The WTO and the Doha Round

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The Doha Round of the World Trade Organization (WTO) negotiations has been ongoing for 10 years, and given political cycles in major countries, there is not much hope for a rapid conclusion. The topics on the table are important, and in principle there is enough substance for all countries to gain from an agreement, but, unfortunately, too much emphasis has been placed on gains through market access alone. The Doha Round is about much more than market access. Concluding the talks arguably requires greater recognition of the value of trade policy disciplines that will be part of any agreement. The WTO is not just a market access negotiating forum; it is also a multilateral umbrella through which governments can agree on rules of the game for other trade-related policies. Given the slow progress of the Round, greater emphasis could be put on leveraging existing WTO bodies to enhance the transparency of nontariff measures, address regulatory concerns that impede liberalization of trade in services, and launch a dialogue on domestic economic policies that can create negative spillover effects for trading partners.

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More by Bernard Hoekman here. He emphasizes on three things:

• leveraging existing WTO bodies to enhance the transparency of nontariff measures
• addressing regulatory concerns that impede liberalization of trade in services,
• launching a dialogue on domestic economic policies that can create negative spillover effects for trading partners

Nepal-India Bilateral Investment Promotion and Protection Agreement (BIPPA) simplified

It was published in Republica, October 26, 2011, p.7. It is about Bilateral Investment Promotion and Protection Agreement (BIPPA), which was signed on October 21, 2011, between Nepal and India.

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Nepal-India BIPPA simplified

There has been a lot of buzz about Bilateral Investment Promotion and Protection Agreement (BIPPA), which was signed on October 21, 2011, between Nepal and India. While some political leaders have censured the government on grounds of it being “anti national”, others have shied away from appreciating the signing of the agreement by this administration despite supporting the idea of BIPPA itself. Rarely has the interest of general public been so intense on a bilateral economic issue and support of private sector so high than now. Before breaking Nepal-India BIPPA down to the simplest terms, let me at the outset argue that most of the remonstrations have been outright illogical, misinformed, and pitched to score political points.

What’s BIPPA?

BIPPA is a legal instrument that establishes specific rights and obligations to meet the primary purpose of protecting foreign investments against discriminatory measures (i.e. policy inconsistencies) by the host state. To ensure protection and promotion of investments, and to encourage capital flows along with the commitment to credible liberal economic policies, countries typically enter into investment protection agreements like BIPPA. In principle, it ensures reciprocal encouragement, promotion and protection of investments, thus enabling conditions conducive to increase investment by investors.

It guarantees rights of foreign investors, and ensures them fair and equitable treatment, security, and dispute resolution mechanism. The contracting parties are obliged to treat investments at least as favorably as they do to domestic and third party foreign investments. In case of nationalization or expropriation of investment, nondiscriminatory compensation is guaranteed. Generally, compensation is equal to the market value of the investment expropriated (plus interest at ‘fair and equitable’ rate) “immediately before the expropriation or before the impending expropriation becomes public knowledge”. Investors are allowed to freely transfer returns to investment. Dispute resolution could happen both at the level of investors and a contracting party or two governments, i.e. both at investor-to-state level or state-to-state level.

Nepal-India BIPPA

While Nepal has already signed BIPPA with six countries (including India), India has signed such agreement with 80 countries (as of May 2011), out of which 70 BIPPAs have already come into force and the remaining are in the process of being enforced. Nepal signed its first BIPPA with France on May 2, 1983. It was followed by agreements with Germany (October 20, 1986), the UK (March 2, 1993), Mauritius (August 3, 1999), Finland (February 3, 2009) and India. In South Asia, India has BIPPA with Sri Lanka, Bangladesh and Nepal.

While a majority of the issues in the agreement between Nepal and India are similar to other BIPPAs signed internationally, a few provisions and scope of definitions have created confusion and led to misinformed debate. According to the BIPPA, the investments should “not be subjected to nationalization, expropriation or any other measure having similar effects except for reasons of public purpose in accordance with the law, on a non-discriminatory basis and against fair and equitable compensation”. To avert confusion, it specifically defines what constitute indirect expropriation (having an equivalent effect to direct expropriation without formal transfer of title or outright seizure) and how it is determined (a case-by-case, fact-based inquiry considering a set of relevant factors outlined in the agreement). Furthermore, in case of losses because of war, armed conflict, emergency or insurrection or riots, Indian investors should be treated and compensated as we do to our own investors or to third party investors. This addresses the confusion regarding if we will have to compensate for events internal to firms such as labor strikes and supply-side issues such as increase in cost (or decrease in profits or increase in losses) resulting from load-shedding.

Regarding compensation, if investors deserve one, then it will be equivalent to the “fair market value of the investment expropriated, immediately before the expropriation or before the impending expropriation became public knowledge, whichever is the earlier”. The investors, based on the laws of the host country, can ask for review of compensation being offered. Additionally, while the interpretation of these provisions is subject to contention, it should be realized the scope of the definition of these issues apply equally to investments in both countries. It is not applicable to compensation claims made before the enforcement of the agreement, which means that some Indian companies like UTL and Dabur Nepal cannot claim compensation for losses already inflicted upon their business.

The Nepal-India BIPPA remains in force for ten years and will be automatically extended thereafter unless one of the countries intends to terminate it.

