Wednesday, June 27, 2012

Alcohol imports and consumption in Nepal

Interesting stats:

  • Total alcohol import: Rs 4 billion
  • Domestic production by importing raw materials: Rs 11.70 billion
  • Export of Khukuri beer to 13 countries

Here is a news story related to this in Karobar Economic Daily. Now compare this with total garment export—one of Nepal’s top export items— of Rs 4.08 billion in 2010/11. [Btw, I checked in official data sources for beverages, spirits and vinegar (HS Chapter 22) imports and it was Rs 2.024 billion in 2010/11. Exports was close to Rs 1.023 billion. Anyway, though the figures given by Nepal Alcohol Production Association and as reported in the media might be a bit inflated, the fact is that the market for alcohol is increasing.]

There is a huge market for alcohol and the demand is increasing each year due to rise in household income, thanks to high remittance inflows. There are instances where most of the remitted money in some districts is spent on imported, high premium liquor. To bridge growing demand-domestic production gap, imports are surging. Since this also increases custom duties, the MoF is disinclined to take any corrective measures on this front (like promoting domestic firms to produce premium liquor). In fact a major portion of revenue growth is coming from duties on imports, which is rising each year.

Why not let domestic producers produce liquor by importing raw materials from abroad if consumer demand for liquor is going to grow unabated? Morality aside (for which government needs to regulate the market strictly), this would add some value to production domestically and increase job opportunities. While the investors need more fiscal incentives, the government needs more revenues from the industry. How can we create an equilibrium between these two forces?

Anyway, are we thinking right when we talk about increasing domestic revenue? How long can the MoF rely on revenue growth on the back of rising imports? This is not a sustainable approach. In fact, it’s a destructive approach—you increase imports and consumption, add little to domestic productive capacities, drain remittances on imports that could be produced domestically if given the right policies and regulatory mechanism, foster lackluster behavior and complacency right from households to bureaucracy, add little to economic growth by promoting services and trading activities in place of industrial activities, …. Where is this loop leading us to?

Tuesday, June 26, 2012

Is large-scale investment in infrastructure sufficient to reduce logistics delays?

Raballand, Refas, Beuran, and Isik argue it is not. The collusion among various stakeholders/agencies at ports is a major part of the problem.

The international community has been increasing investment in projects that promote trade facilitation and improve logistics in the developing world, including in ports. In Africa, a key motivation for such projects has been a presumption that poor infrastructure and inefficient border control agencies are the major causes of extended delays in sub-Saharan Africa (SSA) ports. Based on new data and analysis, this note argues that collusion between controlling agencies, port authorities, private terminal operators, logistics operators, and large shippers is an important part of the problem. Decreasing dwell times in ports requires governments to combat collusive practices between the private sector and public authorities and recognize that large-scale investments in infrastructure are not sufficient to reduce logistics delays.

Meanwhile, here is the latest Logistics Performance Index (LPI) published by the WB. 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.

Monday, June 25, 2012

Why do public service delivery fail?

Shanta Devarajan argues:

Teachers in Tanzania are absent 23 percent of the time; doctors in Senegal spend an average of 39 minutes a day seeing patients; in Chad, 99 percent of non-wage public spending in health disappears before reaching the clinics.

These and other service delivery failures have been widely documented since the 2004 World Development Report, Making Services Work for Poor People.

But why do these failures persist?  Because they represent a political equilibrium where politicians and service providers (teachers, doctors, bureaucrats) benefit from the status quo and will therefore resist attempts at improving services.  For instance, teachers are often the campaign managers for local politicians.  They work to get the politician elected, in return for which they get a job from which they can be absent. Powerful medical unions ensure that their members can work in the private sector and neglect their salaried government jobs.  The losers are the poor, whose children don't learn to read and write, or get sick and die because the public clinic is empty.

[…] How can we disrupt this equilibrium to improve services for poor people? One possibility is to provide them with information.  We saw that community monitoring (poor people obtaining the information directly) had an effect on teacher performance.  But more broadly, poor people do vote.  If, with information, they vote along service delivery lines--rather than for politicians from their own ethnic or religious group, or who promise them private goods such as a job building roads--then it would be more difficult for politicians to ignore service delivery failures. 

[…] Information may not be the only solution.  The underlying problem is that politicians are behaving "clientelistically"--more interested in handing out private goods to their "clients" rather than public goods that benefit society, especially the poor--and getting away with it (they get elected).  And if most politicians behave this way, it's in every politician's interest to follow suit.  How can we move from clientelism being the norm to one where it is the exception?

This reasoning also perfectly fits the state of service delivery in Nepal. Eventually, there is continued supremacy of extractive political and economic institutions over inclusive ones.

Sunday, June 24, 2012

NEPAL: Prime Ministers and the economy

Here is a snapshot of how the economy (related one here as well) fared during various prime ministers since 1990/91 in Nepal. The highest GDP growth rate was 7.9 percent in 1993/94. Fiscal deficit widened the most in 2008/09, which shows how much Nepal is unable to match rising expenditure with revenue. FDI committed by authorized firms at DoI was the highest in 2010/11 (annual FDI growth rate was the highest in 1992/93). Initially due to conflict and now due to lack of job opportunities (new investors are reluctant to come and existing ones are perishing due to labor problems, high cost of production resulting from inadequate supply of electricity and supply-side constraints), the number of migrants is increasing.

