2003) and Mexico (2000-2004), and recession in Mexico (1994-1996) and its effect on the working poor. In a country where most of the working poor are engaged on agricultural sector and do part-time work to earn an extra income, this feature is kind of expected.

Is this a matter of relief or comfort? Well, not really! The paper does not say that poor do not get hurt; what it says is that the working poor are affected less intensely than full-time wage earners. The working poor might loose income marginally but the fact is that this marginal loss in income means a lot to their share of household income and the corresponding consumption budget. Also, it is generally agreed that poor people have the highest marginal propensity to consume. Social protection, cushioning the loss in marginal income, and social safety are necessary to not only help the poor but also to stimulate local economy.

… that periods of slow growth and recession in Mexico and Chile improved the poor’s relative income. That their labour income does not fall as much as others’ during crises may offer comfort, but even a small decline can exact a heavy toll. Safety nets and emergency assistance help protect minimum consumption levels, but policies to confront economic crises should not be mere mitigation strategies. They should include interventions to strengthen human capacity and improve the poor’s main asset: labour.

In a related IPC working paper the authors look at the changes in labor markets and the dynamics of inequality and poverty in Brazil, Chile, and Mexico. One interesting finding is that the earning per worker is a function of slow-moving changes in the structure of employment and the characteristics of workers and rapid changes in the prices of labor for specific workers. The structure of employment is affected by demographic changes, education, and structural transformation in employment from agricultural labor.

Demographic changes, better education and the decline of agricultural labour are among the most significant changes in the structure of employment, and they contribute to observed changes in earnings. Among the most important changes in prices contributing to the change in earnings are changes in the returns to formal and informal employees relative to the self-employed; changes to full-time employment relative to part-time workers; changes in the returns to urban workers relative to rural workers; and change in the earnings of workers in services relative to workers in agriculture. In general, changes in earnings frequently favoured low-earning workers, mostly because of the change in the returns for their labour. This is in contrast to the changes in the structure of employment, which tended to favour high-earning workers.

Monday, March 23, 2009

Geithner and Keynes

US Treasury Secretary Timothy Geithner echoes Keynes in an article published in the WSJ:

Simply hoping for banks to work these assets off over time risks prolonging the crisis in a repeat of the Japanese experience.

The Public-Private Investment Program is better for the taxpayer than having the government alone directly purchase the assets from banks that are still operating and assume a larger share of the losses. Our approach shares risk with the private sector, efficiently leverages taxpayer dollars, and deploys private-sector competition to determine market prices for currently illiquid assets.

When financial institutions come to us for direct financial assistance, our government has a responsibility to ensure these funds are deployed to expand the flow of credit to the economy, not to enrich executives or shareholders.

Saturday, March 21, 2009

Irrationality and clean indoor air!

Behavioral economist Dan Ariely studies the bugs in our moral code: the hidden reasons we think it's OK to cheat or steal (sometimes). Clever studies help make his point that we're predictably irrational -- and can be influenced in ways we can't grasp.

Researcher Kamal Meattle shows how an arrangement of three common houseplants, used in specific spots in a home or office building, can result in measurably cleaner indoor air.

Friday, March 20, 2009

Protectionism? Nah, too dangerous!

Here is Catherine Ashton, European Commissioner for Trade, making a case for keeping open markets and not resorting to protectionism despite the fallout of the current global financial crisis. She makes a case for quick passage of the Doha Round by arguing that even if tariffs were raised to the level allowed under WTO, global income could reduce by at least half a trillion dollars.

To truly deliver on those commitments made at the G-20, we need to turn the rhetoric into the reality and complete the Doha round of  world trade talks. This agreement would add hundreds of billions of dollars to the world economy every year and allow the developing world to continue to lift its citizens out of poverty through the dignity of their own labor and the genius of their own ideas. Doha is also, too, our insurance policy against protectionism. Recent studies show that if tariffs were raised to levels still allowed under the current World Trade Organization’s ceilings, global income could be reduced by at least half a trillion dollars. That’s a large chunk of the financial fiscal stimulus gone.

And if the Doha round is concluded, it’s certainly not just others that will gain, as some have already claimed. U.S. exports to key markets in Europe, Asia, Latin America will grow, in some cases at double-digit rates. The U.S. trade deficit is expected  to improve and U.S. GDP would increase. But let me make a  point about the impact on jobs. Our analysis shows that Doha will modestly improve real wages in all sectors of the United States economy for both skilled and unskilled workers and that the net effect of the round will be job creating.

The loss in welfare is on average; it has to be seen in perspective and one should not hasten to a conclusion that there will be a huge loss in welfare. Of course, there will be loss in welfare (arising from higher deadweight loss) and increasing tariffs above the existing levels would be terrible, both in terms of growth and employment. But, if we break up the dividends of the full Doha Round, it seems that the poorer countries would get the least of the benefit pie. The most going to China, Brazil and South Africa. In fact, Sandra Polaski’s general equilibrium model of global trade flows under different scenarios shows that the total gains from trade would be between $32-55 billion, with rich nations getting $30 billion; middle income countries like China, Brazil and SA getting $20 billion; and poor countries getting $5 billion (about $2 per head). So, argument for not raising tariff from existing levels makes sense. But, without looking at the spread of benefits out of the Doha round, it does not make sense to argue for its quick passage. Let the Doha Round be rewritten for what it was first perceived to be- a development round. Putting development argument first before tariff and protectionism arguments would give a clearer picture (that includes the argument for policy space, not necessarily tariffs).

Meanwhile, Becker and Murphy put inputs on the ongoing chorus (among rightists) against growing government spending (despite the desperate need for stimulus, which the markets can’t do own its own right now!). Honestly, they cherry-pick their arguments from a narrow base and make a case against government spending and try to over glorify markets.

