Sunday, January 31, 2010

Costs of strike/shutting down Nepal (bandas)

In my latest Op-ed I estimate the costs of strike or closing down a country. It is called banda in Nepali. Political parties, student unions, ethnic populations and anyone trying to show discontent over government policies call for banda and disrupt normal live and economic activity. There is only loss and pain (and no gain) from bandas.

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Costs of Nepal bandas

Organizing strikes (popularly known as bandas) have been the easiest way to either show discontent over government policies or to press for one that serves the interest of a certain group. The people dislike bandas because it never serves their interest. It costs them their freedom, vocation and income. Frustrated by the disruption of normal life, youths have initiated a campaign DIE Nepal Bandh DIE. Even Mother’s Groups in various cities have protested against bandas.

It has been a cancer to the industrial sector, whose contribution to the GDP has nosedived in recent years. A World Food Programme survey conducted last year in Tarai showed that 93 percent of food traders identified bandas as a major constraint to do business. Almost 14 percent of traders were forced to close down their businesses. According to Enterprise Survey 2009, 62 percent of enterprises think instability is the biggest constraint.

What are the costs of bandas to the country and importantly to the public? By looking at the cost incurred by each sector if it is shut down for a day, I did a quick back-of-the-envelope calculation. The numbers are startling: On an average, one day banda would cost Rs 1.96 billion, which is around 88 percent of the total value of goods and services produced in the country in a day. The industrial sector alone would suffer over Rs 346 million per banda day. Yes, you read it right. The country bleeds enormous amount in lost production and revenue.

The economy is divided into three major sectors: Agriculture, industry and service. The agriculture sector consists of two sub-sectors: Agriculture and forestry, and fishery. The industrial sector consists of mining and quarrying; manufacturing; electricity, gas and water; and construction sub-sectors. The service sector is composed of nine sub-sectors: Wholesale and retail trade; hotels and restaurants; transport, storage and communications; financial intermediation; real estate, renting and business; public administration and defense; education; health and social work; and other community, social and personal services. Each sub-sector’s contribution to GDP is different. Depending on the level of market integration, bandas impact these sub-sectors either fully or partially.

I look at two scenarios to estimate the cost of bandas. In the first scenario, agriculture and forestry; public administration and defense; education; and health and social work sub-sectors are not affected by bandas. In the second scenario, all sectors except 40 percent of agriculture and forestry sub-sector are affected by bandas. This is a reasonable assumption because bandas do not affect market transactions of all agricultural goods. No matter what, people do trade and consume bare minimum goods for survival. The rigidity value, which I define as the responsiveness of agricultural sector to bandas and assume it to be 40 percent, varies depending on the intensity and breadth of bandas. The less responsive the agricultural sector (i.e. the more rigid), the less it is affected.

Under the first and second scenarios, the cost would be at least Rs 1.23 billion and Rs 1.96 billion per banda day respectively. The second scenario is most likely when there is a nationwide strike. The first scenario is likely when there is a strike in certain parts of the country. Though these numbers might differ from other estimates with different assumptions, they nevertheless give a fairly good picture of the costs associated with bandas.

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On an average, one day banda would cost Rs 1.96 billion, which is around 88 percent of the total value of goods and services produced in the country in a day. The industrial sector alone would suffer over Rs 346 million per banda day.

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Based on the second scenario, let me put the costs in perspective. On average, one hour of banda would cost at least Rs 82 million to the economy. In other words, each person in the country would lose Rs 69 per banda day. If we consider the working population only, i.e. 15-64 years, then the cost would be Rs 117 per banda day. Furthermore, if there were a rural employment program that provides jobs and pays Rs 100 per day to people below the poverty line during the lean agriculture season, then one day of banda would have cost over 218,190 rural jobs.

The total cost would be even higher if we add indirect costs. For instance, bandas are complemented with destruction of public and private infrastructures, which costs millions to rebuild. Also, a few hours of economic activity are lost before the sub-sectors bounce back to full gear after bandas. Besides affecting the existing as well as future potential of tourism industry, one of the major sources of foreign exchange for the country, it also causes external migration and decline in exports. Rapid decline in exports is one of the reasons for Rs 20 billion balance of payments deficit in the first quarter of this fiscal year.

Frequent bandas trigger capital flight, which is detrimental to long-run economic growth. Partly due to bandas, multinational companies like Colgate Palmolive ceased production last year. The garment industry is near extinction. It is also putting upward pressure on general prices of goods and services, thus contributing to a double-digit inflation rate.