The soaring expenditure and the inability to match it up with revenue (see widening fiscal deficit) is resulting in a situation where the economy is increasingly reliant on foreign aid to fund most of its reform programs and development works. Inflation was the highest in 1991/92 (due to the turmoil in the Gulf then and its impact on oil prices, the shock the economy got following economic blockade by India in 1989, and sudden change in economic structure following liberalization in 1992).

Based on the figures seen here, make you own judgment regarding which leader/party delivered growth and prosperity to the Nepali people.

Prime Ministers and Economy
    billion %
Prime Ministers  Fiscal year Fiscal balance FDI-authorized firms Remittance Aid disbursement BoT Inflation
KPB 1990/91 -10.66 0.41 2.13 5.99 15.03 9.81
KPB/GPK 1991/92 -11.26 0.60 2.32 7.80 16.32 21.05
GPK 1992/93 -11.96 3.08 2.99 9.24 17.15 8.86
GPK 1993/94 -11.62 1.38 3.47 11.56 31.66 8.95
GPK/MMA 1994/05 -10.55 0.48 5.06 11.25 45.64 7.66
MMA/SBD 1995/96 -13.82 2.22 4.28 14.29 56.14 8.13
SBD/LBC 1996/97 -14.36 2.40 5.60 15.03 70.01 8.09
LBC/SBT/GPK 1997/98 -17.78 2.00 6.99 16.46 61.49 8.33
GPK/KPB 1998/99 -17.99 1.67 10.31 16.19 56.49 11.38
KPB/GPK 1999/00 -17.67 1.42 12.66 17.52 64.13 3.39
GPK 2000/01 -24.19 3.10 47.22 18.80 63.54 2.43
SBD 2001/02 -22.94 1.21 47.54 14.38 61.25 2.89
SBD/LBC 2002/03 -16.44 1.79 54.20 15.89 78.22 4.75
SBT/SBD 2003/04 -15.83 2.76 58.59 18.91 81.89 3.96
SBD/KG 2004/05 -18.05 1.64 65.54 23.66 89.85 4.54
KG 2005/06 -24.78 2.61 97.69 22.04 100.90 7.96
KG/GPK 2006/07 -30.09 3.23 100.14 25.85 138.60 6.4
GPK 2007/08 -33.41 9.81 142.68 29.30 178.56 7.7
PKD 2008/09 -49.80 6.26 209.70 36.35 222.40 13.2
PKD/MKN 2009/10 -41.20 9.10 231.73 49.77 314.66 10.5
MKN/JNK 2010/11R   10.05     332.97 9.60
JNK/BRB 2011/12P            

Few caveats:

  • Depending on the nature of expenditure (especially capital expenditure) there is a lag of few months to years. So, expenditure in nth year might only show its effect after n+k years, where k>=0. It means GDP growth figure during the tenure of a certain prime minister might not fully reflect the impact of his (no female PM yet!) expenditure programs or reforms.
  • That said, over 50 percent (70 percent in 2010/11) of total expenditure is recurrent expenditure. Capital expenditure is well below 20 percent. It means the impact of most of the expenditure is more or less reflected in the figures.
  • The increasing fiscal deficit shows the difference between expenditure and revenue. We are spending beyond our means!
  • FDI is related to those committed by firms registered at Department of Industry. It doesn’t mean that the committed money is actually invested. Nevertheless, it reflects investors’ confidence on the economy.
  • High remittance inflows could be viewed as a proxy for high number of migrants seeking jobs abroad. It then means the lack of employment opportunities in the economy. Note that it is also affected by the openness of government policies regarding foreign employment and the demand for Nepali workers abroad.
  • The aid dependency is increasing as Nepal is unable to satisfy its expenditure with domestic revenue. The table shows aid disbursement, i.e. how much of the committed money actually came to Nepal. Note that the discrepancy between commitment and disbursement might also be because of low absorption capacity of our system.
  • The balance of trade (merchandise goods only) shows the difference between value of imports and value of exports. The high figure means imports outpacing exports. It points to our inability to produce goods demanded in the market, the lack of export competitiveness, eroding strength of manufacturing sector, and high dependence on imported items (primarily financed by remittances).
  • Inflation is the least understood beast in our economy! It is mainly affected by prices in India (due to pegged exchange rate), prices of petroleum products, domestic supply constraints and increase in demand due to rise in income arising from high wages and remittance inflows.

Wednesday, June 20, 2012

NEPAL: Fertilizer shortage during planting season

At the height of the planting season, there is acute fertilizer shortage in Nepal. The delay in monsoon has already affected production (maize) in some districts. Add to that the shortage of fertilizer for paddy cultivation, which contributes the most in agriculture GDP (around 21 percent) and also has substantial weight on overall GDP growth. The expected good GDP growth this fiscal year is largely attributed to favorable monsoon last year and high paddy production.

Two versions for the shortage of fertilizer in the market:

  • Farmers allege that the shortage is due to black marketeering of chemical fertilizers and middlemen manipulating the market
  • The government says that the uncertainty over procurement of fertilizers is affecting delivery and supply.

