Thursday, May 31, 2012

Purpose, forms and determinants of green investment

Given the increasing realization of the impact of climate change on productivity and output, which would disrupt fiscal positions (lower revenue and higher spending), discussion is now focusing on “green investment, which is the “investment necessary to reduce greenhouse gas and air pollutant emissions significantly”. Eyraud and Clements have a simple yet resourceful piece about green investment in this issue of F&D magazine.

They argue that green investment could take the following forms:

  • Less polluting investment in energy generation (wind, solar, nuclear,  hydropower or biofuel such as ethanol made from corn or sugarcane)
  • Investments that reduce energy consumption (supercritical coal-fired plants, which are highly efficient electricity plants that burn less coal; efficient grids; efficiency gains in transportation—by using more fuel-efficient and hybrid cars and by increasing use of mass transit; energy-saving appliances and improved waste management; improved insulation and cooling systems)

Government support green investment primarily to

  • Reduce carbon emissions and prevent climate change
  • Improve energy security by diversifying the energy mix
  • Foster growth by promoting competitiveness, job creation, and innovation in new industries.

Common forms of support policies for renewable electricity generation are

  • Feed-in tariffs, which mandate that utility companies pay prices to green electricity producers that reflect the cost of the technology, which can be above the cost of conventional electricity generation
  • Renewable portfolio standards, which require electricity companies to rely on renewables for some fraction of their energy sources

Eyraud and Clements argue that five factors determine the level of green investment:

  • Real gross domestic product (GDP)—higher level of GDP tend to boost investment in green technologies; an additional 1 percentage point of GDP growth should raise green investment growth by about 4 percentage points in the long run, other factors being equal
  • Long-term real interest rate—high cost of capital has a negative impact on green investment; green investment declines by about 10 percent when the real interest rate increases by 1 percentage point
  • Relative price of international crude oil—higher fuel prices increases return on green investment by lowering cost of capital produced from renewables; green investment grows by an additional percentage point when there is a 1 percentage point difference between increases in crude oil prices and economy-wide inflation
  • A variable representing the adoption of feed-in tariffs—high feedstock prices and overcapacity lower investment in biofuel; green investment should be two to three times larger in countries adopting feed-in tariffs, other factors being equal.
  • A variable measuring whether a country has a carbon pricing mechanism (carbon tax or cap-and-trade)—environmental tax levied on the carbon content of fuels

Wednesday, May 30, 2012

Three quarters of world poor live in low aid countries

In an interesting twist to the debate on focus of aid, Jonathan Glennie of the ODI argues that three-quarters of world poor live in low aid countries.

The note finds that a large majority of poor people (around three quarters) live in Very Low Aid or Low Aid Countries (VLACs and LACs) – defined respectively as countries that receive less than 1% and 2% of their GNI in aid (Glennie and Prizzon, 2012) – and have done for at least two decades. This is a story not of change but of continuity: most poor people have long lived in countries which receive very little aid.

It is therefore wrong to suggest that there are now more poor people living in non-aid dependent countries; if anything the data presented here implies the opposite. While the total number of income poor in the world has declined, the proportion of poor people living in High Aid Countries (HACs), where aid is over 10% of GNI, has in fact increased in the past 20 years, from 10% to 15%.

These findings should not be taken to suggest that aid has been unimportant in development, even in countries where it has been relatively low as a proportion of GNI. But they do imply that further thinking is required about the role and purpose of aid in different contexts. If aid is not a significant proportion of the overall economy, and hasn’t been for decades, then what role is it playing, can that role be enhanced, and what other actions might be more important to support poverty reduction than giving aid?

Monday, May 28, 2012

Extractive institutions and prosperity in Nepal

[It was published in The Week (Republica), May 25, 2012, p.13]

Why is Nepal poor?

In 1820, Nepal’s GDP per capita (1990 PPP US$) was US$397, which was US$312 higher than Singapore’s and US$121 lower than Australia’s. By 1913, a Singaporean and an Australian were 2.37 times and 14.93 times richer than a Nepali was. Furthermore, in 1950 Botswana’s, a landlocked country in Sub-Saharan Africa, GDP per capita was US$148 lower than Nepal’s (at US$496). Fast forward to 2008, a Botswanian was 4.21 times richer than a Nepali (a Singaporean and an Australian 24.79 times and 22.31 times respectively). Based on 2010’s current purchasing power parity, Nepal is the twentieth poorest country in the world and its GDP per capita is below the average of low-income countries.

Why is Nepal languishing behind while other countries, which started with pretty much similar income level in the past two centuries, are witnessing high level of prosperity? Why are resource rich as well as landlocked countries making bigger strides than Nepal in the past six decades? In a new book titled “Why Nations Fail”, MIT’s Daron Acemoglu and Harvard’s James Robinson offer persuasive reasoning and insights on the failure of nations like Nepal to prosper, innovate, and achieve sustainable economic growth. Though the book does not specifically include discussion related to the failure of Nepal to usher an economic revolution, it does offer a compelling theory for the failure of low-income country like ours.

Source: Angus Maddison’s historical statistics of world economy

Extractive institutions

In short, nations like Nepal fail because of the continued supremacy of extractive political and economic institutions over pluralism and the freedom to engage in productive activities without fear of expropriation and extortion. Extractive economic institutions are the practices and policies that are designed to extract incomes and wealth for the benefit of few elites at the expense of ordinary citizens. Some of these are insecure private property rights, expropriation of returns to investment, unfriendly labor regulations, uncompetitive practices, and imprudent macroeconomic management such as high inflation and currency controls. These have stifled entrepreneurial spirit and dis-incentivized saving, investment and innovation. But they have helped rulers and elites concentrate power and wealth even at the cost of unrest, strife and civil war. The power holders are neglecting investment in basic public services such as education, innovation, technology, healthcare and infrastructure—the drivers of economic growth— and resisting reform because it threatens the power and wealth of the extractors. Even when there are institutional changes, the elites ensure that the new institutions are not pluralistic enough to challenge their hold on power and wealth. The vicious circles between extractive political and economic institutions has impeded economic growth and restricted pluralistic distribution of political power.