It is frustrating to see political leaders, who promised to develop Nepal like Switzerland, encouraging and initiating bandas. They are depriving citizens of the potential for an increase in per capita income, freedom to pursue one’s dream and vocation, and to live a peaceful life with a hope for a bright future. Bandas have ripped people off the very things that the organizers promised to bring them. Enough is enough. Say NO to bandas!

[Published in Republcia, January 30, 2010, pp.4]

Book Review - Unleashing Nepal: Past, Present and Future of the Economy

Liberating Nepal

In depressing times like these, Shakya offers a number of reasons to remain optimistic

Trying to grasp the multitude of problems that our economy faces is nearly an impossible task. The roots of these problems are all intricately linked, leading to multiple constraints on growth. In order to track the sources of these constraints, it might be helpful to go back to the time when Prithivi Narayan Shah spearheaded the unification campaign and look at how political, social, and economic lives were designed to facilitate the status-quo.

In his new book Unleashing Nepal: Past, Present and Future of the Economy, Sujeev Shakya, a business executive who writes the popular column Arthabeed in the Nepali Times, not only discusses economic and social issues from a historical perspective, but also examines the present economic climate and proposes ambitious reform agendas to unleash the potential of the economy.

Shakya explores the origins, causes, and consequences of the tumultuous economy and offers recommendations based on the centrist economic model, which he calls “capitalist welfare state”. According to this model, the state takes care of welfare related issues and regulates the market, while leaving the remainder of economic activities in the hands of the private sector. He sees the Nepali youth as the most likely candidates to steer Nepal into an era of high productivity, efficiency, and growth.

The most interesting part of the book is the discussion on how the economy was kept in isolation with a protectionist mindset before 1950. It led to preservation of the status quo, severely stagnating economic growth and depriving millions of people from rising above the poverty line. In the name of land reform, the Shah kings and the Rana rulers — who presumed that the economy belonged to them and that the citizens unreservedly served for their interests — arbitrarily distributed land for their own gain.

Liberal economic policies never became the main agenda of the Shahs, the Ranas, and the political parties. This, along with the lack of favorable social and institutional conditions, kept capitalism away from the economy. The rise of militant youth wings and their disruptive activities in industrial sites further distanced investors and entrepreneurs, costing low income people their jobs and the much-needed revenue to fund development and employment programmes.

Shakya argues that given the level of political interference, it is understandable that the public sector did not deliver on its promises. However, an indigestible fact is that the private sector also failed to live up to its promises.  It was driven by the level of concessions extracted from bureaucrats — often by paying bribes — and special treatment in markets. He contends that value addition, productivity, and efficiency were not the main variables of their business equation. A case in point is the fate of beleaguered garment and textile industry after the end of Multi-Fiber Agreement (MFA) of 2005.

Shakya also blames the aid industry for instituting a “business of development”. He argues that the aid industry, which has already spent over US$ 15 billion in four decades, has not only failed to deliver intended results, but skewed the human resource distribution. The great minds are drawn to the aid industry primarily because of high wages with respect to the one prevalent in public and private sector. Instead of creating a new model based on local condition, they ended up fitting local data with an alien model. Consequently, they produced more reports (approximately 270,000 in the past eighteen years) than results.  He also highlights success stories such as community forestry and biogas programs that were funded by donors.

Policymakers and politicians should seriously consider Shakya’s six reform agendas (land, tax, capital market, financial sector, labour, and fiscal) that will potentially help unleash the latent potential of the economy. The underlying themes are liberalization with strong oversight and regulation; promotion of incentives instead of corruption; and creation of a system where value-addition is paramount to yes-man chakari and jagire mentality. He asserts that attaining economies of scale in agro-based, hydropower, infrastructure, and tourism industries must be explored.

Shakya recommends that the private sector be ambitious; the government be pragmatic; and the development community be more supportive in aiding projects that would enhance efficiency and productivity. Furthermore, galvanising the youths’ energy and guiding them in the right direction should become Nepal’s economic focus. He advocates that the education sector reform be consistent with the demand of the globalising world, independent of politics, and free from the clutches of militant trade unions.

The past and present states of the economy as outlined in the book are crucial to understand the turbulent economic history. However, sweeping generalisations of the economy without adequate literature reviews and research makes some sections of the book a bit superficial. Comparing Nepali economic issues vis-à-vis Malaysia is hardly appropriate as these countries vastly differ in terms of geography, endowment, culture and mobility of labour across political, social and economic lines. Also, the reforms advocated in Nepal by the Bretton Woods institutions were nowhere close to the Keynesian model. They were more akin to Hayekian and Friedmanite principles. Furthermore, the highest GDP growth rate occurred in 1984 (9.2 percent), not in1994 (7.9 percent).

