Food price inflation and poverty in South Asia

A new ADB study (Global Food Price Inflation and Developing Asia) finds that a 10% rise in domestic food prices in developing Asia, home to 3.3 billion people, could push an additional 64 million people into extreme poverty based on the $1.25 a day poverty line. Also, if the global food and oil price hikes seen in early 2011 persist for the remainder of the year, economic growth in the region could be reduced by up to 1.5 percentage points.

The report estimates that a 10%, 20% and 30% increase in food prices would increase percentage of poor by 2.0, 4.1, and 6.1 percentage points respectively in Nepal. This translates into 0.55, 1.10, and 1.65 million people respectively. This calculation is based on food price elasticity of poverty. To address food insecurity, the Nepali government has planned to import 100,000 tons of rice (to be financed by WFP) and is releasing 30,000 tons of rice allocated for food deficit mid-and far-western regions. It is also subsidizing food prices at government depots.

The table shows corresponding figures for the other countries in South Asia (excluding Afghanistan and Maldives). It looks like rural India would have the largest impact of food price inflation on poverty. Sri Lanka faces the least impact (among South Asian countries) by food price inflation.

Food prices and poverty (USD 1.25-a-day poverty line) in South Asia
ADB 2011 estimate	Change in percentage of poor (in percentage points) with an increase in food prices by			Change in number of poor (in millions) with an increase in food prices by
	10%	20%	30%	10%	20%	30%
Bangladesh	2.5	5	7.5	3.83	7.65	11.48
Bhutan	1.8	3.5	5.3	0.01	0.02	0.03
India—Rural	2.9	5.8	8.8	22.82	45.64	68.45
India—Urban	2.1	4.3	6.4	6.68	13.36	20.04
Nepal	2	4.1	6.1	0.55	1.1	1.65
Pakistan	2.2	4.5	6.7	3.47	6.94	10.41
Sri Lanka	1.2	2.4	3.6	0.24	0.47	0.71

The report notes that production shortfalls caused by bad weather along with the weak US dollar, high oil prices and subsequent export bans by several key food producing countries have caused much of the upward global price pressure since last June, with double digit increases seen in the price of wheat, corn, sugar, edible oils, dairy products and meat. Rice prices are likely to continue their uptrend as the effects of La Niña persist, prompting consumers to seek less costly and less nutritious substitutes. Persistent structural and cyclical factors such as rising demand for food from wealthier emerging economies, changing diets, competing uses for food grains, shrinking available agricultural land, and stagnant or declining crop yields, are also causing the upward pressure.

In the longer term, structural adjustments are needed to secure food supplies. These include measures to improve crop productivity, increased infrastructure investments (e.g. irrigation and food transport/storage), stronger market integration, and closer global/regional cooperation on food production and supplies. Countries should refrain from export bans on food items.

Meanwhile, a different study by Maros, Martin and Hassan (2011) of the WB found that the food price rise of 2010-11 led to an average poverty change of 1.1 percentage points in low income countries and 0.7 percentage points in middle income countries. The net increase in poverty was 44 million people (falling below the $1.25 per day extreme poverty line).

A loner Paul Krugman!

New York magazine has an interesting profile of one of my favorite economists, Paul Krugman. The author portrays Krugman as a loner trying to counter unrealistic conservative ideas and policies from the left.

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[…] For Krugman, the path forward was perfectly clear: The only way to avert a deepening crisis was massive Keynesian stimulus. During the nineties in Japan, he had seen the nightmare alternative. Officials in Tokyo, faced with a very similar scenario, had done too little to stimulate the economy, again and again, and as their nation’s recovery stumbled, they found they were toggling an unplugged joystick.

[…] Paul Krugman is a lonely man. That he is comfortable in his solitude, that he emphasizes its virtues, that his intelligence gives it a poetic gloss, none of this diminishes the poignancy of his isolation. Krugman grew up an only child and is deeply self-conscious. He will list his shortcomings as though he’d been preparing for the chance: “Loner. Ordinarily shy. Shy with individuals.” He is married but has no children nor—rare for a Nobelist—many protégés. When I asked him if there were any friends of his I could talk to in order to understand him better, he hesitated, then said, “That’s going to be hard.”

[…] Krugman had begun the work that would eventually win him the Nobel Prize—an aggressive revision of international trade theory—by the time he was in his mid-twenties, and so for nearly all of his adult life he has had good evidence for the proposition that he is smarter than just about everyone else around him, and capable of seeing things more clearly. Krugman is gleeful about being right, joyous in the revelation of his correctness, and many of his most visible early fights were with free-trade skeptics on the left. Of Robert Reich, for instance, Krugman wrote: “talented writer, too bad he never gets anything right.” He was a liberal and a Democrat, but even in 1999, when he was hired by Howell Raines to write his Times column, “I still saw equivalent craziness on both sides.”

[…] But Krugman’s writing voice—sarcastic, data-driven, flecked with just a little bit of maybe-there’s-a-bomb-in-the-wastebasket zeal—was perfect for the Internet. His self-certain empiricism matched liberal vanities as precisely as Rush Limbaugh’s stagy authenticity matches conservative ones, and he became a vehicle for the concentrating energies of the progressive generation of 2006.

[…] I ask Summers what he thinks is Krugman’s underlying complaint with the Obama administration. “Paul may be the smartest and most creative applied economic thinker of this era,” he says, “but there is some element of him that is like the guy in the bleachers who always demands the fake kick, the triple-reverse, the long bomb, or the big trade.”

The two economists have known each other since the late seventies, when they were both graduate students in Cambridge, and there were moments in conversation with Krugman that I began to suspect he viewed Summers as a one-man control group for his study of himself. They each share a high assessment of the other’s intellect (“Larry’s extremely smart—ask him and he’ll tell you,” Krugman says). Krugman’s sense of humor is built upon self-deprecation, and sometimes Summers’s sense of humor is built upon deprecating Krugman, too. In the early eighties, when the two worked together in the Reagan administration, Krugman realized that Summers had a talent for effectiveness—winning meetings, organizing subordinates, convincing economic novices of his point of view—that he himself could not hope to match. Summers became the insider and Krugman the outsider.