FDI and employment

The overarching objective of BIPPA is to increase FDI inflows. On this respect, latest studies show that investment protection agreements like BIPPA indeed have positive impact on FDI, especially when it flows to low income countries from relatively high income and high exporting countries. The impact is higher in countries with weak domestic institutions because investors feel relatively more confident investing in the country following investment protection agreements. Regarding employment, there is evidence that, on average, foreign investors pay relatively higher wages and employ more workers than domestic counterparts in certain sectors, particularly manufacturing. We have already seen this to hold true in our case as well.

That being said, just because we singed BIPPA with India does not mean investors will flock to Nepal. The BIPPA has definitely given more confidence to Indian investors on investment protection and have shielded them from losses due to arbitrary policy changes. However, BIPPA is not panacea for all industrial ills and a substitute for real policy reform domestically that could increase foreign and domestic investments. For investments to increase sizably, Nepal needs to address constraints such as lack of power supply, inadequate supply of infrastructures, labor disputes, rising cost of raw materials, policy inconsistencies, and high interest on credit to key sectors.

The major determinants of FDI are macroeconomic, policy and political stability; large and growing market size; and being in proximity of emerging countries with large market size so that goods could be exported there. While Nepal has large markets enveloping it and the BIPPA has guaranteed investment certainty to some extent at the policy level, it urgently needs to fix the others factors restraining investment. Nepal has a lot of work to do to increase FDI from the existing level of US$39 million, which is about one percent of gross fixed capital formation. FDI inflows (percent of gross fixed capital formation) to Bangladesh and India are about 3.7 percent and 4.5 percent respectively.

Misinformed debate

Most of the debate over BIPPA is based on misinformation and inaccurate comprehension of the scope and depth of the agreement. While the private sector has openly welcomed BIPPA, selfish political leaders are politicizing it to make themselves heard by hook or by crook. For instance, former Prime Minister Jhalanath Khanal rebuked the government for signing BIPPA, which he thinks is not in our national interest. He seems to be so lost in the dirty political game that he forgot what was mentioned in Economic Survey 2009/10 published by the Ministry of Finance during his tenure as PM. It stated that “a Bilateral Investment Promotion and Protection Agreement is signed with India to promote Indian Investment in Nepal, while preparation is being made to continue such agreements with other countries as well” (see page 187). This shows how poor our leaders like Khanal’s are in understanding economic issues and also remembering what they officially endorsed while at the helm of power. Similarly, some influential leaders have been arguing that BIPPA is against the interest of our country and the workers. Their argument is that BIPPA will increase Indian dominance and erode rights of domestic workers.

These arguments are senseless, baseless and outright illogical. If BIPPA is against our national interest, then why did we not hear loud outcry of this level when Nepal signed BIPPA with other countries. Importantly, the self-centered leaders opposing BIPPA should explain how exactly Nepal was dominated and workers rights eroded by signing such agreement with five countries before it was done India. In our investment strapped economy, more investment is definitely a good thing and is in our national interest because it will lead to more jobs, revenue and potentially stimulate growth.

National interest

In whichever way the leaders might justify their claims, the fact is that all these illogical and inconsistent assertions against BIPPA are being raised to score political points, which at times are against our national economic interests of stimulating growth and generating more jobs and employment opportunities.

In a nutshell, BIPPA is in our national interest and might help increase FDI by enhancing foreign investors’ confidence on the Nepali economy. However, it cannot be a substitute for the badly needed policy reforms on improving overall investment climate.

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Latest Nepalese opinion on growth, society, neighbors, and priorities

Pretty interesting findings coming out of a survey of public opinion (Insights South Asia- Nepal Survey- 2011) conducted between 16 July and 7 August 2011 by Gallup and South Asia Democratic Forum (SADF). A total of 1,000 randomly selected citizens aged 15 and older were interviewed face-to-face.

Here are the major findings:

Education is the most vital issue

• A majority (58%) of Nepalese chose education as one of the most important issues (out of the eight issues listed).
• Family was selected as one of the most important issues by 44% of respondents, while health and work were mentioned by, respectively, 37% and 31% of respondents. All other topics were selected as being the most important by considerably smaller shares: 11% for religion and spirituality, 10% for living conditions, 5% for the environment and 3% for law and order.
• The likelihood to select education also increased with respondents’ level of education.
• The older the respondents were, the more likely they were to value family and religion/spirituality.

India is the most popular destination

• A third (33%) of Nepalese surveyed had friends or relatives living in another South Asian country (i.e. India, Pakistan, Bangladesh, Bhutan, the Maldives, Sri Lanka or Afghanistan).
• Almost all of these respondents with friends or relatives in another country answered that these friends or relatives lived in India (95%).
• Nearly half (48%) of Nepalese surveyed had at least once visited another South Asian country; virtually all of these respondents said they had visited India (97%).
• More than 8 in 10 (84%) respondents said they had a rather positive opinion about their big neighbor (India).
• About 4 in 10 respondents held a positive view about Bangladesh (44%), Sri Lanka (43%), Bhutan (40%) and the Maldives (39%). Pakistan and Afghanistan had the least positive ratings among South Asian countries, 33% and 26%, respectively.
• Almost three-quarters held a favorable attitude towards China and the US (74% and 73%, respectively). Japan was the third most popular country among the foreign powers listed in the survey (65% viewed it positively). The results for the three European countries - Germany, France or the UK - showed that 44%-46% had a positive opinion about them.

