Thursday, August 18, 2011

Nepal’s sovereign rating

Nepal does not have a sovereign rating. Standard & Poor’s, Moody’s, and Fitch, the three international rating agencies, have not rated Nepal. Altogether 58 developing countries are still not rated by them. Canuto, Mohapatra and Ratha of the World Bank followed the same methodology used by S&P to estimate the rating of the unrated developing countries.

As of April 2011, Nepal got CCC+, Maldives B+ to BB+, Bhutan and Bangladesh BB- to BB. Nepal falls under the "high default risk" category; Maldives “highly speculative”; and Bhutan “speculative”. The rating is based on a regression outcome with the independent variables GNI per capita, GDP growth rate, debt to exports ratio, reserves to imports to short term debt, growth volatility, inflation and rule of law.

Transatlantic economies whipsawed by globalization

Jeff Sachs writes:

A failure of economic strategy and leadership lies behind the near simultaneous collapse of market confidence in the euro zone and US economies. No need to blame the rating agencies: governments in Europe and America have been unable to cope with the realities of global capital markets and competition from Asia – and deserve the lion’s share of the blame.

I’ve watched dozens of financial crises up close, and know that success means showing the public a way out that is bold, technically sound and built on social values. Transatlantic leadership is falling short on all counts. Neither the US nor Europe has even properly diagnosed the core problem, namely that both regions are being whipsawed by globalisation.

Jobs for low-skilled workers in manufacturing, and new investments in large swaths of industry, have been lost to international competition. Employment in the US and Europe during the 2000s was held up only by housing construction stoked by low interest rates and reckless deregulation – until the construction bubble collapsed. The path to recovery now lies not in a new housing bubble, but in upgraded skills, increased exports and public investments in infrastructure and low-carbon energy. Instead, the US and Europe have veered between dead-end, consumption-oriented stimulus packages and austerity without a vision for investment.

Sachs outlines three fiscal policies for the US and the EU.

  • Expand investments in human and infrastructure capital.
  • Cut wasteful spending, for instance in misguided military engagements in places such as Iraq, Afghanistan, and Yemen.
  • Balance budgets in the medium term, in no small part through tax increases on high personal incomes and international corporate profits that are shielded by loopholes and overseas tax havens.

Labor issues cost closure of another garment factory in Nepal

The beleaguered Nepalese garment industry has lost one of the top performs—Surya Nepal, which produces popular international brand John Players and exports to India, the US, Canada, France and other European countries—due to protracted labor problems.

The blame should squarely go to the trade unions that have been letting its members use militant behavior to press their demands (remember locking management staff and giving physical threats?), which has so far revolved around increasing wages (multiple times in a year) and social security (which is a newly introduced concept). When will the trade unions (read its bosses) get satisfied with wages? What is the final deal?  What happened to this deal between labor unions and FNCCI? Do the trade union leaders really represent their members (or trade union members honor agreements singed by their organization heads)?

The policy inconsistency of government and stance inconsistency of trade unions (that have been using extralegal means to press their demands) is bleeding the industrial sector. Vested interests of trade union bosses and their bosses of political parties are actually costing not only the industrial sector but also the na├»ve workers who think they are represented by the leaders are politicians who are past their retirement age. Closing down Surya Nepal will cost 650 direct and 1400 indirect employment. We already lost Colgate Palmolive, Dabur Nepal, Kodak and other MNCs due to labor and political problems. 

Established in 2004 with an investment of Rs 700 million, Surya Nepal was producing popular international brands like John Players and Springwood. The industry was directly employing more than 700 workers, of which majority were women. Likewise, it was providing employment to other 1,400 workers mainly by contracting out its production orders.

Also, read this article that explains how labor militancy is leading to strike-unemployment cycle. This statement is even valid right now: “If you have lost a job, are potentially going to lose, or cannot get one in the market, then blame the outrageous, militant youth wings and the politicians who incite the unions to go on a destructive path.” Read this article that explains the disconnect between outrageous labor demands not matched by labor productivity.

Poverty declined in Bangladesh from 40% to 31.5% in five years

Absolute poverty in Bangladesh dropped to 31.5 per cent in 2010, reflecting an 8.5 percentage point decline in the last five years, according to Bangladesh Household Income and Expenditure Survey (HIES) 2010. This is lower that in Nepal where absolute poverty declined to 13 percent of total population, down from 31.5 percent in 2003/04—an incredible 18 percentage point decline in poverty, or three percentage point decline each year.

According to the HIES 2010 data, poverty in the rural areas shrunk by 8.60 percentage points to 35.2 per cent in 2010 from 43.80 per cent in 2005. The last HIES survey in 2005 showed that 40 per cent of the people of Bangladesh, out of its total population, lived below the poverty line. According to the last survey data, the 43.80 per cent of the total rural population was poor while 28.40 per cent people in the urban areas lived below the poverty line.

One of the main factors is attributed to remittances, which was also the most crucial factor in reducing income poverty in Nepal. The Bangladeshi authorities attribute to this remarkable feat to increased remittances, spread of modern agricultural method, improvements in rural infrastructure and flow of micro-credit to the ultra-poor.

The present report is based on the final data sets of HIES 2010. The sample size was
12,240 households where 7,840 were from rural area and 4,400 from urban area.

South Asia continues to reap the benefits of remittances. The question is: can this be sustainable and can the money be channeled to productive sectors?