The Agriculture Inputs Company (AIC) is responsible for procuring fertilizers, which are distributed through cooperatives. Previously, Indian Potash Ltd (IPL) was barred from supplying fertilizers after farmers complained of underweight sacks (50 kg per sack) of chemical fertilizers. Of 630,000 sacks of fertilizer procured from IPL, about 430,000 sacks were underweight by between 2 kg and 10 kg.

The government subsidizes chemical fertilizers (about 20 percent of actual cost is subsidized). It allocated Rs 2.5 billion for subsidy for 2011-12 in order to supply 150,000 tons of subsidized fertilizers to farmers. Annual demand for fertilizers is around 700,000 tons while government supplies just about 150,000 tons at subsidized price.

The picture shows farmers queuing up to get hold of fertilizers in Taplejung. It is reported that farmers walked two days to reach the district headquarter to get fertilizer. While demand for fertilizer is around 1200 tons in the district, supply is just about 240 tons.  

Few things to note here:

  • The longer the shortage of fertilizers, the more it will impact agriculture production, which in turn will affect both GDP growth rate and food security situation.
  • The AIC’s negligence in monitoring weight and quality of procured fertilizers should be not treated lightly. The truth needs to come out.
  • The proper utilization of subsidized fertilizers should be a matter of concern to all because these are primarily financed by domestic taxpayers. Even donor’s money might have gone to subsidizing fertilizers. Agriculture subsidy is given with an intent to increase production, boost farmer’s income and support their livelihood, reduce food insecurity, promote agriculture employment, reduce poverty and boost economic growth. While all kind of subsidies impact fiscal balance, fertilizer subsidy is a bit different than subsidy on petroleum fuel and LPG. Technically, it is targeted to poor farmers and leakage is lower than in fuel subsidy.
  • However, there are cases where subsidized fertilizers are being sold not via government depots or cooperatives, but though retail shops. The government officials or agencies take money/commission and supply subsidized fertilizer to private players in district headquarters. Farmers are told that the government depots are running short of fertilizers and are recommended to seek supplies from private players, who charge high price. The collusion between private players and government agencies at the district level impacts supply and leads to mis-utilization of subsidy meant for a good purpose.
  • The immediate priority of the government, also MoF and MoAD, should be to procure adequate fertilizer and supply it to the market.

UPDATE (2012-06-22): Recommended readings on the same issue:

Tuesday, June 19, 2012

Rio+20: Climate Change and Nepal

The figure below compares CO2 emissions, projected annual temperature change and projected change in hot days/warm nights (2045-2065).

As expected, emission levels are very low in Nepal. But, annual temperature change between 2045-2065 (relative to the control period 1961-2000) is projected to be higher than in even Bangladesh, China, India and the USA. Hot days and warm nights are expected to increase by 2.5 days and 8 days respectively between 2045-2065 (relative to the control period 1961-2000).

Data source is here. The definition of CO2 emissions per unit of GDP, CO2 emissions per capita, and the projected temperature and annual hot days/warm nights is as follows:

  • Carbon dioxide (CO2) emissions per units of GDP are carbon dioxide emissions in kilograms per $1,000 of GDP in 2005 purchasing power parity (PPP) terms. PPP GDP is gross domestic product converted to international dollars using PPP rates. An international dollar has the same purchasing power over GDP that a U.S. dollar has in the United States.
  • Carbon dioxide (CO2) emissions per capita are carbon dioxide emissions divided by midyear population.
  • Projected annual temperature change is the projected change in annual temperature in the years 2045-2065, relative to the control period 1961-2000.  The range reflects the 10th and 90th percentiles of results from nine general circulation models (GCMs) at a standardized 2-degree grid, employing the A2 storyline and scenario family. Values are aggregated at the country level.
  • Projected change in annual hot days/warm nights are the projected changes in the annual incidence of "hot days" and "warm nights" in the years 2045-2065, relative to the control period 1961-2000.  Hot days and warm nights are those that exceed the 90th percentile of maximum temperatures and those that exceeded the 90th percentile in minimum temperatures, respectively, in the control period. These indicators are useful to understand potentially critical thresholds related to heat stress in different sectors such as agriculture and energy.  The range reflects the 10th and 90th percentiles of results from nine general circulation models (GCMs), employing the A2 storyline and scenario family. Values are then calculated at the country level from 2-degree gridded data.

Rio+20 and Nepal

High-in come countries, with one sixth of the world’s population, are responsible for nearly two thirds of the greenhouse gases in the atmosphere. Methane and nitrous oxide produced by the agricultural sector account for about 10 percent of anthropogenic warming. Most of it comes from the guts of cattle and sheep. Globally, agriculture and land-use change and forestry contribute 14 percent and 17 percent of CO2 emissions, respectively. Read more here.

Though Nepal’s emission levels are very low, irrespective of the unit of measurement, it is disproportionately affected by the vagaries of climate change/weather. The low contribution of enablers of climate change and its high impact on economy and livelihoods call for a balanced approach to meet growth and development needs while keeping low its impact on environment. As of now, there is a tradeoff between these two and the challenge for policy makers is to find a suitable point (say country-specific Pareto optimal point for sustainable development) based on a slew of factors such as endowment, institutional capabilities, livelihood options, infrastructure necessities (including roads, ICT, irrigation, energy) and others. The impact of climate change will alter comparative advantage on agriculture trade (and also of the industrial sector that depends on agriculture sector for raw materials), reduce livelihood options, increase or decrease the average number of warm or cold days and nights, endanger communities living in mountain and low-lying areas and impact their livelihood options, engender distress migration and may induce conflict, among others. Against this backdrop, the Rio+20 (United Nations Conference on Sustainable Development) is a crucial platform for countries like Nepal to voice their concern and seek options to balance growth (jobs enriching) and environment necessities.