Despite these minor glitches, Shakya’s book sets out a baseline for people of all age, color, creed, race, ethnicity and political affiliation to see the past, present, and future of the economy in as clear terms as possible. In depressing times like these, Shakya offers plenty of reasons to be optimistic!

(Published in The Kathmandu Post, January 30, 2010)

Monday, January 25, 2010

Is there limits to growth?

To make the argument, Growth isn’t Possible uses a hamster to illustrate what would happen if there were no limits to growth. Hamsters double in size each week until around 6 weeks old. But if it grew at the same rate until its first birthday, we’d be looking at a 9 billion tonne hamster, which would eat more than a year’s worth of world maize production every day. As things are in nature, so sooner or later, they must be in the economy. Growth is pushing the planet ever closer to, and beyond some very real environmental limits. Yet politicians and economists are seemingly convinced that the economy can grow without end in a finite planet, no matter what the costs.

Interesting stuff from The Impossible Hamster Club

Sunday, January 24, 2010

RCTs, Micro and Macro tussle in development

"There is no magic bullet for sources of growth; growth regressions have not produced anything substantial to identify the sources of growth."

Thats from Bill Easterly an event in Brookings last week. Based on the title of the event, I thought it would focus on what works on development -- either a smaller grassroots development approach (micro approach) or a traditional top-down development approach (macro approach) or a combination of both. Unfortunately, the whole discussion focused on Randomized Controlled Trial (RCTs). Is RCT a grassroots development approach? Jessica Cohen and Easterly debated discussed the pros and cons of RCTs. To be very fair, Cohen's talk was extremely boring (may be thats the drawback of powerpoint-less presentation). She kept on forgetting questions asked by Raj Kumar, the moderator of the event, and the audience.

Meanwhile, Easterly was to the point narrating his dislike for top-down, expert-led approach in development. [After the event, one development economist asked me: “Ain't Easterly behaving like an expert himself despite his dislike for expert’s advise in development?”]. Basically, he favors (in fact, most of the economists do but they differ in the working modalities) bottom-up approach to development that is more attuned to market principles. There is (potentially) more accountability and transparency. However, micros do not add up to macro. So, we might need both approaches-- in fact, there are some complementariness between the micro and macro approaches.

Easterly repeatedly emphasized that the extensive use of RCTs to assess pretty much everything is turning into a social engineering project (he joked: you can do RCTs in pretty much everything but the ones who do it!). He cautioned against conflict of interest among donors who fund RCTs projects and the academicians who evaluate results. His warning: RCTs is going to fail if it gets captured by the aid agencies.

Cohen tried to defend RCTs by arguing that the way it is conducted and the results derived should be noncontroversial; it is a step in the right direction. It is the best way to test any theory. People can learn what works and what does not, paving a way to incrementally do better in implementing projects and increasing effectiveness. She argued that the strong feedback mechanism derived from RCTs could potentially help in aid effectiveness.

I was more interested in Easterly thoughts on HRV's Growth Diagnostics approach, a policy-oriented approach to growth studies that looks at a set of strategies to identify the binding constraints on economic activity and tries to figure out relevant policy to relax the constraints so that the resulting change in the objective function (growth) is the highest.

More precisely, "the strategy is aimed at identifying the most binding constraints on economic activity, and hence the set of policies that, once targeted on these constraints at any point in time, is likely to provide the biggest bang for the reform buck." This approach takes into account the fact that different countries have different binding constraints on growth and that the same policy used to relax a constraint in one country might not work in another country; it is time, context and country specific, in general. This approach to growth studies differs from other approaches like cross-country panel growth regression, growth accounting, and international rankings/benchmarking. It is heavily policy-oriented. It seeks answer to the question: "what is constraining growth?" instead of "what causes growth?" I find this approach very neat, easy to follow and reality-based.

I wanted to ask Easterly what he thinks of growth diagnostics approach as it basically addresses almost all the concerns he has with previous growth studies. Before I could raise my hand, someone from the Woodrow Wilson Center asked him the same question I had in my mind. Easterly's reply: "It is a good approach but if your whole point is that policy effect differs in countries, it does not lead too far." First, if it does not lead too far, then it also means that it leads somewhere, usually in the positive direction; it might not lead way too far on the expected long run growth curve but it does lead in that direction in the short run, which is what policymakers are concerned with. I was expecting a stronger and weighty response from Easterly. Got disappointed :((

Here is Rodrik:

I know from my own experience that there is still a lot that we need to learn about how to do this right. To those who say that the framework is difficult to implement in practice, my answer is "right, it is indeed hard to determine policy priorities, but this approach at least forces you to confront those difficulties in a systematic way."

