Keynesianism saved us from experiencing another global Great Depression

So, says a paper by Lim and Sng.

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The paper discusses and pinpoints three strategic factors that led to the global Great Depression of the early 1930s. After the Great Depression, the lessons learned were encapsulated in Keynesianism and Monetarism. The unanticipated and unprecedented global Great Recession of 2008–09 did not degenerate into the global Great Depression. The paper maintains that this was because of the voluntary global adoption and implementation of Keynesianism, not Monetarism. By May 2010, world industrial production had recovered beyond its previous peak in March 2008. But has the world economy really recovered? Although the world succeeded in aborting the global Great Recession, high unemployment aggregates, bloated budgets and sky-high debts continue to dog many developed economies, including the United States, the Eurozone nations and the United Kingdom. The paper goes on to discuss if the growth path of the world economy would take the form of a W-shape. The paper concludes with the overall important lessons learned by the world in handling the global Great Recession and the Keynesian prescription.

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The demand for subsidized rice in Nepal

The picture says it all.

Caption says: People thronging at Nepal Food Corporation depot in Dailekh. The state-owned depot is providing subsidized rice to the people.

Related new story here (in Nepali language). It is reported that people are staying in line for two days to get subsidized rice. Other are staying in hotel to get their share of subsidized rice. People are given coupon to purchase a fixed quantity. The news report state that people who are close to the officials get coupon and rice easily. Those without any links to officials have to wait for days. But, the depot officials refute the allegation.

The subsidy is Rs 10 per kg for Japanese rice and Rs 5 per kg for Sona Mansuli rice. A sack of Japanese rice (30 kg) costs Rs 625 and a sack of Sona Mansuli (50 kg) costs Rs 1520. So, the government is subsidizing Rs 300 per sack of Japanese rice and Rs 250 per sack of Sona Mansuli rice.

High Food Prices in South Asia: Status, Impact and Solution

Below is a presentation I made during South Asian consultation on ‘Food Justice in a Resource Constrained South Asia’, 26-27 September. The event was organized by Oxfam and SAWTEE in Kathmandu.

High Food Prices in South Asia_presentation_2011-09-27

Latest population estimate of Nepal (26.6 million)

The Central Bureau of Statistics (CBS) has published preliminary findings of Census 2011. Surprisingly, total population in Nepal is found to be at 26.6 million, against previous estimation of around 30 million. Also, population growth rate has come down to 1.4 percent.

Major findings:

• Nepal’s population is 26,620,809 (male 12,927,431 and female 13,693,378).
• The annual growth of population in Nepal is 1.4 per cent which is a little less than what was found 10 years ago. In 2001, the population growth was 2.25 per cent.
• Total new addition in the population in the past decade was 3.45 million.
• The size of the household in Nepal has decreased from 5.44 in 2001 to 4.7 in 2011.The household size is recorded to be highest in Rautahat (6.33) and lowest (3.7 1) in Kathmandu.
• Absentee population increased to 1,917,903, more than double than in 2001.
• More than half of the total population of the country (50.2 per cent) lives in Terai followed by Hill and Mountain belt that constitutes about 43 percent and 7 percent of the total population respectively.
• The urban population constitutes about 17 percent of the total population.
• Kathmandu district has the largest population followed by Morang. Manang constitutes the lowest population.
• Population density of Nepal is estimated 181 per sq.kms. Kathmandu district has the highest density (4408) and Manang (3) has the least.
• Kathmandu has recorded the highest decadal population growth (60.93 %) compared to all Nepal (14.99 %) and lowest in Manang (-31.92 %).
• Sex ratio is estimated to be 94.41 (male per hundred female) in the current census as compared to 99.80 in the previous census 2001.

Reason for decrease in population growth rate:

• Migration (led to decline in fertility rate)
• 1.92 million people living abroad
• Impact of insurgency: 23 districts in hilly region saw negative population growth rate while Kathmandu saw 60 percent growth in population.

Distorted economic advise and selfish politician

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This paper investigates, in a simplified macro context, the joint determination of the (incorrect) perceived model and the equilibrium. I assume that the model is designed by a self-interested economist who knows the true structural model, but reports a distorted one so as to influence outcomes. This model influences both the people and the government; the latter tries to stabilize an unobserved demand shock and will make different inferences about that shock depending on the model it uses. The model's choice is constrained by a set of autocoherence conditions that state that, in equilibrium, if everybody uses the model then it must correctly predict the moments of the observables. I then study, in particular, how the models devised by the economists vary depending on whether they are "progressive" vs. "conservative".

The predictions depend greatly on the specifics of the economy being considered. But in many cases, they are plausible. For example, conservative economists will tend to report a lower keynesian multiplier, and a greater long-term inflationary impact of output expansions. On the other hand, the economists' margin of manoeuver is constrained by the autocoherence conditions. Here, a "progressive" economist who promotes a Keynesian multiplier larger than it really is, must, to remain consistent, also claim that demand shocks are more volatile than they really are. Otherwise, people will be disappointed by the stabilization performance of fiscal policy and reject the hypothesized value of the multiplier. In some cases, autocoherence induces the experts to make, loosely speaking, ideological concessions on some parameter values. The analysis is illustrated by empirical evidence from the Survey of Professional Forecasters.

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Here is the full paper by Gilles Paul.