Nepal will propose focusing on the following key areas of sustainable development:

  • Food security and sustainable agriculture
  • Water and sanitation
  • Energy
  • Sustainable cities
  • Natural disaster
  • Green job and social inclusion
  • Mountain ecosystem

Nepal expects Rio+20 to:

  • Renew commitment of Member States for preserving the Rio principles
  • Foster implementable consensus for fulfilling the implementation gaps in the Rio declaration and other associated commitments
  • Address new and emerging challenges in a fair and equitable manner based on the principle of common but differentiated responsibilities (CBDR)

Specifically, it wants developed countries to fulfill ODA commitment, ease transfer of technology, waive debt, ease trade barriers, and enhance capacity of LDCs. It expects an agreement on the Mountain Agenda adopted in 1992. It expects focus on green economy, especially support for harnessing its hydro-generation potential. It expects the Rio+20 Conference to “fully integrate the IPoA into its outcome document and underline renewed and scaled-up global commitment to achieve sustainable development in the LDCs.”

Read an earlier piece on Rio+20 Summit here.

Saturday, June 16, 2012

District-wise household size, population growth rate, migrant population and remittance inflows

Here is an interesting infographic that shows district-wise household size, population growth rate, absentee (migrant) population and remittance inflows. The relationship between absentee population and remittance inflows is pretty clear. Also, notice that the poorest regions have larger household size and relatively high population growth rate.

Readings related to this infographic:

A total of 23 districts in hilly region saw negative population growth rate while Kathmandu saw 60 percent growth in population. The urban population constitutes about 17 percent of the total population. Kathmandu district has the largest population followed by Morang. Manang constitutes the lowest population. Population density of Nepal is estimated 181 per sq.kms. Kathmandu district has the highest density (4408) and Manang (3) has the least. Kathmandu has recorded the highest decadal population growth (60.93 %) compared to all Nepal (14.99 %) and lowest in Manang (-31.92 %). Sex ratio is estimated to be 94.41 (male per hundred female) in the current census as compared to 99.80 in the previous census 2001.

- About 48% of migrants originate from Terai, 45% from the Hills, and 7% from the Mountain.
- Over 30 percent of household income in the Western region is accounted by remittances. In Syangja, Kaski, and Tanahu, it is 25.5%, 28.2% and 34% respectively. About 43.4 percent of household income in Argakhashi came from remittances. It was 7% in Jumla.
- Jhapa (16.8), Morang (13.2), Chitawan (10), Nawalparasi (11.8), Solukhumbu (10.7) got remittances over NRs 10 billion. Agarkhachi and Jumla got 7.5 and 0.4 billion respectively.

- Migrant destinations differ by their place of origin. A large number of migrants from Far-Western and Mid-Western (and Western) regions go to India; those from Western and and Eastern regions go to the Gulf; and those from Western and Eastern regions go to Malaysia.
- Ethnically, the probability of migration, in descending order, is above average for Muslims/others (mainly to the Gulf), Hill Dalits (mainly to India), Hill Janajatis (mainly to the Gulf), and Brahman/Chhetri (to India, the Gulf and Malaysia).
- Western Hills and Eastern Terai receive more remittance. The Western Hills send the largest number of migrants (20%). For Eastern Terai the number is 17%.

- Per capita receipt of remittances generally increases with recipients’ household wealth (skilled and educated migrants send more).

- In 2008, most of the returnees were from India, followed by the Gulf and Malaysia.
- About 37% of the returnees would “very likely” go back abroad soon. About 34% would “very unlikely” go back soon.
- Most returnees would return to either agriculture (48%) or stay inactive (20%--employment wise) or daily wage workers (10%). These are the ones who are “very likely” to migrate again.

For more on these, read here: and

Thursday, June 14, 2012

FDI, approved industries and employment in Nepal, 1989/90-2010/11

Here is a chart that shows total FDI inflows to Nepal, number of industries/firms and employment generation. Also, it shows the share of investment and employment of top ten FDI origin countries, and India’s agriculture investment share in total Indian FDI inflows.

Total FDI inflows from approved industries in 2010/11 was Rs 10.05 billion and approved industries/firms were 209 (total employment target was 10,887). Of this India’s share in foreign investment was 69.72 percent and share in total employment was 30.07 percent. Meanwhile, China’s share in foreign investment was 11.81 percent and share in total employment was 28.16 percent.

The total FDI approved in agriculture was Rs 367.12 million with employment target of 1337. The highest FDI approved was in manufacturing at Rs 6.134 billion, followed by tourism at Rs 1.184 billion. Of total Indian investment, share in agriculture was 1.55 percent in 2010/11, 81.73 percent in 2008/09 and 21.49 percent in 2007/08.

In the figure above, you can clearly see the surge in FDI immediately after liberalization of the economy in the early 1990s. It declined for the next two years and then increased for two years. The onset of Maoist insurgency and its gradual intensification led to decline in FDI up until 200/01, which it increased and then the total FDI inflows have been erratic up until 2004/05. Both FDI and employment generation are in upward trend since then. That said, the dent in 2008/09 might be because of the impact of global financial and economic crises.