Positive about SAARC

• Following a short description of the South Asian Association for Regional Cooperation (SAARC), a majority of 57% confirmed having heard about the association.
• Strikingly, almost all (98%) respondents who were aware of SAARC thought that Nepal's membership of the association was a good thing.
• In the eyes of Nepalese, the two biggest obstacles to establishing a more intensive regional cooperation among the countries in South Asia were the arms race between India and Pakistan (60% saw this as an obstacle) and historic animosities (58%).
• Respondents appeared to accept all benefits of regional cooperation (as listed in the survey) as being important: the proportion of "important" responses ranged from 75% for "better transport connections to neighboring countries" and "more respect for ethnic and cultural diversity when visiting neighboring countries" to 86% for "more job opportunities in this country" by at least three-quarters of respondents to 82% "cheaper imports" and 86% for "more job opportunities in this country".

Terrorism as the greatest threat

• Terrorism was seen as the greatest threat to security in the South Asian region - 4 in 10 (40%) respondents ranked it number one from a list of six potential threats.
• Crime was the second most frequently mentioned security threat (20%).
• When asked which South Asian country posed the greatest danger to security in the region, Pakistan ranked number one (selected by 28%).

Economic condition

• The largest proportion of respondents (41%) rated economic conditions in their country as poor, and a further 30% as only fair.
• Just a handful of respondents said that economic conditions were excellent (3%) and roughly a fifth (19%) considered them as good.
• A lack of political leadership and corruption were by far the most frequently mentioned factors preventing economic growth in Nepal.
• Almost two-thirds (64%) of respondents who were dissatisfied with the current economic conditions in Nepal said that a lack of political leadership was one of the two most important factors that prevented economic conditions to become better. Similarly, slightly less than 6 in 10 (58%) of these respondents held corruption responsible for the current bad economic situation.
• About one in five (21%) respondents thought that Nepal’s large population was one of the main factors negatively affecting economic conditions, followed by about one in seven (15%) respondents who mentioned crime and a lack of security and the same proportion who selected bad economic policies.
• About a tenth (11%) of respondents identified Nepal’s poorly qualified population as one of two major problems; a lack of infrastructure and environmental problems were each selected by approximately 1 in 20 respondents (6% and 4%, respectively). Virtually nobody regarded trade restrictions as a major brake on economic progress.
• A slim majority (54%) of Nepalese thought that their government was not doing enough to fight corruption, while 30% were satisfied with their government's efforts in this regard. A share of 16% did not answer this question.
• Nepalese were more optimistic when answering the question about future economic developments; 45% of respondents felt that the economy in their country was getting better, compared to 35% who said it was getting worse. India was perceived as having the biggest impact on the Nepalese economy.

• Respondents living in rural areas and villages not only more frequently rated economic conditions in their country as positive, they were also more likely to view the current development of Nepal’s economy positively. Large city dwellers gave a very negative estimate of Nepal’s current economic development: 48% said that economic conditions were deteriorating (vs. 33%-40% of respondents from villages, rural and suburban areas).

Living standards

• About three-quarters (77%) of Nepalese had seen an improvement in their standard of living in the past five years.
• About 1 in 10 (9%) reported that their family's standard of living had deteriorated and 14% felt it had stayed the same in the time frame. Furthermore, about 8 in 10 (79%) Nepalese said that their family's standard of living was getting better at the time of the survey, compared to 11% who said that it was getting worse.

Migration

• More than two-thirds (69%) of Nepalese wanted to continue living in their country, while 31% would like to move temporarily or permanently to another country.
• The United States was the most preferred destination (11% of all respondents), followed by India (6% of all respondents).

• Looking at the socio-demographics of potential migrants, the survey found that the typical would-be migrant was male, young, lives in a large city and has enjoyed at least basic education. In Nepal, 38% of men (vs. 24% of women), 39% of large city dwellers (vs. 28%-31% or respondents from rural areas, villages or suburbs), 35% of the 15-24 year-olds (vs. 30% of 25-39 year-olds, 26% of 40-54 year-olds and 18% of those older than 54) and 40% of respondents with a university education (vs. 13%-21% of those without formal education and 33%-36% of those with primary or secondary/ higher secondary education) said they would like to move temporarily or permanently to another country.

Democracy

• If Nepalese would be given a choice between a secular democracy or a Hindu democracy, the majority (63%) would prefer the latter, while a third (34%) would favor the former.

Loathing violence

• A vast majority (81%) of Nepalese disagreed that the use of violence was an accepted means of re-solving conflicts in their country nowadays, compared to 10% of respondents who held an opposite view - i.e. that the use of violence was still accepted - and 9% who did not answer.

Latest poverty stats: Poverty declined to 25.16 percent in 2010-11 in Nepal

The preliminary report of the NLSS (2010-2011) made public by the Central Bureau of Statistics (CBS) states that 25.16 percent of Nepalese population is below the poverty line fixed at 2,200 calorie consumption per day per person and access to essential non-food items.