As governments continue to determine how many restrictions to place on markets, especially financial markets, the destruction of wealth from the recession should be placed in the context of the enormous creation of wealth and improved well-being during the past three decades. Financial and other reforms must not risk destroying the source of these gains in prosperity.

Therefore, in devising reforms that aim to reduce the likelihood of future severe contractions, the accomplishments of capitalism should be appreciated. Governments should not so hamper markets that they are prevented from bringing rapid growth to the poor economies of Africa, Asia and elsewhere that have had limited participation in the global economy.

Most interventions, including random policies, by their very nature would hurt rather than help, in large part by adding to the uncertainty and risk that are already so prominent during this contraction. Government reactions have demonstrated the danger that interventions designed to help can exacerbate the problem. Even though we had well-qualified policymakers, we have gone from error to error since August 2007.

Oops, despite growth, poverty reduction remains stagnant in Africa (more people actually fell below the poverty line in SSA after the experimentation with SAPs and Washington Consensus). Inequality has also increased. Regulations succumbed to lobbyists’ petty interests (in reference to the failure to regulate investment banks and their shady securities that were priced far less than the risk they posed).That being said, the rise in global income is definitely due to the wonders of market mechanism. However, with this comes the responsibility to take care of the leftovers, those who perpetually remain at the lowest strata of income and social opportunities. Moreover, some lose and some gain by following the price signal and participating in the market. It is the government’s responsibility to take care of those who are left behind by the market, which itself is either reluctant to help or ignorant of those squeezed hard by its process. Always worth to read Krugman’s response on these sort of issues.

Also here is Jack Schwager writing in the FT:

Taken as a whole, Republicans seem to be following a new economic doctrine of deficit spending during bubble economies and deficit restraint in collapsing economies. This could be termed as “Bizarro Keynesianism” – in the Bizarro World, a creation of the Superman comic book series, everything is the opposite of what it is in our world.

Thursday, March 19, 2009

The demise of CCTs in Nicaragua

This one pager published the IPC looks at why a popular Conditional Cash Transfers (CCT) program in Nicaragua, Red de Proteccion Social (RPS), was put to death bed despite initial success in education and health sectors.

In the CCT program, funds were channeled to female households in exchange for commitment to send children to school and administer regular medical check-ups at local health centers. This had positive impact on school enrollment and other education indicators and reduced stunting by 5 percentage points. Despite these successes, the program was discontinued by the Nicaraguan government in 2006, thus marking the demise of a successful 6 years of CCTs.

The end of the Nicaraguan experience with RPS is disappointing
in light of the programme’s achievements, but it provides relevant lessons to policymakers working with CCTs, particularly those receiving external funding. Even if a programme is deemed successful to the international community, domestic constituents must still approve of it. The support of both the non-beneficiary populace and government officials is important. Key domestic officials may change over time, and support cannot be provided solely by a few officials who may not remain in their positions. Frequent communication of a programme’s purposes, policies and results is important to gaining and maintaining support. Without steady domestic approval, even an excellent programme may lose support and eventually be discontinued. With such support, the programme is more likely to continue to function, improve and enjoy greater backing and influence.

Here is my earlier blog post on the need for CCTs during the financial crisis. And, here is a review of CCTs in Latin America and Sub-Saharan Africa.

How green are human rights?

There was an event held at my college yesterday. It was about the how human rights are connected with environment sustainability. There were three panelist- three professors from Mexico, Britain, and Cameroon.

I found this quote, by Professor Bruce (from UEA), interesting:

It is our human rights to use water. However, our choice/decision to use water affects the usage by others. Imports and waste of water, while exercising human rights in one part of the world, is in a sense exports of water (potential stream) from other part of the world. Hence, the very daily choices arising from exercise of human rights is not independent of how individuals use water for daily purposes.

Tuesday, March 17, 2009

Listening to the Poor: Voices from the Bottom Up

The WB has released a new book (Moving out of Poverty: Success from the Bottom Up), which contains findings from a study carried out in 15 countries and interview with 60,000 people, about poverty reduction. I am surprised why Nepal was not included in the list of countries from where “voices of the poor” were collected because Nepal is one of the poorest countries in Asia and 18th poorest in the world (in terms of GDP (PPP) per capita figure from the IMF). The report does not even mention the word Nepal. It looks like a follow up to the Voices of the Poor report, which incorporated voices of 60,000 people from 60 countries, published in 2000.

One of the main findings of the report is that when researchers asked respondents about how they can move out of poverty, almost all of them underscored “individual effort, self-reliance and initiative”. This is not new but still I can’t exactly figure out what this really means (or what the authors really meant by this).

I think it misses to mention an important assumption: ‘provided necessary tools such as credit, relevant infrastructure, healthcare, market access, education, and technology among others, individual effort, self-reliance and initiative could lead poor people out of poverty.’ I think the initiative factor (coming out of agents) and the necessary conditions (usually provided by external agents/exogenous factors) are complementary and have to be synchronize in order to get the biggest bang from a poverty reduction initiative.

… the focus of poverty reduction strategies must therefore shift to increasing economic, social and political opportunities in the local communities where the poor live. These local opportunities include the provision of business know-how, basic access to health and education and the improvement of local governance. Local governments that are responsive and accountable have a critical role in creating the local conditions for households to escape poverty.

One can also get a test of the love with ‘liberalization mindset’ in the report. The report recommends “poverty reduction efforts need a liberalization from below” that includes removing restrictive government regulations, expanding access to markets (especially by providing connectivity through roads bridges and telephones), and integrating poor people’s businesses on fairer terms in new business models”. Nothing new and surprising about these recommendations but still I would be interested in seeing policy experiments that validate these claims.