Both before and after the economy was liberalized, the same set of businesspersons, corporate houses and politicians has been tightly controlling economic activities, leading to suppression of creative destruction. Some of the examples include syndicates in transport sector, middlemen in agriculture, unruly and politically affiliated labor unions, macroeconomic imprudence for the benefit of party cadres, land and fertilizer capture, extralegal levies, control of telecom sector by elites until it was liberalized to initially benefit a select investors, and control of development projects by party associates, among others. Even though there were political changes, the ensuing institutions retained the core values of extraction. These were prevalent during and after the Rana regime, and in the decade long insurgency. Unfortunately, the same extractive practices and policies are given continuity after 2006.

Unless at critical junctures the drive to institutional change leads to inclusive institutions, the same elites and set of powerbrokers and power holders will continue to run the show in one way or the other—social scientists call it “iron law of oligarchy”. For instance, the extractive and repressive Rana regime was replaced in 1950 by a constitutional monarch, who was surrounded by sycophants and extractive institutions that morphed into a different form but still retained its extractive nature. The weak democratic movement and the nascent inclusive institutions threatened the power and playing field of the elites (oligarchs) and feudal order. This led to coup d'état in 1959 by former King Mahendra, who was supported by the very people making a living from the automatic gains from extractive institutions. King Mahendra ruled by an iron fist, subverted pluralism, and squelched inclusive institutions by promoting extractive political institutions that hovered around the palace. This in turn supported extractive economic institutions (limited land rights, debt-ridden state-owned institutions (SOEs), inefficient family-owned businesses and uncompetitive big private sector players), leading to a situation where the few benefited at the cost of many. Though the monarchy yielded executive powers to the democratically elected parliament after 1990, it retained the final say, either directly or indirectly, on crucial matters. This was challenged decisively during the decade long bloody civil war, during which period the former King Gyanendra usurped power and filled in most of the executive positions by the same set of people who were against instituting inclusive institutions and governance structure.

The cosmetic changes in institutions where ultimately the same set of leaders, elites and businesses usurp power and restrain march to prosperity if it affected their hold on wealth and power—leading to insignificant change in livelihoods—have been a hallmark of not only Nepal’s unsuccessful drive to prosperity, but also of fragile nations such as Zimbabwe, Sierra Leone, Myanmar, North Korea, Chad, Haiti, Liberia, Angola and Sudan. Though the intensity of extraction in Nepal is lesser than what is prevalent in other fragile nations, it has nevertheless affected the drive to attaining potential level of prosperity. Worse, it has enabled accumulation of power in the hands of the same people who presided over the gradual institutional changes during different critical junctures in our history.

Path to prosperity

The path to prosperity for Nepal is to ensure genuinely inclusive political and economic institutions. At no point in Nepal’s history since its unification has there been truly inclusive political and economic institution that could create and promote the necessary base for a majority of people to increase wealth and income. Importantly, there has never been sustainability of reformed institutions, however inclusive they were. Under inclusive economic institutions, wealth is not concentrated in the hands of a few elites as a broad range of people from different creed, ethnicity and background could participate to better their lives, and boost wealth and income based on the returns to investment in whatever activity they engage in. Under inclusive political institutions, power is distributed widely in a pluralistic manner, but it is also centralized to some degree to maintain law and order. Importantly, the foundations for secure property rights are distinctly laid out and inclusive market economy guaranteed.

Source: Author’s estimation using WDI database

Now, you must be wondering that there has been economic growth, albeit below 5 percent, even in the presence of extractive institutions. Well, the powerbrokers and power holders allowed some growth to take place by making institutions partially inclusive to ensure their own survival in a changed context. For instance, though during the first and second waves of globalization (1870-1914 and 1945-1980 respectively) political and economic institutions did not wholly change in Nepal, they did change to some extent in select sectors to ensure the flow of income (from taxes and royalties) to extractors. The opening of agriculture and state-sanctioned manufacturing activities helped generate growth below 5 percent. That said the political sphere was tightly controlled by the elites manning Narayanhiti, Singha Durbar and various local level political authorities. The economic sphere was controlled by a handful of businesspersons who loathed open market and competition (think of the slew of bankrupt SOEs and monopoly power enjoyed by a few business houses) for fear of losing market power.

However, during the third wave of globalization (1980 onwards), a confluence of factors ranging from gradually developing momentum for global integration (think of the demand for imported goods, radio and television sets, vehicles, refrigerators, air and road connectivity among others) to the shifting general perception about pitfalls of a closed economy and the compulsion to tailor economic policies as per developments in the Indian economy led to a situation where the extractive institutions could not fully control rents and income as they wished. It spurred greater degree of economic activities than before, but not of the full potential. Creative destruction—which would result in further investment, efficient utilization of resources and innovation—was tightly controlled as is evident from the reluctance to open up lucrative sectors to private players and in reviving debt-ridden, bankrupt SOEs. Consequently, Nepal is experiencing less than potential growth rate under extractive institutions.

Critical juncture

When there are persistent challenges to existing political and economic institutions, resulting in gradual unbinding of power from the elites’ hands, then institutions drift from one phase to another. These drifts arising from the emergence of critical junctures— “major events that disrupt the existing political and economic balance”—and the course taken by countries at that point in time determines their acceleration on the path to prosperity. The junctures are determined by a confluence of social, economic and political factors along with the existing opportunities and challenges brought about by changing context.