Unusually high wage overheads & low labor productivity in Nepal

The chart says it all.

Nepal has the highest labor cost in South Asia and probably the lowest labor productivity. Where is our labor cost competitiveness going? Hello, labor unions?? Hello, FNCCI?? Hello, government??

Four million missing women each year in developing countries

The latest World Development Report 2012 (Gender Equality and Development) argues that “countries that create better opportunities for women and girls can raise productivity, improve outcomes for children and make institutions more representative, and advance development prospects for all.”

• Excess female mortality after birth and “missing” girls at birth account for an estimated 3.9 million women each year in low- and middle-income countries.
• About two-fifths are never born due to preference for sons, a sixth die in early childhood, and over a third die in their reproductive years.
• Ensuring equal access and treatment for women farmers would increase maize yields by 11 to 16 percent in Malawi and by 17 percent in Ghana.
• Improving women’s property rights in Burkina Faso would increase total household agricultural production by about 6 percent, with no additional resources—simply by reallocating resources such as fertilizer and labor from
  men to women.
• The Food and Agriculture Organization estimates that equal access to resources for female farmers could increase agricultural output in developing countries by as much as 2.5 to 4 percent.
• Eliminating barriers that prevent women from working in certain occupations or sectors would have similar positive effects, reducing the productivity gap between male and female workers by one-third to one-half and increasing output per worker by 3 to 25 percent across a range of countries.
• Among developing countries, girls now outnumber boys in secondary schools in 45 countries, and there are more young women than men in universities in 60
  countries.
• Women in low-income countries not only outlive (life expectancy) men but live 20 years longer than they did in 1960.
• Gaps in labor force participation have narrowed with over half a billion women having joined the workforce in the last 30 years. 

The report calls for action in four areas:

• Addressing human capital issues, such as excess deaths of girls and women and gender gaps in education where these persist
• Closing earning and productivity gaps between women and men
• Giving women greater voice within households and societies
• Limiting the perpetuation of gender inequality across generation

In South Asia:

• Missing girls at birth in South Asia —excluding India— was 1,000 in 2008.
• But, missing girls at birth increased in 2008 in India to 257,000.
• The abuse of new technologies for sex-selective abortions, such as cheap mobile ultrasound clinics, accounted for much this shortfall, despite laws against such practices in many nations.
• In countries like Afghanistan and Pakistan, discrimination by parents toward girls is still a serious problem.
• Bangladesh and India have maternal mortality ratios comparable to Sweden’s around 1990, and Afghanistan’s similar to Sweden’s in the 17th century.
• Maternal mortality ration was 280 maternal deaths per 100,000 live births in 2008.
• In 2008, there were about 95 girls for every 100 boys in primary school in the region.

Over five decades of experience with SEZs

A nice review (by Thomas Farole) of what we have learned from special economics zones (SEZs) in the past 50 years. SEZs are primarily aimed at attracting FDI, to increase employment, to support wider economic reform strategy, and to test application of new policies and approaches to industrial growth. SEZs have been increasingly becoming popular in developing countries after its success in East Asia, which enjoyed a favorable export-led growth. Its number has grown rapidly: from 176 zones in 47 countries in 1986 to 3500 zones in 130 countries in 2006.

Traditionally, EPZs were designed to attract FDI by allowing companies to exploit low-cost labor and other relaxed barriers to investment (regulatory, infrastructure, tax, exchange controls, licensing). Mauritius, Malaysia, South Korea, China, Taiwan, Honduras, El Salvador, Madagascar, Bangladesh, Vietnam and Dominican Republic successfully operated SEZs and created thousands of jobs in manufacturing sector and bring about structural transformation. Typically most of the industries in SEZs are labor intensive and assembly-oriented activities, including light manufacture goods such as textiles, apparel, leather, and light electrical and electronic goods.

However, this model is reaching its limit due to changed macroeconomic and regulatory environment in the global economy. Now, the relevance of SEZs will depend on “the effectiveness with which they are designed, implemented, and managed on an ongoing basis that will determine success or failure.” Just attracting investment, creating jobs, and generating spillovers to local economy, and adopting a compelling master plan will not suffice. Since Nepal is ready to enact a SEZ bill and is preparing to build SEZs, it will have to learn from SEZs experience in the past and how effective it will be in the rapidly changing global markets and demand.

Lesson learnt as outlined by Farole:

• Some countries have been more successful in attracting FDI, encourage export-oriented production, and create jobs than others.
• SEZs should be designed to leverage country’s comparative advantage. For instance, Bangladesh used its low-wage labor factor to take off to be a successful garment exporter. It initially focused on attracting high-tech investment but was only successful when it adjusted SEZs design and incentives to suits its comparative advantage, i.e. low-wage labor. Bangladesh provided good incentives such as serviced industrial land infrastructure and relatively reliable supply of power. Infrastructure reliability is an important aspect on SEZ success.
• The incubation period is might be high. It took 5 to 10 years to build momentum in China and Malaysia.
• Private sector involvement is key. For instance, Honduras’s success is led by local entrepreneurs and private sector, who were allowed to developed zones. The government focused on providing regulatory framework, supplied critical infrastructure and services and on-site customs services.
• Failure of SEZs in Africa is primarily linked to the political interference, mainly the failure to separate political support from political objectives in zone projects. Zones are for commercial success, not a political tool. Furthermore, the success depends on how entwined SEZs are with competitiveness of national economy and national investment environment. Critical infrastructure should be adequately supplied so that zones are linked to ports and markets. There should be clear legal and regulatory frameworks.
• Small countries should look to exploit potential for using zones to link up regional suppliers and leverage economies of scale in production.
• For dynamic economic benefits, domestic firms should be encouraged to locate inside zones, strengthen forward and backward links, support business and facilitate movement of skilled labor and entrepreneurs between the zones and the domestic economy. There should be continual training of human resources. This helps in bring structural transformation.
• Sustainability should also be a top priority. It means gender balance, environment conscious activities, clear standards, and effective monitoring and evaluation. SEZs can also be seen as an opportunity to experiment with policy innovations.

