Friday, May 28, 2010

But this is a Keynesian situation...

Martin Wolf blasts OECD's report, which myopically argues that  "a weak fiscal position and the risk of significant increases in bond yields make further fiscal consolidation essential. But, we are not in a normal situation. This is a Keynesian time.

Above all, the private sector is forecast by the OECD to run a surplus – an excess of income over spending – of 10 per cent of GDP this year. On a consolidated basis, the UK’s private surplus funds nearly 90 per cent of the fiscal deficit. Thus, fiscal tightening would only work if it coincided with a robust private recovery. Otherwise, it would drive the economy into deeper recession. Yes, that is a Keynesian argument. But this is a Keynesian situation.

I agree that there needs to be a credible path for fiscal consolidation that would lead to a balanced budget, if not a surplus. That will be essential if the UK is to cope with an ageing population in the long term. I agree, too, that the path needs to be spelled out. Given the high ratios of spending to GDP – close to 50 per cent – the best way to proceed is via tight, broad-based, long-term control over expenditure. But a substantially faster pace than envisaged by the last government might threaten recovery: the OECD, for example, forecasts economic growth at 1.3 per cent this year and 2.5 per cent in 2011. Even this would imply next to no reduction in excess capacity.

Is Nepal “a yam between two boulders”?

Excerpts from a Foreign Affairs article on the influence of India and China in Nepalese political and economic spheres.

The Nepali crews that inch closer to China, bringing heavy trucks to a valley that has known only foot traffic, are at the forefront of a potentially major strategic shift in the region: Nepal, long a dependable ally and client of India, is building economic and political ties with China. Good roads are just one sign of this relationship and, as Rhoderick Chalmers, an International Crisis Group analyst in Kathmandu, explained to me, could "prevent India from using its ultimate sanction of economic blockade on Kathmandu." If China can begin supplying many of the goods that Nepal now receives from India -- especially petrol, diesel, and kerosene -- then India's leverage would be severely limited.

Although one new highway will not in itself push Nepal from India's sphere of influence -- history, economics, and above all, geography will see to that -- the mere fact that India may one day have to compete for Nepal's attention is a sign of Kathmandu's political reorientation. In 2006, as Nepal's monarchy teetered, Maoist leaders and pro-democracy parties signed a comprehensive peace agreement ending a decade-long civil war. Since then, Kathmandu has been building a nascent democracy while wedged in a proxy battle between China and India -- with the United States and Europe watching closely.

As Nepal inches toward a draft constitution and lasting peace deal, it is counting on India, its longstanding patron and a fellow Hindu-majority state. New Delhi remains Kathmandu's biggest supplier of essential goods, including gasoline, and the Nepalese are addicted to Indian films, music, and other forms of pop culture. Although new roads in Nepal's northern reaches may one day extend the country's economic linkages to China, for now the majority of all trade flows are to and from India in the south.

China's renewed interest in its southern neighbor is not entirely a quid pro quo. In Kathmandu, mobs of Chinese tour groups visit the tourist enclave of Thamel, where they frequent Chinese-run restaurants, bookstores, and hospitals. Meanwhile, Chinese cultural centers are popping up across the country, notably in the Terai, along Nepal's southern border with India. According to the Chinese embassy in Nepal, projects such as the Birendra International Convention Center -- a gleaming complex near Kathmandu's international airport -- and the capital city's main highway are evidence that "China treats Nepal as its closest neighbor and best friend."

Although the above initiatives aim to signify the softer side of Chinese-Nepali ties, China ultimately appears most interested in stifling "anti-Chinese" activities on Nepal's soil. And given China's single-minded focus, Communist Party leaders in Beijing seem less concerned with Kathmandu's political jockeying than with ensuring that the next government is as pliant as the current one. One strategy, analysts suggest, has been to focus fewer resources on national politics and more on localized economic aid, such as building schools in politically sensitive border areas. Although China may consider a return of communist governance ideal, its principal concern is stability. "For China, the ideological difference doesn't make any difference," said Dhungel, the presidential adviser. "They had very good relations with the king. They had a very good relationship with the Nepali Congress. And I think they will have relations with whoever emerges as a stable force." 

Review of Major Public Works Programs (PWPs)

This is a summary of Anna McCord’s paper (International PWP Comparative Study) on some of the major public works programs/social safety nets in the world.

PWPs are implemented under two broad labor market situations: (i) acute, short term fall in labor demand or livelihoods disruption (resulting from drought, flood, financial crisis or recession); and (ii) chronic high levels of under- or un-employment and poverty.