In England, the Black Death that killed almost half the population during the fourteenth century, the Glorious Revolution of 1688, and the opening of Atlantic trade resulted in a critical juncture for institutions to change. These events gradually empowered the public and forced the monarchy to cede executive power to the parliament, which in turn created a basis for the emergence of virtuous cycle between inclusive political and economic institutions. The result: Industrial Revolution in the eighteenth century and the envious rise in living standard and military might of Britain. Contrary to the British case, Zimbabwe went backwards when it reached critical juncture post-independence circa 1980, resulting in destitution and collapse of the once thriving economy.

In Nepal, we reached critical junctures in 1950, 1990 and 2006. In 1950 and 1990, the myopic vision of the elites and their penchant to stick to power along with the access to wealth that comes with it ensured continuity of extractive institutions in a bit concessionary terms (mainly due to the compulsion to liberalize the economy), resulting in growth and prosperity below potential. We missed two opportunities to create inclusive institutions. Lately, the successful political revolution in 2006 is leading to sweeping changes in division of power, decentralization, design of affirmative action, access to services, guarantee of rights, reservations and identity. However, there is a high chance that economically we could be either in the same or even in worse condition if these changes at this critical juncture are not matched with the creation and application of genuine inclusive economic and political institutions. As of now, we are starting with the same economic base and agents but with heightened apprehension over extraction of wealth and income in the pretext of ‘fair distribution’. It will stifle innovation, saving and investment. Furthermore, though political composition and structure are changing, the core extractive nature of political institutions is not. The same leaders who failed the Nepali people are still controlling and will likely control the political discourse and powerhouses in the federal set up. Worse, even the new leaders advocating pluralism might be unable and unwilling to change the way extractive political and economic institutions are functioning as they might get consumed by the allure of it while presiding over them at decisive moments.

Will Nepal succeed?

Yes, if the central and state level leaders create genuinely inclusive political and economic institutions that lay the foundation for people to put their best abilities to action and benefit from it in terms of increased wealth and income. Else, even stronger economic turbulence will strike the nation and a few elites from all creed and background will hold power in their hands, benefiting financially at the cost of many people whose aspirations and expectations have skyrocketed lately. Creating inclusive institutions in name only will not suffice. It has to be implemented, which means ceding of control by existing extractors belonging to the elite political and economic section of our society, i.e. allowing creative destruction in both politics and business.

The fate of our prosperity lies not in our history, culture, geography (landlocked), or ignorance about the instruments of prosperity, but in our ability to create truly inclusive political and economic institutions. However, attempting to engineer prosperity without tackling the root causes will render fruitless any cosmetic changes in the structure of power and rule by any group of people.

Saturday, May 26, 2012

State of trade facilitation in Nepal

According to the latest trade facilitation ranking (Global Enabling Trade Report 2012), Nepal stands at 124 out of 132 countries. Nepal’s ranking is the lowest in South Asia. The report shows that Nepal’s tariff rate is one of the highest (ranking is 127 out of 132 countries) and physical insecurity is also one of the severest (ranking 128 out of 132 countries). The availability and quality of transport services and availability and use of ICTs are also poor (ranking 124 out of 132 countries). That being said, margin of preference in destination markets is one of the best (ranking 3) and  tariff peaks are low (ranking 46).

Enabling trade index ranking
Year Rank Value [1-7 (best)]
2009 110 (out of 121 countries) 3.22
2010 118 (out of 125 countries) 3.27
2012 124 (out of 132 countries) 3.07


Singapore topped the index, followed by Hong Kong SAR. Denmark and Sweden, placing third and fourth, respectively, “showed excellent performance based on their strong business environments, efficient border administrations and highly developed infrastructures.” The report also finds that security, quality and trade can be mutually reinforcing through supply chain integrity efforts, but a knowledge gap in identifying buyers remains an important barrier.

The Enabling Trade Index measures institutions, policies and services facilitating free flow of goods over borders and to destination. It breaks the enablers into four issue areas:

  • market access
  • border administration
  • transport and communications infrastructure
  • business environment

Recently, another global ranking of trade facilitation (Logistics Performance Index 2012) as well revealed poor standing of Nepal. It showed that Nepal has the fifth worst logistics efficiency in the world. With a score of 2.04, it ranked 151 out of 155 countries in 2012. Chad, Haiti, Djibouti and Burundi have worse logistic performance than Nepal’s. Compared to previous rankings, Nepal’s performance is sliding downward. In 2007 the ranking was 130 (out of 150 countries) with a score of 2.14 and in 2010 its ranking was 147 (out of 155 countries) with a score of 2.2.

Thursday, May 24, 2012

What growth rate is necessary to escape middle-income trap?

Felipe, Abdon and Kumar (2012) argue:

  • a country that becomes lower-middle-income (i.e., that reaches $2,000 per capita income) has to attain an average growth rate of per capita income of at least 4.7 percent per annum to avoid falling into the lower-middle-income trap (i.e., to reach $7,250, the upper-middle-income threshold)
  • a country that becomes upper-middle-income (i.e., that reaches $7,250 per capita income) has to attain an average growth rate of per capita income of at least 3.5 percent per annum to avoid falling into the upper-middle-income trap (i.e., to reach $11,750, the high-income level threshold
  • Avoiding the middle-income trap is a question of how to grow fast enough so as to cross the lower-middle-income segment in at most 28 years, and the upper-middle-income segment in at most 14 years.

They argue that escaping the middle-income trap lies in a country’s ability to undergo structural transformation (from low-productivity activities into high-productivity activities), the kind of goods they produce and export (sophistication of products), and the diversification of economy. They find that Korea was able to gain comparative advantage in a significant number of sophisticated products and was well connected, but Malaysia and the Philippines were able to gain comparative advantage in electronics only. Hence, Korea was able to escape the middle-income trap. Lower income group countries need to grow faster for longer period of time to escape the middle-income trap.