Based on current market prices, a person needs to earn at least Rs 19,261 (Rs 11,929 for food items and Rs 7,332 for non-food items) every year to buy basic food calories. In 2003-2004 (NLSS II), a person would need 2144 basic food calories. In 1995-1996 (NLSS I), a person would require just 2124 basic food calories to escape the poverty line. Again, the consumption basket is changed in NLSS III. So, even for the same calorie intake people would be spending at varying rate, most likely they would be spending way more, which also means that poverty rate would not decline as fast as they should. Since the consumption basket in NLSS III was changed, the poverty figures cannot be compared with that of NLSS I and NSLL II. More on this in a minute. First, the main highlights of the report:

Overall poverty

• Overall, 25.16 percent of Nepalese are below the poverty line. In rural areas, 27.43 percent people are below the poverty line. In urban areas, 15.46 percent of people are below the poverty line.
• The poverty line for Nepal, in average 2010-11 prices, has been estimated at Rs. 19,261; the food poverty line is Rs. 11,929 and the non food poverty line Rs. 7,332.
• Poverty gap is 5.43 percent and poverty gap squared is 1.81 percent respectively.
• In Kathmandu, a person needs to earn Rs 40,933 per year for buying basic food calories and essential non-food items. And, a person spends Rs 26,323 for non-food items as against Rs 15,610 for basic food calories in Kathmandu.

Regional poverty

• There is high variation in poverty rates amongst the 12 analytical domains. urban Hill is the least poor region with a poverty incidence of 9 percent.
• Within urban areas, poverty ranges from 9 percent in urban Hills to 22 percent in urban Terai. Within rural hills, poverty ranges from 16 percent in Eastern region to 37 percent in Mid and Far Western region.
• Within rural Terai, poverty ranges from 21 percent in Eastern region to 31 percent in Mid and Far Western region. Within each of the development region except the Eastern, hills have higher poverty rates than Terai.

Seasonal poverty

• The poverty rates are highest in April-May coinciding with the food scarce months. Poverty declines gradually till July and again spikes in September. Poverty falls sharply between September and November. Poverty is lowest around November 1 and the timing coincides with the festivals of Dashain and Tihar.

Poverty and household size

• Poverty incidence increases monotonically with household size. The poverty rate is the lowest for one-person households (3 percent), increases drastically to 7 percent for two-person households and reaches the maximum (38 percent) for households having 7 or more members. The depth and severity of the poverty also increase with household size, reaching up to 9 percent and 3 percent respectively for the households that have 7 or more members.
• Poverty increases with number of kids that are under 7. Female headed households have slightly lower poverty rates. Poverty rate is lowest at 12 percent for household with no child under 7, but increases to 47 percent for households with 3 or more children under 7.

Poverty, women and Dalits

• Poverty rates are slightly higher for households headed by males between 26 and 45 years of age and slightly lower of households headed by female.
• The percentage of poor among Dalitsis 42 percent compared to 23 percent for the Non-Dalits.

Poverty and education

• Poverty is substantially lower for higher levels of head’s education. Households with an illiterate head are more than 4.5 times more likely to be poor than households with a head that has completed 11 or higher. Similarly households that have at least a women who completed primary education are much less likely to be poor than households in which the most educated female has lower than primary education.
• Households headed by agricultural wage workers are poorest while those headed by professional wage-workers are the least poor.

Poverty, landholding, and access to services

• Poverty rate falls, both in rural and urban areas, with increase in the size of arable land. In rural areas, households with more than 1 hectare of agricultural land have lower than average poverty rates. In urban areas, reduction in poverty appears even with smaller landholdings.
• Households that are closer to facilities are less likely to be poor than the national average. Having good access to higher secondary school, public hospital, paved roads, market centers, agricultural center, cooperative and banks have large effects on poverty.

Inequality

• The Gini-coefficient declined to 0.3294 from 0.414 in NLSS II.
• Inequality in rural and urban areas is 0.31 and 0.3529 respectively. The corresponding figures in NLSS II were 0.349 and 0.436.

I wonder why they did not have both rural and urban figures for the analytical domains. For instance, if you have figures for Urban-Hill, then it would be better to have figure for Rural-Hill as well. It makes comparison easier. The report has figures for 12 analytical domains.

Earlier, it was reported that poverty declined to 13 percent. This caused quite a stir, with analysts questioning the role of government and donors in helping to reduce poverty (as much of it was attributed to remittances). Specifically, the question was: What did the government and donors do to help reduce poverty if all the astounding gains are due to remittances? They were in the defensive and were struggling to find an explanation (remittances mostly but also due to access to roads, education and health services, they finally said). With NLSS III, they have arrived at 25.16 percent figure by changing the consumption basket (eating more items like fruits, meat, fish, egg and rice). It also means that the figures from NLSS II are not wholly comparable with that of the NLSS III. You can play with statistics and provide multiple deductions from the same data! With the new figure arrived by changing consumption basket (or like they say consumption aggregates), the poverty rate is still high, which means people will be questioning less about the role of government and donor funded poverty-related initiatives (and also the role of remittances). The narrative could be that poverty headcount ratio drastically declined since 1995-96 (to the tune of about 30 percentage point), but it is still high and rigid. [Specifically, about consumption stuff, NLSS III adds one component that asks households their consumption in “last 7 days” (along with consumption during the “typical month” for each of the 72 food items as in previous surveys)].