[…] I brought up the work of the legal scholar Cass Sunstein, now with the Obama administration, who has studied the radicalizing effects of ideological isolation—the idea, born from studies of three-judge panels, that if you are not in regular conversation with people who differ from you, you can become far more extreme. It is a very Obama idea, and I asked Krugman if he ever worried that he might succumb to that tendency. “It could happen,” he says. “But I work a lot from data; that’s enough of an anchor. I have a good sense when a claim has gone too far.”

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How agriculture supports structural transformation?

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“After 20 years of neglect by international donors, agriculture is now again in the headlines because higher food prices are increasing food insecurity and poverty. In the coming years it will be essential to increase food productivity and production in developing countries, especially in Sub-Saharan Africa and with smallholders. This however requires finding viable solutions to a number of complex technical, institutional and policy issues including land markets, research on seeds and inputs; agricultural extension; credit; rural infrastructure; storage; connection to markets; rural nonfarm employment and food price stabilization. This paper reviews what the economic literature has to say on these topics. It discusses in turn the role played by agriculture in the development process and the interactions between agriculture and other economic sectors; the determinants of the Green Revolution and discuss the foundations of agricultural growth; issues of income diversification by farmers; approaches to rural development; and finally issues of international trade policy and food security which are at the root of the crisis in agricultural commodity volatility in the past few years.”

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Read the full paper by Dethier and Effenberger (2011). Structural transformation is usually thought of as moving labor and production from agriculture to industrial sector. Development of agriculture sector would facilitate structural transformation. But, development of agriculture itself plays a vital role in bringing about structural transformation. They key is to raise productivity by using a range of factors, such as new technologies, farm size and access to land. The most difficult are institutional challenges related to market failures, missing markets and property rights. They argue that because agriculture links to small cities and rural areas, it can also be an engine of growth and provide employment opportunities for the rural non-farm economy.

Food prices in 2010-11 and its impact on poverty

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Global food prices have increased substantially since mid-2010, as have prices in many developing countries. In this study we assess the poverty impact of the price changes between June and December 2010 in twenty-eight low and middle income countries. This is done by gathering detailed information on individual households' food production and consumption levels for thirty-eight agricultural and food commodities to assess the impacts on household welfare. This study estimates that this sudden food price surge increased the number of poor people globally, but with considerably different impacts in different countries. The heterogeneity of these impacts is partly related to the wide variation in the transmission of global prices to local prices and partly to differences in households' patterns of production and consumption. On balance, the adverse welfare impact on net buyers outweighs the benefits to net sellers resulting in an increase in the number of poor and in the depth of poverty. We estimate that the average poverty change was 1.1 percentage points in low income countries and 0.7 percentage points in middle income countries with a net increase of 44 million people falling below the $1.25 per day extreme poverty line.

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Full paper by Maros, Martin and Hassan (2011). They find that on an average poverty change was 1.1 percentage points in low income countries and 0.7 percentage points in middle income countries. The net increase in poverty was 44 million people (falling below the $1.25 per day extreme poverty line).

Meanwhile, Carnegie’s Shim and Vera explain the differences between the food price rise in 2010/11 and 2007/08. They argue:

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Several of the factors behind today’s increase parallel those that drove the 2007/2008 food-price crisis—including export controls, biofuels production, high oil prices, and poor harvests. But the prices of cereals, particularly rice, have increased less than in 2008 and domestic prices in some of the world’s poorest countries have actually fallen amid better local harvests. The lower incidence of harmful policy responses, which amplified the crisis last time, likely helped as well.

Although these factors have lowered the surge’s impact, prices are likely to remain elevated and volatile for the next few years. Policy makers must heed the lessons of the past if they are to prevent more hunger now.

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The China of India is…

… the state of Gujarat. Steven Pearlstein explains:

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The biggest obstacle to India’s industrialization remains the lack of infrastructure, and no state is tackling that more aggressively than Gujarat. The entire state has been turned into one large public works project, with billions of dollars in investment being poured into dams, canals, power plants, highways, gas pipelines, electric grids and ports. The state is even assembling the land to create industrial cities along the path of a high-speed rail freight line that the central government is planning between Delhi and Mumbai.

Gujarat’s notoriously efficient, autocratic and incorruptible chief minister, Narendra Modi, is a strong adherent to the Asian-style industrial policy who believes that if you build it, they will come. And they have, bringing oil refineries, shipbuilding facilities, steel and auto plants and LNG terminals. With 5 percent of India’s population, 15 percent of its industrial production, 17 percent of its capital investment and 22 percent of its exports, the joke is that Gujarat has become the China of India.

Rajan Shah started Harsha Engineers in Ahmedabad in 1972, back when textile mills were what passed for Gujarat’s manufacturing base. Harsha got its big break in 1997 when Timkin, the giant ball-bearing maker in Canton, Ohio, decided to stop making the metal cages that are used to hold its bearings and rely on Harsha instead, and the company has grown steadily ever since. Shah figures he still has a 10 to 15 percent cost advantage over global competitors, thanks in part to Gujarat’s low wages and the ready availability of good design and production engineers. But just in case, he’s opening a second plant — in China.

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But economic hurdles remain in India:

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Despite such successes, India has a long way to go to modernize an economy where 80 percent of economic activity takes place in the “informal” sector. Beyond the more obvious problems of corruption, poor infrastructure and a low-productivity workforce, too much of the formal economy is controlled by a handful of family-run conglomerates who are quick to use their political and financial muscle to move into any sector that shows promise. In a nation of naturally entrepreneurial people, this creates headwinds for independent companies trying to attract talent and capital. It contributes to the growing concentration of wealth in the hands of a business elite that by all accounts has grown increasingly disconnected from the rest of the country. And it has encouraged many of the best and the brightest either to leave the country or follow the golden path into real estate and finance rather than manufacturing or government.

