Tuesday, July 12, 2011

Links of Interest (2011-07-12)

1. De and Iacovone on Did NAFTA increase productivity?. “The results show that the North American Free Trade Agreement stimulated the productivity of Mexican plants via: (1) an increase in import competition and (2) a positive effect on access to imported intermediate inputs. However, the impact of trade reforms was not identical for all integrated firms, with fully integrated firms (i.e. firms simultaneously exporting and importing) benefiting more than other integrated firms.” Here is more on NAFTA.

2. Li, Mengistae and Xu diagnose development bottlenecks in China and India. “The analysis finds that China has better infrastructure, more skilled workers, and more labor-hiring flexibility than India, but a worse access to finance and higher regulatory burden. Infrastructure appears to be a key constraint for India: it lags significantly behind China, yet it has important indirect effects for the effectiveness of labor flexibility. Labor flexibility is also likely a major constraint for India, as evident in the predominance of small firms, the importance of firm size in accounting for India's disadvantage in productivity, and the complementarity of proxies of labor flexibility with infrastructure and access to finance. Interestingly, regulatory uncertainty has adverse effects in India but not in China.”

3. Khanal and Satyal weigh in the socio-economic impact of remittances. Their basic argument is that the failure to find jobs (or create due to laxity in implementing such policies) is leading to an exodus of workers to foreign employment destinations. They also argue that remittances have not helped in “reducing poverty”. I wonder how they define it because the latest study on remittances find that it has helped to reduce absolute poverty.

The increase in imports, consumption, aiding real estate and housing bubbles, and change in labor supply of returnees are some of the concerns. Remittances have done both good and bad to the economy, both at the household and macro levels. It in itself is not bad. When there are few existing chances of employment in economy and chances of finding new are very slim, exodus of workers is normal. Systematizing such supply of labor by giving training and helping them find good employment opportunities, if they like, elsewhere is not a bad policy in the short run. In the long run, retaining the required at home is crucial. For that, channeling remittances in productive usages as opposed to consumption of imported goods is essential. Nepali policymakers have failed on this front. And, that is the danger.

We are seeing symptoms of Dutch Disease in the economy. Letting it not be a Dutch Disease itself requires a both short run and long run policies. The former is due to our compulsion as we can’t just chock the flow of money just to check ‘brain drain’ (or ‘brain gain’?). People will go anyway if there are no opportunities at home or the opportunities elsewhere are higher than at home. Systematizing this process (though a second best option) in the short term is good for the nation. The first best option is creating opportunities at home, which can be done gradually. Work should be started on both fronts. Note that even if there are opportunities at home, people still do migrate.

Here is Santosh Pokharel’s take on why remitters are drifting away form using formal remittance channels (high fees and lack of awareness).

4. Bernstein on Obama’s hat tip to Keynes. “The President signaled an understanding of the effectiveness of stimulus along with the need for more of it.” Krugman on “He’s just not that into you”.

5. Campos and Nugent on why the global financial crisis has been wasted.

6. Ezekwesili on the birth of the Republic of South Sudan.

7. Nepal’s budget for FY 2011-2012: The upcoming budget in a new format to make Nepal’s accounting system compatible with international accounting. Any expenditure under the grants and subsidies heading will be considered as recurrent expenditure. Therefore, grants and subsidies that currently fall under capital expenditure will be moved to recurrent expenditure. Revenue and grant will be shown in the income part instead of revenue. Under this heading, tax, other revenues and foreign grants will be included. The principal refund that is currently shown in the revenue heading will be moved to financing part. The principal payment will be moved from the expenditure part.The new budget will have loan investments, capital investment, foreign loans and borrowing under the financing heading. It will be shown under this heading after adjusting refund of loan investment and principal payment of foreign and domestic borrowing. Meanwhile, peace, social inclusion and infrastructure will be the priority (so they say!). Civil servants salary to be hiked by at least 20 percent. Earlier, I argued for why the public sector salary should be increased. Here is my take on Nepal’s policies and programs for FY 2011-2012.