Thursday, September 30, 2010

Maoists’ hydro madness in Nepal

My latest piece is about UCPN(M)’s decree to stop all hydropower projects funded by foreigners and that are export-oriented. I think it is wrong. Period. Why does not this party do something that will boost morale and incentives of investors so that we have badly-needed infrastructure and industrial investment in the economy. It is one of the quickest ways to create jobs and stimulate the stagnant economy. If they think all electricity will be exported, then let the terms and conditions be revised in such a way that electricity produced in our country will first have to fulfill domestic demand and then be allowed to export the surplus. I just do not see the logic in restricting foreign investment, for whatever investment and consumption purposes it may be, in Nepal. I don’t think they will invade our resources and snatch our sovereignty. It is maniac thinking in this century! Additional discussion in my previous blog post.

Maoists’ hydro madness

The demand of Unified Communist Party of Nepal (Maoist)’s water resources and energy department to cease all projects with foreign investment in hydropower sector and let them be reviewed by the parliament’s committee on natural resources was a bombshell. It shook the confidence of domestic as well as foreign investors. They have explicitly argued that the party will oppose any investment in hydropower that is export-oriented and funded by foreign investors.

This wrongheaded and senseless decision, if implemented, will cost the nation dearly in terms of investment, employment, economic growth and, above all, macroeconomic health of our fragile economy. Furthermore, it will exacerbate the existing power crunch.

This decree from the UCPN (M) shows that the party does not have a viable and coherent agenda to steer the economy toward a long-term sustainable growth path. Their failed Marxist ideology reeks of opportunism and hypocrisy. Recall that it was the Maoist government that announced a plan to generate 10,000 MW of electricity in 10 years time beginning 2008. Since the investors were not convinced that their investment deals will be honored by UCPN (M) party cadres and youth wings, they had lack of confidence in the Maoist government and hesitated investing. The then Finance Minister Baburam Bhattarai had to implore with investors, both domestic and foreign, to invest in the country as their dream of leapfrogging to double-digit growth rate in three years’ time had no chance of being realized. Out of power and unable to win confidence of other parties to officially run the state machinery again, they are doing exactly opposite of what they promised to the public and investors.

The average economic growth rate in the past five years has been below 4 percent. Unemployment in the formal sector is stagnating. The industrial sector growth rate declined for three consecutive years since the Maoists joined mainstream politics. It is recuperating after hitting a negative growth rate last year. Similarly, foreign direct investment has tanked. The incessant interference in the industrial sector by militant youth wings and politically-indoctrinated, belligerent trade unions has compelled both domestic and multinational firms to shut down operations, reduce production, and severely affected competitiveness of Nepal’s industrial sector. The result has been devastating: Job market has stagnated, exports have decreased while imports skyrocketed, shortage and carteling have led to unusually high prices of goods and services, and economic growth rate suppressed below 4 percent.

Amidst this unfortunate situation deliberately inflicted by misguided and naive approaches of UCPN (M), the only hopes of reviving the economy rests on two sectors Nepal is naturally endowed with: Tourism and hydropower. There is pretty much a consensus among political parties, including the Maoists, that they will let Nepal Tourism Year 2011 run smoothly. Excellent. Unfortunately, we do not have similar agreement for hydropower sector. It might be because this sector offers a fertile ground for hefty commission for an extended period of time. The UCPN (M) might also be planning to use this issue as a bargaining chip with India as most of the hydropower projects are to be constructed by Indian companies or joint ventures involving Indian companies. Whatever the political motive behind this move, one this is certain: With the Maoists basically against all foreign-invested hydro projects, the prospect of fulfilling domestic power demand and exports of surplus electricity look dim. It will severely affect our ability to create jobs, spur infrastructure investment-led growth, and narrow down negative balance of trade.

Writing a column in one of the leading dailies, a Maoist-affiliated member of parliament and analyst accused those opposing this new stance of his party saying that they are ignoring domestic power crunch and industrial development, and are hell-bent on exporting hydropower to narrow down trade deficit with India. He alleges that critics are not thinking of using electricity domestically to produce goods, which then can be exported at a high value instead of cheaply and directly exporting electricity. He argues that electricity is a ‘raw material’.

This stance reflects his party’s wrongheaded, naive and contradictory analysis about the use of our natural resources. First, no investor will export electricity if domestic demand is very high, which means the price domestic consumers are willing to pay is also very high.

Second, since this is an oligopolistic market – where there are few sellers and many buyers – low supply, high demand, and high price means that there is abnormal profit. No sensible investor would want to ignore profits in the domestic market. Even if they ignore, terms and conditions for purchase of electricity can be revised so that power is not exported until domestic demand is satisfied. With so many big hydropower projects on the anvil, exporting surplus electricity makes a perfect business sense, whose positive externalities, among others, would be a potential reduction of trade deficit and high economic growth rate. Bhutan is doing exactly this.

Third, running rivers are our raw materials. Harnessing latent energy out of this and transacting it within and outside of our border comes under services sector. Fourth, at present neither the government nor the domestic investors have financial resources and expertise to fund big hydropower projects. Hate it or love it, we will need foreigners to invest in the hydropower sector. There is no alternative to it. Small hydropower projects could be funded by domestic investors, but not big ones, which is the need of the hour for high and sustained growth. The country has already wasted way too many scarce resources in funding small hydropower projects that cannot fulfill increasing electricity demand in the domestic economy. We need to look for economies of scale to remain competitive.

The seemingly opportunistic, wrongheaded and senseless stance of the largest party in the parliament should be shelved for good. Else, investors will shy away from investing in Nepal, job market will not grow, and economic growth will continue to stagnate at a low level. If investments are made in line with the laws and regulations of the hydropower sector, then there is no logical justification to disallowing foreign investment in hydropower sector, be it for domestic use or exports.

[Published in Republica, September 30, 2010, pp.7]

Can India’s growth rate take over China’s?

Latest edition of The Economist says it might because of two factors: demography and democracy.

Its economy is expected to expand by 8.5% this year. It has a long way to go before it is as rich as China—the Chinese economy is four times bigger—but its growth rate could overtake China’s by 2013, if not before (see article). Some economists think India will grow faster than any other large country over the next 25 years. Rapid growth in a country of 1.2 billion people is exciting, to put it mildly.

There are two reasons why India will soon start to outpace China. One is demography. China’s workforce will shortly start ageing; in a few years’ time, it will start shrinking. That’s because of its one-child policy—an oppressive measure that no Indian government would get away with. Indira Gandhi tried something similar in the 1970s, when she called a state of emergency and introduced a forced-sterilisation programme. There was an uproar of protest. Democracy was restored and coercive population policies were abandoned. India is now blessed with a young and growing workforce. Its dependency ratio—the proportion of children and old people to working-age adults—is one of the best in the world and will remain so for a generation. India’s economy will benefit from this “demographic dividend”, which has powered many of Asia’s economic miracles.