If you are wondering about how Nepal stands wrt FDI inflows to regional nations, then the figures look disappointing. FDI inflows to Nepal in 2010 was just $38.99 million. In contrast, India’s was $24.64 billion. The latest (2011/12) FDI inflows to India  was a record FDI of $46.8 billion.

So, what are the main constraints to FDI inflows to Nepal? Some of them are:

  • Political instability/strikes
  • Lack of appropriability of returns to investment
  • Militant trade unions
  • Inadequate supply of infrastructure (power and road network)
  • Policy inconsistency
  • Increasing cost of doing business

For solutions, read this. (The hope is that the newly formed Nepal Investment Board will encourage investors to come to Nepal. Btw, does anyone have any idea about NIB’s website?)

  • Political stability (if it can be achieved!)
  • Taming labor militancy and smoothening industrial relations
  • Policy consistency on key issues related to investment regime and sectoral support
  • End of syndicates, which foster uncompetitive practices and charge high fares
  • Credit at low interest rate to key sectors where we enjoy comparative advantage consistent with our land, labor and capital resource endowment
  • Emergency measures to supply power for at least two shifts in manufacturing plants
  • Fast track endorsement of investment plans and lowering cost of doing business in Nepal
  • Enactment of SEZ bill
  • Industrial security

[Update 2012-07-06: FDI from approved industries has been updated.]

Will flat cash incentives for exports work in Nepal?

The FNCCI, following a strong lobby by GAN, has asked the government to extend at least two percent cash incentives to all exports, irrespective of value addition and destination. Currently, the government offers two percent of total export revenue as cash incentive if there is 30-50 percent value addition, three percent for 50-80 percent value addition and four percent for over 80 percent value addition.

The main purpose of cash incentives scheme is to increase exports and reduce trade deficit. Just by giving cash incentives won’t achieve this because the cash incentives received by exporters will hardly be reflected on the price of final exported items. Cash incentives are given after goods are exported and they do not necessarily boost price competitiveness. As of now it is a misplaced export incentive with too much bureaucratic hassles to claim cash (plus incongruous with other policies’ emphasis on domestic value addition together with employment generation).

Quick comments:

  • Cash incentives won’t be directly reflected on the price of final exported items. Hence, it won’t directly boost price competitiveness. It might just compensate the lost revenue due to high cost of production arising from exogenous factors to the firm/sector in question (e.g. load-shedding and cost of diesel, strikes, bandha).
  • Conditioning cash incentives on value addition is one hook for not letting the scheme be inefficient. It should be further linked to employment generation as well, i.e. offer such incentives to those strategic sectors that have both high value addition and high employment generation. See this presentation for more on this.
  • Cash incentives or other export promotion measures should be designed keeping in mind the factors/determinants that boost competitiveness of manufacturing sector: government forces (education policies, energy policies, economic, trade, labor, financial and tax policies, science and technology policies, manufacturing and infrastructure policies); capabilities (innovation, technology, process, infrastructure); market forces (demographic, macroeconoimc environment); and resources (human, materials, energy, financial).
  • Fundamentally, export incentive packages that increase productive capacity and address binding constraints to exports growth work more often than simply doling out cash based on certain value addition criterion. The same amount of money can be used to construct roads up to manufacturing plants or to provide credit and concessional loans to emerging entrepreneurs or to subsidize insurance premium during transportation of goods to the nearest port in India or to construct the much needed special economic zones. These measures will help enhance our exports and add to productive capacities more than the cash incentives.
  • Cash incentives as of now is unlikely to alter Nepal’s export destinations and composition of export basket.
  • Competitiveness of Nepali export items is going down. The main reasons are: lack of adequate supply of infrastructure, political instability/strikes, labor problems, lack of innovation by private sector, and government’s inability to implement key reforms enshrined in major policy documents. The state of trade facilitation in Nepal is pathetic, ranking 124 out of 132 countries. Nepal has the fifth worst logistics efficiency in the world. Supply-side constrains have eroded competitiveness to a great extent. Cash incentives for exports won’t directly address these problems. If these issues are resolved (by both government and private sector), then you won’t need cash incentives to boost competitiveness  (if it can!) and exports and to reduce trade deficit.

Tuesday, June 12, 2012

Improved highways and performance of firms

Saugato Dutta finds that firms along the Golden Quadrilateral, a major highway project in India, reported decreased transportation obstacles to production, reduced average stock of input inventories (by about a week's worth of production), and a higher probability of having switched the supplier who provided them with their primary input. Firms in cities where road quality did not improve displayed no significant changes.