What I don’t understand is, despite knowing (and having a feel about) these solutions for a long time, why were/are not the development agencies and the aid industry synchronizing their initiatives to tackle the problems head on? It kind of baffles me more than anything else because the poverty reduction strategies we study in school are not in line with the actions of most of the development and aid agencies that are making high pitch noises voices about poverty alleviation for the last four decades.

That being said, the report is useful in knowing what the poor people (as opposed to experts from development agencies and development models) actually say about their condition of life. It also discusses the concept of poverty and how it has evolved over the years.

Self-initiative is considered is the most important factor for moving out of poverty.

Here is a generalized diagram of how to move out of poverty:

Wise Chinese stimulus stuff

The NYT reports:

The country is using its nearly $600 billion economic stimulus package to make its companies better able to compete in markets at home and abroad, to retrain migrant workers on an immense scale and to rapidly expand subsidies for research and development.

Construction has already begun on new highways and rail lines that are likely to permanently reduce transportation costs.

And while American leaders struggle to revive lending — in the latest effort with a $15 billion program to help small businesses — Chinese banks lent more in the last three months than in the preceding 12 months.

The Guangdong training programs are half in the classroom and half in the factory, usually the business that plans to employ the trainees. By increasing productivity, training programs can hold down corporate labor costs per unit of production for years to come.

China’s huge training programs may also help preserve social stability by keeping the unemployed off the streets, although Chinese officials deny that is their intention.

ABC clouds and climate change in Nepal

This kind of story scares me when it happens in developing countries, which severely lack manpower and firepower to deal with issues like  fires, wildfires and increasing accumulation of clouds above the skies of major cities, leading to rise in temperature.

According to this news piece, two major national parks in Nepal are burning creating Asian Brown Cloud (whatever that means!) over Kathmandu and other cities. This is compounded by increasing smoke emission from motor vehicle, factories, and cooking gas.

According to NASA, wildfires appear to be raging in or very close to some of the national parks and conservation areas, including Langtang National Park and Makalu Barun National Park, located along the northern border of the country. The forest fire raging in Langtang National Park in Rasuwa district for the last seven days is said to be the worst of all.

According to a NASA report today, there was a reduction of solar radiation to the surface by as much as 15 per cent in Kathmandu. Thirty-seven domestic flights were delayed due to poor visibility caused by hazy weather on Sunday.

A weatherman also blamed the dust particles passing through the northern Indian and Pakistani cities coupled with thick wildfire smoke for the ABC. Apart from Kathmandu, Biratnagar, Pokhara, Dhangadhi and Bhairahawa have also been affected by the ABC, which is concentrated three km above the earth’s surface and can travel halfway around the globe in less than a week.

Can the aid agencies and climate change advocates do something about this? Oh well, who cares about the change going on above in the skies over Nepal. I have not heard of any such international effort to tackle such issues happening in real time in Nepal, at least not since the time I became aware of these issues!

Monday, March 16, 2009

Higher education and development

Nice series of articles about the role of science and technology (higher education) in achieving economic development on SciDev.

Anyone seeking to tackle the problems facing the developing world must remember two simple facts of life. First, none of these problems — from food shortages and the spread of disease, to achieving sustainable economic growth — can be addressed without the use of science and technology.

Second, harnessing science for development depends on the skills of a country's people. And that in turn requires a robust and effective higher education system — the only mechanism that can produce and sustain these skills.

But in the recent past, many governments overlooked this critical information. Few developing countries, for example, refer to either science or higher education in their Poverty Reduction Strategy Plans — the documents that guide donors, and others, on a country's investment priorities.

Here is an interesting article that argues for more donor funding on improvement in research activities in the developing countries rather than commissioned studies in specific areas.

If donor agencies genuinely want to recognise 'ownership' in the development dialogue, then funding institutional research capacity should be an essential ingredient of bilateral development cooperation.

More good news

Good news # 1 (Carnegie Junior Fellow for Trade, Equity & Development program)

Good news # 2 (FEI Outstanding Student Award 2009… the pic is from this freshmen year news piece…not one of my fav pics!)

Friday, March 13, 2009

Developing countries and the financial crisis

The developing countries face a financing gap of $270-$700 billion (that’s a pretty wide range!) due to the financial crisis, according to a new report by the WB. It argues that developing countries are likely to face higher spreads and lower capital flows than over the past seven years, leading to weaker investment and slower growth. The low income countries are still feeling the burnt of fuel and food crisis, which depleted international reserves. Then the ensuing global financial crisis led to lowering of commodity prices, especially primary goods- the main export items of LICs, leading to lowering of terms of trade. This is likely going to increase deficit. All the problems occurring at the same time or in sequence will put enormous pressure on fiscal stability.

One of the main worries for the developing countries is the decline in remittances, the life blood of small economies like Nepal which has more than a million citizens working abroad. Remittances contribute to approx 20% of GDP. Surprisingly, remittances inflows have been increasing until recently in Nepal. No one knows how long it will last until the crisis cripples remittances inflow. But, it is expected to decline soon. The World Bank estimates that remittances will nosedive in 2009 and will recover in 2010.

The paper said that 94 out of 116 developing countries have experienced a slowdown in economic growth. Of these countries, 43 have high levels of poverty. The most affected sectors are those that were the most dynamic, typically urban-based exporters, construction, mining, and manufacturing. Cambodia, for example, has lost 30,000 jobs in the garment industry, its only significant export industry. More 500,000 jobs have been lost in the last three months of 2008 in India, including in gems and jewelry, autos and textiles. The ILO predicts that global job losses could hit as much as 51 million people and affect 30 million workers.

The WB says that financial crisis will have long-term implications for developing countries. Debt issuance by high-income countries is set to increase dramatically, crowding out many developing country borrowers, both private and public.Developing countries that can still access financial markets face higher borrowing costs, and lower capital flows, leading to weaker investment and slower growth in the future.