McCord reviews six public works programs: (i) USA’s New Deal programs, (ii) Argentinean Jefes program, (iii) India’s National Rural Employment Guarantee Act (NREGA), (iv) Ethiopia’s Productive Safety nets Program (PSNP), (v) Senegal’s AGETIP (Agence d’Execution des Travaux d’Interet Public, and (vi) Ireland’s Community Employment Program. She compares and contrasts these PWPs with South Africa’s Expanded Public Works Programs (EPWP) and offers some recommendations.

Broadly there are four types of objectives of social protection programs:

  • PWPs offering short term employment to fend off temporary labor market disruptions (Indonesia’s Padat Karya program)
  • PWPs promoting labor intensification of government infrastructure spending to boost aggregate employment (social protection objective indirect; direct objective is employment creation)
  • Large scale government employment programs which tend to offer some form of employment guarantee in response to chronic or sustained levels of elevated employment (such as the New Deal, NREGA, Jefes, PSNP)
  • PWPs that enhance ‘employability’ of workers through the provision of skills formation and workplace experience (Irish Community Employment Program)

Usually large scale social protection programs, such as AGETIP, fail to attain substantial coverage and suffer from limited impact and seemingly inappropriate conception and design. NREGA avoids this danger of form over substance, in part due to close scrutiny to which it is subjected as a consequence of the highly organized role of civil society in monitoring anti-poverty interventions.

For measurement of the effectiveness of PWPs, the microeconomic impact of program participation (current and future earning and/or reemployment prospects) and the macroeconomic impact (net effect on aggregate employment and unemployment) are evaluated. The effectiveness of a PWP intervention in terms of its contribution to social protection is contingent on the appropriate duration of employment and the extent to which it enables livelihoods protection and/or accumulation to take place.

PWPs that are more likely to be successful in alleviating poverty in the context of persistently high levels of unemployment and poverty provide a guarantee of ongoing or repeated episodes of employment on a massive scale. Some form of job guarantee is included in the program.

Social protection consists of all initiative that provides income (cash) or consumption (food) transfers to the poor, protect the vulnerable against livelihood risks, and enhance the social status and rights of the excluded and marginalized. (see Devereux and Sabates 2004). The World Bank considers risk coping, risk mitigation and risk reduction as key components of social protection.

Social protection can be carried out through wage transfer (cash, food or inputs), asset benefits, and training or work benefits.

If employment were offered on a sustained basis, or were guaranteed in times of need, as in NREGA, with no sustained benefits accruing from the assets created,the program would confer prevention social protection, or risk mitigation. If there are sustained benefits accruing from assets created from sustained employment programs, then it could be termed as promotive/transformative social protection (social risk reduction).

Case studies:

1) The USA’s New Deal Programs (1933-43)

  • Developed in response the depression following the Wall Street Crash in 1929
  • Five concurrent centrally administered public works initiatives (1933-43): (i) Civilian Conservation Corps (CCC) in 1933; (ii) Civil Works Administration (CWA), an emergency initiative during the winter of 1933-34; (iii) Works Progress Administration (WPA) in 1935; and (iv) National Youth Administration (NYA) in 1935
  • Massive expansion of state expenditure in an attempt to stimulate the economy while also providing enough employment to ensure that the basic needs of all working families were met.
  • Infrastructure spending topped 3% of GDP
  • At the height of the program, it absorbed over 50% of the unemployed labor force.

2) The Argentinean Jefes de Hogar Program (2002- )

  • Program for Unemployed Heads of Households
  • Initiated in 2002 in response to an economic collapse; unemployment rate rose to 24%
  • Objective: Income support for families and a reduction in unemployment
  • Offered employment in a range of projects created by public or local non-profit agencies; only one participant per household who is not receiving unemployment insurance and other transfer benefits from the government
  • Participants received a regular monthly transfer of 150 pesos in exchange for 20 hours of work per week or for attending a school or training program for at least 20 hours per week.
  • Total  cost: 1.6 million pesos in 2005 (< 1% of GDP)
  • Employed 2 million persons in Spring 2003; 1.3 million, 8.7 percent of total labor force, persons enrolled in April 2006
  • Assets created: micro enterprises mainly in agriculture (26%), social and community services (17%), maintenance and cleaning of public spaces (14%), public lunchrooms (11%), educational activities (10%), healthcare and sanitation (5%), etc.
  • Evaluation findings: attributed to having reduced poverty and unemployment (though some disagreements linger); initial macroeconomic multiplier effect was estimated by the government at 2.57; enrollment drawn almost entirely from the poor; but now closing the program to new entrants has meant that a significant number of the poor are not covered by it.