Inequality: Status, Effects, Causes & Solution

This blog post is a collection of major points from the latest edition of Finance & Development magazine. It deals with inequality and its various dimension.

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Global inequality is higher than inequality within nations, argues Branko Milanovic. The richest one percent of people in the world receive nearly 14 percent of global income while the poorest 20 percent receive just over one percent of global income. He argues that “global inequality seems to have declined from its high plateau of about 70 Gini points in 1990–2005 to about 67–68 points today.This is still much higher than inequality in any single country, and much higher than global inequality was 50 or 100 years ago.”

The rising inequality in both developed and developing countries is against the prediction of Kuznets upside-down “U” shaped curve and Heckscher-Ohlin-Samuelson (HOS) theorem. Kuznets argued that when everyone is poor inequality is very low. Then as people being to move form low productive agriculture to high productive non-agriculture sector, average income rises as wages also rise. This means as economy growth, inequality rises. But, economies grow richer, urban-rural gap is reduced and social security transfers (unemployment benefit, pension) lower income gap and hence inequality. The Hecksher-Ohlin-Samuelson theorem predicts that in international trade countries specialize on production of goods in which they have comparative advantage. The poor countries specialize in production of goods that requires low skill. This means demand for low skill goods rises as they cost less. Then wages of low-skilled workers increases relative to high-skilled workers. The narrowing gap between wages of different skill levels means that inequality is declining. But, are these evidence holding up now?

Milanovic argues that Kuznets was right during the early days of the US (up until 1970s)and the UK (up until 1920s). But, inequality is rising now when average mean income is also rising. Similarly, inequality in poor countries is also rising, which is counter to HOS theorem.

[The Chinese case shows application of ‘Kuznetsian’ case, may be till the half part of the curve: Gini was 30 before 1978, i.e. when the country uniformly poor and before economic reforms. Then massive growth in coastal areas major manufacturing hubs and sectors led to increase in wages of the workers involved those sectors. Meantime, China also saw massive increase in economic growth. But, inequality is still rising and has surpassed the inequality prevalent in the US. Milanovic argues that Chinese government can help reduce inequality by extending social security to people outside the state sector or introduce unemployment benefits or, preferably, implement guaranteed rural employment scheme like NREGA in India.]

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In 2010, real per capita income in the United States was 65 percent above its 1980s level and in the United Kingdom, 77 percent higher. Over the same period, inequality in the United States increased from about 35 to 40 or more Gini points (see Chart 1), and in the United Kingdom, from 30 to about 37 Gini points. These increases reflect significant adverse movements in income distributions. Overall, between the mid-1980s and the mid-2000s, inequality rose in 16 out of 20 rich OECD countries. This coincidence of rising mean income and rising inequality in mature economies would no doubt have surprised Kuznets, as it did many economists.

Inequality also rose in China, a poor country with comparative advantage in unskilled labor–intensive products, whose trade-to-GDP ratio jumped from about 20 percent to more than 60 percent in 2008. The HOS theorem of globalization predicts that inequality would have fallen as wages of low-skilled workers relative to skilled workers rose. In fact, however, China’s Gini coefficient rose from less than 30 in 1980 to about 45 today. Once again, fact confounds theory.

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He identifies four potential causes of rise (stable in some countries) in inequality:

• technological progress (favored skilled workers, whose wages increased more)
• institutional change (higher taxes and social transfers—redistribution)
• changing social norms (society encourage high wages by skilled workers)
• globalization (specialization in high-skilled exports increases wages of the skill group)

He stresses that social transfers, unemployment benefits, guaranteed employment in rural areas like NREGA in India, social support programs such as Oportunidades in Mexico and Bolsa Familia in Brazil might help to reduce inequality. The decline in inequality in Brazil (from Gini of around 60 in 2000 to 57 today) can be attributed to social support programs, and broader access to education that increased the supply of skilled workers. Still, Brazil remains among the five most unequal countries in the world.

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Berg and Ostry explore if there is a trade-off between equality and efficiency? They say NO, especially in the long term there is no trade-off between efficiency and equality.

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In fact equality appears to be an important ingredient in promoting and sustaining growth. The difference between countries that can sustain rapid growth for many years or even decades and the many others that see growth spurts fade quickly may be the level of inequality. Countries may find that improving equality may also improve efficiency, understood as more sustainable long-run growth.

[…]inequality is strongly associated with less sustained growth. […]too much inequality might be destructive to growth. Beyond the risk that inequality may amplify the potential for financial crisis, it may also bring political instability, which can discourage investment. Inequality may make it harder for governments to make difficult but necessary choices in the face of shocks, such as raising taxes or cutting public spending to avoid a debt crisis. Or inequality may reflect poor people’s lack of access to financial services, which gives them fewer opportunities to invest in education and entrepreneurial activity.