In order to aid stimulation of developing economies, the WB has launched an Infrastructure Recovery and Assets (INFRA) program (among other programs), which, it says, will channel investment in infrastructure so that badly needed investment is not completely dry. This is a form of fiscal stimulus ($15 billion) in the developing countries.

What’s amazing is that the whole argument for investment on infrastructure to stimulate the economy began with American Recovery and Reinvestment Act, launched by the Obama administration. Most of the development agencies have been arguing for similar stimulus in the developing countries. What I don’t understand is that why were these development agencies waiting for this disaster (and for so long) to channel in investment on infrastructure projects in the developing countries? For decades it was known that there is deficient supply of infrastructure in the developing countries. Still, there was no such aggressiveness in improving on this front by providing aid and expertise to the developing countries.

For instance, the most binding constraint on growth in the Nepali economy is bad infrastructure. You don’t need a sophisticated analysis to realize that it is the most binding constraint on growth (actually, I tried it myself in a recent paper!). People know that there is deficient supply of infrastructure and markets and production sites are not linked. Still, the development agencies did not invest on this crucial sector that would have produced the biggest bang for a buck.

All of a sudden, there is a renewed vigor to pour in investment on infrastructure sector in the developing countries. Everyone wants to ‘follow the herd’. Nothing wrong with this initiative but I think it is too late and too little to stimulate developing economies by focusing investment in infrastructure only. Widen social safety nets, free them of some of the harsh conditionality on lending so that countries can use funds in the sectors that they think are going to be affected the most, provide them expertise (not command the actions) on prudent and productive investment, and so on.

Anyway, here are addition discussion about the impact of financial crisis on the poorest countries. Duncan Green discusses this issue here. Here is Shanta Devarajan’s views on if Africa needs a fiscal stimulus, largely dependent on foreign aid (he says, it depends). Here is a post based on UNU’s paper on the impact of financial crisis on the developing countries. And, here is a post about the need for social protection safety nets like CCTs during this financial crisis.

Thursday, March 12, 2009

Sen on Smith and capitalism

Amartya Sen on Adam Smith, current financial crisis, and capitalism

All the affluent countries in the world – those in Europe, as well as the US, Canada, Japan, Singapore, South Korea, Taiwan, Australia and others – have depended for some time on transactions that occur largely outside the markets, such as unemployment benefits, public pensions and other features of social security, and the public provision of school education and healthcare. The creditable performance of the allegedly capitalist systems in the days when there were real achievements drew on a combination of institutions that went much beyond relying only on a profit-maximising market economy.

The need for supervision and regulation has become much stronger over recent years. And yet the supervisory role of the government in the US in particular has been, over the same period, sharply curtailed, fed by an increasing belief in the self-regulatory nature of the market economy. Precisely as the need for state surveillance has grown, the provision of the needed supervision has shrunk.

Despite all Smith did to explain and defend the constructive role of the market, he was deeply concerned about the incidence of poverty, illiteracy and relative deprivation that might remain despite a well-functioning market economy. He wanted institutional diversity and motivational variety, not monolithic markets and singular dominance of the profit motive. Smith was not only a defender of the role of the state in doing things that the market might fail to do, such as universal education and poverty relief (he also wanted greater freedom for the state-supported indigent than the Poor Laws of his day provided); he argued, in general, for institutional choices to fit the problems that arise rather than anchoring institutions to some fixed formula, such as leaving things to the market.

Meanwhile, here is one of the most realistic statements about what economics is all about by Rodrik:

Economics is really a toolkit with multiple models - each a different, stylized representation of some aspect of reality. One's skill as an economist depends on the ability to pick and choose the right model for the situation. Economics' richness has not been reflected in public debate because economists have taken far too much license. Instead of presenting menus of options and listing the relevant trade-offs - which is what economics is about - economists have too often conveyed their own social and political preferences. Instead of being analysts, they have been ideologues, favoring one set of social arrangements over others.

More here

VDIS: Guilty have the upper hand!

I got a lot of angry comments (okay, I got good ones as well) when I wrote this opinion piece defending the government of Nepal’s decision to implement Voluntary Disclosure of Income Scheme (VDIS), which was designed to give an opportunity to tax evaders to reveal sources of their assets and income and pay 10% of it to clear outstanding tax payments before they face the regulatory music. I had hoped that the government would enforce this provision to the fullest. Sadly, the government is bowing down to the illegitimate demands of business executives, who are the principle tax evaders.

It is ironic that the government has yielded to demands of tax evaders, who are in a way guilty of committing a crime, i.e. conceal true worth of assets and income and not pay taxes to the government. The government has spared application of VDIS in investments made in labor-intensive industries like hydropower, physical infrastructure, and “other productive services” (uff, another loophole!).

I can’t understand why the FNCCI, the apex representative body of the business sector, is so ferociously arguing against VDIS. Is this an indication that the business executives have amassed more ‘black money’ than is thought? It is a golden opportunity for them to turn ‘black money’ into ‘white money’. They are ignoring this at their own peril!

The Maoists government should live up to its promises and proposed policies. People have already heard too much (and redundant) rhetoric. Time for action! By this, I mean real action, which might often come at the expense of few crooked business executives going down or behind bars! The VDIS is one of the few policies I have been supportive of the Maoists government.

Why let the guilty have an upper hand?

Tuesday, March 10, 2009

Documentary on the financial crisis

Very interesting video from Frontline:

Getting Keynes and animal spirits right

Robert Shiller explains:

Adherents to Keynes’s message were so eager to get this simple policy implemented, on both sides of the Atlantic, that they failed to notice – or perhaps they intentionally disregarded – that the General Theory also had a deeper, more fundamental message about how capitalism worked, if only briefly spelled out. It explained why capitalist economies, left to their own devices, without the balancing of governments, were essentially unstable. And it explained why, for capitalist economies to work well, the government should serve as a counterbalance.