Instead, Easterly said what he always says: "outside experts cannot figure out what drives growth... rather than experts from HKS and NY, local people know it better"--its a classic Easterly bash. I like his work but feel uncomfortable with his strong inclination to Hayekian principles. It reminds me of this paper where Samuelson and Hayek debate (not through emails but snail mails and publications) on the 'inevitability thesis' (a summary of the paper is here).

The event was organized to launch a book "What Works in Development?: Thinking Big an Thinking Small". The book has contributions from a range of eminent development economists. You can find papers presented at the Brooking Development Conference here.

Wednesday, January 20, 2010

The downfall of Nepalese garment industry

My latest op-ed is about the downfall of garment industry in Nepal (thanks to Theo Birch for helping to fine-tune the article!). The inability of the industry to foresee changes brought about by globalization and an outdated industrial policy are the main reasons. My earlier pieces on the garment industry in Nepal here, here, and here.

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Demise of garment industry

Few people realized that 2010 began with unfavorable news for the Nepalese economy. The garment industry, once the highest foreign exchange earner for Nepal, has almost disappeared. In fact, only one firm still exports readymade garments to the US, once the biggest market for this industry. The growing Indian market has been the focus of attention of the few remaining firms that are struggling to survive. The demise of the garment industry demonstrates the failure of our trade promotion policy and industrial policy. To avoid recurrence of similar event, it is vital that we assess the causes of the downfall of garment industry and learn lessons from our mistakes.

An article in Republica accurately reflects the importance of the garment industry: “Through the first 16 years of journey, the industry with over 1,200 active production units in 2000 occupied about 7.2 percent share of the total manufacturing sector, earned one-third of the total export income, witnessed investment climb to Rs 6 billion and directly employed 90,000 people, supporting livelihood of 450,000 persons.”

Alas, this glory is now lost. Exports to the US, which previously accounted for more than 80 percent of total garment exports have been insignificant this year. Less than ten firms remain in operation. Hundreds of thousands of employees have been laid off. The country has lost a reliable source of revenue. Worse, the failure of this industry has led to the collapse of the whole exports sector.

Where and how did it go horribly wrong? The answer lies in an inability to foresee the changes brought about by globalization. Policymakers and garment investors failed to notice quite obvious signs of change in the international market. They failed to design corrective policies to restructure the outdated domestic garment industry. Instead of addressing the constraints that were making the garment industry uncompetitive, they basked on the already secured preferential agreements and wasted valuable time and resources in securing more of them.

In 1990, the WTO’s member countries signed the Agreement on Textiles and Clothing (also known as the Multi-Fiber Agreement), which eliminated quotas on the trade of textiles and clothing. This was to be implemented in four phases; commencing with 16 percent reduction in quota of 1990’s imports. Thus it was known two decades ago that all quotas in this sector would be abolished. There was ample time to invest and restructure the Nepalese garment industry. However, both investors and policymakers turned a blind eye to the necessity for the reorganization of this industry.

Traditionally, the Nepalese garment industry grew not because its products were competitive and superior, but because it got preferential access to the markets in the US and the EU. The guaranteed market access for Nepalese garments and the imposition of quota on exports from countries that had advanced capital and competitive production mechanism meant that even if our products were not competitive in terms of price and quality, they were still exported without any restriction on quantity.

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Where and how did it go horribly wrong? The answer lies in an inability to foresee the changes brought about by globalization.

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Prior to the first phase of quota elimination in 1995, Nepal had five years to upgrade its production structure so that firms could expand their size and tap synergies to exploit economies of scale, i.e. as you produce more of the same good, the average cost would decline. This would, in principle, improve price competitiveness of Nepalese garments. Unfortunately, it never happened. Meanwhile, garment investors in countries such as China, India, Vietnam, Cambodia, and Sri Lanka, with the help of their governments, were already working to ensure the competitiveness of their products and the consolidation of their production. They were already preparing for the competitive international garment market after 2005.