Using highly disaggregated trade data, we compare the exports of countries in the middle-income trap with those of countries that graduated, across eight dimensions that capture different aspects of a country’s capabilities to undergo structural transformation, and test whether they are different. The results indicate that countries that made it into the upper-middle-income group had a more diversified, sophisticated, and non-standard export basket at the time they were about to jump than those in the lower-middle-income trap today. Likewise, countries that have attained upper-middle-income status had more opportunities for structural transformation at the time of the transition than countries that are today in the lower-middle-income trap. We also find that the sophistication of the export basket of countries in the upper-middle-income trap is not statistically different from that of the countries that made it to high-income at the time they were about to make the transition. However, countries in the upper-middle-income trap are less diversified, are exporters of more standard products, and had fewer opportunities for further structural transformation than the countries that made it into the high-income group.

They provide working definition of four income groups of GDP per capita in 1990 PPP dollars:

  • low-income below $2,000
  • lower-middle-income between $2,000 and $7,250
  • upper-middle-income between $7,250 and $11,750
  • high-income above $11,750

They show that in 2010, 35 out of the 52 middle-income countries were in the middle-income trap, 30 in the lower-middle-income trap (9 of them can potentially graduate soon as they have been in this income group over 28 years); and 5 in the upper-middle-income trap (2 of them can potentially leave it soon as they have been in this income group over 14 years). 8 out of the remaining 17 middle-income countries (i.e., not in the trap in 2010) are at the risk of falling into the trap (3 into the lower-middle-income and 5 into the upper-middle-income).

In South  Asia, while Sri Lanka could escape the trap soon Pakistan could fall back into the trap. Altogether 37 countries have always been low-income since 1950 (Afghanistan, Bangladesh and Nepal from South Asia).

Wednesday, May 23, 2012

MGNREGA: Self-targeting, food prices, poverty, local capacity and jobs

Summary of latest papers on MGNREGA’s self-targeting ability, impact of food prices on poverty vis-à-vis income effect, capacity of local authorities to create enough jobs and workers’ incentives to take up MGNREGA jobs.

Jha, Bhattacharyya, Gaiha, & Shankar (2009) find that overall the size of landholdings is a negative predictor of participation in MGNREGA. A one standard deviation increase in landholdings (4.5 hectares) reduces the odds of MGNREGA participation by 1.3 fold (p.6). Specifically, they find a positive relation between size of landholdings and participation in Andhra Pradesh, and but the case is opposite in Rajasthan. They argue that program capture might be prevalent in Andhra Pradesh because of land inequality, political interference, and geographical remoteness.

Jha, Gaiha, & Pandey (2010) argue that the ratio of NREGS wage to agriculture wage, marital status, age, gender, and education determines employment in the rural employment guarantee program. Their conclusion is based on household level survey data from three states: Rajasthan, Andhra Pradesh, and Maharashtra.

  • While it is broadly true that the selection of workers for NREGS favors illiterate workers and those from deprived backgrounds, female workers appear to have a lower chance of being selected. In two of the three states, the ratio of NREGS wage to agricultural wage has significant effects. Marital status and age also affect the chances of getting employment in NREGS. Within each state, workers in some districts have higher chances of being employed in NREGS.
  • Once employed in NREGS, the duration of such employment is affected by social background or educational status. Factors relevant for selection for NREGS are not necessarily so for the duration of employment.

Ghose (2011) finds that MGNREGS, despite problems in implementation, has succeeded in providing substantial additional wage employment to the rural poor at a wage no lower than what prevails. It has thereby increased money incomes for this group of workers quite significantly. Yet, the program has not made a significant contribution to reduction of rural poverty. The reason is food price inflation to which the program has ended up contributing. While the MGNREGS increased the demand for food, this was not met by an increase in the supply of food in the short run. Ghose finds that the increase in wage income of rural households attributable to MGNREGA was 22.2 percent in 2009-10, up from 7.4 percent in 2006-07 (p.5).

In a case study of Birghum district in West Bengal, Mukherjee & Ghosh (2009) find:

  • High inter-block variations in terms of average person-days created and utilization of NREGA funds. The blocks which have performed better also show significant variation across the Gram Panchayats within the block. There seems to be no clear relation between utilization of available funds and average person-days created either at the GP level or at the block level.
  • The weak correlation observed between number of households with job card and availability of NREGA funds at the GP level suggests that GPs are not able to come up with adequate number of NREGA schemes to absorb the laborers demanding employment.
  • There is also no evidence of NREGA getting better implemented in blocks with higher share of agricultural laborers or higher percentage of BPL households, which one would expect. Rather, blocks with higher share of BPL households show lower average person-days created under NREGA.
  • Lack of technical skills and human resource seem to be the major reasons why the GPs are not able to develop adequate number of schemes under NREGA.
  • Though NREGA allows scope for creating various types of durable productive assets at the community level (such as roads, improving rural infrastructure, drought-proofing, watershed development, water conservation etc), focus has remained on types of works which are easy to design (such as road construction and pond excavation).
  • The GPs lack the capacity to design adequate number of schemes under NREGA which can be meaningfully linked with the livelihood and infrastructural development of the local economy. Therefore, greater efforts should be given for the capacity building of the GPs, especially the backward GPs.

Dutta, Murgai, Ravallion, & van de Walle (2012) argue that poorer families tend to have more demand for work on the scheme, and that (despite the un-met demand) the self-targeting mechanism allows it to reach relatively poor families and backward castes.

