Sunday, April 17, 2011

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

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

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

Aim of the white paper

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

Good in the white paper

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

Bad and ugly in the white paper

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

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

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

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

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

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

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

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

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

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