Friday, December 18, 2009

The impact of aid on manufacturing exports

Aid tends to depress the growth of exportable goods.

We categorize goods by how exportable they could be for low-income countries, and find that in countries that receive more aid, more exportable sectors grow substantially more slowly than less exportable ones. The numbers suggest that in countries that receive additional aid of 1 percent of GDP, exportable sectors grow more slowly by 0.5 percent per year (and clothing and footwear sectors that are particularly exportable in low-income countries grow slower by 1 percent per year).

We also provide suggestive evidence that the channel through which this effect is felt is the exchange rate. In other words, aid tends to make a country less competitive (reflected in an overvalued exchange rate) which in turn depresses the prospects of the more exportable sectors. In the jargon, this is the famous “Dutch Disease” effect of aid.

Paper by Subramanian and Rajan here

Court approves liquidation of NDB. Finally!

Finally, the Patan Appellate Court has given a green signal to liquidate the troubled Nepal Development Bank (NDB). Initially, I wrote an op-ed arguing for immediate liquidation of the bank as the process was going to take too long through the usual court procedure.

The decision by the court is to allow the central bank to liquidate NDB is contrary to recommendation by chartered accountant Tirtha Raj Upadhaya, who was appointed to assess if it is necessary to liquidate the bank. However, he raised the idea that despite being in deep trouble, NDB could be revived with extra capital injection from new promoters. I also wrote another op-ed arguing that the bank should not be revived, no matter what Upadhaya recommends. And, it turned out to be exactly that way. Extremely important and a wise decision by the judges. Deserves two thumbs-up!

Issuing a verdict on the case lodged by the central bank, the court on Thursday endorsed NRB´s decision to liquidate the bank and instructed NRB to appoint a liquidator for steering the liquidation process ahead.

The court also named Chartered Accountant Narayan Bajaj as the liquidator, and instructed him to complete all tasks related to liquidation within three months.

Going by the court’s decision, Bajaj would now assess the assets of the bank and identify how much he can recoup from their disposal. Based on the amount he recovers, Bajaj will then repay its debtors.

Interesting comparison!

Source: Duncan Green