The second reason for optimism is India’s much-derided democracy. The notion that democracy retards development in poor countries has gained currency in recent years. Certainly, it has its disadvantages. Elected governments bow to the demands of selfish factions and interest groups. Even the most urgent decisions are endlessly debated and delayed.

India’s state may be weak, but its private companies are strong. Indian capitalism is driven by millions of entrepreneurs all furiously doing their own thing. Since the early 1990s, when India dismantled the “licence raj” and opened up to foreign trade, Indian business has boomed. The country now boasts legions of thriving small businesses and a fair number of world-class ones whose English-speaking bosses network confidently with the global elite. They are less dependent on state patronage than Chinese firms, and often more innovative: they have pioneered the $2,000 car, the ultra-cheap heart operation and some novel ways to make management more responsive to customers. Ideas flow easily around India, since it lacks China’s culture of secrecy and censorship. That, plus China’s rampant piracy, is why knowledge-based industries such as software love India but shun the Middle Kingdom.

Understanding basic statistics for policymaking

Compilation of several brief tutorials in a single file. Original source here. Refreshing and very useful! View it on full screen for clarity.

Reading Statistics 101

Democratizing development economics

The World Bank Group’s President Robert Zoellick argues that development economics as of now is not “democratic” enough and it must broaden scope of the questions it asks to make it more relevant to the challenges of the present world and policymaking. His suggestions: Focus on empirical evidence but don’t always go after data as it does not capture everything; try to encompass the experiences of successful emerging economies; and do not follow blueprints.

But it is appropriate to ask: Where has development economics brought us? Is it serving us well?

Even before the crisis there was a questioning of prevailing paradigms and a sense that development economics needed rethinking. The crisis has only made that more compelling.

A great deal of progress has been made over the last several decades: in health, education, and poverty. The share of people living in extreme poverty in developing countries has more than halved in the quarter century since 1980; global child mortality rates have almost halved.

But success has been uneven; countries are frustrated by the lack of progress on overcoming poverty and achieving the Millennium Development Goals, a useful yard¬stick to measure progress.

Most of the fall in poverty has occurred in East and South Asia and Latin America. While the world will meet the MDG target of halving the number of people living in extreme poverty by 2015, progress in Sub-Saharan Africa, despite some notable recent gains, still lags. Progress at the country level is even more uneven: Only 45 of 87 countries with data have already achieved or are on track to achieve the poverty target.

[…]The success of China and others has raised questions on the role of the state. What are the effective and proper roles of government ---- Enabler? Referee of fair and clear rules? Empowerer? Investor? Owner? Or anointer of winners?

The benefits of globalization and reform have yet to reach many of the poor. Many see the economic policy prescriptions of the Washington Consensus as incomplete -- lacking attention to institutional, environmental or social issues, or simply lacking as a guiding philosophy.

Others herald “orthodox” policies as helping developing countries navigate the crisis, pointing out that some developed countries strayed from orthodox lessons of finance and budgeting to their peril.

[…]Emerging economies are now key variables in the global growth equation. The developing world is becoming a driver of the global economy. Much of the recovery in world trade has been due to strong demand for imports among developing countries. Led by the emerging markets, developing countries now account for half of global growth and are leading the recovery in world trade.

We see a similar trend in the global development landscape, with developing countries assuming important roles alongside traditional development partners. These new partners are contributing not only aid, but more importantly are becoming major trading partners and sources of investment and knowledge. Their experiences matter.

Yet for too long prescriptions have flowed one way. A new multi-polar economy requires multi-polar knowledge.

With the end of the outdated concept of a Third World, the First World must open itself to competition in ideas and experience.

The flow of knowledge is no longer North to South, West to East, rich to poor.

[…]Yes, there are some basic principles we can follow: a belief in property rights; contract rights; the use of markets; getting incentives right; the benefits of competition within and across economies; the importance of education; macro-economic stability -- but we might learn these more from economic history than from economic models.

As the World Bank’s “Doing Business” reports have highlighted, small and medium- sized enterprises can flourish given an enabling environment that encourages – rather than blocks or constrains – the entrepreneurial spirit.

Beyond the basic principles, experience would suggest that we may need to consider differentiated policy approaches.

The right policies may differ across phases of development -- for example reliance on export-led growth versus domestic demand, or on different types of innovation, depending on the closeness of companies to technology frontiers.

The right policies may differ now from the 1970s given the changes brought about by the internet and the growing importance of supply chains in international transactions.

The right policies on financial regulation may differ across phases of development -- what may safeguard in one context may strangle in another.

[…]We need a deeper understanding of the process of how an economy’s structure evolves. This is not just about the shift from agriculture to industry and services over time.

Within agriculture, services, or industry, we need to know much more about the process of moving into higher quality goods and services, about what determines a country’s economic dynamism, and what contributes to the flexible adjustments in the structure of an economy.

I would maintain that a competitive market should be the economy’s fundamental mechanism for allocating resources. But there are market failures. There are also government failures -- including an inability to correct market failures. There is an important role for good governance, anti-corruption, and the rule of law, and governance will go beyond considerations of simple economic efficiency.

Here is a paper that provides an overview of the history of development research at the WB.

Six main messages emerge. First, research and data have long been essential elements of the Bank's country programs and its contributions to global public goods, and this will remain the case. Second, development thinking is in a state of flux and uncertainty; it is time to reconsider both the Bank's research priorities and how it does research. Third, a more open and strategic approach to research is needed -- an approach that is firmly grounded in the key knowledge gaps for development policy emerging from the experiences of developing countries, including the questions that policy makers in those countries ask. Fourth, four major sets of problems merit high priority for our future research: (i) securing economic transformation; (ii) broadening opportunities to participate in the benefits of, and contribute to, such transformation; (iii) dealing with emerging risks at all levels; and (iv) assessing the results of development efforts, including external assistance. Fifth, a new multi-polar world requires a new multi-polar approach to knowledge; the Bank must learn from, and collaborate with, developing-country researchers and institutes. Sixth, greater emphasis must be given to producing the data and analytic tools for others to do the research themselves and providing open access to those tools. And open data initiative needs to be extended to open knowledge. This will better inform development policy debates and allow for deeper engagement with the direct stakeholders in the outcomes of those debates.

Reaction from some economists here:

Nobel Prize-winning economist Michael Spence, who led a commission on economic growth, said Mr. Zoellick’s comments are “generally not only in the right direction, but very useful.” Harvard economist Dani Rodrik…. also praised the World Bank president. “The speech hits all the right notes: the need for economists to demonstrate humility, eschew blueprints…and focus on evaluation but not at the expense of the big questions,” Mr. Rodrik said.

But the reaction wasn’t unanimous. New York University economist William Easterly…called Mr. Zoellick’s comments “amazingly presumptuous.” He says the current system of economic research, where ideas are picked apart by other economists, works well. If anything, he says World Bank economists are often the exception because their bosses pressure them “to reach the ‘right’ conclusions,” Mr. Easterly said—meaning that World Bank loans are useful and foreign aid is productive.