  • Participation rates on the scheme are higher for poor people than others.
  • Targeting performance varies across states. Some of those living above the official poverty line in better-off states will no doubt be relatively poor, and need help from the scheme. The overall participation rate seems to be an important factor in accounting for these inter-state differences in targeting performance, with the scheme being more pro-poor and reaching scheduled tribes and backward castes more effectively in states with higher overall participation rates.
  • While the scheme is clearly popular with women—who have a participation rate that is double their participation rate in the casual labor market—the rationing process does not appear to be favoring them. We also find evidence of a strong effect of relative wages on women‘s participation—both wages on the scheme relative to the market wage and the male-female differential in market wages. As one would expect, poor families often choose whether it is the man or the woman who goes to the scheme according to relative wages.
  • For India as a whole, we find that the scheme‘s average wage rate was roughly in line with the casual labor market in 2009/10. This might look like competitive labor market equilibrium, but that view is hard to reconcile with the extensive rationing we find. Interestingly, we do find a significant negative correlation between the extent of rationing and the wage rate in the casual labor market relative to the wage rate on the scheme. Although this is suggestive, on closer inspection we are more inclined to think that other economic factors are at work. Indeed, the correlation largely vanishes when we control for the level of poverty. Poorer states tend to see both more rationing of work on the scheme and lower casual wages—possibly due to a greater supply of labor given the extent of rural landlessness.



Dutta, P., Murgai, R., Ravallion, M., & van de Walle, D. (2012). Does India's Employment Guarantee Scheme Guarantee Employment? World Bank Policy Research Working Paper 6003, 1-34.

Ghose, A. K. (2011). Addressing the Employment Challenge: India's MGNREGA. ILO Employment Working Paper No. 105, 1-40.

Jha, R., Bhattacharyya, S., Gaiha, R., & Shankar, S. (2009). Capture of Anti-Poverty Programs: An Analysis of the National Rural Employment Guarantee Program in India. Journal of Asian Economics 20(4), 456-464.

Jha, R., Gaiha, R., & Pandey, M. K. (2010). Determinants of Employment in India’s National Rural Employment Guarantee Scheme. ASARC Working Paper 2010/17, 1-34.

Mukherjee, S., & Ghosh, S. (2009). What Determines the Success and Failure of 100 Days Work at the Panchayat Level? A Study of Birbhum District in West Bengal. IDSK Occasional Paper 16, 1-19.

Thursday, May 17, 2012

Employment Guarantee Act in Nepal

[It was published in Republica, May 16, 2012, p.8.]

Work on it

While a cycle of political deadlock, hope and uncertainty continue to plague political sphere, Prime Minister Dr.Baburam Bhattarai’s government quietly approved an Employment Guarantee Act (EGA) and sent it to the parliament for endorsement. The EGA, modeled along India’s Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), will guarantee jobs to households below poverty line (BPL). If endorsed by the parliament and implemented from next fiscal year, this demand-driven scheme —originally drafted by National Planning Commission (NPC)— will help in reducing unemployment and under-employment, which is estimated to be around 46 percent of population, reduce distress migration from rural to urban areas, boost agriculture productivity, and enhance livelihood opportunities. Unfortunately, this hugely consequential public works program is not adequately discussed and consulted with relevant stakeholders.

The EGA guarantees 100 days of employment per year to one adult member of BPL households. Apart from providing jobs, the scheme seeks to create infrastructure that would help in boosting productivity and livelihood opportunities. According to NPC officials jobs will be provided in work related to construction, infrastructure, industries and other development projects. If the government is unable to provide jobs within a stipulated deadline to those who are eligible and demand one, then it will have to pay unemployment allowance equivalent to around 50 to 60 percent of minimum wage. It will have grievance redressal mechanism set up at grassroots level. In an economy with 83 percent of the population still living in rural areas, time-tested and successful public works program like employment guarantee will be a vital policy tool for social protection. That being said, without proper planning, monitoring and executive agencies at grassroots level, there is also a danger that the scheme could be a huge fiscal burden and a major instrument for elite capture, i.e. wealthy and those in power capture funds and works meant for the needy and poor.

In India, MGNREGA came into force on February 2, 2006 with an aim to directly touch the lives of the poor and promote inclusive growth. This flagship rural employment scheme of the Congress government is credited for partly helping the party get an astounding electoral victory in 2005. MGNREGA is an extension of Employment Guarantee Scheme (EGS) implemented in Maharashtra in 1979 in response to debilitating impact of famine and drought on poor households. The scheme guarantees employment within 15 days if a qualified person submits employment application at a local administrative authority. The wage rate is equal to the unskilled agriculture labor wage, which is now adjusted for inflation as well. Currently, the MGNREGA wage is highest in Haryana (IRs 191 per day) and lowest in Bihar and Jharkhand (IRs 122 per day). The average wage across all states and union territories is IRs 145 per day for seven hours of manual unskilled work. The work has to be provided within 5 km radius of the village a person is residing or else extra wage of 10 percent is payable. Moreover, working and living facilities (safe drinking water, shade for children and periods of rest for workers, first-aid box for emergency treatment and minor injuries, and safety equipment and measures for health hazards connected with work) have to be provided. At least one-third of the work is reserved for women and the while designing work by the Gram Panchayats 60:40 wage to material ratio has to be maintained. The permissible work is related to water management, land management and rural connectivity in and around the areas where the workers reside.

The program is running into its sixth year of operation and its assessment thus far has largely been positive. In its first year, the program was implemented in the 200 most backward districts. The next year it covered an additional 130 districts and now it covers all districts of India. In 2010/11, it provided employment to 55 million households and of the 2.6 billion persons-days of work provided, 47.7 percent was taken up by women and 51 percent by Scheduled Castes (SCs) and Scheduled Tribes (STs). Latest estimate shows that the cost of MGNREGA is about 0.45 percent of GDP, 3.19 percent of expenditure and 5.08 percent of revenue.