[…]a 10 percentile decrease in inequality (represented by a change in the Gini coefficient from 40 to 37) increases the expected length of a growth spell by 50 percent. The effect is large, but is the sort of improvement that a number of countries have experienced during growth spells. We estimate that closing, say, half the inequality gap between Latin America and emerging Asia would more than double the expected duration of a growth spell in Latin America.

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Kumhof and Ranciere argue that higher income inequality in development countries is associated with higher domestic and foreign indebtedness.

Need for immediate relief for industrial sector in Nepal

This was published in Republica, September 12, 2011, p.6. Here is a piece on the same issue by Milan Mani Sharma of Republica.

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Relief for industrial sector

At a time when the public’s confidence on bureaucracy and political leaders is ebbing down to arguably the lowest level after skyrocketing of hope following the 2006 revolution, the newly appointed Prime Minister Dr. Baburam Bhattarai’s team has announced a slew of “relief” measures to convince Nepali people that the new government feels and fathoms the desperation for tangible change. While some of the measures are consistent with the major party’s political agenda and are outright populist, they are nevertheless required in one form or the other. Pundits and talking heads can preemptively debate on the intention and nature of the relief package, but the application of these initiatives merit some time. Their success has to be judged against the intended objective and efficacy.

Now, as much as the public needs relief package, the industrial sector also deserves immediate measures to kick-start jammed growth engine and jobs creation. It needs immediate relief for two main reasons. First, due labor related problems and policy inconsistency, the investor’s morale and market confidence are pretty low right now, leading to withholding and withdrawal of investment plans. Second, due to lack of adequate supply of infrastructure and supply-side constraints, industrial output is declining and cost of production is rising, leading to low economic activities, stagnation in employment generation, and loss of competitiveness.

Unless the industrial sector gets the badly needed relief from these constraints, the dream of attaining double-digit growth—also reiterated by Finance Minister Barsa Man Pun as soon as he assumed office and trumpeted by the UCPN (Maoist) bigwigs multiple times– won’t be realized. High growth will not be attained just by customary assistance to agriculture sector—whose output and volatility largely depends on the monsoon— by offering fertilizer subsidies, investment in irrigation and promotion of agriculture cooperatives. High and sustained growth requires structural change and more reliance on industrial activities.

Unfortunately, our industrial sector— which constitutes mining and quarrying; manufacturing; electricity, gas and water; and construction sectors—has been consistently losing ground. Currently, its contribution to GDP is approximately 14 percent only. Meanwhile, manufacturing sector is fast losing strength, bringing down its contribution to GDP to 6 percent. Note that a strong and sustained growth of manufacturing sector means more jobs, stimulation of economic activities, and a high but less volatile growth rate. We just have to look at our neighbors—China and India—for example.

It does not come as a surprise that the dismal performance of industrial sector, particularly manufacturing sector, is also reflected in the export-oriented sector, one of the most important sectors through which our economy gets foreign exchange reserves. The latest annual macroeconomic data released by the central bank shows that total exports are estimated to be just Rs 64.6 billion in 2010/11, down from Rs 76.7 billion in 2008/09 but up from Rs 60.8 billion in 2009/10. When the data was released the authorities were quick to point out that exports have increased by 6.1 percent, which is higher than 5.4 percent growth of imports. There is nothing to be exuberant about on this one as the high growth rate of exports was relative to previous year when exports plunged by Rs 7 billion. A slight improvement when the base is too low obviously gives a larger bump in growth rate! Also, the relatively low growth rate of imports has to do with decrease in imports of certain commodities, thanks to restrictive policies imposed by the government.

The situation has gotten so worse that we cannot even finance our petroleum imports (Rs 75.07 billion in 2010/11) by exports revenue. Diversification of exported product and destination is not happening as our export basket is squeezing and we are increasingly dependent on India for both exports and imports. Overall, exports of goods and services have declined from as high as 27 percent of GDP in 1997 to less than 15 percent today. Meanwhile, imports of goods and services have exploded to 28 percent of GDP. This has resulted in total trade deficit of around 22 percent of GDP. Similarly, an estimated Rs 2.93 billion of balance of payments surplus following two successive years of deficit has more to do with a fluke of handsome transfers and reimbursements as our economic fundamentals have not changed much. Our current account deficit is still negative despite a surge in remittances.

You might be wondering how all these dismal numbers are related to the above-mentioned call for industrial relief. Well, persistent labor dispute, which exacerbated after the UCPN (Maoist) affiliated unions formally entered the industrial sector as an organized group plus the destructive activities of Young Communist League (YCL), hit investor and market confidence pretty hard. It led to closures of multinational companies and withholding of investment spending. The unruly activities of trade unions, which are run by people who care more about themselves and party leaders rather than job security and welfare of workers they claim to represent, was continuing even when the relief package was announced. Recently, it cost us Surya Nepal Private Limited’s Biratnagar-based garment manufacturing unit. The popular Fire and Ice restaurant in Thamel is the latest victim of few unruly trade union members who are trying to dictate management level appointment, which is beyond their jurisdiction and obligation. Furthermore, the inadequate supply of infrastructure (power and roads network) and other constraints such as policy inconsistency, security, and sporadic blockade of major trade routes are also contributing to withdrawal of investment, capital flight and closure of firms. Domestic investors are moving to service sector (save hotel and restaurants) that has relatively low union pressure and less cost of doing business.