It also has an effect on foreign investors, who are keenly aware of the dangers of trying to compete against the local oligarchs. Enron tried it and wound up losing $1 billion on an ill-fated energy project. And I found it telling that Wal-Mart, which for years has been pushing hard for the government to relax rules that prevent foreign firms from opening stores in India, may chose to continue its joint venture with the Bharti family rather than go it alone.

A somewhat closed financial system is also restraining growth. India’s central bank is most proud that its tight restrictions on the flow of borrowed money into the country minimized the impact of the recent global financial crisis on India. But business executives complain that those same restrictions also prevent the development of a corporate bond market that is badly needed as a source of infrastructure funding. They require banks to keep so much of their deposits on reserve, or directed to low-return loans to farmers, that the cost of borrowing for businesses and consumers is two percentage points higher than it needs to be. It also doesn’t help that Indians continue to put much of their savings into gold rather than into a financial system that would recycle it into the economy.

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Can Keynesians be anti-Keynesian?

Dave Altig, senior vice president and research director at the Atlanta Fed argues:

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One of the interesting things about the article is that among the economists cited as being among the critics of "Keynesianism," you find the names John Taylor, Robert Mundell, and Kenneth Rogoff. I find that list interesting because if you follow the links I attached to those names you will find work with models that are decidedly Keynesian in structure. Works by Taylor and Rogoff are, in fact, seminal contributions to the "New Keynesian" paradigm that dominates macroeconomics today.

As far as I know, none of these men have repudiated the basic worldview that motivates the referenced work. In fact, as recently as last year John Taylor approvingly described, as he has many times, a key characteristic of the paradigm for monetary policy that was in place the decades before the financial crisis:

"… the central bank has a strategy, or rule, to adjust the interest rate depending on economic conditions: In general, the interest rate rises by a certain amount when inflation increases above its target and the interest rate falls when by a certain amount when the economy goes into a recession."

I added the emphasis to the last part of that passage as it is a feature of the so-called Taylor rule that is entirely built on the foundation of the New Keynesian model.

How, then, to explain the Keynesian predilections of the economists mentioned as presumed carriers of the anti-Keynesian mantle? The source of the confusion, I think, goes back to the historical, but somewhat obsolete, distinction between so-called Keynesianism and monetarism. The latter was, of course, personified in Milton Friedman and his dispute with what was the orthodoxy in the three decades following the Great Depression. Lost in the early-days labeling, however, was the fact that the disputes were more about the empirical details of theory rather than the theory itself.

In particular, Friedman did not deny the effectiveness of policy in principle but rather its wisdom or impact in practice. This sentiment is exactly the one he expressed in his prescient and transformative 1968 presidential address to the American Economics Association:

"In the United States the revival of belief in the potency of monetary policy was strengthened also by the increasing disillusionment with fiscal policy, not so much by its potential to increase aggregate demand as with the practical and political feasibility of so using it."

[…] My point is not to dispute or defend the truth of the Ricardian proposition. My point is that it has absolutely nothing to do with whether one believes (or does not believe) that the New Keynesian framework is the right way to view the world. The essential policy implications of the New Keynesian idea (like the old Keynesian idea) is that changes in gross domestic product can be driven by changes in desired spending by households, businesses, foreigners, and the government in sum. You can believe that and still believe in fiscal policy ineffectiveness, as long as you believe that total spending is unaltered by a particular policy intervention.

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Size of shadow economy in Nepal

In terms of ranking, Nepal has 76th largest shadow economy (p.31) among the 120  countries considered by Schneider, Friedrich, Andreas Buehn and Claudio E. Montenegro (2010). The size of Nepal’s shadow economy is equal to about 37.5 percent of GDP, according to new estimates in WDR 2011. It is increasing since 2002. The average size of informal economy in South Asia is 34 percent of its GDP.

The latest WDR 2011 notes: “Shadow economies are a near universal phenomenon throughout the world. The shadow economy is commonly defined to refer to all market-based legal production of goods and services that is deliberately concealed from public authorities. The empirical method used in this paper is based on the statistical theory of unobserved variables, which considers multiple causes and indicators of the phenomenon to be measured, i.e. it explicitly considers multiple causes leading to the existence and growth of the shadow economy, as well as the multiple effects of the shadow economy over time. In particular, we use a Multiple Indicators Multiple Causes (MIMIC) model – a particular type of a structural equations model (SEM) – to analyze and estimate the shadow economies of 162 countries around the world. These estimates over the period 1999 to 2006/2007 suggest that shadow economies accounted for as much as 35 percent of official gross domestic product, on average, in 98 developing countries, 38 percent in 21 Eastern European and Central Asian countries, and 18 percent in 25 high-income countries in 2006. The major driving force toward informal economies seems to be high taxes (direct and indirect), combined with labor market regulations, the quality of public goods and services, and the condition of the “formal” economy. Across a broad set of countries, the model suggests that reducing taxes followed by a reduction in fiscal and business regulation will enhance of the appeal of work in the formal sector. However, the relative importance of these driving forces differs significantly across country groups.” [Source for WDR 2011: Schneider, Friedrich, Andreas Buehn and Claudio E. Montenegro (2010), Shadow Economies all over the World: New Estimates for 162 Countries from 1999 to 2007, Background paper for the World Bank study of the informal sector in Central, Southern Europe and the Baltic countries (Task number P112988).]

Mr. Cooperative-Distributor Finance Minister Adhikari’s White Paper

Finally, rather than following the media about news concerning white paper brought out by the Finance Minister (FM) Bharat Mohan Adhikari, I read the white paper itself (sorry, no English version yet). After widespread opposition from pretty much all fronts (except the UCPN(M) party), Adhikari eventually dropped the idea of bringing out a supplementary budget. But, as a reporter from Kantipur daily argued (sorry, couldn’t find the online link!), the white paper is a clever ploy to incorporate all the stuff that were to be in the supplementary budget and is largely along the UCPN(M)’s diktats. This might be an alternative to the supplementary budget Adhikari was talking about.