The first phase of quota elimination in 1995 was followed by further quota eliminations of 17 percent in 1998, 18 percent in 2002, and finally 49 percent at the end 2004. The second phase of quota elimination hit the Nepalese garment industry and the overall exports very hard, leading to a collapse of total exports, which have not recovered to the level reached in 1997. Though this was a catastrophic blow to the whole export-based sector, it was not appropriately heeded by investors and government. During the ten-year transition phase of MFA, the production structure in Nepalese garment industry hardly changed. Most of the firms had small-scale production units with little cost advantage in production. Some of the intermediate goods that were used to produce final output were simply imported from third countries whose garments exports were subjected to quota restrictions, marginally redesigned, and stamped with ‘Made in Nepal’ tag for export. This meant that producers were merely acting as distributors to earn quick profits, often by gimmickry. There was very little creativity used in enhancing productivity, efficiency, marketing and distribution. Meanwhile, the investors paid little attention to product diversification and eroding competitiveness of their products.

While other governments actively engaged in upgrading their garment industry by establishing Garment Processing Zones, Export Promotion Zones, increasing consultancy for better management, and extending capital and credit to their garment investors, the Nepalese government ignored the aggressive steps taken by other countries and did pretty much nothing. It simply requested more preferential agreements. It also failed to encourage and help investors find niche markets abroad. In addition, the government was unable to ensure the security of investors and the smooth flow of goods across the Nepalese border. Frequent strikes along the main highways led to an increase in transportation cost. This also increased the risk of delivery problems, leading to an escalation in the final price of garments. It further eroded the price competitiveness of Nepalese garments. To make matters worse, trade unions and militant youth wings made a mockery of property rights by occupying and confiscating private property, and forced an increase in wages and allowances, irrespective of labor productivity. The lack of a regular power supply also aggravated the situation.

The downfall of the Nepalese garment industry illustrates some important lessons which could be used to avoid a similar fate befalling other export-based industries. The Nepalese government should not be hankering after preferential export terms; it should be investing and ensuring that domestic firms are competitive in terms of price and quality and are constantly innovating to keep up with cut-throat competition in the international market. Meanwhile, it is imperative that the government keep investors and supply chains away from the clutches of the militant youth wings and the unions. An industrial policy and trade promotion policy designed to address these issues is a need of the hour to keep our industrial base intact.

[Published in Republica, January 19, 2010, pp.5]

Tuesday, January 19, 2010

Competition or Coordination Among Aid Suppliers?

Frot and Santiso argue that too much aid fragmentation is not an important issue; too little competition between the suppliers of aid is the main problem. This basically means that the efforts to coordinate aid among donors, in line with the 2005 Paris Declaration and the 2008 Accra Agenda, is a misplaced priority. For aid effectiveness, the priority should be to increase competition among aid agencies.

They argue that in 1960 each developing country received aid from, on average, two donors. In 2006, it was more than 28. They also show despite there has been a significant expansion of donors’ portfolio size, partnerships among them is extremely low.

 

a sectoral analysis reveals that fragmentation has become more pronounced in all sectors. The social sector is the most fragmented, and follows the most pronounced trend towards more fragmentation.

The aid community often debates about too much fragmentation, and so usually too many donors. But in many countries there are very few donors. Too little fragmentation, or more precisely too little competition among donors, is also an issue.

It is peculiar that an abundance of suppliers is criticised in the "aid market", when economics underline the virtue of competition almost everywhere. However in the world of aid, the presence of many donors does not imply competition among them, but more often superposition of costs and administrative procedures. Aid monopolies therefore appear desirable if they cut these costs while barely raising the already overinflated price of aid.

The current approach is institution-based. Donors and recipients meet in international meetings, and pledge to act. Progress is monitored by a multilateral institution (OECD’s Development Assessment Committee) that cannot constrain donors to implement their pledges, except through a delicate game of naming and shaming.

We wonder about the efficiency of this approach. To deal with a too heavy administrative weight by creating new administrations is somehow ironic. It remains to be proven that these new institutions will lower transaction costs and manage to implement a labour division that donors are often reluctant to effectively achieve. The problem with this approach is that it basically ignores why aid is fragmented. It does not attempt to change the incentives donors and recipients face, and so is unlikely to radically change their behaviours. In particular, it disregards the lack of competition that creates fragmentation.

This decentralised approach argues that fragmentation is a consequence of the current institutional setting where competition is absent. It directly tries to make fragmentation an unsustainable outcome instead of ruling it out by assumption. Its difficulty lies into designing the set of rules that provide the right incentives, and to make donors accept these rules. This is by no means an easy task, but it is more ambitious and promising.