The World Bank’s chief of research, Martin Ravallion, responded, “I have never been told what conclusions I should reach, and I doubt very much that anyone told Bill Easterly what conclusions he should reach in his many years working for the Bank’s research department.”

Wednesday, September 29, 2010

India’s bilateral trade talks

Since further multilateral trade liberalizations agenda at the WTO is not moving forward (its nearly a decade since the Doha Round started—the Uruguay Round took eight years to complete), India is moving on with “Plan B”, which includes bilateral and regional trade deals. More here



Start of


Thailand  2001 Under negotiation; likely to be signed in 2010
Singapore  2002 Signed in December 2007; to be reviewed
Sri Lanka 2003 Under negotiation
Mauritius  2003 Under negotiation
China 2003 Joint feasibility study underway
Asean 2003 Trade in goods pact signed in August 
2009; agreement on services to be 
signed soon 
Malaysia 2004 Likely to be signed by December 2010
BIMSTEC 2004 Under negotiation
GCC 2004 Under negotiation
Japan  2005 To be signed in October 2010
SACU 2005 Under negotiation
Chile  2005 Signed in March 2006; to be reviewed 
Israel 2006 Under negotiation
SAFTA 2006 In force
EU 2006 Under negotiation
EFTA 2008 Under negotiation
Australia 2008 Joint feasibility study underway
Nepal  2009 Treaty in force until 2016 
South Korea 2009 Under negotiation
New Zealand 2009 Under negotiation
Indonesia 2009 Joint feasibility study underway
Turkey  2010 Joint feasibility study underway
Pakistan _ No formal agreement; Most Favoured 
Nation status accorded 
Asean          =     Laos, Vietnam, Singapore, Thailand, Malaysia, Indonesia, 
                            Brunei, Cambodia, Myanmar, Philippines
      =    Bangladesh, India, Sri Lanka, Thailand, Myanmar
             =    Kuwait, Bahrain, Saudi Arabia, Qatar, UAE, Oman
           =    South Africa, Lesotho, Swaziland, Botswana, Namibia
         =    India, Pakistan, Sri Lanka, Bangladesh, Bhutan, Maldives,
                           Nepal, Afghanistan
           =    Switzerland, Iceland, Norway, Liechtenstein

India’s style of negotiating trade deals:

[..] India’s approach to trade talks has also evolved in the last seven years. For instance, the cloud of secrecy has given way to a consultative process, where industry associations and trade bodies are consulted and their concerns taken on board. FTAs are generally negotiated based on the feedback of the industry chambers and associations, which form the main basis of the negotiating text for the government. Even though the ministry of commerce and industry negotiates the deals, inputs and suggestions are also sought from other ministries and departments.

One reason for this is the improved political management of trade negotiations. Prime Minister Manmohan Singh created a new institutional framework for trade policy formulation within the government by creating the trade and economic relations committee (TERC), which includes the Cabinet ministers for external affairs, finance, commerce & industry, agriculture, deputy chairman of the Planning Commission and senior officials. TERC has played an important role in securing governmental green signals for FTAs. It has enabled the external affairs ministry to bring to bear considerations relating to foreign and strategic policy on FTAs. When the India-Asean FTA faced domestic political hurdles, for example, it was the external affairs ministry that gave the needed push by underlining the importance of closer strategic relations with Asean.

That apart, Indian industry’s attitude to FTAs has changed. “You cannot compare India of seven years ago with the India of today,” said a commerce ministry official. Over the last few years, Indian industry has also realised it can compete favourably in the global marketplace. “Besides, it has realised that we may have a scarcity of some product today, but five years from now, we might be world-beaters. We are factoring all this in when we go out to negotiate,” the official added.

Labor market flexibility and employment during crisis

The global employment level is set to remain stagnant for 2010 before recovering in 2011, so say the authors of this note. They argue that trade openness leads to faster rises in unemployment, but also faster recovery. Also, high severance pay reduces unemployment and high unemployment benefits actually increases it. Their analysis shows that reduction in unemployment growth is more pronounced under a domestic banking or debt crisis than in countries that are only exposed to the global demand shock. The impact of global downturn persisted longer on average while employment growth reverted faster after domestic crisis.

They evaluate the average response to a crisis for countries with low levels of trade [with a trade (imports + exports) to GDP ratio of 25%] and compare the response to countries with a high openness level [of 130%]. For labor market institutions, they use a measure of the severance pay associated with laying-off workers. They compare the responses to a crisis when severance pay is one standard deviation below and above the mean. Their conclusion is that higher openness to trade led to a stronger reduction in employment growth in the initial phase of the crisis, but also allowed for a faster recovery.

The initial negative impact of openness in the case of a debt and banking crisis is consistent with findings on the importance of access to finance for exporters (see Iacovone and Zavacka 2009 or Berman 2009). Unlike a global economic downturn, banking and debt crises have a direct impact on the availability of credit for firms. Since exporters are more sensitive to changes in external finance conditions given their high up-front costs, the higher the openness-to-GDP ratio the stronger is the importance of the financial constraint and the more pronounced the impact on employment.

Countries with higher unemployment benefits suffered on average a more severe reduction in employment growth. One potential reason for this finding is that unemployment benefits can cause downward real wage rigidity (Campolmi and Faia 2005, Zanetti 2007) – if unemployment benefits are high, workers are more likely to resist a downward adjustment of wages. Another possible explanation is the role of informal employment. In poor countries with no or very low unemployment benefits and small welfare systems, workers who lose a formal job are often forced to take up informal activities instead. Thus, they do not appear as unemployed in our data, but typically suffer a substantial deterioration in their incomes and working conditions. Robustness checks revealed that the results for unemployment benefits are strongly driven by countries which have unemployment benefits in the upper 20th percentile. Thus, moderate unemployment benefits that provide a safety net for workers do not appear to be detrimental to employment growth during times of crisis.

Tuesday, September 28, 2010

Export discoveries and imitation

The rate of export discoveries goes down when first movers expect fewer benefits from their inventions because of imitation threats posed by competitors, according to a new working paper by Bailey Klinger and Daniel Lederman. Indeed, if prices for exports are determined only by global demand, imitators can either drive down those prices or drive up production costs. That, the authors argue, can lower the chances of product diversification in the export market within a particular country or industry. But that market failure might be partly compensated when export discoveries in one industry lead to findings in another. Because export diversification and new export discoveries are linked to economic growth, the authors recommend that governments not use entry barriers to protect innovators from the threat of imitation. Instead, they should consider interventions that directly stimulate export discoveries.
Full paper by Klinger and Lederman here. Export diversification along the extensive margin is inextricable from the introduction of new export products. The authors test the hypothesis that the threat of imitation inhibits the introduction of new exports -- export discoveries -- under the assumption that the intensive and extensive margins of exports are correlated within broad country-industry groups. Econometric evidence from panel-data techniques that are appropriate for count data (the number of discoveries) suggests that discoveries within countries and industries rise with the growth of exports along the intensive margin (relative to the growth of non-export gross domestic product) but the magnitude of this partial correlation increases with domestic barriers to entry and with customs delays in exporting. However, the magnification effect of barriers to entry appears to be less significant as a determinant of total within-country export discoveries. This is consistent with inter-industry and within-country spillovers related to export discoveries, implying that barriers to entry enhance the effect of export growth on discoveries within country-industries but total discoveries might be unaffected by barriers to entry.