At the outset, let me argue that the white paper, which will form the basis for the upcoming budget of an expected size of over Rs 350 billion, is heavily distorted towards promoting cooperatives in any form and in any sector where specifics of financial flow can’t be precisely tracked. Private sector development appears as a halfhearted initiative left at the backburner of the entire initiative. If the upcoming budget comes up in line with this white paper, then FM Adhikari can safely be called Mr. Distributor. The budget might be a one-sector inclined cooperative budget at the cost of private sector and the crucial investments needed in sectors that are the binding constraints to growth in our economy. I can envision a slew of moral hazard issues with this kind of expenditure plan.

Aim of the white paper

• To redistribute economic sources and resources so that it is not concentrated on the hands of few people. To give priority to domestic private and public enterprises to ensure an independent, self-reliant and progressive economy.
• To induce socio-economic transformation by rolling out scientific land reform and ending feudalistic land distribution.
• To give priority to local communities while exploiting the country’s natural resources and to encourage farmers to increase production. Marginalized communities, women, children, elderly, and handicapped to be cared of and to be imparted scientific knowledge and given education and training.
• To overhaul existing economic and social structures, which are major constraints to economic development. To decrease poverty and inequality, production would be increased and poor people’s reach to it will be ensured.
• Public, cooperative and private sectors would be the drivers of progressive, prosperous, modern, justified, and inclusive New Nepal.

Good in the white paper

• A renewed focus on agriculture sector and land reforms (yet these are lofty goals that have been with us for a long time). Plenty of programs to boost agriculture production and distribution of food in food deficit areas. Demarking agricultural land and incentivizing people to produce food there. Discouraging real estate expansion in agricultural land. Food security is given priority.  A lot of support programs to increase agriculture production in some VDCs and communities. Various kinds of agriculture cooperatives (animal, vegetable, fishery, herbs, etc) are given priority.
• Protection of forests and promotion of forestry sector, especially entrepreneurs in this sector. Also, irrigation projects (small, medium and large) are to be promoted.  Increase fertilizer subsidies (hope there won’t be much leakages) and promotion of organic manure and fertilizers using byproducts from animal shed.
• Encouraging cooperatives of small farmers so that their combined land can be used to produce one product by using tractors, power tiller, and other small scale machinery and techniques. This could increase production and productivity, if it works as intended.
• Promotion of tourism sector. Commitment to book all tax evaders. Establishment of Infrastructure Development Fund with the involvement of private sector. Loads of big infrastructure projects.
• Tax break (both VAT and income tax) for the first 15 years if agriculture, vegetable, herbs and fruit processing plants are established in hilly region. Herbs Center to be established in Nepalgunj. Cardamom Development Center to be established in eastern hilly region.
• While acknowledging that high inflation is negatively affecting the people and even farmers, it argues that low food production, and political instability and uncertainty are driving general prices upward. It promises stronger market supervision against manipulation of prices. However, it never touches the issue of how black marketeering, deliberate withholding of inventory, and manipulation of prices by agents other than producers, wholesalers and retailers are contributing to push up general price level. (Note that on an average a 10 percent increase in food prices increases inflation by one percentage points.)
• Acknowledges that the rise in imports is unsustainable. Import of petroleum products constitute 17% of total imports and it is expected to rise further as power crisis intensifies. Almost 98 percent (up from 61% in FY 2065/66) of the the existing export earnings is being used to import petroleum products. Ease imports of petroleum products (but HOW?). Is the government ready to reform Nepal Oil Corporation (NOC) by breaking its monopoly and monopsony powers in the petroleum market? I guess NO because of the political and union pressures.
• Power generation (chiefly hydroelectricity) is given priority, but the details are dodged to a body that is to be formed to address the “energy crisis”.
• Increasing migration to urban areas and abroad for jobs is draining labor force in rural areas. Policies to address them are outlined but they might not be enough to provide enough incentives for youths to stay back in the villages. Expansion of youth self employment program could produce a number of entrepreneurs (mind you, like in other programs there will be some mis-utilization of this fund for sure).
• Providing food products at discounted prices from government depots. (Well intentioned, but media reports show that the price of rice set by Nepal Food Corporation is expensive than the price of rice in the market, especially after the construction of rural roads.)
• Addressing water shortage problem in Kathmandu and constructing overhead bridges. Also, funds allocated for feasibility study of various infrastructures such as city metro, railways, fast track roads, hydroelectricity, tunnel roads and more. Cooperatives are also to be promoted to work in these areas (but, one wonders how can cooperatives find massive amount of money required for even small infrastructure projects, especially low capacity community hydropower projects?).