3) Indonesia’s Padat Karya (PK) Program (1998-2001)

  • Initiated in 1998 in the wake of East Asian crisis to tackle transient unemployment and impoverishment resulting from the economic crisis
  • Made a one-off episode of financial transfer until the crisis was over
  • Used work requirement as a crude targeting mechanism
  • Approximately 400,000 workers and 58 million days of labor were created between 1998 and 2000; total employment created was equivalent to 7% of the unemployed
  • Focused on urban areas of Java and drought-stricken rural areas
  • Evaluation findings: termed a model scheme for delivering income support to the poor during economic crisis; but shortcomings such as failing to reach women, minimal consultation with community, no NGO involvement, no transparent mechanism, no long term positive impacts, and no capacity building component; poor coverage and targeting as 64-100% of the participants were non-poor; poor targeting
  • Considering a national employment guarantee program

4) India’s National Rural Employment Guarantee Act, NREGA (2006)

  • Offers 100 days of guaranteed employment per annum to at least one member of rural household
  • Unemployment benefits given if the state fails to provide jobs within 15 days of work demanded by workers
  • Wage is equal to minimum unskilled agricultural wage
  • Evaluation findings: varies from state to state as implementation is highly variable, depending on levels of political buy in and also state administrative capacity; issues of corruption; raised wages in the rural areas; almost all of the households that demanded work were given one.

5) Ethiopia’s Productive Safety Nets Program, PSNP (2005-)

  • Initiated in response to chronic food crisis; 5-12 million people depend on PWP transfers for survival each year
  • Objective: to provide households with enough income (cash/food) to meet their food gap and to build community assets to contribute to addressing the root causes of food insecurity.
  • Offers repeated episodes of employment, for up to five years, and implements complementary livelihood promotion initiatives to graduate people out of poverty.
  • The program faces significant problems in identifying, designing, and implementing the scale of infrastructure projects required to absorb the levels of workers anticipated.
  • Approximately 7.3 million households members benefited in 2006, which is approximately 2-3 million workers.
  • Cost: US$ 915 for the years 2007 and 2009; total transfers (wages plus direct support) are estimated to be US$ 148 million, 16% of the project total.
  • Evaluation findings: initially exclusion of poor households; with revision of the program, the exclusion of poor people is not to the same extent; subjected to major problems in terms of the identification and management of sufficient numbers of programs to absorb the requisite amount of labor.

6) Senegal’s Agence d’Execution des Travaux d’Interet Public, AGETIP (1989- )

  • Initiated to quell urban dissent and political instability following contested election victory of the government of Abdou Diof in 1988 and launched in 1990; to alleviate urban unemployment and to improve living conditions of the poor in urban areas through infrastructure development.
  • Privately managed public works executing agency that enters into a contractual agreement with the central government for sub-project execution.
  • Aim to increase labor intensity and SMME activity in order to increase aggregate employment per unit of spending
  • Created 450,000 temporary jobs between 1989 and 2004; 21,000 created in 2004 alone (0.5% of total labor force)
  • Evaluation findings: highly successfully project; impacted the construction sector; in 1991, there were 80 engineering firms and 350 construction firms and this had risen to 350 engineering firms and nearly 2000 construction firms by 2004 (although it is not clear if this can be attributable to AGETIP); promoted efficiency in the public works construction and processes.

7) Ireland’s Community Employment Programme (CEP) (1994- )

  • Offers sheltered government funded employment for those not able to find employment in the open labor market.
  • Participants offered relatively high wage levels and secondary benefits during their employment, but graduation out of the program very low
  • Covered almost a quarter of total unemployment; wage rate was below the minimum wage; 19.5 hours of work a week with payment of € 210.
  • Evaluation findings: the program suffers from dual goals of improving the employment outcomes of its participants and of supporting the not-for-profit sector; if CEP is considered a demand-side measure designed to create aggregate employment, then it has been successful but if it is considered as supply-side measure designed to move workers into regular employment, then it is unsuccessful.
  • Cost: € 295 million in 2005

PWPs international comparison

With just a cost of 1% of GDP, India’s NREGA covered 15% of total labor force through PWP jobs. With 2% of GDP, Ethiopia’s PSNP covered 4.8% of total labor force through PWP jobs.