Sunday, September 26, 2010

Maoist madness in the Himalayas

The Maoist party is probably the most contradictory and inconsistent party in Nepalese dirty political arena. It is perhaps the most disgustingly opportunistic party unwilling and unable to bring out policies to institute prerequisites for long term economic growth. Except for Dr Bhattarai, I have not heard of any other Maoist leader arguing logically about economic growth and the economic mess we are in right now.

The one thing that you should not interfere when everything is in a mess is the sector that is posing as the binding constraint to economic activities. Low appropriability of returns arising from micro-risks such as political instability and corruption along with low social returns due to a lack of infrastructure are the two strongest constraints on the economy at present. Failure to address these constraints, thanks to politicization and obstruction by the leaders, is costing the economy dearly.

Micro-risks are always there in the economy. So, there is now way we will get away with them so soon. But, we can address the lack of infrastructure constraint with appropriate long term goals and vision. When the Maoist party was in power, they approved several hydropower projects in order to fulfill their dream of generating 10,000 MW hydroelectricity in 10 years.

Alas, their own dream is shattered by their own actions. The natural resources department of the UCPN (Maoist) has demanded that contracts and agreements on the West Seti, Upper Karnali, Arun-III, Chainpur Seti, Upper Karnali ST-1, Lower Arun, Upper Marsyangdi-II, Budhigandaki, Tamakoshi III A, Dudhkoshi, Dudhkoshi-4, Likhu, Phulkot and Namlan, among other hydropower projects, be presented for deliberations in the Legislature- Parliament´s Committee on Natural Resources. They also asked the government to stop all ongoing activities at those projects until the agreements are presented before the parliamentary committee. It is pure madness that will only exacerbate the economic mess. Electricity sourced from running water is almost the only source of power in this country. Furthermore, the country desperately needs a sizeable bout of investment now. They only sectors that are feasible are tourism and hydroelectricity. This could have bridged to some extent the investment gap, provide jobs, and potentially export revenue if we were able to export them after domestic use. This could have partially solved the perpetual balance of trade deficit. Alas, we are no so lucky. The economy is being held hostage by one single party which is raising voices on the back of “proletariat ” agenda. It is only concerned with usurping power by selling the failed Marxist agenda.

How can the Maoists justify this business unfriendly and contradictory act? This is not in the interest of the Nepali people. One ideologically dogmatic party should not and cannot not dictate and constrict the realization of aspirations of 28 million people. Who are the Maoists to argue that these projects are against national interest? Mind you, they only received 40 percent votes in the past election, if you assume that the election was fair in all 75 districts. Technically, they received 40 percent agreement on their proposed policies from among the eligible voters. This does not mean that they received a majority to dictate long term economic growth matters with myopic political vision to usurp power and push the country decades backward. Almost 60 percent of the eligible voters dissented with the Maoist party’s agenda. Additionally, how can a party, whose cadres are being fed by taxpayers like us, act as if there is no government and the rule of law. It is ludicrous and beyond sensible reasoning.

Their main target is India. They probably want to target Indian joint ventures in hydropower sector, restrict their activities, and use this as a bargaining chip during negotiations with India to fulfill their own vested interest of getting top posts in the government.  Four of the projects targeted by the Maoists are being developed by Indian investors, either solely or through joint ventures. It affects at least 3300 MW of hydro projects: Upper Karnali (900 MW), Tamakoshi 3 ´A´ (880MW), Upper Marshyngdi (600 MW), Arun III (402 MW), Lower Arun (400 MW), Balefi (50 MW) and Likhu (34 MW). Here is a very sensible piece from Dr. Ram Sharan Mahat.

At a time when investment is going down and the country is reeling under severe power crunch, this act does not do a bit in terms of protecting our economic interests. Investors will leave the country as they did during the bloody insurgency. Any surplus electricity can be exported, which the Maoists say should not be allowed. Why? How can they bridge the huge balance of trade deficit with India? The only viable way to do it is through electricity exports, exactly like what Bhutan is doing.

The Maoists are largely responsible for the economic mess we are in right now. Since they launched the bloody insurgency, which by the way is the bloodiest one in the world if we consider the level of fatalities and development level, in 1996, investment is tumbling down, exports are decreasing, employment is shrinking, imports are exploding due to limited avenues for investment of remittance money, and balance of trade is widening.

Most of the bidding in public works (construction of public infrastructure) is taken by the Maoist-affiliated wings, fostering massive inefficiency. Daily consumable goods are being procured and restricted supply in the product market to artificially jack up prices. Industrial districts are turned into youth wing camps. They have made a mockery of private property by willfully confiscating property. Investors are pulling out money and running away. Way too many evil acts are committed by the UCPN (M). They have pushed Nepal’s development at least a decade backward.

Again, they are mostly targeting Indian JVs and commercial interests. It is nothing but a political move. Nepali investors simply cannot and do not have the financial and technical capability to invest in large projects the country desperately needs. We need foreign investment. Period. Apart from using this issue as a political bargaining tool, they are probably after commission (like they are doing in the construction sector). The Maoist party is (may be even more) as corrupt as the other political parties. Its top echelon is the most hypocrite (as well as incoherent and inconsistent) I have noticed since the time I understood Nepali politics, however incomplete it may be. This recent senseless stunt is just a distraction from its latest corruption scandal. Lets sort out the scandal first!

The economy is being made a scapegoat to achieve vested interest of one very unpopular party that wants to run the show using fist instead of logic and sensible acts. We all know how Dr Bhattarai, the Finance Ministry during the Maoist government, had to implore with domestic and foreign investors to invest in Nepal when they shunned investment due to militant youth wings’ and unions’ activities. He even assuaged investment in hydropower sector to realizes its wild dream of producing 10000 MW in ten years. Now, it is totally opposite simply because they are not (and cannot after several unsuccessful rounds of voting for the prime minister position) in power.

The UCPN(M) should be stopped from doing taking law in its hand. It is costing our nation dearly. Their failed ideology is against the business sector, our economic interests and long term growth path. The party has comprehended neither geo-politics nor geo-economics. They look like pure opportunists, playing illogical and incoherent dirty games with both friends and foes. So far I have not heard of any group or organization supporting this wrong headed move. Stop this madness!

Saturday, September 25, 2010

(Over)optimistic about India and China?