The key to this insight was the role Keynes gave to people’s psychological motivations. These are usually ignored by macroeconomists. Keynes called them animal spirits, and he thought they were especially important in determining people’s willingness to take risks. Businessmen’s calculations, he said, were precarious: “Our basis of knowledge for estimating the yield 10 years hence of a railway, a copper mine, a textile factory, the goodwill of a patent medicine, an Atlantic liner, a building in the City of London amounts to little and sometimes to nothing.” Despite this, people somehow make decisions and act. This “can only be taken as a result of animal spirits”. There is “a spontaneous urge to action”.

To a remarkable extent we have got into the current economic and financial crisis because of a wrong economic theory – an economic theory that itself denied the role of the animal spirits in getting us into manias and panics.

It is the role of the government at two levels to see that these events do not occur. First, it has a duty to regulate asset markets so that people are not falsely lured into buying snake-oil assets. Such standards for our financial assets make as much common sense as the standards for the food we eat, or the purchase medicine we get from the pharmacy. But we do not want to throw out the good parts of capitalism with the bad. To take advantage of the good parts of capitalism, when fluctuations occur it is the role of the government to see that those who can and want to produce what others want to buy can do so. It is the role of the government, through its counterbalancing fiscal and monetary policy, to maintain full employment.

The principles behind such an economy are not the principles behind a socialist economy. The government insofar as possible is only creating the macroeconomic conditions that will allow the economy to function well.

That is the role of government. Its role is to ensure a “wise laisser faire”. This is not the free-for-all capitalism that has been recommended by the current economic theory, and seems to have been accepted as gospel by economic planners, and also many economists, since the Thatcher and Reagan governments. But it also is a significant middle way between those who see the economic disasters and unemployment of unfettered capitalism, on the one hand, and those who believe that the government should play no role at all.

The idea that unfettered, unregulated capitalism would invariably produce the good outcomes was a wrong economic theory regarding how capitalist societies behave and what causes their crises. That wrong economic theory fails to take account of how the animal spirits affect economic behaviour. It fails to take into account the roles of confidence, stories and snake oil in economic fluctuation.

Also see this opinion piece by Martin Wolf

Monday, March 9, 2009

The need for CCTs during the financial crisis

The credit crisis has hit almost all the countries in one way or the another. Now, it is just a matter of how severely are they hurt. Getting credit has not been more difficult, even in the developing countries. This increases vulnerability of the already vulnerable population and the need for social protection increases as the crisis digs deeper holes into the global economy. It seems this is the most opportune time to push for social protection programs such as Conditional Cash Transfers (CCTs) to help cushion household income and also to help achieve MDGs of education and healthcare.

CCTs, born out of Mexico’s Oportunidades, is already successfully implemented in Latin America and in small scale in some African and East Asian countries. CCTs have boosted the use of preventive health care services in Colombia, Honduras, Mexico, and Nicaragua by between 8 and 33 percentage points, according to the WB. See this report for a detailed discussion about the impact of CCTs on poverty, education, and healthcare.

As might be expected, the effect on poverty reduction is greatest when the size of the cash transfer is generous. In Mexico, the poverty gap—or shortfall from the poverty line—among CCT beneficiaries in rural areas was reduced by 19 percent. Household consumption patterns have changed among CCT beneficiary households, in part because cash transfers are made to women. The evidence shows that women spend more than men do on food, high-quality nutrition, and other things that benefit children. CCTs have been so successful against poverty because they largely target poor households. Also, they have not, as some feared, led to adults reducing their work outputs in response to the steady income supplement.

CCTs have clearly increased the use of education services in country after country. In Pakistan, for instance, a CCT program increased the school enrollment of 10-14 year-old girls by 11 percentage points. And in Mexico, the Oportunidades program decreased dropout rates between the 6th and 7th grade by 9 percentage points.

The report shows that CCTs can indeed help poor households weather shocks ranging from an economic crisis to unemployment, illness, or death of a breadwinner. CCTs can also help ensure that households don’t cut back on children’s basic health and schooling. That said, CCTs are really designed to help get rid of long-term structural poverty than deal with sudden, short-term, income shocks, which require a more flexible social insurance instrument.

The ideal transfer program to deal with transient poverty (i) does not involve a long-term commitment such as school enrollment, (ii) is self-targeted and doesn’t involve complex administrative decisions for exit or entry, and (iii) involves the participation of beneficiaries in activities (for example, job-related) that address the source of the shock. While workfare programs or unemployment insurance are better suited to deal with transient poverty, having a CCT program in place during a crisis is clearly much better than not having any large-scale social assistance program at all.

CCTs are considered innovative for several reasons: (i) their targeting mechanisms; (ii) beneficiaries receive cash rather than in-kind benefits; and (iii) the transfers are conditional. CCTs are designed to increase the human capital of beneficiaries by making transfers conditional on certain requirements, such as school attendance, visits to health clinics and renewals of immunization. Additionally, CCTs aim to alleviate poverty in the short-term.

It offers qualifying families cash in exchange for commitments such as taking babies to health clinics regularly or sending children to school. These programs, now found in over two dozen countries, can reduce poverty both in the short and long term, particularly when supported by better public services. CCT programs help to reduce poverty in participating households and to protect them from the worst effects of unemployment, illness, or other income shocks. Participating households also tend to spend more on food and improved nutrients than comparable households who don’t receive the transfer, according to the WB report.