If you want to make a valid comparison of poverty over time then you need comparable consumption aggregates (similarly constructed and that they are converted to constant prices using price deflator relevant to the poor).  So, the earlier media story by Prem Khanal that poverty declined by 13 percent still holds true. In the figure below, the red line reflects change in poverty over time using the 1995-96 poverty line whereas the blue line reflects change based no the “new” poverty line.The dotted lines in the figure below represent the alternative estimate based on such valid comparisons.

Doing Business 2012: South Asia and Nepal edition

The latest Doing Business 2012: Doing Business in a More Transparent World report lists Singapore as the top economy to do business, followed by Hong Kong SAR, China; New Zealand; the United States; and Denmark. The report ranks economies based on performance in ten indicators: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, and resolving insolvency. 

The report’s data cover regulations measured from June 2010 through May 2011 in 183 economies.This year rankings on ease of doing business have expanded to include indicators on getting electricity.The report finds that getting an electrical connection is most efficient in Iceland; Germany; Taiwan, China; Hong Kong SAR, China; and Singapore.

The Republic of Korea was a new entrant to the top 10. The 12 economies that have improved the ease of doing business the most across several areas of regulation as measured by the report are Morocco, Moldova, the former Yugoslav Republic of Macedonia, São Tomé and Príncipe, Latvia, Cape Verde, Sierra Leone, Burundi, the Solomon Islands, the Republic of Korea, Armenia, and Colombia. Two-thirds are low- or lower-middle-income economies.

The report shows that governments in 125 out of 183 economies implemented a total of 245 business regulatory reforms—13 percent more reforms than in the previous year. In Sub-Saharan Africa, a record 36 out of 46 economies improved business regulations this year. Over the past six years, 163 economies have made their regulatory environment more business-friendly. China, India, and the Russian Federation are among the 30 economies that improved the most over time.

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South Asia

• In South Asia, Maldives ranked 79, followed by Sri Lanka (89), Pakistan (105), Nepal (107), Bangladesh (122), India (132), Bhutan (142) and Afghanistan (160). The regional average (in rank) is 117.
• Sri Lanka implemented the most reforms of any of the eight economies in South Asia, helping to create a better environment for entrepreneurs.
• Sri Lanka rose nine places in the global ranking to 89, partly by strengthening investor protections and reducing taxes on business. India, the region’s second top performer in the global survey, climbed seven places to 132. Recently implemented mandatory electronic filing and payment for value-added tax made paying taxes easier for Indian firms.
• Bhutan, rising four places to 142, recently launched a public credit registry and streamlined business start-up while Afghanistan, ranked 160, made it easier for local businesses to get an electrical connection.
• Over the past six years, all eight economies in South Asia have made their regulatory environment more business-friendly.

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Nepal

In terms of ease of doing business, Nepal ranked 107 out of 183 countries. Last year, Nepal’s ranking was 110 (non adjusted figure was 116). It is quite an improvement in terms of easing doing business in the country. Most of the push is contributed by making property registration easy, by enacting measures to protect investors and by improving enforcement of contracts.The Finance Act 2008 has reduced the fee for transferring a property from 6 percent to 4.5 percent of the property’s value.In 2011 Nepal improved oversight and monitoring in the court, speeding up the process for filing claims. This is the only reform enacted in terms of easing procedures to do business this year.

Here is how Nepal compares with the regional average:

• Best regional performance in registering property -- ranked 24 overall (regional average is 123). In Nepal, you need 3 procedures, takes 5 days and costs 5% of property value to get a property registered. The corresponding figures for the region are 6, 103, and 7.3.
• In terms of protecting investors, Nepal’s performance in the region was the best -- ease of shareholder suits index (0-10) is 9 (regional average is 6).
• In terms of enforcing contracts, Nepal’s performance was the best in the region -- 39 procedures to enforce a contract (regional average is 43)
• Lowest regional performance in cost of starting a business -- 37.4 % of income per capita (regional average is 21.6% of income per capita)
• In the ten indicators, ranking climbed up in four of them (when compared to previous year): dealing with construction permits, getting electricity, paying taxes, and resolving insolvency.

Doing Business 2012: Nepal
DB rank 2011	110
DB rank 2012	107
Improvement in ranking (position)	3
Topic ranking
Topics	DB 2012 Rank	DB 2011 Rank	Change in Rank
Starting a Business	100	95	-5
Dealing with Construction Permits	140	161	21
Getting Electricity	99	102	3
Registering Property	24	23	-1
Getting Credit	67	64	-3
Protecting Investors	79	74	-5
Paying Taxes	86	90	4
Trading Across Borders	162	161	-1
Enforcing Contracts	137	137	No change
Resolving Insolvency	112	113	1

[All Doing Business 2011 rankings have been recalculated to reflect changes to the methodology. For paying taxes, economies that have total tax rates below 32.5% in Doing Business 2012 are assigned a total tax rate of 32.5% for the purpose of calculating the rankings. For Doing Business 2011, the total tax rate is 32.7%.]

Nepal’s economic agenda for PM Bhattarai’s India visit

[This piece was published in Republica, October 18, 2011. p.7]

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PM Bhattarai’s India visit

What’s Nepal’s economic agenda?

Prime Minister Dr. Baburam Bhattarai is scheduled to visit India starting next week. While his team is consulting with a range of stakeholders to shortlist viable agenda for the visit, commentators and talking heads have flooded the market with suggestions and recommendations ranging from historical to political to economic issues without even knowing the nature of the upcoming visit by our prime minister. Some have even gone to the extent of arguing that political agenda, chiefly repealing ages old treaties inked since 1950, should supersede any other “minor” agenda such as those related to economics.