These constraints are also identified as problematic factors for doing business in Nepal by the latest Global Competitiveness Report 2011-2012, which has ranked our economy as 125^th most competitive (out of 142) in the world. We are ranked the lowest in supply of electricity and second worst in supply of infrastructure. The ranking is miserable in labor regulation, labor market efficiency, productivity, security, production sophistication, and innovation. The business sector thinks government instability is the most problematic factor for doing business, followed by inefficient government bureaucracy, policy instability, corruption, inadequate supply of infrastructure, and restrictive labor regulation.

It is leading to an erosion of our industrial capacity, without which growing at a steady 5 percent growth rate—let alone a double-digit rate—is impossible. Hence, the call and need for immediate industrial relief. A tentative relief package could be: taming labor militancy and smoothening industrial relations; policy consistency on key issues related to investment regime and sectoral support; effective end of syndicate; credit at low interest rate to key sectors where we enjoy comparative advantage consistent with our land, labor and capital resource endowment; emergency measures to supply power for at least two shifts in manufacturing plants; fast track endorsement of investment plans and lowering cost of doing business in Nepal; enactment of SEZ bill; and industrial security. These are doable and are not populist measures.

PM Dr. Bhattarai and FM Pun are well aware of these constraints and the challenges faced by the industrial sector. Now, they should at least make an effort to bring out industrial relief package to restore confidence of investors and markets. Of course, they will face resistance from their own party and other vested interest groups. But, it should be rightly confronted with as demanded by the emergency nature of our eroding strength of industrial sector.

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Middle men in agriculture market

This incident shows how middle men in agriculture distort the market. The farmers never get the true price for their agriculture products. Moreover, most of the subsidized agricultural inputs get routed by agents.

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The Sapahi farmers are also demanding that the government find market for their produces and punish people creating artificial shortage of chemical fertilizers, seeds and pesticides.

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How can you not find market for agriculture produce when in fact the market is seeing food prices? Incentives structure (price) is failing to work here.

Update on the human cost of Maoist insurgency in Nepal

• Killed: 17,828
• Disappeared: 1,452
• Disabled: 5,912
• Displaced: 89,171
• Property loss suffered: 14,348

Source: Republica, September 10, 2011, p.3 (quoted Ministry of Peace and Reconstruction)

The latest numbers are higher than the previous estimate.

Pic sourced from NepalStats

China’s economic might to surpass America’s by 2030

So argues Arvind Subramanian. Here are excerpts from The Economist which reviews Subramanian’s latest book:

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[…] Mr Subramanian combines each country’s share of world GDP, trade and foreign investment into an index of economic “dominance”. By 2030 China’s share of global economic power will match America’s in the 1970s and Britain’s a century before. Three forces will dictate China’s rise, Mr Subramanian argues: demography, convergence and “gravity”. Since China has over four times America’s population, it only has to produce a quarter of America’s output per head to exceed America’s total output. Indeed, Mr Subramanian thinks China is already the world’s biggest economy, when due account is taken of the low prices charged for many local Chinese goods and services outside its cities.

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More from The Economist:

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[…] Big though it is, China’s economy is also somewhat “backward”. That gives it plenty of scope to enjoy catch-up growth, unlike Japan’s economy, which was still far smaller than America’s when it reached the technological frontier.

[…] Buoyed by these two forces, China will account for over 23% of world GDP by 2030, measured at PPP, Mr Subramanian calculates. America will account for less than 12%. China will be equally dominant in trade, accounting for twice America’s share of imports and exports. That projection relies on the “gravity” model of trade, which assumes that commerce between countries depends on their economic weight and the distance between them. China’s trade will outpace America’s both because its own economy will expand faster and also because its neighbours will grow faster than those in America’s backyard.

[…] He is overly sanguine only on the problems posed by China’s ageing population. In the next few years, the ratio of Chinese workers to dependants will stop rising and start falling. He dismisses this demographic turnaround in a footnote, arguing that it will not weigh heavily on China’s growth until after 2030.

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Rodrik argues (Rodrik’s cautious views here and also here):

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[…] “I see lots of fragility in the Chinese system. Combine the stresses that will arise from the need to alter their economic model with the restiveness beneath the surface (the number of riots that take place in that country every single day is mind boggling) and their inability to effectively deal with political dissent, and I think you have a very explosive situation. It could well be that a balance that you can maintain at 9% growth becomes impossible at 6%.”

[…] “They have little choice but to emphasize domestic demand now. But this will create problems. Domestic consumer will demand, at the margin, more health care, housing, and entertainment — not more steel or electronics or the other stuff on which the export engine depends. The mismatch means lots of factories will have to close and lay workers off.”

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Remittance 2.0 in Nepal

Trailokya Raj Aryal digs into an old book and finds an uncanny similarity during the Rana regime and the present day. It relates to how people depend on remittances, spend an import induced consumption filled lifestyle, and stagnate the economy.

