Stiglitz on global stimulus

Stiglitz argues for a global stimulus package with grants made available to the poor countries, else as much as 200 million people will go down the poverty line, plus rethinking on having a new global reserve system.

if we are to avoid winding up in another debt crisis, some, perhaps much, of the money will have to be given in grants. And, in the past, assistance has been accompanied by extensive "conditions," some of which enforced contractionary monetary and fiscal policies – just the opposite of what is needed now – and imposed financial deregulation, which was among the root causes of the crisis.

One of the more important medium-term initiatives urged by the UN commission is the creation of a global economic coordinating council, which would not only coordinate economic policy, but would also assess impending problems and institutional gaps. As the downturn deepens, several countries may, for example, face bankruptcy. But we still do not have an adequate framework for dealing with such problems.

And the US dollar reserve-currency system – the backbone of the current global financial system – is fraying. China has expressed concerns, and the head of its central bank has joined the UN commission in calling for a new global reserve system. The UN commission argues that addressing this old issue – raised more than 75 years ago by Keynes – is essential if we are to have a robust and stable recovery.

Nepal floats very unrealistic development strategy paper

I wonder when the policymakers in Nepal will realize that high investment will guarantee high economic growth only when there are complementary factors in place to ensure that the investment is properly utilized, i.e. creating an ‘equilibrium’ of demand for and supply of goods and services being produced.

I say this because the Maoists government has released National Development Strategy Paper (NDSP), which it will present as the main strategy paper in the upcoming Nepal Development Forum (NDF) scheduled to take place in May. The NDF is a forum for donors to review NDSP and determine if the donor community wants to invest in some of the projects outlined by the government of Nepal. What’s in NDSP? The main theme of the paper is INVESTMENT. The government will tell donors to pour in money, cough up some of its own, and make (unrealistic) promises that it will deliver growth! How many times have this kind of forums been successful in delivering the outcomes? Has anyone tracked the efficiency of donors- say, output and investment ratio in the sectors they are investing in? (The drama of donor community in Nepal, its activities, outcomes, and efficiency deserves an extended analysis in another blog post!).

The NDSP, which also forms the second part of the Three-Year Interim Plan, has set a target to achieve an average economic growth rate of 7.6 percent and lower the national poverty level to 21.5 percent over a period of the next three years starting from mid-July 2009. According to the strategy paper, the government plans to invest Rs 1151.6 billion (US$ 14.5772 billion) from domestic resources for formation of fixed assets (in 3 years time). Of this, private sector is expected to invest Rs 324 billion (US$ 4.10127 billion) while remaining Rs 827.7 billion (US$ 10.4772 billion) is anticipated to come from government´s sources. Note that planned total investment is double the size of GDP of Nepal. If this is not overly ambitious and unrealistic, then I need to relearn the difference between reality and dream! Also, I doubt if the private sector would invest US$ 4.1 billion at a time when the very existence of their survival is in question.

Among the sources of funding, the strategy paper aims to mobilize Rs 532.2 billion (US$ 6.69362 billion) worth of revenue, Rs 233.3 billion (US$ 2.93422 billion) of foreign aid and Rs 70.8 billion (US$ 0.890453 billion) worth of internal loans. I doubt on the calculation of these numbers. What are the assumptions and facilitation process?

What else? The strategy paper also aims to achieve agriculture growth of 5.2 percent and non-agricultural growth of 8.8 percent during the period. At a time when the whole industrial sector is going bust and there is a decline in agriculture production, I am surprised how the guys at the National Planning Commission (NPC) came up with these numbers. Again, this projection does not reflect reality. The Maoists government has a tendency to talk highly but deliver poorly. See this and this.

It is very unlikely if the government will be able to garner the proposed amount of investment. Additionally, we simply do not have the complimentary factors that are needed to realize the fruits of this investment. The biggest hurdles are poor institutional setting and bad infrastructure, corruption and appropriability concerns. Moreover, the industrial sector has never been this uncompetitive (blame labor disputes, increasing competition, power cuts, defunct supply chains, …). Mend these, and the fallout will be favorable!

The WB has rightly criticized NDSP as being ambitious. They also should say it is unrealistic and seek a complete revision of the objectives, revise long-term projects and include more short-term projects heavily focused on infrastructure, governance aspects, and, most importantly, make the government clearly identify how it is going to boost private sector confidence and not let its militant cadres disrupt their business activities.

Regarding the proposed investment, Goldmark, country director of Nepal’s largest lender, said that it would be challenging to mobilize the planned investment as long as investors do not feel considerable improvements in the environment for doing business. The strategy paper should pay due attention to checking erosion of business confidence and this can be done by improving the law and order situation, she said.

Apart from a long-term energy development program, Goldmark also urged the government to bring in short-term projects to develop hydropower and added that the NDSP needs to have different case scenarios to address future global and domestic economic conditions, which are difficult to predict.

She also said the NDSP is silent on public finance management and public procurements and stressed the need to focus on issues and to improve government accountability towards the people. “Promise less and improve deliveries,” she advised the government.

I will write more on this issues in the next op-ed. The bottom line: the whole paper should be revised and the goals should be made realistic. All the procedures and steps should be clearly identified so that tracking the progress of projects and investment flow is rational and accountable.