Bad and ugly in the white paper

• The economic problems are not fully examined. Some of the major macroeconomic problems are not even mentioned there. It acknowledges that GDP growth rate will be 3.5%, below the target of 4.5%. Similarly, inflation would be 10%, higher than the expected 7%. It does not mention that we are running a BoP deficit, primarily due to increasing balance of trade deficit and a slowdown in the growth rate of remittances. It does not mention the fact that the industrial sector’s growth is one of the lowest in decades. So is the case with FDI and the reasons for low economic growth rate. The underlying causes of these are not even mentioned.
• The whole aim of the paper is to make grounds for massive redistribution of taxpayers’ and donor’s money in the name of cooperatives (whose nature and scope is as broad as the sky!). It will be reflected in the upcoming budget. This was the most prized aspect of the budget rolled out by former FM Babu Ram Bhattarai of UCPN(M) party. This is not only be continued but will be massively expanded by FM Adhikari. Any argument that aids the case for a huge cooperative sector is explored and included. Now, who is playing the music and who is dancing to it? You guess!
• Cooperatives are seen as a solution to the macroeconomic problems faced by the country. It is not a good idea. Even balance of trade deficit is being considered to be addressed by promoting cooperatives.
• The issue of power crisis is mentioned and solution is easily alluded-- as if everything in there will work-- to a recent decision by the cabinet to declare “energy crisis” and give a governing body sweeping powers that transcend the domain of several line ministries and Nepal Electricity Authority (NEA). The fact is that despite having so much potential for high rate of return, investors, both domestic and foreign, are disinclined to invest in this sector. The reason: unfair PPA agreements, disruption of already ongoing projects by villagers and workers who are usually incited by political parties, and threat to disruption of investment (especially Indian) by the UCPN(M), which sees India as the chief foe that is not letting Nepal grow and become prosperous. To a large extent, it has become a self-fulfilling prophesy in the Maoist party and the answer of last resort to all the pinning questions faced by its leadership.
• There is more emphasis on domestic production and domestic consumption. It is fine for the agriculture sector. But, it is not quite the right policy for non-agriculture sector. Some of the goods and services that we don’t and can’t produce should be imported and these are the goods and services on whose imports taxes have to be decreased to ease pressure on general price level. For those that can be produced but cannot compete with international prices, the market should not be distorted outright, but enough incentives should be given to domestic producers to produce the goods and services at a competitive price so that consumer welfare is not compromised.
• There is no mention of NTIS 2010. How can exports be promoted without even making policies in line with NTIS 2010, our main export promotion document and strategy? No strategies to support the entire supply/value chain involved in making an exportable product is outlined.
• Distribution of taxpayers’ money to sections of population (marginalized, conflict-stricken, women, dalits, …) without even creating benchmark for who qualifies and until when, i.e. no sunset clause. Are we going to distribute money to them for life or for a certain period so that they have incentives to get on their own foot for living? Okay, I get the idea of supporting this section of population. But, not forever. It has to end as some point of time so that there is no moral hazard problem in this well-intentioned policy move. It might well turn up into an easy way to dole out massive amount of state resources to party cadres and political activists. A better and productive way could be to blend these support programs with employment generation scheme like NREGA. Similarly, the programs of providing support for shallow tube well, irrigation, fertilizers and canals could be blended with rural employment generation schemes.
• Sloppy slogans like “Increase production, become self-independent”; “One Village, One Product”. Slogans alone won’t do any good. Did “Your village, build yourself” produce any significant result (other than increase in development expenditure as money was easily doled out to VDCs, but never tracked if it was properly used). Massive leakages occur when effective supervision is not there. Also, capture of such money by the elites is a typical phenomena in developing countries.
• Virtually no new programs and incentives for the private sector, which is left cold and dry by FM Adhikari. No sign of including the private sector even in infrastructure building, apart from the Infrastructure Development Fund.
• Resurrection of sick industries, especially small and medium ones. For what purpose? It will drain state resources for unproductive purposes.

The other parties, who are not on board with the current shaky and ineffective coalition government, should pressure FM Adhikari to correct the seemingly faulty policies and not let him easily distribute hard earned taxpayers’ money. We should have investment in productive sectors and activities. Short term band aid to the existing problems of low production, exodus of youths, and unemployment is not as sustainable solution to a prolonging crisis. We should bring about structural transformation in the sense that our economy relies less on agricultural sector and more on non-agricultural sector, but at the same time we produce enough to at least feed our population. Higher productivity in the agricultural sector should be the norm, not higher production and rerouting human and financial resources to this low wage sector.

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UPDATE (2011-04-18):  Here is an excellent editorial on the same issue published in Republica national daily. Some of the crucial issues (among them the very rationale for bringing out a white paper) I forgot to touch upon are discussed in the editorial.

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“The white paper on economy that the government unveiled this week seems nothing more than a smart aleck which will not do any good to the yawning economy. In fact, the government, knowingly or unknowingly, has abused the term “white paper”, as governments come up with such a paper after achieving stability following a war or long conflict or undergoes a sea change in governance system.

Thus, bringing such paper is rare worldwide and when done, it becomes an authoritative document shedding lights on all dimensions of the country’s economy, development and social status prevalent so far. However, the government has unveiled the paper even though the country has not undergone any such major changes that compel the government to release a white paper explaining the real status of the economy.

What was really disturbing was that the paper was full of plans and policies the government was eager to adopt, but it was less focused on presenting realistic summation of existing situation of the country’s economy and development,which are the essential components of a white paper. Judged by its contents, we believe it is merely a ‘concept paper’ and not a white paper as said.

And, in the parliamentary system and procedures we have adopted, the State’s plans, policies and programs are tabled at the parliament and widely debated before getting parliamentary endorsement. So, the ‘newly invented’ practice of announcing government policies and programs through a white paper is an unacceptable attempt of undermining the supreme right of the legislator that in the long run will weaken the parliamentary system.

In this context, what should be made out of the white paper that the government unveiled this week? Sadly, we think it carries no meaning at all. It only misleads the people, who are tired of the messy politics and weak law and order situation.

We believe that the government’s sole motive behind unveiling such a deceptive white paper is to hide its series of failures. Despite much commitment to take the ongoing peace process to a logical end and completing the peace process, the Maoist-UML government has not managed to induct even a Home Minister and given the cabinet a full shape. Even after two months in office, it has done nothing tangible to take the peace process and the constitution drafting process ahead, nor has it managed to deal with major economic problems, like taming high inflation and accelerating development works.

It has not devised any programs to revive the hope of the people. In such a situation, through the paper the government seems to be trying to be perceived as doing better by at least engaging the people with shallow promises. But, we think such a ploy will only add to people’s disenchantment. Hence, we urge the government to concentrate on making tangible progress on the ground, rather than making false promises."