Remittance 1.0

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The signing of Versailles Treaty in 1919 officially ended the First World War, and some 200,000 Nepali soldiers who went to fight for the British Empire returned home with money and foreign ways. As Sardar Bhim Bahadur Pandey explains in the first volume of his brilliantly written book, “Tyas Bakhatko Nepa: Ranakalin Akhiri Teen Dashak” (Nepal at that time: The last 3 decades of Rana rule), suddenly impoverished villages of Nepal’s hilly region were awash with cash, almost 130 million Indian currency, equivalent to 13 billion rupees at the time of writing the book some 25 years ago, and 68. 41 billion Rs in today’s prices.

With nowhere to invest their money on, many soldiers invested on real estate, and some spent it all on merry-making. Their use of foreign products impressed the simple-minded villagers who until then had not even imagined those things existed, and their tales of faraway lands, customs and battlefields, not to mention the social prestige accorded to them made many young men dream of going abroad to work.  Similarly, the taste for foreign goods naturally resulted in an increase in imports, a trend encouraged by the Rana oligarchy as it led to an increase in customs revenue, which in turn killed the local industries as they could not compete with the cheaper and finer imports from abroad. Had the money been spent on Nepal’s industrialization and had the ways been devised to save the cottage industry, late Mr Pande argued, Nepali villages would have been no less wealthy than the Swiss villages. Alas, Nepal’s industrialization was doomed even before it started, marking the beginning of the age of Remittance 1.0 in which our able-bodied young men went abroad, sent or brought money home and then spent most of that money on sustaining the costly habit of foreign goods. The country gained nothing.

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Remittance 2.0

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One would expect that the economic blunder of the Rana regime to be corrected after more than 60 years since we bade adieu to the oligarchy, but no leaders, irrespective of the regime (democratic, Panchayat and the post-Panchayat) did anything about it, and call it our sheer misfortune, the leaders of New Nepal too do not seem bothered by it. Just like an upgraded computer virus, Remittance 2.0 is now affecting the country in a scale far bigger and deadlier than its predecessor.

If the figures released by the Ministry of Labor and Transport Management are to be believed, more than 42,000 of our youths went abroad to work in countries other than India, in the month of Shrawan (July17-August 17) alone. With thousands of youths going abroad for work each month, the flow of remittance has also increased and has become the mainstay of our economy with Nepal receiving with an estimated $ 3.5 billion in 2010 sent by some two million Nepali workers abroad.

However, instead of it going to productive sectors, a significant chunk of it is being spent on imports and real estate, just like in the year 1920 and as such our manufacturing capacity is going down each day. One would expect that the inflow of money would lead to industrialization which in turn would make it possible for the youths to find employment in their own country, but exactly the opposite is happening. What the economists call the Dutch disease effect, ie, reliance on one sector leading to decline in manufacture sector, is clearly visible in Nepal’s case. 

What’s more amazing is, at a time when we are witnessing a mass exodus of youths in search of employment abroad, the militant labor unions affiliated with various political parties are closing down whatever industries we have with their unreasonable demands, the recent example being the closure of Surya Garments. And at a time when other countries are negotiating trade terms and signing free trade agreements with each other, we are left requesting foreign governments to increase the quota of Nepali workers, rather than making investors, both domestic and foreign, feel secure enough to invest in Nepal.

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Check this and this (and the links within) for a detailed look at remittances. Here are two cools charts (this and this) depicting district-wise remittance distribution and the results shown by NLSS III. Here is former finance secretary Rameshore Prasad Khanal arguing how migration is leading to low fertility rate in Nepal and could stall population growth rate.

Chart source: NepalStats

Public works plus unconditional transfer program in Ethiopia: A review of PSNP

Lieuw-Kie-Song reviews Ethiopia’s Productive Safety Net Programme (PSNP)-- which includes employment through public works as well as transfer component-- and argues that the integration of the two commonly used social protection strategies creates synergies and much better outcome than implementation of the two programs independently.

For instance, it covers labor-constrained households by the safety net (transfer) program, which public works program that uses labor from each household cannot cover. But, it also employs non labor-constrained households in public works that focuses on natural resource rehabilitation and maintaining rural infrastructure, which transfer programs cannot do. Labor-constrained households (due to sickness, maternity, household size, disability, old-age, or death) can switch partially or fully to the direct unconditional transfer component of the program. This switch can be either permanent or temporary depending on the nature of the constraint faced by households.

The combination of these two components-- public works and direct transfers-- in the same program has resulted in a more “coherent framework of enhancing productivity and providing social protection”, argues Lieuw-Kie-Song . The author argues that PSNP is providing regular and predictable income and employment, fostering decent work environment; introducing a formal set of rights for participating households, including an appeals process to address grievances; allowing flexible working hours for women; and integrating a high degree of local and participative decision making.

PSNP targets chronically food insecure households in famine-prone areas in rural Ethiopia. It has around 8 million beneficiaries from around 1.5 million households. So far, the cost of the program is 1.2 percent of Ethiopia’s GDP. It provides transfers (15 kilos of cereal per household member per month for six months a year) to food insecure households. For households that are required to work, which is guaranteed, to get this transfer must work for five days to receive the transfer for one person.

The objective of the program is 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. A review of the program by Anna McCord found that the program faces significant problems in identifying, designing, and implementing the scale of infrastructure projects required to absorb the levels of workers anticipated.

Improvement in competitiveness of Nepali economy in 2011-2012?