Preliminary cost estimate of employment guarantee scheme
Number of BPL population (million) 6.71
Minimum agri wage per day (NRs) 195
Average household size 4.90
Number of households BPL 1369028.57
Potential employment demand (15-59 years) 742013.49
Wage cost per day, billion 0.14
Wage cost per year (100 days of employment), billion 14.47
Administrative cost (25 percent of wage cost), billion 3.62
Total cost (wage plus administrative), billion 18.09
Total cost (share of budget for FY 2011-12) 4.70
Total cost (share of GDP in constant prices, 2011-12) 2.69

Source: Own estimate based on Census 2011 and NLSS III data

A quick estimate of the potential cost of the proposed EGA reveals that to cover all adults of BPL households (as per NLSS III) it would cost at most 2.69 percent and 4.7 percent of 2011/12 GDP and budget respectively. It includes wage and administrative costs of providing employment to around 0.74 million adults from 1.37 million BPL households. However, implementing the program is not as easy as it sounds because of the need to generate additional revenue to fund the program, the need to finalize central-state power division to execute and share cost burden, and the inherent administrative hassles and shortcomings.

First, implementing EGA without additional sources of funding or without cutting unproductive and untargeted subsidies would be a challenge in the face of rising budget deficit, which is expected to reach about 3.8 percent of GDP this year. Finding an additional Rs 18 billion for EGA when the MoF is struggling to secure enough funds for retired PLA combatants along with additional expenses required for Nepal Army in the post-integration era is a big headache for MoF officials. The problem compounds when revenue growth fails to keep pace with expenditure growth.

Second, NPC’s hurry in getting it implemented from next fiscal year would invite operational trouble because EGA typically mandates federal states to cover some portion of the cost as seen in the case of MGNREGA in India. EGA designed now without taking into account this political aspect is going to run into serious trouble. Furthermore, all other employment schemes need to be either scrapped or incorporated in EGA to ensure smooth operation, plug leakages, and avert duplicates. The required homework on this front is dismal.

Third, without strong local level institutions (VDCs) and representatives manning local offices, leakages will be extremely high. Implementing the scheme with weak grassroots institutions would result in fudging of muster rolls, manipulation of account by contractors and elite capture of the employment slots meant for BPL households. This is precisely one of the reasons why Karnali Employment Guarantee Program failed to yield satisfactory result. The EGA should be allowed to be used as yet another tool for political parties and their supporters to legally plunder state coffers without adding any value to productive capacity of the nation.

Fourth, the work under EGA should be strictly related to rural sector, including land management, water management and rural road connectivity—all of which will help boost agriculture production and productivity. The program is meant for BPL households and public works should be carried out in places where most of them reside, i.e. rural areas. Also, the assets created should be fairly long lasting so that they not only help agriculture sector, but also link this with the industrial sector.

Fifth, since large-scale social protection schemes like EGA create temporary distortions in the agriculture labor market, the government should be able to adequately deal with such byproducts. For instance, the MGNREGA wage rate put upward pressure on overall wage rate in India and created a shortage of labor in major agriculture states like Punjab and Haryana, where workers from poor states like Bihar and Uttar Pradesh migrated during lean agriculture season. This will also happen in our economy and temporarily affect both agriculture and industrial sectors.

Overall, while it is commendable that the NPC is pushing for the implementation of EGA, the government should realize that the scheme would be a waste of resources if it is implemented without adequate institutional set up and clear cost sharing mechanism between central and state governments. Importantly, it should be ensured that the scheme is demand-driven rather than supply-driven and adequate initiatives are instituted beforehand to plug loopholes and inefficiency.

Logistics Performance Index: Nepal ranked 151 out of 155 countries in 2012

The latest LPI ranking shows that Nepal has the fifth worst logistics efficiency in the world. With a score of 2.04, it ranked 151 out of 155 countries in 2012. Chad, Haiti, Djibouti and Burundi have worse logistic performance than Nepal’s.

Compared to previous rankings, Nepal’s performance is sliding downward. In 2007 the ranking was 130 (out of 150 countries) with a score of 2.14 and in 2010 its ranking was 147 (out of 155 countries) with a score of 2.2.

[The three areas where there is improvement in score (but ranking is still low) are customs, infrastructure and logistics competence. Customs clearance time has improved by half a day, and clearance and delivery of exports are to traders’ satisfaction. While the quality of airports, roads, rail and warehousing infrastructure is pathetic, telecommunication/IT has improved with less traders and freight forwarders (29%) indicating it as an issue. The satisfaction with competence and quality of services is average though this is an improvement. That being said, performance on all other indicators is pathetic.]

The ranking in timeliness of shipments in reaching destination within the scheduled or expected delivery is 153 out of 155 countries. The ranking in the ease of arranging competitively priced shipments is 151. The ranking in infrastructure and tracking & tracing is 149.

LPI 2012 Nepal
LPI Rank 151
Score 2.04
Customs Rank 125
Score 2.2
Infrastructure Rank 149
Score 1.87
International shipments Rank 151
Score 1.86
Logistics competence Rank 146
Score 2.12
Tracking & tracing Rank 149
Score 1.95
Timeliness Rank 153
Score 2.21

Nepal has the worst logistics performance ranking in South Asia. Between LPI 2010 and LPI 2012, all countries in South Asia have improved logistics performance ranking except Nepal. India is ranked 46 out of 155 countries, followed by Pakistan at 71, Sri Lanka at 81, Maldives at 104, Bhutan at 107 and Afghanistan at 135.