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Interesting stats from WDR 2011: Conflict, Security and Development

Below are some of the interesting facts and figures from World Development Report 2011: Conflict, Security and Development:

• No low income fragile or conflict-affected country has yet achieved a single Millennium Development Goal. Violence is the main constraint to meeting the MDGs. 
• Poverty rates are 20 percentage points higher in countries affected by repeated cycles of violence over the last three decades.  Every year of violence in a country is associated with lagging poverty reduction of nearly one percentage point.
• 1.5 billion people live in countries affected by organized violence, either currently or recovering from political violence, fragility and/or high levels of homicide.
• People living in countries currently affected by violence are twice as likely to be undernourished and 50 percent more likely to be impoverished. Their children are three times as likely to be out of school.
• 42 million people (roughly equivalent to the entire population of Canada or Poland) are displaced today as a result of conflict, violence or human rights abuses. Of these, 15 million are refugees outside their country and 27 million are displaced internally within their own country. 
• Countries with recent human rights abuses are far more likely to experience conflict than countries with a strong history of respect for human rights. Each one-step deterioration on the five point Political Terror Scale - which measures arbitrary detention for nonviolent political activity, torture, disappearances, and extrajudicial killings - resulted in a more than 43 percent increase in the risk of civil war in the following five years.
• Countries with weak government effectiveness, rule of law, and control of corruption have a 30 - 45 percent higher risk of civil war, and significantly higher risk of extreme criminal violence than other developing countries.
• 90 percent of civil wars in the 21st century occurred in countries that already had a civil war in the previous 30 years.
• The global trade in cocaine and heroin, which are largely produced in countries affected by conflict and violence, is valued at $153 billion. The drug trade is the largest income component of global organized crime and is roughly comparable to the global total of official development assistance (ODA, which equaled $110 billion in 2010).
• It took the 20 fastest reforming countries in the 20 century between 15 and 30 years – a generation – to raise their institutional performance from very fragile to more resilient levels.  Specifically, it took 17 years on average to reduce military interference in politics and 27 years to reduce corruption to establish rules-based controls against corruption.
• Over the last 20 years, on average, a country with 20 years of violence experienced twice the volatility in aid flows of a country that did not experience violence. Revenue volatility has considerable costs for all governments, but particularly for fragile situations where it may derail reform efforts and disrupt institution building. 
• Maritime piracy is estimated to have direct economic costs of between $5.7 billion and $11.2 billion, including ransoms, insurance and re-routing. Global efforts to contain and deter it are estimated at between $1.7 and $4.5 billion in 2010.
• The economic spillover effects for countries affected by conflict are often huge. Countries lose an estimated 0.7 percent of their annual GDP for each neighbor involved in civil war.
• What drives people to join rebel movement and gangs?  In surveys conducted in six countries and territories affected by violence, the main reasons cited for why young people become rebels or gang members are very similar—unemployment predominates for both. This is not necessarily the case for militant ideological recruitment.
• What are citizens’ views on the drivers of conflict? In surveys conducted in six countries and territories affected by violence, involving a mix of nationally representative samples and subregions, citizens raised issues linked to individual economic welfare (poverty, unemployment) and injustice (including inequality and corruption) as the primary driver of conflict.

Story of Nepali migrants in the Middle East

Political instability in Nepal, too many unemployed youths, few opportunities for unskilled and low skilled labors, and the government’s apathy toward this group of population are forcing youths to do anything to go abroad for jobs. There risks of being swindled by agents and being deported are there, but they take a gamble. Eventually, some of them land in worse condition than they were in Nepal. The remittance inflows is keeping the economy afloat, but how long can this last, especially amidst the political turmoil in the Middle East?

Indecisive Finance Minister Bharat Mohan Adhikari

My latest op-ed is about the discussion surrounding budget (supplementary or/and full budget) in Nepal. The finance Minister is indecisive on the timing and nature of the budget itself. As with most of the former finance minsters, there isn’t anything remarkable in his tenure so far. But, he has done worse by creating confusion over budget, triggering the resignation of finance secretary, wavering on tax evasion scandal, and not taking into confidence the officials of his own ministry. Read the full article for more discussion. By the way, no op-ed pieces for the next two months.! :)

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Indecisive Finance Minister

Barely three months are due for the next fiscal year to start, but Deputy Prime Minister and Finance Minister Bharat Mohan Adhikari is still undecided about the possibility of supplementary budget. On April 3, during the Public Account Committee hearing, responding to lawmakers’ question about the budget muddle, he argued that the decision to quash or bring a supplementary budget was uncertain as of then, but a full-fledged budget for the next fiscal year would be prepared by May 3. While the officials at the Ministry of Finance (MoF) are perplexed at Adhikari’s arbitrary decisions and indecisions at the same time, Finance Secretary Rameshore Prasad Khanal resigned due to differences over supplementary budget, tax evasion scandal, and transfer of officials in the ministry.

As a citizen concerned about the future of the nation, one should ask why and for what purpose do we need supplementary budget. Or are there alternatives at this point in time? Adhikari argues that the coalition is looking for “alternatives to supplementary budget to deal with the new economic challenges.” Given our macroeconomic fundamentals, the progress of the already announced budget by former Finance Minister Surendra Pandey, and the state of development expenditures, let us be assured that no new economic challenges have emerged since the last fiscal year. In fact, we are in the same economic mess that we have been in since 2008. It is very likely that Adhikari is looking for alternatives not to address the economic woes, but, is bowing to pressures, to allow UCPN (Maoist) to freely dole out taxpayers’ money to their disgruntled political base.

Therefore, rather than procrastinating on the nature or existence of supplementary budget, Adhikari should have the guts to openly pronounce that even a discussion about supplementary budget is a distraction from addressing the major macroeconomic challenges faced by the economy. Period.

So far, Adhikari has failed to be a competent finance minister. He is chiefly responsible for creating an unnecessary situation where an honest civil servant like Khanal had to resign, reducing morale of the rest of the few competent and honest civil servants. To retain trust, if any remains in him, from civil servants and donor community, Adhiarki should not fail again by succumbing to the UCPN (Maoist)’s party-centered pressure to bring out a distributive supplementary budget in one form or the other. It does no good to the country, but to the few political cadres and parties.

The confusion surrounding supplementary budget has bewildered and diverted focus of MoF officials who are just preparing to review the performance of this fiscal year’s budget and to iron out budgetary allocations for next year. The officials who are responsible for preparing budgetary allocation based on priorities set by National Planning Commission and ruling parties are unaware of the deliberations on supplementary budget taking place at residences of political leaders. This is nothing less than trying to willfully play with tax payers’ money and state coffers. The value addition of such an expenditure plan is negative because only few will reap direct or indirect benefits from this.