Seems like Nepal’s ranking in competitiveness has improved, according to the latest Global Competitiveness Report. Nepal’s ranking has improved by five position, reaching 125 (out of 142 countries) in 2011-12 from 130 in 2010-11 in the Global Competitiveness Index (GCI) 2011-2012. But, Nepal’s ranking is still the lowest in South Asia. Sri Lanka is the most competitive economy in South Asia. In South Asia, ranking of Nepal, Pakistan, Sri Lanka improved while that of India and Bangladesh declined.

The GCI comprises 12 categories – the pillars of competitiveness – which together gives a picture of a country’s competitiveness landscape. The pillars are: institutions, infrastructure, macroeconomic environment, health and primary education, higher education and training, goods market efficiency, labor market efficiency, financial market development, technological readiness, market size, business sophistication and innovation.

South Asia	GCI 2011-2012		GCI 2010-2011	Change
	Rank	Score	Rank
Sri Lanka	52	4.33	62	10
India	56	4.30	51	-5
Bangladesh	108	3.73	107	-1
Pakistan	118	3.58	123	5
Nepal	125	3.47	130	5

Switzerland tops the overall rankings. Singapore overtakes Sweden for second position. Northern and Western European countries dominate the top 10 with Sweden (3rd), Finland (4th), Germany (6th), the Netherlands (7th), Denmark (8th) and the United Kingdom (10th). Japan remains the second-ranked Asian economy at 9th place, despite falling three places since last year.The United States continues its decline for the third year in a row, falling one more place to fifth position. In addition to the macroeconomic vulnerabilities that continue to build, some aspects of the United States’ institutional environment continue to raise concern among business leaders, particularly related to low public trust in politicians and concerns about government inefficiency.

Top five countries	GCI 2011-2012		GCI 2010-2011	Change
	Rank	Score	Rank
Switzerland	1	5.74	1	0
Singapore	2	5.63	3	1
Sweden	3	5.61	2	-1
Finland	4	5.47	7	3
United States	5	5.43	4	-1

The bottom five countries in the ranking are Chad, Haiti, Burundi, Angola and Yemen.

Bottom five countries	GCI 2011-2012		GCI 2010-2011	Change
	Rank	Score	Rank
Yemen	138	3.06	n/a	n/a
Angola	139	2.96	138	-1
Burundi	140	2.95	137	-3
Haiti	141	2.90	n/a	n/a
Chad	142	2.87	139	-3

The report argues that “while competitiveness in advanced economies has stagnated over the past seven years, in many emerging markets it has improved, placing their growth on a more stable footing and mirroring the shift in economic activity from advanced to emerging economies.”

The People’s Republic of China (26th) continues to lead the way among large developing economies, improving by one more place and solidifying its position among the top 30. Among the four other BRICS economies, South Africa (50th) and Brazil (53rd) move upwards while India (56th) and Russia (66th) experience small declines. Several Asian economies perform strongly, with Japan (9th) and Hong Kong SAR (11th) also in the top 20.

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Nepal’s case:

Though the five position improvement in ranking looks like good news, it actually is regaining the same ranking as in 2009-2010 (though an improvement in overall score by 0.5 points). Also, the inclusion of new countries with lower competitiveness might have pushed down (or improved) Nepal’s ranking. In 2009-10, Nepal’s ranking was 125 out of 133 countries; in 2010-11, the ranking was 130 out of 139 countries; and in 2010-11, the ranking is 125 out of 142 countries. But still, this is an improvement over last year’s ranking.

Nepal is still a factor-driven economy but its macroeconomic environment is better than that of other factor-driven economies. Its labor market efficiency is below the standard of other factor-driven economies (given the series of labor unrest, it is expected). Nepal still has a long way to go to become an efficiency-driven and then innovation-driven economy.

In basic requirements (institutions, infrastructure, macroeconomic environment, and health and primary education), Nepal’s ranking is 121 out of 142 economies. In efficiency enhancers (higher education and training, goods market efficiency, labor market efficiency, financial market development, technological readiness, and market size), Nepal’s ranking is 127. In innovation and sophistication factors (business sophistication and innovation), Nepal’s ranking is 132.

Nepal’s macroeconomic environment is ranked as 50 most competitive out of 142 economies. Similarly, its market size is ranked 98 out of 142 countries. Innovation in Nepal is ranked 134 out of 142 economies. Nepal’s infrastructure ranking is the second worst, 141 out of 142 economies. Research has also shown infrastructure as the most binding constraint to growth in the Nepali economy.

The other rankings are: institutions (124), infrastructure (141), macroeconomic environment (50), health and primary education (115); higher education and training (129), goods market efficiency (125), labor market efficiency (128), financial market development (100), technological readiness (130), market size (98); business sophistication (125) and innovation (134).

In the survey of business sector, government instability is identified as the most problematic factor of doing business in Nepal. It is followed inefficient government bureaucracy, policy instability, corruption, inadequate supply of infrastructure, and restrictive labor regulation, among others.

Balance of payments surplus at Rs 2.93 billion in FY2010/11

The latest update from the central bank shows that Nepal had a balance of payments (BoP) surplus of Rs 2.93 billion in fiscal year 2010/11 after two years of negative BoP. BoP is an accounting record of all monetary transactions between a country (Nepal) and the rest of the world. The reasons for this positive news are an increase in government capital transfers and external loans and decrease in the current account deficit, which came down to to Rs 11.91 billion.