Logistics Performance Index ranking (out of 155 countries)


LPI Rank LPI Score LPI Rank LPI Score
2012 2010










Sri Lanka

























In South Asia, Nepal has the highest lead time (days) for export via port or airport and land (6 days and 7 days respectively). Lead time is the amount of time between the placing of an order and the receipt of the goods ordered. Similar is the case with import lead time. The number of agencies for export and import (5 each) is the highest in South Asia. Furthermore, the documents required for both exports and imports (6 and 5 respectively) is also the highest in South Asia. Export cost via airport and land supply chains (US$1831 and US$1651) is also the highest in South Asia. Similarly, import cost via airport and land supply chains (US$1957 and US$2322 respectively) is also the highest in South Asia.

Better logistics mean better economic competitiveness and trade performance. It also helps in lowering food prices as “transport and logistics directly affect the price and local availability of food through the performance and resilience of food chains.” The study shows that in developing countries, particularly in landlocked and poor ones, transport and logistics account for 20-60 percent of delivered food prices. The efficiency of a country’s supply chain depends on logistics performance.

High income economies dominate the top logistics rankings, while the economies with the worst performance are least developed countries that are also often landlocked, small islands, or post-conflict states.

So, what is so special about logistics in the top performers? Well, all top performers have developed and maintained a strong public-private partnership and dialogue; good cooperation between policymakers, practitioners, administrators and academics; and a comprehensive approach in the development of transport services, infrastructure and efficient logistics.

The Logistics Performance Index is based on a worldwide survey of operators on the ground (global freight forwarders and express carriers), providing feedback on the logistics “friendliness” of the countries in which they operate and those with which they trade. The ratings are based on 6,000 individual country assessments by nearly 1,000 international freight forwarders, who rated the eight foreign countries their company serves most frequently. It is the weighted average of the country scores on the six key dimensions:

  • Efficiency of the clearance process (i.e., speed, simplicity and predictability of formalities) by border control agencies, including customs
  • Quality of trade and transport related infrastructure (e.g., ports, railroads, roads, information technology)
  • Ease of arranging competitively priced shipments
  • Competence and quality of logistics services (e.g., transport operators, customs brokers)
  • Ability to track and trace consignments
  • Timeliness of shipments in reaching destination within the scheduled or expected delivery time.

Tuesday, May 15, 2012

Sri Lanka: The upcoming South Asian miracle

Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management, explains the promises of an upcoming South Asian miracle, i.e. Sri Lanka. The article below is adapted from Sharma’s article published in The Economic Times. It is based on his new book Breakout Nations: In Pursuit of the Next Economic Miracle.

After decisive end of a bloody civil war, Sri Lanka is on a path of robust growth with investment in infrastructure, readily available human capital, better investment climate, and building up of the prerequisites for high growth rate. The Sri Lankans will definitely enjoy a peace dividend that will be of envy to its regional partners like Nepal.

Why Sri Lanka can be a breakout nation

Ruchir Sharma

I first visited Sri Lanka in 1997, shortly after a rebel bombing of the central bank headquarters had thrown the financial system into chaos. Military checkpoints made travelling around Colombo rather punishing, but the overwhelming impression was of a charming island and talented people trapped inside a seemingly endless civil war.

When I returned in 2011, the civil war had ended with surprising finality, and I took an extra day to see the country, including the huge territory that had been behind the lines of the Tamil rebels.

This should have been easy enough: the Tamil capital at Trincomalee is just 160 miles from Colombo - but the new highways were still being built, and the helicopter on offer was a single-engine job of the kind that routinely crashes in India. My accommodating hosts arranged for the air force to take me up in a twin-engined helicopter.

I've taken helicopters in many emerging markets when the road network is inefficient, normally a bad sign for the economy. But the aerial views of the multiple expressways under construction, the lush green plantations of the interior, and the new resorts facing the turquoise waters that drape the island helped convince me that Sri Lanka is no longer a land in waiting.

In the 1960s, Sri Lanka was billed as the next Asian growth miracle, only to be stymied by a tryst with socialism that played a direct role in igniting the civil war. During the war, Sri Lanka grew half as fast as South Korea and Taiwan and became another country in the long line of emerging-market disappointments.

Today, it seems that Sri Lanka's time has come. The civil war is over, the process of healing is under way, and there is every chance that Sri Lanka will become a breakout nation. Despite slowing sharply during the war years, the economy continued to grow at an average pace of nearly 5% even though it was running on one engine: the prosperous Western province where Colombo is located, and where the well-educated young population was producing strong growth in industries and services.

The North and East Provinces, which account for 30% of Sri Lanka's land and 15% of its population, were largely war zones. With the nation whole again, achieving 7% growth over the next decade should be well within reach.

Since taking office in 2005, President Mahinda Rajapaksa has been consolidating power in ways that critics see as the start of a family dynasty. For now, however, he is deploying his growing powers to ends that suggest he understands the fundamentals of growth, if not of democracy.

Rajapaksa's regime is working to trim the fat left over from the socialist experiments of the 1970s, including high taxes and government debts that still equal 80% of GDP. It is also bringing the vast swaths of formerly rebel-held territory back into play; the government has established vocational training centres and low-interest loan programmes, distributed boats and livestock, and begun building roads and bridges in the former war zone.

Banks are returning, big retail chains are setting up shop, and domestic airlines are flying to Jaffna and Trincomalee again. The flood of state spending drove growth in North and East provinces up to 14% in 2009 and 2010, and they are expected to grow at above 13% for several more years, making them the fastest-growing areas of the country.