Media reports indicate that left leaning political economists and analysts are preparing the expenditure and revenue plan without knowledge of concerned government officials. This comes out of desperation to show party cadres that something is being done by their leaders in power. Worse, the Maoist party duped its followers with grandiose promises that are next to impossible to fulfill in reality. The latest move might be an avenue to placate disgruntled political base, who are increasingly getting frustrated with the way party leaders like Pushpa Kamal Dahal have been hoodwinking them by promising them bounty that country’s economy cannot afford. What could be better way of silencing mounting grudges than by doling out money to political cadres at the cost of development and welfare of poor people!

Let us be very clear about the consequences of supplementary budget or its alternatives, which reports indicate are largely distributive in nature. It means Adhikari and coalition government are planning to allocate money to favorable “model” districts, VDCs and political organizations and cadres under various disguises such as priority development projects, self employment schemes, and social security/welfare. This will keep their political base happy for the time being, but will drain state resources and donors’ money. Worse still, internal and external loans to finance their political agendas will have to be burdened by future generations as per capita debt mounts on top of the already high rate.

Honestly, if Adhikari is concerned about the existing state of our economy and welfare of citizens of which approximately 78 percent live below $2 dollar a day, then he should unconditionally take responsibility for the fiasco at MoF, openly come out against supplementary budget or its alternatives, speed up tax evasion investigation by giving every tooth it needs, and aggressively work to bring out sustainable policies that will address the major macroeconomic challenges of our economy. Letting down the morale of a few honest civil servants amidst hundreds of dishonest ones sends a wrong message to the ones who are thinking of being honest and those that are aspiring to join civil service for the sake of this country.

Meanwhile, while preparing budget that will draw in expenditures from the tax payers’ pocket, all the established procedures (which definitely do not include preparing budget at political leaders’ residences without the knowledge of MoF officials) should be fulfilled. Adhikari has failed to do it and to stand by the very civil servants he is supposed to work with.

Our problems are clear, but positions of our political parties to address them are not. We are facing balance of payments crisis, ballooning trade deficit, high and sticky prices, impending financial disaster, eroding competitiveness of our products, declining exports, ailing industrial and manufacturing sectors, frequent labor disputes, industrial insecurity, stagnation in job creation and economic growth, acute power crisis, and lack of adequate infrastructures.

On top of this about 3.7 million people are at risk of food insecurity, and people are reeling under high fuel and food prices. Any new policies that will increase consumption expenditures (instead of investment spending) will further fuel prices, which will affect the poorest lot the most. Tackling these problems requires a fundamental shift in the way we allocate budget and prioritize sectors and projects.

Rather than addressing these problems, a budget designed to dole out money to party cadres and to favor political bases will further exacerbate them. Neither supplementary budget nor alternatives to it will address them in a matter of just three months. Adhikari most probably knows it pretty well, but is too feeble to not succumb to the UCPN (M)’s pressure. He should acknowledge that his indecisiveness and feebleness should not put taxpayers’ money at risk and drain state’s coffers to fulfill selfish political agendas.

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[Published in Republica, April 10, 2011, p.6]

Trade profile of South Asian LDCs

Trade profile of South Asian LDCs, 2008
LDC	WTO membership	Final bound tariff	Avg. applied tariff	Share in world exports		Share in world  imports
				Goods	Services	Goods	Services
Afghanistan	Process of accession	-	5.6	0	-	0.02	-
Bangladesh	Founding member	169.2	14.4	0.1	0.02	0.14	0.1
Bhutan	Process of accession	-	21.9	0	0	0	0
Maldives	Founding member	36.9	20.4	0	0.02	0.01	0.01
Nepal	Acceded in 2004	26	12.7	0.01	0.01	0.02	0.02

Source: World Trade Profiles, WTO (2009)

Despite having low average tariffs and liberal trade regimes, South Asian LDCs’ shares in global trade remain very low. Maldives graduated from the LDC club in 2010.

Update on the Nepali economy—ADB version

The latest Asian Development Outlook 2011 has a 4-pager update (authored by Yubraj Acharya, ADB Nepal Resident Mission) on the Nepali economy. It states that political uncertainties, unfavorable weather, and weakening remittances from abroad impacted economic growth in last fiscal year.  It projects growth rate to fall below 4 percent in FY2010/11, reflecting the “protracted post-conflict transition process”.

The ADB estimates Nepal’s GDP growth rate to be 3.8% in FY2010/11 and 4.0% in FY2011/12 (assuming favorable monsoon and weather). Inflation is estimated to be 10% and 8% in FY2010/2011 and FY2011/12, respectively. Current account balance (share of GDP) is expected to be negative 0.5%. The GDP growth projections of the World Bank and the ADB are pretty much similar. Earlier, the WB projected that Nepal’s real GDP growth to be 3.7% and 4% in 2011 and 2012, respectively.

The ADB is hopeful that tourism and more vibrant construction activity will modestly boost growth in FY 2011/12. Meanwhile, agricultural sector is expected to grow by 4% in FY2010/11, up from 1.3% in FY2009/10. This is expected to have some push on GDP growth rate as the performance of the agricultural sector has a heavy weight on growth in Nepal. But, delay in completion of the transition, high food and oil prices, and the impact of the unrest in the Middle East (primarily hitting remittances inflows) are the major risks to the economy.

The higher growth rate in FY 2009/10 (4%) than that in FY 2008/09 (3.8%) is attributed to increased economic activity in small industrial sector (thanks to fewer political strikes) and the expansion of services sector. Deceleration in the growth rate of remittances and excessive lending to real estate led to liquidity crunch in the banking sector.

The ADB notes that high food-inflation in India and low domestic crop production was the main source of high inflation in the economy. These are two of the causes. The report misses to mention the role of high global food and fuel prices starting 2008 as the main source of inflation that has remained sticky ever since. The other factors that are having a drag on domestic prices are supply bottlenecks due to extended periods of bandas and strikes, leading to shortage of essential items. Additionally, hoarding, black marketeering, deliberate withholding of supplies and inventory, and agricultural trade hurdles imposed by our neighbors contributed to keeping prices higher even after the normalization of market forces in the domestic economy. Here is an article that details why there is such a high level of sticky prices in Nepal.