While the ages old treaties might deserve review or repeal, of which I have insufficient knowledge to make a definite judgment, what is certain is that not all the outstanding issues can be resolved in a single visit. There are many challenges and opportunities emerging as a result of our close historical, cultural and economic ties with India. As a sovereign nation that aspires to rise along with the rapid progress made by our neighbors, we should be looking at and thinking over ways to neutralize challenges and take advantage of opportunities keeping in mind our national interests and immediate priorities. As of now, given the domestic constraints to growth and development, our immediate priorities are not political, but economic issues such as importing electricity, increasing investment, promoting exports, collaborating on R&D, and sharing best practices on rural development.

Whatever Nepalis say or feel about India, the fact is that it is increasingly being recognized as economic and democratic emerging powerhouse with tremendous potential in a number of fronts, thanks to the astounding economic growth rate, which might overtake China’s growth by 2013 due to two main factors, namely demography and democracy. The Indian economy is projected to be the third largest (in PPP terms) by 2050 and is expected to grow at over 6 percent until 2050. The booming Indian middle class together with its market potential and human resources have been closely followed by investors worldwide. Meanwhile, Indian investors are spreading their wings deep into Africa and Latin America. Currently, India is the shining star of the wave of globalization that swept the globe after 1990. It is increasingly reckoned as an indispensable economic, military, political and democratic force. And, in its backyard lies Nepal, one of the poorest countries in Asia struggling to grow above 4 percent, which is battered by numerous non-economic constraints that have forced investors to rescind investment plans.

The growing power of India at the global level and our excessive dependence on its markets for most of the things we consume in a daily basis make any high level visit by Nepali authorities a significant and worthy issue for discussion. Given the nature of our constraints and those that can potentially be resolved now, it will be pragmatic if PM Bhattarai and his team take up economic issues only with India. The economic issues should hinge on addressing the most binding constraints in the short term, which means all agenda should aim at securing high growth rate, investment and employment.

First, the country will experience power cuts of at least 14 hours a day in the coming months. Since the domestic demand is far higher than supply of electricity, there is no possibility of lighting our bulbs or operating refrigerator all day unless we depend on alternative sources of energy, which as of now also seems hopeless. Despite having a huge potential in hydroelectricity we are still continuously importing about 50 MW from India. Now, swallowing whatever pride we have in our running waters, we will have to request India to increase the supply of electricity by at least 200 MW with an aim to reduce the scheduled hours of load shedding. We cannot afford closure of more firms and further erosion of investors’ confidence, which are costing us both revenue and jobs.

Second, enticing new Indian investment and securing existing ones should be high on the agenda. Several Indian MNCs have closed down operation in Nepal due to political instability, power outage, labor dispute, and lack of investment guarantee, among other factors. PM Bhattarai should commit, and rightly honor, to provide full security to foreign investment in Nepal. It might encourage Indian investors, our major source of FDI, to reconsider investing in Nepal. If this does not happen, then there is no reason to believe that investors outside of India would even consider investing sizably in our economy. We are in a dire need of investment in infrastructures (hydro and transport networks), the most binding constraint to economic activities.

Third priority should be on securing favorable trade and transit facilities for Nepali traders so that our products exported either to India or via India to other countries do not have to incur additional costs, making them uncompetitive in the global market. Indian market absorbs approximately 61 percent of our total exports and it is the source of almost 57 percent of our total imports. Believe it or not, our trade and transit needs are one-sided. With expanding domestic as well as global markets, Nepal is insignificant in terms of market size to the Indian investors and exporters. Cognizant of this reality, we should ask the Indian government to accord special privileges to Nepali exports, and to address a range of non tariff barriers (such as CVD, local duties, double lock system, delay at Calcutta port), that are increasing cost of our exported products. Furthermore, we should try to convince the Indian government to allow for unhindered entry of Nepali exports via India to Banglabanda so that our exporters can use the nearest Bangladeshi port. Overall, the trade and transit agenda should be aimed at securing provisions that will help our exports avoid extra costs in final markets as well as during transportation phase. It would be fantastic if India gives concession like it did in the trade and transit treaties of 1996.

Nepal has always been asking for favors from India. Our politicians and negotiators hardly make an effort to learn best practices in development and employment generation. This is the right time to do so and should be our fourth agenda. Nepal should request India to share its expertise in research and development, especially on IT, education and agriculture. There is a great deal we can learn from India’s success in services industry. Furthermore, we should seek assistance from India to help us commercialize agriculture sector and increase production like it did during the Green Revolution in mid-1970. It will not only help in supporting structural change, stimulating growth and generating employment in rural areas, where still 83 percent of our population resides, but also help reduce food insecurity. We could also ask India to help us establish and invest in special economic zones (SEZs), on which it has an abundance of capital and experience.

Finally, and further to the previous point, we should make an effort to learn how India manages to fairly efficiently run its rural development programs, chief among them being National Rural Employment Guarantee Act (NREGA), which guarantees 100 days of employment to one adult member of a rural household at wage rate equal to that of unskilled laborers in agriculture sector. Our National Planning Commission is considering rolling out a similar kind of program in rural Nepal. We should learn from India’s experience in running rural employment programs like NREGA and, if possible, seek assistance (both investment and capacity building) in other rural development initiatives.