Here is the abstract of the paper:

India's Golden Quadrilateral Program, a major highway project, aimed at improving the quality and width of existing highways connecting the four largest cities in India. It affected the quality of highways available to firms in cities that lay along the routes of the four upgraded highways, while leaving the quality of highways available to firms in other cities unaffected. This feature of the project allows for a difference-in-difference estimation strategy, where status on and off the improved highways, and distance from them, are used as treatment variables. This strategy is implemented using data from the 2002 and 2005 rounds of the World Bank Enterprise Surveys for India. Firms in cities affected by the Golden Quadrilateral highway project reduced their average stock of input inventories by between 6 and 12 days’ worth of production. Firms in cities where road quality did not improve showed no significant changes. The reduction in stocks of input inventories also varied inversely with the distance between the city in which a firm was located and the nearest city on an improved highway. Firms on the Golden Quadrilateral were also more likely to have switched the supplier who provided them with their primary input, suggesting that they saw reason to re-optimize their choice of supplier after the arrival of better highways. Consistent with these findings, firms on the improved highways reported decreased transportation obstacles to production, while firms in control cities reported no such change.

Monday, June 11, 2012

Two oil survey/exploration companies pulling out of Nepal

Texana Resources Company and Cairn Energy are stopping survey work citing “force majeure”, which “frees a party from fulfilling an obligation in the event of circumstances going beyond its control.” The reason given by the two companies: bureaucratic hurdles and lack of cooperation from the government.

The Houston-based Texana flashed its plans on June 1 while Cairn, a Scottish oil and gas company, did so on June 8. Officials at the Department of Mines and Geology confirmed that the two companies had announced their plans to stop work. This is not the first time that Texana and Cairn have invoked force majeure. They have halted work in the past citing volatile political and security situation.

Both have already spent millions of dollars in Nepal on preliminary surveys and were now all set for a 'seismic operation,’ which determines whether the surveyed areas contain commercially viable quantities of oil. To date, Texana has spent US$3 million and Cairn US$20 million in the country. The two companies pay an annual fee of US$ 50,000 per 'block’ to the Nepal government. They have also deposited US$ 400,000 each as bank guarantees.

Six years later, Cairn received a licence to explore five other blocks--Block 1 (Dhangadhi), Block 2 (Karnali), Block 4 (Lumbini), Block 6 (Birgunj) and Block 7 (Malangawa).

But trouble started brewing in December 2011 when Texana applied to the Department of Mines to transfer its rights and obligations to the Canada-based Patriot Petroleum Corp. Texana and Patriot had signed a sales and purchase agreement under which Texana would assign to Patriot all its interests under a petroleum agreement for exploration of Block 3 (Nepalgunj) and Block 5 (Chitwan).

Clause 64 of the Nepal government and Texana agreement allows the US-based company to transfer its project to any other company, and the government has to endorse it within 60 days of request. Till date, the Department of Mines has not approved Texana’s application.

Cairn had asked the department to amend its work plan one-and-a-half-years ago in order to address a request for a new work plan, which is yet to be endorsed. “Our decision to declare force majeure is primarily based on the government's delay in endorsing our work plan amendment,” said Bharat Gyawali, the local representative of Cairn.

I smell corruption here! Btw, in 2010, FDI inflows to Nepal was just $38.99 million.

Sunday, June 10, 2012

Changing composition of and destination for exports and imports of Nepal

The composition of Nepal’s export basket is changing. Some of the traditional export items like honey and garments have lost market share. Meanwhile, exports of iron and steel products as well as textiles have increased rapidly along with that of tea, ginger, essential oils n.e.s., instant noodles, medicinal herbs, large cardamom, and wool products. Overall, the share of merchandise exports in GDP declined from 10 percent in fiscal year 2003/04 to 5 percent in fiscal year 2009/10.

The composition of merchandise imports is also changing. The share of agricultural goods and textiles and clothing imports fell. The share of transport equipment, electrical and non-electrical machinery, and iron and steel increased. Notably, the share of imports of gold rose from 0.1 percent in 2003 to 11.1 percent of total imports in 2010. Gold imports began to rise after India raised its import tariff. The tariff increase may have encouraged Nepal to import gold from third countries and trade with India. In value terms, petroleum products, vehicles, machines, and iron and steel were Nepal's main imports.

Along with the changes in the export and import baskets, there have also been changes in direction of trade. On top of the flow of exports and imports over the past few years to the top destinations, it is also revealing to look at the direction of trade in 2003 and 2010 (before WTO accession and the latest year of comparable data available after 2004). While India's share in exports is increasing, the US's is decreasing, perhaps reflecting the sharp decline of Nepali garment exports following the phase out of the Agreement on Textiles and Clothing. On the other hand, Nepal's exports to some SAARC members such as Bangladesh and Bhutan have increased rapidly, but the volume of exports in absolute terms is insignificant.

With regards to imports, the share of Nepal's traditional trade partner – the EU – as an import source has declined, while the shares of the Middle East countries, in particular the UAE, have increased rapidly. India still commands the lion’s share of Nepal’s import.

Apart from India, other major sources of Nepal’s imports are China, UAE, Indonesia, Thailand, the UK, Japan, South Korea, the US, Argentina and Singapore. Imports of goods have exploded unsustainably. Between 2000/01 and 2009/10, while imports from India increased by 374 percent, imports from China, UAE, Indonesia, Thailand and the US increased by 239 percent, 1052 percent, 256 percent, 127 percent, and 318 percent, respectively. 