Sunday, March 8, 2009

Nepal’s tourism industry: High hopes amidst weak foundation

It seems like this spring break is getting productive(I still have to finish my thesis by the end of this break!). On the first day of the break, I wrote this opinion piece about Nepal’s tourism industry and the need to rethink promotion campaigns and policies amidst global recession. The need for price competitiveness without compromising on quality of service has not been higher. I argue that the government needs to formulate realistic policies and targets that are consistent with Nepal’s macroeconomic situation (especially exchange rate appreciation), regulatory structure, and infrastructure. I use the latest Travel and Tourism Competitiveness Report to back up my arguments.

Travel and tourism (T&T) industry has been playing a vital role in sustaining GDP growth rate, which has been stagnating at 3.8 percent in the past decade. At a time when the industrial sector is going bust due to power cuts, labor disputes, and declining price competitiveness, a prosperous tourism industry is of supreme importance. The travel and tourism industry has been one of the largest employers (more than 548,000 in 2008) and fastest entry-vehicle into the workforce for youths.

To lure more tourists, the government announced Visit Nepal 2011 in January with the aim of attracting one million international visitors. The targeted number seems pretty ambitious because during a similar campaign in 1998, Nepal hosted only 464,000 tourists, earning US$ 24.8 million in revenue.

Does Nepal have the appropriate supporting regulatory structure, flexible policy framework and basic infrastructure that would increase price competitiveness without compromising on quality of service? According to the latest Travel & Tourism Competitiveness Report, published annually by the World Economic Forum, the answer to this question does not look that encouraging. Out of 133 countries, Nepal ranks 118 in travel and tourism competitiveness. It was ranked 116 in 2008’s report, which means competitiveness of this industry has actually declined.

Tourists are highly sensitive to price competitiveness and value added services provided by this industry. Generally, three factors – macroeconomic risks, regulatory structure, and tourism infrastructure – are essential to improve price competitiveness and to induce more per capita visitor spending in the Nepali tourism industry.

Read the full opinion piece here

International tourism, Nepal

Links of Interest (03/08/2009)

The poverty trap facing low-income countries

The need for a new paradigm in economics to explain current global crisis

Remaking the WB in a time of crisis

The state of maternal mortality in Nepal

Visa-restriction index 2008

Two pics sourced from Nepal: A Himalayan Kingdom in Transition by Karan and Ishii (reminds me of my village and work on the field!)

house harvesting

Thursday, March 5, 2009

RCTs in education

Esther Duflo has an article in NBER’s quarterly newsletter Reporter about how randomized controlled trials (RCTs) were used to find out what works and what does not work in education sector reform in the developing countries. She discusses the RCTs done in India and Kenya to find out what requires (what does not) for high quality learning (good in heterogeneous student setting), lower teacher absentee, and re-empowering parents (not much effect) in the education reform process. She argues that a likely case would be that the government could be better in getting the schools work better for the poor (rather than giving ownership to local communities or parents). Strange finding given the fact that huge amount of resources are spent by multilateral donors in handing over responsibility of managing schools to local communities in countries like Nepal and India.

Does better access to inputs (textbooks, teachers) affect school outcomes (attendance, test scores) — and if so, by how much? The motivating theoretical framework was very simple, but the results were surprising. For example: Glewwe, Kremer, and Moulin found that lowering the student-textbook ratio from 4 to 2 had no effect on average test scores. Banerjee, Jacob, and Kremer found that halving the student-teacher ratio also had no effect on test scores.

These negative results prompted new reflection on the barriers to education in poor countries: If simply providing inputs does not increase the quality of education in poor countries, then it must be necessary to change the organization of teaching in schools, both the pedagogy and the incentives faced by students and teachers. This led to a new round of field experiments motivated by the general question: Can changing the organization of teaching in schools affect education outcomes? For the most part, these more recent projects have varied more than one factor at a time in different experimental groups, making randomization a powerful tool for examining the role of incentives, spillovers, and other key questions in the economics of education.

Together, a series of randomized evaluations of education programs in developing countries have taught us something about how education in developing countries can be improved: focus teaching on skills students need to progress further; find ways to motivate teachers. Neither of these is necessarily an easy, ready-to-implement prescription. Much more work is needed to develop programs that can achieve these two objectives on a large enough scale, especially given the political economy of education in developing countries. While neither suggests plug-and-play prescriptions, they do give us ample direction about where to search.

What’s more, these experiments have also taught us something about how to search, how we can learn about learning. Each experiment answers some questions and asks new ones; the next study builds on the previous one, progressively suggesting a model of education which is ready to be enriched over time.

The relationship between load shedding and pregnancy

This news is interesting. Following rapid fall in hydro electricity generation, the government of Nepal cut power supply for almost 16 hours a day (this means, only 6 hours of power in 24 hours!). This has restricted most people in their houses (and increased the time invested with family members).

The unintended consequence: more number of pregnancies reported at hospitals. Could increasing hours of load shedding lead to higher population growth rate? I hope not, especially for a poor country like Nepal, which already has one of the highest population growth rates in the world! This could potentially further lower per capita at a time when real income is already expected to decrease due to high inflation rate hovering at around 14%.

According to media reports, the number of women with bulging bellies visiting Prasuti Griha (a top maternity hospital in Kathmandu) has risen sharply, and this has been attributed to the almost round-the-clock cut in power, leaving Nepalis with no other means of entertainment except copulation. There is no reason why the G-8 nations cannot bring about a baby boom if they follow in Nepal’s footsteps.

NEA, however, should be prepared to face the government’s ire once the census figures are out in 2011 and it realizes that all its efforts to bring down population growth to replacement level has gone for a toss.

Meanwhile, I have been told that young couples venturing out for candlelight dinners has taken a nosedive, much to the chagrin of restaurant owners. “Why go out and waste money, when you can enjoy romantic evenings everyday in the confines and comforts of your own apartment,” they say.