[...] too many commentators discuss China and India with breathless admiration -- extrapolating, for example, that growth will continue at a breakneck pace for decades. In doing so, they treat emerging economies as if they were already world powers, echoing the hubris that preceded the Asian currency crisis of 1997-98.
Pranab Bardhan's Awakening Giants, Feet of Clay: Assessing the Economic Rise of China and India is a welcome corrective to that view. It succinctly summarizes the challenges facing China and India, including environmental degradation, unfavorable demographics, poor infrastructure, and social inequality -- threats that the leaders of China and India understand. Even as others have lavished praise on China, and Chinese citizens have grown stridently nationalistic, Chinese President Hu Jintao and others in the current leadership have been cautionary. As Chinese Premier Wen Jiabao said in 2007, the country's development is "unsteady, unbalanced, uncoordinated, and unsustainable." In India, meanwhile, although the government has orchestrated campaigns to highlight the country's growth and reform, its plans to develop roads and other infrastructure are a prominent and expensive recognition of the country's enduring gaps.
A more contentious claim offered by Bardhan is that internal reform -- not the global market -- has been the key driver of both countries' growth. Rather than focusing on India's information technology sector or China's export-led industrialization, Bardhan highlights less glamorous domestic sectors. Examining the rural economy -- in which a majority of Chinese and Indians work -- he concludes that growth is driven from below. He shows, for example, how China's steepest reductions in poverty had already happened by the mid-1980s, before the country began attracting sizable foreign trade and investment. The main causes of China's decline in poverty, Bardhan argues, were investments in infrastructure and reforms to town and village enterprises, which are predominantly agricultural.
The book thus suggests that the fates of China and India are in their own hands -- and do not depend on the West, as many assume. If that is correct, then these giants can continue to grow despite the global economic crisis, towing much of Asia along with them. This would have great implications for geopolitics and economics. To the contrary, however, neither China nor India can ignore external conditions.
The book review is here. I am half way through the book and it is refreshing as well as filled with some surprises about the Indian and the Chinese economy.

Wednesday, September 22, 2010

Conflict and development in South Asia

Ghani and Iyer have a good note on the relationship between conflict and development in South Asia. This blog post is just jutting down of major points from their note.

Countries that have low per capita income have a higher conflict rate. However, high income does not guarantee peace and stability also. In Nepal, Sri Lanka and Pakistan, for their given level of development, the conflict rates are much higher. The figure does not show causality, i.e. conflict may be contributing to low per capita income, or low income may be contributing to conflict. In Nepal, all the regions had high conflict intensity during the decade-long Maoist insurgency. Poor countries are at a greater risk of being plunged into conflict.

In general, conflict rates are seen to be higher between (in low per capita income ones) and within (in lagging regions) countries. In South Asia, conflict is concentrated in lagging regions, which have lower income per capita than national average. It is easier to recruit rebels in lagging regions because the opportunity cost of conflict is relatively low. Meanwhile, geographic conditions such as forest cover is related to incidence and intensity of conflict. States in India that have higher forest cover have higher conflict intensity. Conflicts can be triggered by low economic growth, unequal distribution in gains from development, political marginalization, shocks from natural disasters, and commodity price shocks.

Reducing conflict is a prerequisite to political stability, which, in turn, is the prerequisite for implementing pro-growth policies. One of the policy options to reduce conflict in South Asia is the deployment of police force, which the authors argue, are underequipped and understaffed. In addition to the police force, armed forces are also deployed depending on the incidence and intensity of conflicts. Another policy option is to conduct negotiations and sign peace pacts with insurgents. An economic solution to conflicts is to expand welfare programs and reduce poverty in conflict-affected areas. Many of the policies launched with this intention have failed due to poor economic policy selection and poor implementation. A right combination of these approaches could be a fruitful policy approach to amicably solve conflicts.

>>More on poverty and conflicts, here are Djankov and Reynal-Querol arguing that poverty does not necessarily cause civil war. Their point is that poverty and civil war could be driven by the same determinants (like colonial history), some of which are missed by in the typical econometric specifications that bat for poverty as a cause of conflict. Meanwhile, Fisman and Miguel argue that in Africa an income drop of 5% increases the risk of civil conflict in the following year to nearly 30%. Short term shocks to income do trigger violent conflicts.

According to a working paper by Iyer and Do, a 10 percentage point increase in poverty is associated with 25-27 additional conflict-related deaths and geographic condition such as elevation and the presence of mountains and forests explain a quarter of the cross-district variation in conflict intensity.

Similarly, Antonio Ciccone argues that a 5% income shock (say by drought) raises the likelihood of civil conflict by 15 percentage points.

Tuesday, September 21, 2010

Sachs vs. Easterly over MDGs, again!

Jeffrey Sachs bats for “multi-donor pooled funding that has clear timelines, objectives and accountability”.

We need a major change of funding toward pooled donor funding. Bilateral aid would remain, but mainly to promote demonstration efforts and innovations. The core of assistance would use pooled mechanisms to scale up what has been proven to work, avoiding fragmentation and poor accountability. Indeed, there are moves in this direction: a new maternal and child health initiative to be agreed this week saw African leaders specifically request that the support should come through the Global Fund. Similarly, infrastructure funding could be scaled up through new public-private financing pools for roads, rail and power, via the World Bank and African Development Bank.

William Easterly mocks Sachs and argues that only trade-fuelled growth can help the world’s poor. He thinks that private sector is the one that will help in reducing poverty, not aid.

This is all the more misguided because trade-fuelled growth not only decreases poverty, but also indirectly helps all the other MDGs. Yet in the US alone, the violations of the trade goal are legion. US consumers have long paid about twice the world price for sugar because of import quotas protecting about 9,000 domestic sugar producers. The European Union is similarly guilty.

Equally egregious subsidies are handed out to US cotton producers, which flood the world market, depressing export prices. These hit the lowest-cost cotton producers in the global economy, which also happen to be some of the poorest nations on earth: Mali, Burkina Faso and Chad.

According to an Oxfam study, eliminating US cotton subsidies would “improve the welfare of over one million West African households – 10 million people – by increasing their incomes from cotton by 8 to 20 per cent”.

To be fair, the US government has occasionally tried to promote trade with poor countries, such as under the African Growth and Opportunity Act, a bipartisan effort over the last three presidents to admit African exports duty free. Sadly, however, even this demonstrates the indifference of US trade policy towards the poor.

The biggest success story was textile exports from Madagascar to the US – but the US kicked Madagascar out of the AGOA at Christmas 2009. The excuse for this tragic debacle was that Madagascar was failing to make progress on democracy; an odd excuse given the continued AGOA eligibility of Cameroon, where the dictator Paul Biya has been in power for 28 violent years. Angola, Chad and even the Democratic Republic of the Congo are also still in. The Madagascan textile industry, meanwhile, has collapsed.