All of these issues are directly linked to stimulating economic growth, generating employment and addressing the most pressing short term challenges of our economy. These doable initiatives in the short term should be the priority instead of the elusive political agenda. Importantly, let us try to learn good growth and development practices from India this time.

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[Published in Republica, October 18, 2011, p.7]

Great Convergence after Great Divergence?

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Greg’s mill was part of a revolution in industry that would profoundly alter the world’s pecking order. The new technologies—labour-saving inventions, factory production, engines powered by fossil fuels—spread to other parts of western Europe and later to America. The early industrialisers (along with a few late developers, such as Japan) were able to lock in and build on their lead in technology and living standards.

The “great divergence” between the West and the rest lasted for two centuries. The mill at Styal, once one of the world’s largest, has become a museum. A few looms, powered by the mill’s water wheel, still produce tea towels for the gift shop, but cotton production has long since moved abroad in search of low wages. Now another historic change is shaking up the global hierarchy. A “great convergence” in living standards is under way as poorer countries speedily adopt the technology, know-how and policies that made the West rich. China and India are the biggest and fastest-growing of the catch-up countries, but the emerging-market boom has spread to embrace Latin America and Africa, too.

[…]Economic catch-up is accelerating. Britain’s economy doubled in size in the 32 years from 1830 to 1862 as increased productivity spread from cotton to other industries. America’s GDP doubled in only 17 years as it overtook Britain in the 1870s. The economies of China and India have doubled within a decade.

This is cause for optimism. An Indian with a basic college education has access to world-class goods that his parents (who might have saved for decades for a sputtering scooter) could only have dreamed of buying. The recent leap in incomes is visible in Chinese cities, where the cars are new but the bicycles look ancient, and in the futuristic skyline of Shanghai’s financial district.

[…]No country, or group of countries, stays on top forever. History and economic theory suggest that sooner or later others will catch up. But this special report will caution against relying on linear extrapolation from recent growth rates. Instead, it will suggest that the transfer of economic power from rich countries to emerging markets is likely to take longer than generally expected. Rich countries will be cursed indeed if they cannot put on an occasional growth spurt. China, for its part, will be lucky to avoid a bad stumble in the next decade or two. Emerging-market crises have been too quickly forgotten, which only makes them more likely to recur.

[…]The force of economic convergence depends on the income gap between developing and developed countries. Going from poor to less poor is the easy part. The trickier bit is making the jump from middle-income to reasonably rich. Can China and others manage it?

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For more, read The Economist’s special report on catch-up. Dani Rodrik argues that convergence is not automatic and it might not happen altogether any time soon. He argues that 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. But, the policies that successful countries have used to achieve this are hard to emulate.

State of Hunger in South Asia, 2004-2009 (Global Hunger Index 2011)

IFPRI has just published 2011 Global Hunger Index report titled The Challenge of Hunger: Taming Price Spikes and Excessive Food Price Volatility. It calls for action to curtail high and volatile food prices and to protect the poor from rising food prices. Conforming the outcome of other reports by the FAO and other organizations, the new report argues that  the main causes of high and volatile food prices are growing demand for biofuels, extreme weather and climate change, and increased financial activity through commodity futures markets. Worse, these challenges are exacerbated by historically low levels of grain reserves, export markets for staple commodities that are highly concentrated in a few countries, and lack of timely, accurate information on food production, stock levels, and price forecasting, which can lead to overreaction by policymakers and soaring prices.

In order to identify hunger levels and hot spots, the Global Hunger Index scores countries based on three equally weighted indicators: the proportion of people who are undernourished, the proportion of children under five who are underweight, and the child mortality rate. According to the 2011 Index, 26 countries have levels of hunger that are alarming or extremely alarming, and all those with extremely alarming levels—Burundi, Chad, the Democratic Republic of Congo, and Eritrea—are in Sub-Saharan Africa.

To tame food price volatility and protect the poor against future shocks, the report recommends addressing the drivers of food price volatility; tackling global market characteristics affecting volatility, including building up stocks by coordinating international food reserves and sharing information on food markets; and building resilience for the future. Specifically, it recommends to

• curtail biofuels subsidies and mandates
• discourage the use of food crops in biofuels production
• regulate financial activity in food markets
• reduce the incentives for potential excessive speculation in food commodities
• invest in climate change adaptation and mitigation
• safeguard smallholder farmers against extreme weather-related shocks
• strengthen social protection systems
• improve emergency preparedness
• invest in sustainable small-scale agriculture

The 2011GHI reflects data from 2004 to 2009 – the most recent available country-level data on the three GHI components. It is thus a snapshot not of the present, but of the recent past. An increase in a country’s GHI score indicates that the hunger situation is worsening, while a decrease in the score indicates an improvement in the country’s hunger situation.