With load-shedding excepted to continue for at least another four to five years, I recommend restaurant owners to shut down their business and use that space instead to open maternity clinics. Makes perfect sense, right?

Wednesday, March 4, 2009

Good news (at least for me)!

So, I got this email today:

Dear Chandan -

It is the our extreme pleasure to inform you that FEI Central PA Chapter Board of Directors has selected you as the recipient of the FEI 2009 Outstanding Student Award for Dickinson College.

This Award will be presented to you at the FEI Educator's Night meeting on March 24, 2008.  You are welcome to invite your parents or a guest to attend the dinner and meeting as guests of the Chapter.

The award winners should arrive no later than 5:30 p.m. at the headquarters of The Hershey Company at 100 Crystal A Drive, Hershey.  I am sure you will be able to travel with one of the professors from the Economics Department. If you choose to go on your own let me know and I will send you directions.  We can firm up travel plans after Spring Break.

Please let us know that you are able to attend this dinner and award ceremony.

The Economics Department

I just arrived in the college from a trip to DC. I had gone to give an interview for a fellows position at a reputed think tank. All I can do now is to be optimistic! :)

Forever Globalization!

Globalization is such a diverse, broad-based, and potent force that not even today’s massive economic crash will dramatically slow it down or permanently reverse it. Love it or hate it, globalization is here to stay.

The bottom line: Nationalism never disappeared. Globalization did not lessen national identities; it just rendered them more complex. Even in a Bill Gates era, today’s Otto von Bismarcks still wield great power. Globalization and geopolitics coexist, and neither is going anywhere.

More here.

Sunday, March 1, 2009

Product space, comparative advantage and Nepal’s export sector

Does coordination failures bind the Nepali economy from moving to more favorable “nearby” products (or new productive activities) that could contribute to higher GDP growth rate?

A “product space” is used to analyze if coordination externalities pose as a binding constraint on growth[1]. It is argued that the assets and capabilities needed to produce a good are imperfect substitutes for those needed to produce another good “but their degree of asset specificity will vary” (Hausmann & Klinger, 2007). This means that a country’s capability to produce one good is somehow tied with the installed capability in the production of other similar goods, i.e. nearby goods.

For instance, either labor or capital or both used by company A to produce good X might be used by company B to produce good Y. Though good X and good Y are different and have different market prices, the factors used to produce one good can be used to produce (or at least initiate production of) other goods at a lower cost. In order to produce good Y, company B can benefit from the trained human resource or existing capital stock of company A. Similarly, company B can use infrastructure already installed for A’s use and make good Y. This means that the existence of already installed capability can be easily used to produce other “nearby goods” that uses similar capability. This would mean that future structural transformation would depend on what is ‘close’ to existing production, creating strong path dependence for the emergence of new exportable products (Klinger, 2007). The overall connectedness of an economy’s export basket affects the rate of export upgrading and the length of growth collapses after a shock to primary export items (in Nepal’s case carpets and garments industries).

As seen in the product spaces below, Nepal has some nearby products which command high price in the international market. Moreover, the existence of “nearby” products is pretty much consistent with the level found in countries with similar income level. However, it should be noted that despite the existence of multiple “nearby” products, the rate of successful upgrading of the production capacity might be affected due to infrastructure constraints. Moreover, the evolution of new nearby products would also depend on the increment in the existing stock of facilitators/infrastructures such as road transport, electricity, and communication.

Nepal’s product space 1985[2]:

Figure 1


The comparatively advantageous products in the export market (denoted by black squares) are scattered and the ones where the potential to upgrade to new productive activities lied in the labor intensive sectors (denoted by green dots towards the left of Figure 1), particularly garment and textiles. This is the only region on the product space above where the nodes are connected by red lines (which means proximity greater than 0.6). Moreover, the remaining links in that region are dark blue, which means a proximity index between 0.55 and 0.65. It indicates that this sector has the installed capacity to move to more productive activities that could generate comparative advantage on exports. We also see some red links connecting nodes at the bottom of right hand corner of the figure. These nodes correspond to machinery, especially electronics.

Though there are no comparatively advantageous products at present in this sector, it could potentially be a promising one due to the existence of high proximity between other products. The product space also shows other products that are exported with comparative advantage (scattered black boxes in the figure). These products do not have high proximity and there is no scope of shifting to productive activities around them, i.e. their installed capability does not benefit the production of nearby products that use similar capability because there is none! These are just noises in the product space (such as lead and lead alloy products, which are high valued but have low demand in the international market).

The products that were exported with comparative advantage in 1985 were: trousers, breeches of textile fabrics (8423)[3]; skirts of textile fabric for women (8434); undergarments of textile fabrics for women (8443); textile men shirts (8441); other textile outer garments (8439); sacks and bags of textile materials (6581); twine, cordage, ropes & cables (6575), women dresses of textile fabrics (8433). In the garments and textile sectors, the two most promising products, based on the global market size and the proximity of products in domestic production activities, were undergarments knitted of cotton (8462) and footwear (8510). The other products that seem promising are in the machinery industry (toward the lower right hand in Figure 1). Products that have relatively large share on international market and some degree of proximity in domestic production structure are electronics microcircuits (7638); radio broadcast receivers for vehicles (7621); and photographic cameras, parts & accessories (8810).

The export of some agricultural products was also comparatively advantageous in 1985. However, the production of such products occurred in isolation with very low proximity, if any (see upper right hand in Figure 1). This underscores the earlier argument that high and sustained growth rate is not possible from the export of agricultural products, which are of low value in the global market. The agricultural products that were export with comparative advantage were: leather of other bovine cattle & equine leather (6114); leather or other hides or skins (6116); shellac, seed lac, stick lac, resins, gun resins, etc (9); art, collector species & antiques (8960); fresh or dried grapes (575); fixed vegetable oil (440); beans, peas, lentil & other legume vegetables (542), and other cereal meals & flours (7). Notice that production of all these products are peripheral and are pretty much independent of the installed capacity used in the production of other products. This shows that in 1985 most of the products that were exported with comparative advantage came from the garment and textile industries.