It is already clear that the goals will not be met by their target date of 2015. One can already predict that the ruckus accompanying this failure will be loud about aid, but mostly silent about trade. It will also be loud about the failure of state actions to promote development, but mostly silent about the lost opportunities to allow poor countries’ efficient private businesspeople to lift themselves out of poverty.

This kind of ideological battle will be fought for a long time to come. Similar form of battle was fought in the past, is being fought right now, and will be continued in the future. In a way, both are right, and both are wrong. Sometimes ideology blinds sensible reasoning. It is seen vividly in economics (incessant right and left tussle) than in any other subject. Perhaps, this is what adds spices to economics!

The human cost of Maoist insurgency in Nepal

Preliminary estimates (number):
Killed - 16,791
Disappeared - 1,327
Internally displaced - 78,708
Widowed - 9,000
Disabled - 4,305
Property lost - 11,775

It would be interesting to see the economic costs as well. Is there any that I missed?

A note from flood-hit region of Pakistan

My good friend Adil Solaiman from Pakistan penned this note after visiting a relief camp in a flood-hit area in Pakistan. A must read.


I'm not big on writing notes and tagging a bunch of people, some of whom I haven't spoken to in many years, but I feel this is an appropriate time to do so. On September 16th, 2010, I, along with an aunt, a cousin, and an guide from the area traveled to Nowshera, Pakistan to distribute goods at a flood relief camp. Here, I'd like to share my experiences from the trip, as well as ask you all to not forget the 20 million Pakistanis who are struggling to get their life back in order after the worst floods in Pakistan's history. I know its long, but I hope you will bear with me.

In the early hours of Thursday September 16th, our team loaded our truck with 40 bags of relief goods that were purchased the day before using donated funds. These funds, totaling 40,000 rupees (£300, $450), were collected from both from family members as well as students from the Penn State College of Medicine. The bags were assembled at a grocery store in Islamabad, and each bag contained 1kg rice, 3kg lentils, 0.5 kg sugar, 0.5 kg salt, 0.5 kg tea, 0.5 kg powdered milk, and 1 packet of spices. It was estimated that this was enough food to feed a small family for several days, and our goal was to reach 40 families in the area. So on Thursday morning, we loaded our truck and set off to Nowshera, a city about 100km west of Islamabad.

As we approached Nowshera, I immediately began noticing tents scattered throughout relief camps around the city. There were some large camps, some smaller ones composed of only five to ten tents. The majority of tents I saw had the logos of either the UNHCR (United Nations High Commission for Refugees) or of CARE International. There were also tents from several other international firms, which was good to see. I was actually fairly impressed by the international presence on the ground. In addition to the tents from international organizations, I met a team of Indonesian doctors and nurses at a rest stop outside of Mardan. They were disaster relief specialists, and this was their second tour of the region since the floods have hit. They expressed their concern at the tremendous need of the flood victims, but also expressed their optimism at the efforts they have coordinated and also the global response. This also filled me with confidence.

We arrived at the campsite where we were to distribute our relief goods a little past 10am in the morning. Suddenly, all my optimism and confidence vanished. Our driver had taken us to one of the most neglected parts of Nowshera. The campsite was sandwiched in between a rocky hill on one side, and a graveyard on the other. I saw tents built in ditches that would surely become flooded if it rained a little bit again, I saw tents built adjacent to and on top of graves, and I saw tents built on top of all the rocks and gravel littered along the side of the hill. For me, it was a sobering reminder of just what life has become for so many Pakistanis. In this camp, there must have been more than 50 tents, and as we were driving through, men, women, and children of all ages noticed our truck and started to follow us. We drove to the end of the camp, and our plan was that as we were driving back out, we'd toss a bag of goods to each tent as we drove by. This was to ensure that one family did not receive three or four bags while another received none at all. However, this plan quickly fell apart.

As we started to drive back, my cousin and I hopped on the back of the truck to prepare to distribute the bags. But seeing this, the people around the camp started to gather around the truck and prevented us from driving forward. They began telling us stories about how long it's been since they have received any aid, and started begging that we give them aid. The look of desperation on their faces was crystal clear. We first told the people to return to their tents and that we'd give each one a bag. When that failed, we tried to ask everyone to form a line so that again we'd ensure one bag per family to maximize those we can help. That too did not go over well. Instead, people started feeling like they had to take the initiative otherwise they might not receive any aid. More people started to gather around the truck, and at this point, my cousin and I had a decision to make. We could either stick to our plan and risk upsetting the people who had gathered, who numbered in excess of 40, or we could just distribute the goods to whoever was around. In the interest of safety, we decided to go with the latter. However, this too proved problematic. As we started to hand bags down from the truck, people started to climb onto the truck themselves and started snatching bags and running. Pretty soon, the truck was full of people each reaching for bags and trying to get off before someone else grabbed it. Luckily, there wasn't any incidents of violence, but the 40 bags of aid were gone within a matter of a minute or so. Naturally, given the way the distribution process panned out, there were people that were unable to get any bags of aid and expressed their frustration at their lack of fortune. One flood victim walked off in disgust, muttering,"Meri baari to kabhi aati hi nahin hai. Meri kissmat hi kharrab hai." (Its never my turn for to get aid. I guess my luck just sucks).

Hearing those words made my heart sink, because even though we had just distributed Rs 40,000 worth of goods, I felt like I had distributed a mere 4 rupees worth of goods. The people here were so desperate, and to see that desperation with my own eyes was very powerful. As the people walked back to their tents, some carrying our bags of aid and some not, I took a closer note at the suffering around me. I saw children popping their heads in and out of their tents, covered with sweat and dirt and fanning themselves to get some comfort. I saw pregnant women that had wandered over to the truck who now were slowly walking back. I had people coming up to me, some asking for money for medicines for their heart conditions while some asking for help for their elderly parents or young children that had not eaten anything in days. Having run out of goods, I proceeded to distribute money from my pocket to several of the flood victims that had gathered. After talking to several of the other victims that had gathered, we got back into the car and started to head out of the campsite. I left the area with mixed feelings. I knew that we had done good work today and helped a lot of people, but I couldn't help but feel that a lot more efforts like the one we had just made were required.

Leaving the campsite, our driver took us for a tour of sorts around Nowshera and Peshawar to see some of areas that were particularly affected by the floods. This was another sobering experience. Many of the places looked like they were part of a movie set. In almost every place we went, there were clothes thrown about all over the ground - indicating in just how much of a rush people had to vacate their homes when the waters struck. There were gates to houses still standing, yet the houses themselves had been washed away. There were cars, formerly used as a crucial method of transportation for the poor farmers of the region, left overturned and still full of water. Most strikingly, there were large stretches of houses that were still flooded, several weeks after the floods subsided. This is proof of the great need of people of the region, and proof that they should not be forgotten.