[The figures are based on data from UNSD, Comtrade database (SITC Rev.3); sourced from Nepal’s TPR 2012

Few observations:

  • Sophistication of Nepali export basket is very low. The export items are still low-valued goods with high price elasticity of import demand. Nepal is losing competitiveness in its major export, i.e. garments. The government cannot promote all export items at the same time. It should focus on promoting the 19 goods and services identified in NTIS 2010.
  • Trade concentration is with India is very high. The share of trade deficit with India in fiscal year 1974/75 was 78.81 percent. It decreased to 26.55 percent in fiscal year 1988/89 and then started increasing rapidly in the last two decades, reaching 65.87 percent in fiscal year 2010/11. The total trade deficit in 2010/11 was NRs 331.84 billion. Nepal is selling high amount of dollars to purchase Indian rupee, which in turn is used to purchase goods from India.
  • Competitiveness of Nepali export items is going down. The main reasons are: lack of adequate supply of infrastructure, political instability/strikes, labor problems, lack of innovation by private sector, and government’s inability to implement key reforms enshrined in major policy documents. The state of trade facilitation in Nepal is pathetic, ranking 124 out of 132 countries. Nepal has the fifth worst logistics efficiency in the world. Supply-side constrains have eroded competitiveness to a great extent. The situation has reached to such an extent that some businessmen design garment items here, manufacture in Bangladesh and then import them for consumers in the Nepali market.
  • Due to huge remittance inflows, Nepalis are consuming at an alarming rate. There are symptoms of Dutch Disease. Some of the imports like petroleum fuel cannot be curbed in the absence of alternative sources of energy. Simply, a Dutch disease occurs when an economy depends on one sector so much that it leads to decline in manufacturing sector. In Nepal, increasing remittances at the household level have led to high consumption demand, high imports, and appreciation of real exchange rate, resulting in the erosion of manufacturing sector and its competitiveness.
  • At the same time, the subsidy given by government in diesel and LPG is destroying NOC’s balance sheet and putting strain on fiscal balance. The increase in load-shedding hours has led to substantial rise in demand for diesel, which has further widened trade deficit.
  • Reviving exports with SEZs has remained a distant dream. The cash incentives for exports scheme, though a bit misplaced, should be broadened in terms of value addition and employment generation.
  • Apart from addressing the supply-side constraints, the government needs to devise smart strategies to foster R&D investment, innovation, production of high-value goods and services based on our comparative advantage and endowment, and promote Nepali items in the international market (this would also require active involvement of Nepali embassies and consulates aboard). Rather than relying more on tariff and quota concessions (we need them!), Nepali exports sector need to shore up its competitiveness; both the government and the private sector need to be pro-active role on this front.

(Relevant tweet for the figure above here)

Exports are declining, especially after 1996 (so is the contribution of industrial sector and manufacturing sector to GDP). Export of goods and services was 26% of GDP in 1997. It was 9.75% of GDP in 2010. It is expected to be 9.78% of GDP in 2011/12. Imports are ever-increasing, reaching 37% of GDP in 2010. It is expected to be 32.57% of GDP In 2011/12.
Trade deficit is ever-widening, reaching around 23% of GDP.

Saturday, June 9, 2012

Resource Raj replacing License Raj in India

So argues Raghuram Rajan and explains what is happening in India and why it is failing to reform and keep up the growth momentum. He contends that as with the other major emerging markets, India’s fate is in its own hands. Excerpts:

[…]Bharatiya Janata Party (BJP) contested the 2004 election on a pro-development platform, encapsulated in the slogan, “India Shining.” But the BJP-led coalition lost that election.

[…]that election suggested a need to spread the benefits of growth to rural areas and the poor.

[…]India’s political class decided that traditional populism was a surer route to re-election. This perception also accorded well with the median (typically poor) voter’s low expectation of government in India – seeing it as a source of sporadic handouts rather than of reliable public services. For a few years, the momentum created by previous reforms, together with strong global growth, carried India forward. Politicians saw little need to vote for further reforms, especially those that would upset powerful vested interests. The lurch toward populism was strengthened when the Congress-led United Progressive Alliance concluded that a rural employment-guarantee scheme and a populist farm-loan waiver aided its victory in the 2009 election.

But, while politicians spent the growth dividend on poorly targeted giveaways such as subsidized petrol and cooking gas, the need for further reform only increased. For example, industrialization requires a transparent system for acquiring land from farmers and tribal people, which in turn presupposes much better land-ownership records than India has.

As demand for land and land prices increased, corruption became rampant, with some politicians, industrialists, and bureaucrats using the lack of transparency in land ownership and zoning to misappropriate assets. India’s corrupt elites had moved from controlling licenses to cornering newly valuable resources like land. The Resource Raj rose from the ashes of the License Raj.

India’s citizenry eventually reacted. An eclectic mix of idealistic and opportunistic politicians and NGOs mobilized people against land acquisitions. With investigative journalists getting into the act, land acquisition became a political land mine.

Moreover, key institutions, such as the Comptroller and Auditor General and the judiciary, staffed by an increasingly angry middle class, also launched investigations. As evidence emerged of widespread corruption in contracts and resource allocation, ministers, bureaucrats, and high-level corporate officers were arrested, and some have spent long periods in jail.

The collateral effect, however, is that even honest officials are now too frightened to help corporations to navigate India’s maze of bureaucracy. As a result, industrial, mining, and infrastructure projects have ground to a halt.

Populist government spending and the inability of the supply side of the economy to keep pace has, in turn, led to elevated inflation, while Indian households, worried that no asset looks safe, have taken to investing in gold. Because India does not produce much gold itself, these purchases have contributed to an abnormally wide current-account deficit. Not much more was required to dampen foreign investors’ enthusiasm for the India story, with the rupee falling significantly in recent weeks.