Nepal’s product space 2000:

Figure 2


In 2000, the number of products exported with comparative advantage was higher than in 1985 (see the number of black squares in Figure 2). Products which could be manufactured using the installed capacity needed for the production of the goods exported with comparative advantage in 1985 were produced in 2000 and exported with comparative advantage. Some of these products were undergarments excluding shirts of textile fabrics (8442); other outer garments & clothing knittes (8459); other made up articles of textile materials (6589); blouses of textile fabrics (8435); suites & customs made of textiles for women (8431); knitted jerseys, pullovers twinsets (8451); and knitted synthetic undergarments (8463), among others.

Almost all the products that were nearby the products that were exported with comparative advantage in 1985 were produced and exported successfully in 2000. This means that coordination failures, at least in this sector, are out of question. The failure of this sector in the global market after 2005 has to do with other factors such as poor infrastructure and high corruption, which increased transportation costs and transaction costs, leading to lack of price competitiveness at a time when other big players entered the market with similar products but at a very low price. Due to the absence of nearby products and favorable proximity, the agricultural sector did not see new products added to the list of products that were exported with comparative advantage. Similar is the case with the machinery industry, which showed some potential of generating new competitive products in 1985. The slackness in these two sectors has to do with poor quality of infrastructure and corruption as explained earlier.

Figure 3

Figure 4


As seen above, Nepal’s production is highly peripheral and sparse, which is not that different from similar income countries (see Figure 1, 2 and 4). Exports related productive structure is concentrated in agricultural (labor intensive) and manufacturing sectors, especially high-valued ones in the garments and textiles industries. There are also relatively more nearby products and proximity in the textile and garment industries. However, despite this why did the garment and textile industry went bust after 2005, the year MFA expired. The answer points towards other factors that hindered the shift in productive activities in the economy, mainly infrastructure and corruption.

This further substantiates the argument that the economy could not upgrade to new productive activities after the end of MFA as there were very few nearby products remaining with high proximity in the textile sector. The backward and forward linkages are also very weak in almost all the industries. Several small sized firms and their production are not linked by medium and large scale firms. For instance, there are around 30 small firms producing medicinal plants. But, there are no medium and large sized firms that could utilize small firms’ production. The production either is processed locally or is exported to India for processing. There seems to be a clear coordination problem here.

However, note that this problem is caused by a stronger constraint, namely a lack of infrastructure (and poor quality of existing ones). It is precisely because of the lack of infrastructure (electricity and road transport) that investors are not willing to invest on medium and large sized processing plants. More than 14 hours of power cuts daily is a major factor in the emergence of such backward and forward linkages. In addition, the delivery time and transportation costs are high in the absence of adequate means of transportation. Hence, the coordination problem itself is dwarfed by much stronger constraints— lack of infrastructure.

The hypothesis that coordination failures/externalities are the binding constraints on growth is not consistent with the analysis presented above.

This is a part of growth diagnostics of Nepali economy I am currently doing as a part of my research. Previous blog post about why taxes do not qualify to be the most binding constraint on growth here. Here is a blog post about the evolution of exports in Nepal. Here is my bet on why infrastructure is the most binding constraint on growth. I will post more updated analysis about the infrastructure constraint in later posts.

Apologies for the unclear equation below (I did not bother to rewrite the equation again just for this blog post)!!


[1] Klinger (2007) provides an interesting metaphor: “products are like trees and firms are like monkeys.” Structural transformation involves the movement of monkeys from the poor part to rich part of the forest. It is easier for monkeys (firms) to jump short distance (i.e. to change products that use similar pre-existing factors).

[2] Each node is a product and its share of world trade determines its size. Node sizes are proportional to PRODY, which is a measure of revealed sophistication of each product. Rather than the distance between products, what matters in this figures is the color-coding of the linkages between pairs of products (also known as proximity): light blue link = proximity under 0.4; beige link = proximity between 0.4 and 0.55; dark-blue= proximity between 0.55 and 0.65; red link=proximity greater than 0.6; black square indicates product exported with comparative advantage; if a country is producing goods in a dense part of the product space, then the process of structural transformation is much easier because the set of installed capabilities can be easily redeployed to other nearby products. If a country specializes in peripheral products, then structural transformation is not that easy. The proximity between two productsclip_image002[8]and clip_image004[4] is the minimum of the pairwise conditional probabilities of a country exporting a good given that it exports another:

clip_image002[14]and RCA stands for revealed comparative advantage and is calculated asclip_image002 , where exports is denoted byclip_image002[12], good by clip_image002[6], and country byclip_image004.clip_image006[3] The number in brackets refers to Standard International Trade Code (SITC) of the products.



Picture sources: Hidalgo CA. Klinger B, Barabasi A-L, Hausmann.R, Science 317, 482-487 (2007)

Klinger, Bailey. "Development and the Topology of Product Space." UNTCAD Speakers Event October 2007. United Nations Committee on Trade and Development:, 2007.

Hausmann, R., & Klinger, B. (2007). Growth Diagnostic: Paraguay. Cambridge: Center for International Development, Harvard University.

Hausmann, R., Rodrik, D., & Valesco, A. (2004). Growth Diagnostics. Cambridge: Center for International Development, Harvard University.

Hausmann, R., Hwang, J., & Rodrik, D. (2006). What Your Export Matters. NBER Working Paper#11905 .

Hidalgo, C., Hausmann, R., Klinger, B., & Barabasi, A.-L. (2007). The Product Space Conditions Development of Nations. Science 317 , 482-487.