My reasons for writing this note are several-fold. First, to all my friends around the world, I wanted to remind you that even though it might not be headline news anymore (it never really was in the US, was it?), the need of these people is still great. It will take months, if not years for people to fully recover from this disaster. Over the next few weeks, the weather in Pakistan will cool down considerably, and the flood victims that have faced unbearable heat for the last few weeks will soon have to face the freezing cold. On behalf of them, I thank you for all you have done so far, and want to remind you that all contributions, no matter how big or how small, are very important. I hope you will continue to be generous in your contributions to the suffering people of Pakistan.

And to my Pakistani brothers and sisters. Let's be honest, most if not all of us have led very privileged lives. We (or our parents to those who were born abroad) hail from a poor country that is quickly getting poorer and poorer. We suffer from crippling poverty, rampant illiteracy, corrupt politicians, determined terrorists, electricity shortages, and a largely apathetic middle class. It is time for us to wake up and take responsibility for the future of our country. To those who are in a position to personally volunteer - DO IT. I promise it will be a very rewarding experience for you, and it's so easy to do. All you need is some money and a driver that knows his way around. But to the majority of you, please donate generously to reputable international agencies and make a positive difference to these people. Our country needs us, and it's too easy to simply ignore this need. The Quran teaches us that Allah changes not the condition of a people, until they change their own condition. Let's help make Pakistan the great country that it was destined to become, because it cannot reach there without our help and our prayers.

Monday, September 20, 2010

Neoclassical models (plus economists) failed!

A good narrative about how neoclassicals and rational expectationists assumed general equilibrium in everything (and created an economic mess, emanating from the Wall Street):
[...] New thinkers say they are still having trouble breaking in. Among the new NSF grant awardees is J. Doyne Farmer, a physicist at the Santa Fe Institute who is trying to bring the idea of complexity back into economics by making use of advanced computing power to map human economic behavior the way weather or climate change is tracked. But Farmer says he got his $450,000 grant for a three-year study of systemic risks in markets only after a sympathetic NSF case officer overruled negative assessments by “neoclassical economists” who reject any model that doesn’t tend toward general equilibrium. “The established view just holds this stuff back,” Farmer says. “One of the dangerous cultural patterns that economics has fallen into is an excessive emphasis on theorem proof for its own sake rather than what gives you scientific results. That’s led to a disdain for computer simulation.” Johnson, who is director of the new Institute for New Economic Thinking funded by George Soros, says: “You do see some new thinking, but it doesn’t get traction in terms of policy. It’s a symptom of how far right society has gone.”
The great names in the profession have not necessarily helped. The top economists in the Obama administration—Summers; Christina Romer, the just-departed chair of the Council of Economic Advisers; and her replacement, Austan Goolsbee—are all part of the orthodoxy. Critics say Summers should know as well as anyone how the old thinking has been outstripped. As a Harvard professor, Summers wrote after the 1987 stock-market crash that it was impossible to believe any longer that prices moved in rational response to fundamentals. He even cautiously advocated a tax on financial transactions. Yet Summers, one of the world’s most astute economists, later abandoned these positions in favor of Greenspan’s view that markets will take care of themselves. And in the current era, Summers and the rest of the Obama team seem to have underestimated the depth and systemic nature of the economic crisis. Stimulus spending was timid (in deference to political antipathy to big government), mortgage workouts meager, and financial reform minimalist. The administration maintains it did as much as it could under the political constraints, but others disagree. “The financial-reform bill and other changes in the regulatory landscape are more incremental,” says MIT’s Lo. “It’s a reaction to the most immediate set of events as opposed to a more profound rethinking about the underlying causes of the crisis.”
A little history is in order here: it was largely because the field of economics came to be dominated by “neoclassical” thought—or the idea that markets are rational and can reach “equilibrium” on their own—that so-called financial innovation on Wall Street was allowed to run amok in recent decades. That led directly to the crisis of 2007–09. No matter how crazy or complex the products got, the theory was that, with little government oversight, the inherent stability of markets would keep things from getting too out of hand. It was in large part because of this way of thinking that government intervention of any kind in the markets, including regulation, came to be seen as a kind of heresy, especially after the Soviet Union collapsed and command economies and “statism” were thoroughly discredited.
The new financial-reform law has changed that to some degree, but it still leaves most of the major decisions about government oversight to the same regulators who failed last time. We are still, to a large extent, flying blind in conceptual terms. Just as the Great Depression demonstrated to John Maynard Keynes and his followers that markets often behaved badly—leading to the Keynesian reinvention of economics in the ’30s—this present crisis drove home the truth, or should have anyway, that rational models of markets don’t work well because there are too many unknowns. People most often don’t behave as rational actors. There is no real equilibrium in the real world. Above all, market economies are capable of destroying themselves. This is especially true in the world of finance, which has always worked according to different rules than other sectors of the economy and is much more prone to panics and manias. In 1983, a young Stanford economist named Ben Bernanke published the first of a series of papers on the causes of the Great Depression. The financial system, Bernanke said, was not unlike the nation’s electrical grid. One malfunctioning transformer can bring down the whole system. “I’ve never had a laissez-faire view of the financial markets,” Bernanke told me, “because they’re prone to failure.” Even Friedrich Hayek, the godfather of 20th-century laissez-faire thinking, believed that financial markets were more subject “to bouts of instability,” says one of his biographers, Bruce Caldwell of Duke University, a self-described libertarian scholar.
Yet amid the free-market triumphalism of the post–Cold War era, all this hard-won wisdom about the differences in finance was forgotten or ignored. To policymakers in Washington, it seemed silly and nitpicky to treat finance as a different animal. The dominant thinkers were the “rational expectations” economists of the Chicago school who simply assumed capital flows, no matter how open, would be stable.

Sunday, September 19, 2010

Consequences of high-skilled “brain drain”

This paper presents the results of innovative surveys which tracked academic high-achievers from five countries to wherever they moved in the world in order to directly measure at the micro level the channels through which high-skilled emigration affects the sending country. The results show that there are very high levels of emigration and of return migration among the very highly skilled; the income gains to the best and brightest from migrating are very large, and an order of magnitude or more greater than any other effect; there are large benefits from migration in terms of postgraduate education; most high-skilled migrants from poorer countries send remittances; but that involvement in trade and foreign direct investment is a rare occurrence. There is considerable knowledge flow from both current and return migrants about job and study opportunities abroad, but little net knowledge sharing from current migrants to home country governments or businesses. Finally, the fiscal costs vary considerably across countries, and depend on the extent to which governments rely on progressive income taxation.

More here. The study was done in Tonga, the Federated States of Micronesia, Papua New Guinea, Ghana, and New Zealand. The authors estimate that the best and the brightest gain US$40,000-75,000 per year from emigrating from these five countries. Gains disaggregated are: annual remittances are $2000-7000, trade and FDI effects are close to the remittances value, and annual fiscal impacts are at most $1000 for Tonga and Micronesia, $6000 for Ghana, $10,000 for New Zealand, and $17,000 for Papua New Guinea. They also find that migration leads to large increases in human capital of migrants, but little net knowledge transfers to home governments or business. The gains are estimated to be much higher relative to the magnitude of possible negative externalities.