The effects reverberate nationwide. On my helicopter trip, I visited some of the newly-renovated resorts, from the retro-chic Chaaya Blu in Trincomalee to the Cinnamon Lodge in Habarana, which lies in the 'cultural triangle' formed by Sri Lanka's three ancient cities.
It wasn't hard to imagine tourists, seduced by the country's raw appeal, coming in droves. While prices are not as dirt cheap as they were at the height of the war, they are still very low - $150 for a high-end hotel room - which means the Sri Lankan currency is still very competitive and attractive to foreign investors.

War-zone insurance rates that had made it too expensive to dock in Sri Lanka have disappeared, leading to a large increase in cargo traffic at the main port in Colombo. The government is pouring money into new terminals there, as well as new ports and harbours in formerly rebel-held regions.

The reintegration of the marginalised Tamils - with their high levels of educational achievement and English fluency - could provide a huge boost to a nation that multiple consulting firms already rank highly as a potential destination for multinationals looking to outsource customer service, IT and other back-office operations.

It would be a mistake to sugarcoat the post-war mood. The final stages of the war were highly controversial: charges of human-rights violations still fly against both sides.
There is evidence that Tamils, embittered by the bloody endgame of the war and suspicious of Rajapaksa, continue to leave the country. But many of those who remain seem determined to put the war memories behind them. I was surprised to see Tamils in Trincomalee working to attract Indian tourists to the 'Ravana trail'.

While to Indians Ravana was the devil incarnate, in Sri Lankan legend, he was one of the most powerful and inspired of ancient kings. The difference of interpretation is of no small magnitude in Sri Lanka, which has long feared domination by its much-larger neighbour.

But in Trincomalee locals say that as long as the 'Ravana trail' is drawing tourists, subjective spins on the myth don't matter.

It's only natural for nations to trade most heavily with their neighbours and, indeed, the success of east Asia has been driven in no small measure by the willingness of China, Japan, Taiwan and South Korea to leave old wars in the past, at least when they are cutting business deals.

In contrast, there is no region in the world with weaker trade among immediate neighbours than south Asia where trade within the region has stagnated at 5% of total trade with the world.

Sri Lanka could be the country to move the region toward a new trade regime. The government is proposing a grand deal that could unlock trade with India and provide a huge boost to the economy. The opposition comes from Sri Lankan businessmen fearful of Indian competition. But India welcomes the deal, in part as an opportunity to balance China's growing interest in Sri Lanka as a linchpin on its supply routes through the Indian Ocean.

Sri Lanka is only too happy to exploit its felicitous location in return for even a small share of China's gargantuan outbound investment; China is investing heavily in the Sri Lankan port at Hambantota, the home base of the Rajapaksa family.

There is some risk that the peace dividend could prove fleeting: a 2009 study by the US Agency for International Development found that 40% of nations that end a civil war will revert to violence within a decade. However, Sri Lanka's peace could well hold because of the decisive end to the war.

There is also a fundamental national consensus that the future should be decided based on what works, not on the ideological debates that retarded Sri Lanka's development for so long. By the late 1990s, even the main left-leaning party, the SLFP, was moving toward a more modern development model built on an open economy and trade liberalisation.

Over the course of its war, Sri Lanka grew its economy slowly but positively, by a total of 206%. The country now has economic and administrative momentum. The government can build prosperity without interruption by suicide bombers.

Sunday, May 13, 2012

What explains the decline in poverty in Asia and Nepal?

According to a recent report by the ADB:

  • Increase in expenditure contributed to lower number of poor people below US$1.25 a day, i.e. income effect
  • But, it was dampened to some extent by rising food and non-food prices
  • The net effect seems to show that the increase in expenditure contributed more to offset the negative impact of rising food and non-food prices.

The annual reductions in the poverty headcount ratio have been impressive in Armenia (22.61%), Azerbaijan (13.31%), Bhutan (15.26%), urban areas of the PRC (15.98%), Fiji (13.31%), Kazakhstan (24.81%), Sri Lanka (11.01%), and Thailand (21.12%). In Nepal, the annual reduction in poverty was to the tune of 7.61% between 2003 and 2010.

In further decomposition of the contributing factors to poverty reduction, the researchers also consider the effect of population growth along with the income effect, food prices and non-food prices. The results show that 30.40 million people escaped poverty in developing Asia every year during the survey periods. The income effect was the most significant.

  • If prices and populations had stayed the same, the increase in mean household income during the period would have helped 244.10 million poor escape poverty every year.
  • In Nepal, if prices and populations had stayed the same, the increase in mean household income between 2003-2010 would have helped 2.80 million poor escape poverty every year. Keeping other factors constant, increase in population, food prices, non-food prices and income would have increased the number of poor by 0.1354 million, 0.8544 million, 0.8843 million and –2.80 million every year. The net effect on poverty would have been a decrease in poverty by 0.20 million every year between 2003 and 2010. Hail the migrants and remittance inflows!
  • In Nepal, food prices and non-food prices contributed to increase in poverty by 5.15 percent and 1.09 percent respectively. But, the income effect decreased poverty by 14.86 percent, leading to a net effect of decline in poverty by 7.61 percent annually between 2003 and 2010.
  • The recent food price increases have slowed poverty reduction.
  • The income effect in rural India is the biggest.

Explaining the change in the number of poor people (million)
Country Change in number of poor due to Net effect on poverty
Population Food price Non-food price Income
Bangladesh 0.70 5.51 5.89 -13.43 -1.33
Bhutan 0.00 0.01 0.01 -0.04 -0.02
India–Rural 3.31 40.37 45.38 -99.69 -10.63
India–Urban 2.55 13.22 13.42 -30.85 -1.65
Nepal 0.14 0.85 0.88 -2.80 -0.92
Pakistan 0.60 9.40 8.78 -18.99 -0.20
Sri Lanka 0.01 0.42 0.62 -1.33 -0.28

For more on the decline in poverty, see here, here and here.