Fragmentation increases cost for recipients, leading to reduction in aid efficiency. Dealing with donor’s requirements and consultants reduces the total value of aid for recipients. Sometimes, important human resources are diverted to addressing donor’s multiple conditions. However, sometimes it is better to have as little fragmentation as possible. Recently, a lack of cooperation among donors led to a disastrous health situation in rural districts in Nepal. Instead of competition among donors, a lack of coordination among those working in the health sector was the main problem in dealing with an emergency situation. In such a situation, it is hard to explain how competition among donors would have avoided the unfortunate incident; better coordination among donors would have avoided the health disaster.

Sometimes coordination might be efficient than competition as it might clear information externalities and increase efficiency (by avoiding duplication of interventions). If there are many donors working in the same sector and same project, it is beneficial to align their interventions so that the final output is cost-effective and beneficial to the recipient country.

Both markets or aid agencies could bring the needed alignment. In an imperfect setting, the latter could do the job more efficiently if they coordinate interventions because they “know” what they are doing and what and where. The cost of alignment of interventions through the market might be inefficient with regards to cost and time needed to bring the needed change. The aid industry is not the same as commodity markets.

[Also see takes on similar issue by Owen Barder (who argues for a considered combination of market mechanisms, networked collaboration, and collective regulation for better aid effectiveness) and Bill Easterly.]

Monday, January 18, 2010

Climate Change 101: Separating Scientific Facts and Fictions

This is a guest post by Greg Shinsky from Monash University, Australia . An earlier blog post from Greg can be found here.

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The inquisitive nature of scientific study necessarily means that the details of something as complex as climate change can never be completely agreed to or understood. For example, the Hadley Centre recently released data demonstrating that the warmest year since records began was 1998.[1] On a straight reading, twelve years without a new record would, according to sceptics, be rather a large lull in what is supposed to be a rising trend. However, because heat can be trapped in other parts of the climatic system (such as the oceans) and not show up for a long time, modelling often shows the occasional decade in which no rise in surface temperatures is recorded.

This lack of scientific certainty does not however mean that policymakers and popular media outlets should be ignorant of established scientific principles – namely the reality of the much quoted but perhaps not widely understood ‘greenhouse effect’.

As demonstrated by the diagram below, the greenhouse effect is determined by two primary forces: (1) the amount of incoming shortwave solar radiation that strikes the earth, and (2) the amount of outgoing longwave radiation that is retained by the atmosphere. Within this system, the earth’s atmosphere, consisting of various gases, plays the vital role of a greenhouse. The atmosphere is essentially a blanket which selectively balances and traps the unequal wavelengths of radiation and remits them back to warm the earth’s surface.

The gases within the atmosphere, such as carbon dioxide (CO2), methane, nitrous oxide and water vapour, exist naturally and are very effective at absorbing thermal radiation expelled from the earth’s surface. However, small changes in the concentrations of these gases can drastically alter the heat-trapping capabilities of our atmosphere. Moreover, these gases have different lifetimes ranging from a few days to centuries.

The continual accumulation of these gases in the atmosphere (with CO2 being the largest by far), since the commencement of the industrial revolution, has led to a disruption of the carbon cycle.

This means the earth’s carbon ‘sinks’, such as forests and oceans, are no longer able to naturally absorb the amount of greenhouse gases emitted, with the result that concentrations of CO2 (in terms of parts per million [ppm]) are now approximately one third higher than pre-industrial levels. At the same time the earth has experienced a 0.6ºC increase in mean global temperature over the past century with most of this increase, according to the IPCC, being “attributable to human activities”.[2]

However, as temperature follows concentrations with a time lag, the full effect of current emissions is yet to be felt and is estimated to fall anywhere between 1.4 to 5.8ºC by the year 2100.[3]


[1] See ‘The Economist’, January 9th – 15th article on p.70-71.

[2] International Panel on Climate Change (2001), Climate Change 2001: Synthesis Report, Summary for Policymakers. Available from http://72.14.207.104/search?q=cache:pQvAnSohe-8J:www.ipcc.ch/pub/un/syreng/spm.pdf+ipcc+2001+climate+change+summary+policymakers&hl=en&gl=us&ct=clnk&cd=2

[3] Ibid

Sunday, January 17, 2010

Rebuilding Haiti

George Packer writes:

Yet Haitian political culture has a long history of insularity, corruption, and violence, which partly explains why Port-au-Prince lies in ruins. If, after an earthquake that devastated rich and poor neighborhoods alike, Haiti’s political and business élites resurrect the old way of fratricidal self-seeking, they will find nothing but debris for spoils. Disasters on this scale reveal something about the character of the societies in which they occur. The aftermath of the 2008 cyclone in Burma not only betrayed the callous indifference of the ruling junta but demonstrated the vibrancy of civil society there. Haiti’s earthquake shows that, whatever the communal spirit of its people at the moment of crisis, the government was not functioning, unable even to bury the dead, much less rescue the living. This vacuum, which had been temporarily filled by the U.N., now poses the threat of chaos.

