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.