Anyway, the report notes that exports are decreasing due to low productivity and infrastructure bottlenecks, leading to eroding competitiveness. It should also be noted that protracted energy crunch, labor militancy, and supply side constraints are also weighing heavily on the loss of exports. Imports surged more last fiscal year because of high gold imports, which has become a hot investment commodity after the squeeze in real estate market. The widening trade deficit and decelerating growth rate of remittances pushed current account deficit to 2.7% of GDP last fiscal year from a surplus of 4.2% of GDP the year before.  The official reserves declined by US$113 million and Nepal drew US$42 million from IMF’s Rapid Credit Facility to offset external shock.

The ADB expects that further monetary tightening will not happen as real estate activity is already slowing down and the expected moderation of price levels in India will put less pressure on prices in Nepal.

Nothing major new or enlightening stuff to guide policymaking is in the brief report. But, it is a good rundown of the state of major macroeconomic variables and how the events of last year impacted them.

Growth, inflation and poverty in Asia

Asia and the Pacific is poised to grow at 7.8% in 2011 and 7.7% in 2012, according to Asian Development Outlook 2011.The projected growth rates are lower than the 9% posted in 2010, but the ADB projects that the region will continue its firm recovery from the global economic crisis.

But, inflation remains a major worry. It argues that inflation will need to be carefully managed using a mix of policy measures, including more flexible exchange rate management and coordinated capital controls, rather than simply relying on tighter monetary policy. After expanding at 4.4% in 2010, consumer prices are set to accelerate further to 5.3% in 2011 before easing back slightly to 4.6% in 2012.

South Asia will maintain its recent robust economic performance with forecast growth of 7.5% in 2011 and 8.1% in 2012, following a 7.9% expansion in 2010. India's 2010 performance was particularly strong and broad-based, even with fiscal consolidation and monetary tightening, and the economy is set to strengthen further to post 8.2% growth in 2011 and 8.8% in 2012. Pakistan's devastating floods weighed on its growth performance, while the end of the conflict in Sri Lanka continued to help underpin its economic expansion. In January, the World Bank projected South Asia’s real GDP growth accelerated to an estimated 8.7 percent in FY2010-11 from 7.0 percent in FY2009-10, buoyed by very strong growth in India, which represents 80 percent of regional GDP. It projected South Asia to grow by 7.7% and 8.1% in 2011 and 2012, respectively.

More findings from the report (sourced from Real Time Economics blog):

• Should food and oil prices rise 30% in 2011 and not fall too sharply in 2012, economies of developing Asia (China, Hong Kong, India, Indonesia, South Korea, Malaysia, Philippines, Singapore, Taiwan, Thailand) would together see a 0.7 percentage point hit to growth.
• The same scenario of 30% increases in 2011 would add 1.7 percentage points to inflation. The projected impact would be highest in India and Singapore in 2011, where inflation would rise by more than 2 percentage points each. Oil, rather than food, would have a bigger impact on inflation.
• ADB calculates that for every 10% increase in local food prices, the percent of poor people in Asia, calculated as living on less than $1.25 a day, goes up 2 percentage points, to 29% of the population. That’s an additional 64 million people living in poverty because of higher food prices.
• Should local food prices go up 30%, that would increase Asia’s poor to nearly a third of the overall population, or 1 billion people.
• South-South cooperation: Strengthening economic links between countries in the South can create new global growth that can take up the slack left by cooling demand from industrialized countries in the North, according to a special chapter on “South-South Links”. Much of the growth in South-South trade has been driven by "Factory Asia", where intermediate goods sourced from the region are assembled in the People's Republic of China and other local manufacturing hubs before being exported to final destinations in the United States and Europe. South-South trade between Latin America, Africa and the Middle East has grown rapidly but still remains comparatively small.
• India’s growth: India's economy will remain robust over the next two years although growth is expected to moderate in FY2011 as slower external demand and tighter fiscal and monetary policies weigh on expansion, and as high oil prices remain a threat. Improved agricultural output, strong private consumption, robust investment, and a pickup in exports supported growth in FY2010. Gross domestic product in the year to March 2012 (FY2011) will expand by 8.2% down from an estimated rate of 8.6% for FY2010. For FY2012, growth is expected to bounce back to 8.8% as investment and overall economic activity pick up and as planned reforms move forward. At the same time, continued inflationary pressure, a pullback in private investment and structural obstacles present challenges going forward. Fiscal and monetary policies will also remain less accommodating than in the past as the government follows its fiscal consolidation road map and the Reserve Bank of India acts to anchor inflation expectations. The government needs to tackle structural constraints including the poor agriculture supply chain and farm productivity. A positive start has been made with programs to remove production and distribution bottlenecks for farm products and these steps should continue, the report says. Transforming manufacturing by reducing infrastructure bottlenecks and investment hurdles linked to labor regulations, land acquisition and environmental clearances should also be addressed.
• China’s growth: Slowing investment and exports will see growth in the People's Republic of China (PRC) moderate in 2011 and 2012.the economy is likely to expand by 9.6% this year and 9.2% in 2012. It grew by 10.3% in 2010, on the back of a strong recovery in exports and a rebound in investment and consumption. Fixed asset investment will remain a key driver of growth over the next two years, the report says, although the rate of expansion is set to decelerate slightly from past levels due to the winding back of fiscal stimulus measures and tighter monetary policy. However, a moderation in export and industrial output growth will offset this somewhat as demand from major markets remains sluggish and as tax rebates on some export products expire. The inflation rate, which averaged 3.3% in 2010, will pick up to 4.6% in 2011, lifted by abundant liquidity and higher food and commodities prices, before easing back to 4.2% in 2012 as commodity prices level off. The report notes that the PRC's rapid shift from a low to middle income economy over the past three decades has been accompanied by widening income gaps, widespread environmental damage and underdeveloped services. To support inclusive and sustainable growth, the Government will need to undertake broad policy adjustments such as increased public service spending, more financial sector liberalization, develop capital markets to help small enterprises and the self-employed access credit, and increase the role of the private sector.