But if Haiti is to change, the involvement of outside countries must also change. Rather than administering aid almost entirely through the slow drip of private organizations, international agencies and foreign powers should put their money and their effort into the more ambitious project of building a functional Haitian state. It would be the work of years, and billions of dollars. If this isn’t a burden that nations want to take on, so be it. But to patch up a dying country and call it a rescue would leave Haiti forsaken indeed, and not by God.

Jeff Sachs proposes Haiti Recovery Fund for rebuilding Haiti.

How would a Haiti Recovery Fund be organized? It should receive emergency outlays from the United States and other donors; organize a board that includes members appointed by Haitian President René Préval, the U.N. secretary general and donors; and empower a management team to formulate and execute plans agreed to by the Haitian government.

Very soon, the first phase of recovery operations in Haiti will end. Tragically, tens or hundreds of thousands will have died under the rubble, with relief and equipment arriving too late. Now the race is on to save Haiti itself. Its capital, a city without reserves of food, water, power, shelter, hospitals, medicine and other vital supplies, faces the real possibilities of hunger, epidemics and civil unrest. And the rest of the country is like a body without a head. The port is shut, the government is overwhelmed, many U.N. peacekeepers have transferred to Port-au-Prince, and the normal operations of government, skimpy as they once were, have broken down entirely.

The recovery fund would focus first on restoring basic services needed for survival. For months to come, medical supplies from abroad should be stockpiled and then distributed in the capital and beyond. Makeshift surgical units and clinical facilities will be essential. Power plants on offshore barges will be needed for electricity until new plants can be constructed. The salaries of public workers -- especially teachers, police officers, nurses, reconstruction workers and engineers -- must be assured, despite an utter collapse of revenues. Haiti's currency will need to be backed by international reserves so that the demand for public spending does not create harrowing inflation. The Haiti Recovery Fund, together with a quick-disbursing grant from the International Monetary Fund, should provide the needed reserves and budget financing.

Friday, January 8, 2010

RTAs are not distortionary!

This paper reviews the theoretical and the empirical literature on regionalism. The formation of regional trade agreements has been, by far, the most popular form of reciprocal trade liberalization in the last fifteen years. The discriminatory character of these agreements has raised three main concerns: that trade diversion would be rampant, because special interest groups would induce governments to form the most distortionary agreements; that broader external trade liberalization would stall or reverse; and that multilateralism could be undermined. Theoretically, all of these concerns are legitimate, although there are also several theoretical arguments that oppose them. Empirically, neither widespread trade diversion nor stalled external liberalization have materialized, while the undermining of multilateralism has not been properly tested. There are also several aspects of regionalism that have received too little attention from researchers, but which are central to understanding its causes and consequences.

 

Source: RTA

Tuesday, January 5, 2010

Death of the global trade system???

Here is Paul Blustein:

Someday historians may look back on 2010 as the year the global trade system died -- or contracted a terminal illness. A pledge by world leaders to complete the Doha round of global trade negotiations this year looks increasingly likely to end in yet another flop, and that would deal a crushing blow to the trade system as we know it.

After eight painful years of standstill and failure, with each meeting just a shoveling of intractable problems forward to the next, the Doha talks might collapse once and for all in 2010, possibly taking the World Trade Organization (WTO) down in the process.

If Doha falls apart, the WTO's ability to continue performing its vital functions would be imperiled. If it can't forge new agreements, how long before it loses its authority to arbitrate disputes? The trade body won't disintegrate overnight, but the danger is that its tribunals will be weakened to the point where member countries start ignoring WTO rulings and flouting their commitments.

The demise of Nepalese garment industry

Here is a sad story:

Today Nepal has only one firm exporting garment to the US. A dozen other are trying to survive by turning their focus to the Indian market.

This is the same industry which was a big hit until 2005:

Through the first 16 years of journey, the industry with over 1,200 active production units in 2000 occupied about 7.2 percent share of the total manufacturing sector, earned one-third of the total export income, witnessed investment climb to Rs 6 billion and directly employed 90,000 people, supporting livelihood of 450,000 persons.

What caused the downfall?