• The 2011 world GHI fell by 26 percent from the 1990 world GHI, from a score of 19.7 to 14.6.
• From the 1990 GHI to the 2011 GHI, 15 countries reduced their scores by 50 percent or more.
• Between the 1990 GHI and the 2011 GHI, 19 countries moved out of the bottom two categories— “extremely alarming” and alarming.”
• In terms of absolute progress, Angola, Bangladesh, Ethiopia, Mozambique, Nicaragua, Niger, and Vietnam saw the greatest improvements in their scores from the 1990 to 2011 GHI.
• In terms of percentage decrease in GHI scores from the 1990 GHI to the 2011 GHI, the following countries saw the greatest improvements, beginning with the most improved: Kuwait, Turkey, Malaysia, Mexico, Islamic Republic of Iran, Albania, Peru, Nicaragua, Ghana, and Fiji.

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State of hunger in South Asia:

• South Asia has the highest regional 2011 Global Hunger Index (GHI) score—22.6 (worst than in Sub-Saharan Africa regional score).

• The 2011 GHI score fell by 25 percent in South Asia compared with its 1990 score, and the 2011 GHI score in Southeast Asia decreased by 44 percent.

• The South Asia region reduced its GHI score by more than 6 points between 1990 and 1996—mainly due to a large decline in underweight in children under five, but the fast progress was not maintained. South Asia has lowered its GHI score by only one point since 2001 despite strong economic growth. Social inequality and the low nutritional, educational, and social status of women, which is a major cause of child undernutrition in the region, have impeded improvements in the GHI score.

• In Bangladesh—a country where 25 percent of the population is ultra-poor (living on less than USD $0.50 a day)—only about 7 percent of the population has access to social protection or safety net programs.

• Bangladesh saw large gains in improving their GHI score between the 1990 GHI and the 2011 GHI, reducing its score by 36 percent.

• Bangladesh and India have the highest prevalence—more than 40 percent—of underweight in children under five in South Asia.

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Hunger in South Asia (Increase in GHI score means hunger situation is worsening)
Country	1990               (with data from 1988-92)	1996               (with data from 1994-98)	2001               (with data from 1999-2003)	2011               (with data from 2004-2009)	Rank 2011
Bangladesh	38.1	36.3	27.6	24.5	70
India	30.4	22.9	24.1	23.7	67
Nepal	27.1	24.6	23	19.9	54
Pakistan	25.7	22	21.9	20.7	59
Sri Lanka	20.2	17.8	14.9	14	36

Out of 122 developing countries and countries in transition, Sri Lanka has the best ranking in South Asia (lower ranking is better). Compared to 1990, the state of hunger in 2011 has improved in all South Asian countries for which data is available. However, there has not been much improvement since 2001, i.e. though the score has changed, the state of hunger is pretty much unchanged. Nepal’s and Pakistan’s state of hunger has remained unchanged (“alarming”) since 1990.

Hunger in South Asia
Country	1990	1996	2001	2011
Bangladesh	Extremely alarming	Extremely alarming	Alarming	Alarming
India	Extremely alarming	Alarming	Alarming	Alarming
Nepal	Alarming	Alarming	Alarming	Serious
Pakistan	Alarming	Alarming	Alarming	Alarming
Sri Lanka	Alarming	Serious	Serious	Serious

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Here is a related post on high food prices in South Asia.

UPDATE (2011-11-16): Nepal’s state of hunger in 2011 is updated as serious from alarming. I misread the scale. [<= 4.9 is low; 5-9.9 is moderate; 10-19.9 is serious; 20-29.9 is alarming; and >= 30 is extremely alarming]

Nobel prize in economics to Thomas Sargent and Christopher Sims

This year's the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel  goes to Thomas J. Sargent and Christopher A. Sims "for their empirical research on cause and effect in the macroeconomy". Below is the press release:

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How are GDP and inflation affected by a temporary increase in the interest rate or a tax cut? What happens if a central bank makes a permanent change in its inflation target or a government modifies its objective for budgetary balance? This year's Laureates in economic sciences have developed methods for answering these and many of other questions regarding the causal relationship between economic policy and different macroeconomic variables such as GDP, inflation, employment and investments.

These occurrences are usually two-way relationships – policy affects the economy, but the economy also affects policy. Expectations regarding the future are primary aspects of this interplay. The expectations of the private sector regarding future economic activity and policy influence decisions about wages, saving and investments. Concurrently, economic-policy decisions are influenced by expectations about developments in the private sector. The Laureates' methods can be applied to identify these causal relationships and explain the role of expectations. This makes it possible to ascertain the effects of unexpected policy measures as well as systematic policy shifts.

Thomas Sargent has shown how structural macroeconometrics can be used to analyze permanent changes in economic policy. This method can be applied to study macroeconomic relationships when households and firms adjust their expectations concurrently with economic developments. Sargent has examined, for instance, the post-World War II era, when many countries initially tended to implement a high-inflation policy, but eventually introduced systematic changes in economic policy and reverted to a lower inflation rate.

Christopher Sims has developed a method based on so-called vector autoregression to analyze how the economy is affected by temporary changes in economic policy and other factors. Sims and other researchers have applied this method to examine, for instance, the effects of an increase in the interest rate set by a central bank. It usually takes one or two years for the inflation rate to decrease, whereas economic growth declines gradually already in the short run and does not revert to its normal development until after a couple of years.

Although Sargent and Sims carried out their research independently, their contributions are complementary in several ways. The laureates' seminal work during the 1970s and 1980s has been adopted by both researchers and policymakers throughout the world. Today, the methods developed by Sargent and Sims are essential tools in macroeconomic analysis.

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Here (also here) is technical note that further describes the new laureates contribution.