Friday, September 17, 2010

Nepalese economy still stuck in mess

My latest piece is based on the latest macroeconomic review  2009/10 published by the central bank of Nepal. My point is that despite substantial reduction in BOP deficit, the economy is still in a mess: low growth, low employment, high inflation, growth less investments in few sectors, and consumption fuelled economy, thanks to remittances, among others. The way BOP deficit declined has nothing to do with addressing these important variables.


Economy still stuck in mess

Last week, the central bank came up with encouraging news that Balance of Payments (BoP) deficit declined from Rs 20 billion in the first quarter of 2009/10 to Rs 2.62 billion when the annual figures were compiled. Commentators were quick to extol stringent steps taken by the central bank to restrain imports of certain goods. The decline in BoP deficit has given some respite to policymakers, at least in the short term with regards to restoring market confidence that they can competently manage transactions between Nepal and the rest of the world.

Though this is welcoming news, it does not mean that other macroeconomic variables are also on the right track vis-à-vis existing monetary and fiscal policies. The core problems that led to BoP deficit beginning first quarter of last fiscal year have not been resolved yet. Worse, fresh indicators about the competitiveness of the economy show that the economy is still plagued by structural constraints, leading to alarming lending and consumption levels without reasonably proportional impact on growth and employment. We are still stuck in the same economic mess as before—widening trade deficit, high inflation, slow economic growth, low employment, and rigid non-economic constraints.

Our economy’s BoP is composed of three sections: Current account, capital account and financial account (there is ‘balancing item’ as well to account for statistical errors). Current account is the sum of balance of trade (exports minus imports of both merchandise goods and services), net factor income (such as interests and dividends), and net transfer payments (such as remittances, foreign aid, and pensions). This is the most important part of BoP with regards to its bearing on our economy’s growth, employment, exchange rate, and inflation. Despite the decline in BoP deficit, our current account is still in a very bad shape, implying that the main economic and non-economic issues are not resolved yet. Unless they are addressed, any fix on BoP accounts is of temporary, unsustainable nature.

Merchandise exports are down by 9.7 percent to Rs 61.13 billion in 2009/10. Last year, it was up by 14.2 percent reaching Rs 67.70 billion. Exports to both India and other countries declined. Meanwhile, merchandise imports have surged to Rs 378.80 billion, a growth of 33.2 percent. It grew by 28.2 percent, reaching Rs 284.47 billion in 2008/09. Imports from India and other countries grew by 34.2 percent and 31.8 percent, respectively. Consequently, trade deficit widened by 46.5 percent, reaching Rs 313.67 billion. In 2008/09, it rose by 33.3 percent and amounted Rs 216.77 billion. Trade deficit with India and other countries rose by 46.75 percent and 46.7 percent, respectively. This indicates an unfavorable balance of trade situation. It is simply unsustainable as we cannot forever import more than what we can afford to.

The reason why BoP was in surplus in previous years (Rs 44.66 billion in 2008/09) was because of high inflow of remittances, which checked current account from deteriorating amidst rising negative balance of trade. As growth rate of remittances inflows went down, thanks to declining demand of Nepali workers following the global economic crisis, current account went into the red, dragging overall BoP in its direction.

Current account deficit amounted to Rs 32.35 billion as against a surplus of Rs 41.44 billion in FY 2008/09. Capital account, which reflects a net change in national ownership of assets, surplus doubled this year to Rs 12.58 billion, up from Rs 6.23 billion in 2008/09. Financial account deficit was Rs 3.70 billion as against Rs 21.20 billion surplus in 2008/09. As a result, the overall BoP situation came down from a deficit of about Rs 20 billion in the first quarter to Rs 2.62 billion by the year’s end. The transfers and earnings from capital account are insufficient to negate widening trade deficit, which is dragging overall BoP in the negative terrain.

The decline in BoP deficit by the fourth quarter of 2009/10 looks like progress, isn’t it? Yes, but there is nothing to cheer about. There is no major change in indicators that will keep BoP accounts in a comfortable space in the coming years. Unless we find a way to narrow down the trade deficit – primarily by exporting more, and encouraging domestic production and consumption instead of imports of pretty much everything ranging from luxurious to non-luxurious goods and services – the problems associated with BoP deficit will not be adequately addressed. Continuing to bank on remittances and trade credit liabilities to even out BoP account is not a smart idea and policymaking.

It should be realized that in terms of productive capacity of the economy, prospect of future growth and employment scenarios, we are still very much deep in the same mess we were at the beginning of this year when BoP deficit was record high. In fact, we are actually going deeper into the mess. The ratio of exports to imports has declined from 23.8 to 16.1. Economic growth rate plunged from 3.9 percent to 3.5 percent. Inflation is still double-digit. Worse, amidst supply side constraints, cartelling and increasing money supply, inflation will probably creep up and stagnate at high level. Additionally, consumption has increased by 0.3 percentage points to 90.6 percent of GDP, and domestic savings is worryingly low at 9.4 percent of GDP.

The message is clear: We are still deep into economic mess, and the way BoP deficit declined by the fourth quarter of 2009/10 has not and will not contribute to us getting out of low growth, low employment, high prices and remittances-fueled impact-less investment cycles. This is further substantiated by the latest Global Competitiveness Report which ranks Nepal as the least competitive nation in South Asia. Globally, Nepal is 125th (out of 139 countries) most competitive nation!

[Published in Republica, September 16, 2010, pp.7]

Thursday, September 16, 2010

South Asia (and Nepal) in 2012

What would South Asia look like two years from now? The World Bank’s GEP has forecast for some of the South Asian countries. Nepal is expected to grow at 4.2 percent in 2012. Its current account balance is expected to be the second best, albeit negative, in 2012. Bangladesh is the only country in South Asia whose current account is expected to be positive in 2012. Also, in 2012 Bangladesh is expected to be the second highest growing economy (at 6.1 percent), following India, which is expected to grow at 8.2 percent in 2012.

Source: GEP, 2010-09-16

In 2012, Nepal will be around US$ 20 billion economy, (nominal GDP) with imports higher than exports. With population of 31 million, its per capita GDP is expected to be US$ 579.

Source: GEP, 2010-09-16

Tuesday, September 14, 2010

Poverty in Nepal

Different measures have different estimates. The NLSS I and NLSS II have the following estimates.

Meanwhile, MPI and the WB have the following estimates:

Additionally, the ADB has its own estimate of poverty and draws a poverty line at $1.35 a day. For Nepal, with the new ADB estimates, the percentage of population living in poverty is higher than under $1.25 a day. Under $1.35 a day estimate 59.5% of the population live in poverty, while under the WB’s estimate 24.7% live below the $1.25 a day line and under $2 a day 64.3% of the population live in poverty.