In the new millennium, however, labor stir, instability, extortion and threats to industries started to add cost of production, contrary to the actual need of the industry, especially after the US extended duty-free facility to competitors in Caribbean and Sub-Saharan countries (2002) and quota phase out (2005). This started to take toll on the industry.

(add the impact of the end of MFA as well--see below)

What could have saved the industry?

Garment Association Nepal (GAN) had made clear that only three measures can revive the industry -- establishment of Garment Processing Zone (pushed since 1999) that lowers production cost; an order-based hiring system (sought since 2007) that frees manufacturers from undue labor cost and stir; and duty-free-entry facility for Nepali garments in the US (lobbied for since 2005).

Was this day expected? I think, yes! I have written about the sorry state of the garment industry several times, highlighting not only what ails this industry but also offering recommendations on reviving its past glory.

Nepalese garment investors and the government basked on quota system so much that they forgot how competitive its competitors had become (and how uncompetitive they were becoming):

What surprises me the most is the fact that our leaders and garment sector entrepreneurs have not yet realized the value of competition and the stark truth that the Nepali garment sector cannot simply compete with the big producers, who continue to take an advantage of agglomeration economies, from Cambodia, China, India, Vietnam, and Mexico, at least not in the current situation.

Instead of rectifying defective economic policies considering the changed circumstances in the market brought about by globalization, the bureaucrats are too bogged down and intent on getting the preferential treatment in the US market. It shows how misguided our economic priorities are and how ignorant and unyielding our policymakers are to change the course of economic policy for good.

The prevailing illusionary notion among the policy-makers and garment sector entrepreneurs -- who are already battered hard by the depression in the garment sector -- is that the industry can recoup lost jobs and revenues if they are able to secure special treatment in the US market.

However, what is hard to swallow is the fact that no such recouping would occur and greater revenue generation would just be a dream, unless a miracle happens in favor of Nepali products in the international market. After the end of the MFA, Nepal already has lost market pie to big producers from China, India, Cambodia, and Vietnam, among others.

Rather than addressing the constraints that were making the garment sector uncompetitive, the government engaged on a fruitless effort to secure preferential treatment in the US market. But, it never realized admitted that this was a distant dream!

After more than four years of lobbying, there is hardly any progress. The policymakers are bogged down into this issue as if this is the only sector that would help stimulate export-led growth and employment generation. Exploration of other comparatively advantageous sectors have been overshadowed by the obsessive focus on securing preferential access to a market that is already flooded with similar goods from countries which enjoy huge cost and competitive advantage over Nepali exporters.

A senior diplomat, who is quite familiar with these issues, from the State Department opined that it is very “unlikely” that Nepal would get preferential access to the US market under the present circumstance. Unfortunate this might be but it is not surprising. By now the Nepali lobbying troupe has a fair idea of how hard it is to secure preferential treatment from the US Congress; despite over four years of lobbying, things have not moved a bit in the positive direction.

It should have been a clear indication that the entire effort might be a lost cause, not because we don’t need to prop up this sector but because we can’t do it under present labor and economic conditions in particular and the incapacity to fulfill enhanced labor, quality and environmental requirements brought about by increasing globalization in general. The senior official advised Nepali leaders and lobbyists to be a bit more realistic and not chase for something that is not attainable.

I emphasized:

The illusionary notion that securing duty-free access to the US market would revive the garment and textiles sector is fundamentally flawed. Policymakers and investors should be a bit more realistic about our real manufacturing and export capacities.

I suggested:

This does not mean that we need to abandon the promotion of garment and textile industry abroad. It would be fruitful to look at regional markets, which has higher potential than markets abroad because of lower transportation and transaction costs. This sector could gain more if the same amount of political and financial capital is invested in lobbying to eliminate countervailing duty (CVD) of 4 percent in the recently signed Nepal-India trade treaty.

Expediting establishment of GPZs and giving tax credits and subsidy incentives to investors would also aid the process, though, to be frank, no one knows how much this will help the dying sector regain its past glory. To satisfy the never-ending fascination with Western markets, the government and the exporters need to look into niche markets rather than the entire garment and textile market, which, as argued before, are already conquered by competitive firms from other countries. Promoting selected products that reflect Nepali tradition and heritage would be one of the potential niche markets.

For more discussion about the garment industry in Nepal, check out this short paper.

Sunday, January 3, 2010

No, economists are not skinflints!

It has something to do with opportunity cost, rationality, preference, efficiency and utility. Economists are not cheap!

Saturday, January 2, 2010