Thursday, May 28, 2009

Glory for FC Barcelona

FC Barcelona, my favorite soccer team, won Champions league final against Manchester United. Three titles this season—La Liga, Copa, and Champions league—what a season, what an amazing game, and what an amazing team!

A review of the Nepali economy under the Maoist-led administration

In the last day of his role as prime minister, the Maoist premier Prachanda claimed that his administration gave “utmost importance to economic transformation” and made “major contribution to economic revolution”. Unlike his boss, former Finance Minister Dr. Baburam Bhattarai was a bit modest in laying claims about economic progress achieved under his leadership. In assessing the economic policies and progress under the Maoist administration, it is unclear how the dismal performance, especially in encouraging private sector and utilizing development expenditures, amounts to or leads to “economic revolution”.

The most successful and significant achievement of the previous administration was to ensure governance and accountability in revenue collection, which increased by 40 percent in the first ten months of the current fiscal year, for which credit goes to Dr. Bhattarai’s policies on taxation. Given the institutional intransience for good governance at customs and government agencies, many people, including myself, were skeptical about revenue targets of Dr. Bhattarai, who, with good leadership and ‘carrot and stick’ approach, was able to beat all pessimistic expectations. Under his leadership, the Inland Revenue Department was more vigilant than ever in curbing leakages, streamlined and cleaned up the mess in the department, and offered extra incentives to customs personnel for better performance.

The other commendable policies initiated by Dr. Bhattarai were loan waiver of heavily indebted farmers and the Youth Self-Employment Program (YSEP). These programs were well-intentioned but the execution was not all that clear. Overall, the huge demand for loans by youths and partial relief received by some of the poorest farmers was worth the policy experimentation.

Not all the program and policies of the previous administration were productive. The drive for more revenue generation and implementation of VDIS led to savings flight as nervous investors and savers searched for safer vaults abroad. While this policy was unpopular in the business community, the government, instead of trying to find a common path, wasted more than three months going head-on-head against the businessmen, whom it saw as “feudalist and bourgeois classes”. At a time when there was a desperate need for normalization of tension between the private sector and the government, this incident led to souring of relationship and fostered distrust between the two.

Fond of making bombastic, populist and unrealistic claims and a tendency to look backwards in the age of globalization, the Maoists government miserably failed in convincing the private sector, foreign investors, and development agencies that their Marxist/socialist model was worth trying. Filled with pompous slogans, socialist ideas and the aim to develop “national capitalism”, Dr. Bhattarai’s budget was not well received by the private sector. They, along with the development agencies, repeatedly asked him to be clear about government’s position on the role of private sector and in general the economic system. Trying to treat private sector and cooperatives in equal footing by bringing Investment Board and Cooperative Board under the Economic Council was probably the most dubious plan. Instead of streamlining of disaggregated economic activities, it led to more chaos and confusion in the industrial sector. Also, the plan to revive moribund, sick industries with the aim of increasing employment and channeling their production for government’s use was a blunder. The drumbeat of double-digit growth rate without assessing ground realities and workable economic policies perplexed people.

The most devastating and counterproductive policies were to let YCL make a mockery of contract enforcement, destabilize the already feeble industrial sector, and turn a deaf ear to dire call for industrial security. By implicitly supporting the activities of its militant cadres, the Maoist administration showed double standards in dealing with the private sector. Some of the Maoist ministers even endorsed and defended the extralegal occupation of industrial districts by YCL cadres, forced donation campaign, and threat to life and property of businessmen, whom they see as ‘feudalists’. The government engaged in multiple rounds of discussion with businessmen but did not budge on the call for disciplining YCL cadres and taming disruptive activities of trade unions. This led to closure of several garment firms, jute mills, and multinational companies, among others. The Maoists administration backtracked only after it was threatened of noncooperation by the opposition parties; it was not because it was responding to the concerns of the private sector.

Later on, the Maoist government was busy cleaning its own mess. Too focused on controlling and finding a way out for its disruptive cadres, it was helpless in supplying the most needed essential services in rural areas. For instance, it was powerless when more than one-third of the population was under the threat of starvation at the height of the global rise in price of food and commodities, and when major forests were on fire. Moreover, the government also did not do enough to manage safe return of IDPs.

With regards to macroeconomic management, the administration’s performance was very disappointing. The price level initially rose above 14 percent due to rise in food, fuel and commodity prices in the global market. However, as prices of these items declined globally, they were too sticky in the Nepali market, leading to inflation rate of above 10 percent. The government was unable to manage shortage of goods, which was created artificially by holding back inventories. The export sector continued to lose its grip in international market and trade deficit is rising. The supply of fuel was severely affected due to frequent closure of the main highway linking the Valley and Terai. The government had to bail out cash-strapped, debt-ridden NOC two times. Still, the nation lacks a plan to close big hole in NOC’s balance sheet. On top of that, there is no immediate plan to bridge the wedge (of 500 MW) between demand for and supply of electricity in the economy. Worse, domestic and foreign investors are not yet convinced of secure investment, rule of law, and respect for property rights in the infrastructure and hydropower sectors.

The Maoists also failed to mobilize development expenditure, leading to very few development programs being implemented—a point even Dr. Bhattarai has conceded. So far, only 27 percent of total capital expenditure has been spent. Meanwhile, achieving the targeted economic growth rate is now a fairy tale!

The economy is far from being transformed. There were some successes in revenue collection and welfare programs. However, there were even more problems-- industrial relations deteriorated, allocated development money remained unspent, investors and donors remained skeptical of Maoists policies, price level spiraled upwards, and there was a severe shortage of energy, which further crippled the industrial sector, among others.

Links of Interest (05/27/2009)

From manufacturing to services to land in developing countries now (to ensure smooth food supply to rich countries’ consumers!)

Dambisa Moyo and Easterly respond to Sachs’s ironies

Serving the poor through (subsidized) markets

New database on nutritional impact

US trade policy for development: further open up markets to exports from poor countries

Feeble domestic demand is a dragging down EU markets