As with the other major emerging markets, India’s fate is in its own hands. Hard times tend to concentrate minds. If its politicians can take a few steps to show that they can overcome narrow partisan interests to establish the more transparent and efficient government that a middle-income country needs, they could quickly re-energize India’s enormous engines of potential growth. Otherwise, India’s youth, their hopes and ambitions frustrated, could decide to take matters into their own hands.

Friday, June 8, 2012

Sustainable development at Rio+20 and Nepal’s expectation

After hosting the Earth Summit two decades ago, Rio de Janeiro, starting June 20, is again welcoming more than 130 heads of state and thousands of people in what is expected to be the largest conference in recent times. Twenty years ago, the Rio Earth Summit emphasized on sustainable development keeping in mind the drive for rapid economic growth, rising population and environmental necessities, including conserving land, air and water. It also laid foundation for the Kyoto Protocol, established the Convention on Biological Diversity, and the Convention to Combat Desertification.

The three-day long meeting for the United Nations Conference on Sustainable Development, or Rio+20, in June will also discuss similar issues, albeit with more urgency to balance growth with environment necessities. In effect, the problems have magnified in the past two decades. UN Secretary General Bin Ki-moon argued: "Global economic growth per capita has combined with a world population to put unprecedented stress on fragile ecosystems. We recognize that we cannot continue to burn and consume our way to prosperity. Yet, we have not embraced the obvious solution: sustainable development."

After failing to decisively address the challenges of balancing growth, population and environment imperatives, Rio+20 offers world leaders an opportunity to agree on a new course toward a future that does what the world should have done in the past twenty years. It is the most important global forum to seek balance among economic, social and environmental dimensions of prosperity and human well-being.

The UN secretary-general has recommended focusing on three issues:

  • creation of job-focused growth along with environment protection and social inclusion
  • empowering women and young people
  • smarter use of resources to minimize waste

Furthermore, he has asked governments, businesses and other coalitions to endorse Sustainable Energy for All Initiative, which aims for universal access to sustainable energy, and a doubling of energy efficiency and use of renewable sources of energy by 2030.

However, several countries that have just started to grow at breathtaking rate argue they cannot wholly afford to move onto a more sustainable pathway without compromising on their growth strategies. This might explain the reluctance to reach an agreement on emission controls during the latest UN Framework Convention on Climate Change (UNFCCC) summit in Durban, South Africa. The summit in Rio should seek to find alternative courses for growth that boosts employment generation and puts nations on a low-carbon, resource-efficient development path. With the technological innovation and workable ideas that have emerged in the past two decades, it could be entirely possible to generate "green growth" that encompasses both growth and environment concerns. It could herald an age of a ‘green industrial revolution’.

While preparation of the global plan of action—entitled ‘The Future We Want’ worked upon by the UN preparatory committee PrepCom—to be adopted at the Rio+20 is still going on behind the scene, as of now no consensus has emerged from the negotiations. The action plan has to be ready for approval before June 20. Already a coalition of international NGOs has argued that the action plan “looks set to add almost nothing to global efforts to deliver sustainable development”. The main bone of contention is over the concept of green economy and its relevance and meaning to the global South. Other disagreements include issues such as equity, sustainable consumption, sustainable development goals (SDCs), production in global South, social justice, technology transfer and trade. There is also confusion over the commitments to be made by nations and their capacity to facilitate the inclusion of SDGs in national development plans and priorities.

Secretary-General Ban has urged nations not “let a microscopic examination of text blind us to the big picture […] we do not have a moment to waste”. It is very essential for negotiators to reach a consensus on the most contentious issues well ahead of the summit. It should be comprehensive and try to incorporate almost all the concerns raised by the global South. A global pact on finding the right balance between growth and environment is long overdue. The Rio+20 summit is a historic opportunity on this regard and its outcome should not disappoint global citizens, especially on issues surrounding SDCs, climate change and gender inequality.

Nepal will propose focusing on the following key areas of sustainable development:

  • Food security and sustainable agriculture
  • Water and sanitation
  • Energy
  • Sustainable cities
  • Natural disaster
  • Green job and social inclusion
  • Mountain ecosystem

Nepal expects Rio+20 to:

  • Renew commitment of Member States for preserving the Rio principles
  • Foster implementable consensus for fulfilling the implementation gaps in the Rio declaration and other associated commitments
  • Address new and emerging challenges in a fair and equitable manner based on the principle of common but differentiated responsibilities (CBDR)

Specifically, it wants developed countries to fulfill ODA commitment, ease transfer of technology, waive debt, ease trade barriers, and enhance capacity of LDCs. It expects an agreement on the Mountain Agenda adopted in 1992. It expects focus on green economy, especially support for harnessing its hydro-generation potential. It expects the Rio+20 Conference to “fully integrate the IPoA into its outcome document and underline renewed and scaled-up global commitment to achieve sustainable development in the LDCs.”

Amidst the political uncertainty and vacuum, just read that the Nepal’s Prime Minister Baburam Bhattarai is all set to fly to Rio de Janerio, Brazil, on June 18 to attend the Rio+20 summit with as many as 23 other officials.