Nepal’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 section in the BoP.

Trade deficit increased by 5.4 percent to Rs 330.34 billion during the year (almost two-thirds of it with India). Exports in 2010/11 grew by 6.1 percent while imports grew at a slower rate of 5.5 percent.

Remittance inflows amounted to Rs 253.55 billion, a growth of 9.4 percent over last year´s receipt. A total of 354,716 workers went abroad (an increase of 20.61% over last year). Imports from India increased by 20.5 percent (the previous fiscal year it was 33.7 percent).

FDI inflows amounted to Rs 6.44 billion last fiscal year. A total of 171 joint ventures were approved by the Department of Industry.

The country´s gross foreign exchange reserves increased by 1.2 percent to Rs 272.10 billion in mid-July 2011. The reserves were at Rs 268.91 billion in mid-July 2010.

The annual average inflation remained at 9.6 percent in 2010/11. Despite a 14.7 percent rise in food prices, the annual average consumer price index moderated because prices of non-food items and services grew at a low rate of 5.4 percent. Annual average salary and wage rate index rose by 18 percent in 2010/11.

Briefly:

• Balance of payments: Rs 2.93 billion
• Current account: –Rs 11.91 billion
• Balance of trade: –Rs 330.34 billion (growth of 5.4%; exports grew by 6.1% and imports grew by 5.5%; exports amounted to Rs 64.56 billion and imports Rs 394.90 billion)
• Net transfers (grant, pension, remittance and duty refund): Rs 307.86 billion (growth by 8.9%)
• Remittance inflows: Rs 253.55 billion (growth of 9.4%)
• FDI inflows: Rs 6.44 billion (FDI commitment was Rs 10.05 billion)
• Forex reserve (as of mid-July 2010): Rs 272.10 billion (growth of 1.2%)
• Inflation: 9.6%
• Petroleum import: Rs 75.07 billion (almost Rs 10 billion higher than total export revenue)
• Gold import: Rs 11.35 billion
• Revenue mobilization: Rs 200.79 billion
• Budget deficit: Rs 50.63 billion

Quick comments:

While it is good news that BoP is in surplus, there isn’t much to cheer about looking at the positive figure. The fundamentals of our economy have not changed to make a positive impact on economic growth, manufacturing sector and export potential. This is evident from the fact that trade deficit is continuing to increase (though at a bit slower rate). Remittances (precisely net transfers) helped a bit in reducing current account deficit (which came down to –Rs 11.91 billion from –Rs 28.14 billion the year before) and eventually BoP situation.  A lot of previously unsettled transfers has taken place, pushing up the BoP account in the positive territory. Inflation has remained sticky at nearly double digit level.The monetary policy for last fiscal year targeted to attain a BoP surplus of Rs 7 billion, which was tagged as ambitious target.

The growth rate of exports was higher than that of imports not because of an increase in manufacturing capacity; it was increasing at this modest rate in previous years as well. The low imports growth last fiscal year was due to curb in gold imports. Again, nothing much to cheer about on this front as well except for the fact that BoP was in the positive territory.

The broader point here that is that despite a marginal increase in exports, which was higher than growth of imports, and balance of payments surplus last fiscal year, we still are in a deep trench. Our economic fundamentals have not changed. The same problems that have been plaguing our exports sector are obstinately persistent. Supply-side constraints such as intermittent blockades, labor disputes, and lack of adequate infrastructures (primarily road transport and electricity) are further eroding our competitiveness. These constraints are mostly exogenous in nature. They are making our exports uncompetitive and are also preventing diversification of exports basket.

That said, some endogenous factors such as the lack of entrepreneurship and innovation in exports sector, the ignorance about the rapidly changing and globalizing market, and the inability to embrace a change in restructuring production, marketing and distribution structures of firms are some of the other factors ailing the growth of industrial and export sectors.

Most of these are non-economic constraints. So, the set of solutions are political consensus on national agenda regarding export and industrial promotion, amicable settlement of labor disputes, and simplification of rules and procedures regarding construction of infrastructures directly related to these sectors. It should be aided by promotion of entrepreneurship in and restructuring of exports sector. Else, our exports and industrial competitiveness will continue to decline, resulting in a widening trade deficit, prolonging of BoP crisis, further slowing down of growth rate, and stagnating employment opportunities.

Can there be convergence between developed and developing countries?

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The question addressed in this paper is whether the gap in performance between the developed and developing worlds can continue, and in particular, whether developing nations can sustain the rapid growth they have experienced of late. The good news is that growth in the developing world should depend not on growth in the advanced economies themselves, but on the difference in the productivity levels of the two groups of countries – on the “convergence gap” – which remains quite large. Yet much of this convergence potential is likely to go to waste. Convergence is anything but automatic, and depends on sustaining rapid structural change in the direction of tradables such as manufacturing and modern services. The policies that successful countries have used to achieve this are hard to emulate. Moreover, these policies – such as currency undervaluation and industrial policies – will meet greater resistance on the part of industrial countries struggling with stagnant economies and high unemployment.

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Here is the full paper by Dani Rodrik. Convergence depends on bridging the productivity levels/gap. And exploiting it needs sustaining rapid structural change in the direction of tradables such as manufacturing and modern services.