What Can Developing Cities Today Learn From the Urban Past?

Abstract from a NBER working paper by Edward L. Glaeser on lessons on urbanization for developing cities:

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The downsides of density, including traffic congestion, contagious disease and crime, were common in Victorian London and classical Rome, just as they are today in Sao Paulo and Lagos. Our urban past provides lessons for developing world cities today. 

• The first lesson, that I highlight, is that political power, not commerce, has long driven the growth of the world’s largest cities, and that fact remains true for many developing world mega-cities today. 
• The second lesson is that while market access fundamentally shaped the cities of the past, the power of transport to determine urban fortunes has declined. Transportation infrastructure no longer transforms cities unless it is accompanied by complementary investments, such as education. 
• The third lesson is that infrastructure, such as sewers and roads, functions best when combined with incentives, which can ensure the adoption of sewers and discourage the abuse of highways. 
• The fourth lesson is that the development of many western cities relied on a nexus of property rights for landowners, including the right to build, buy, alienate, mortgage and rent, that are far more limited in many developing world cities. 
• The fifth lesson is that there is a menu of institutions for managing infrastructure, including direct public control, independent public authorities and public private partnerships. Local conditions, especially the level of public capacity, will determine the best choice among those institutions.

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A Proposal to End the COVID-19 Pandemic

Abstract from a latest IMF Staff Discussion Note by Ruchir Agarwal and Gita Gopinath:

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Urgent steps are needed to arrest the rising human toll and economic strain from the COVID-19 pandemic that are exacerbating already-diverging recoveries. Pandemic policy is also economic policy as there is no durable end to the economic crisis without an end to the health crisis. Building on existing initiatives, this paper proposes pragmatic actions at the national and multilateral level to expeditiously defeat the pandemic. The proposal targets: (1) vaccinating at least 40 percent of the population in all countries by the end of 2021 and at least 60 percent by the first half of 2022, (2) tracking and insuring against downside risks, and (3) ensuring widespread testing and tracing, maintaining adequate stocks of therapeutics, and enforcing public health measures in places where vaccine coverage is low. The benefits of such measures at about $9 trillion far outweigh the costs which are estimated to be around $50 billion—of which $35 billion should be paid by grants from donors and the residual by national governments potentially with the support of concessional financing from bilateral and multilateral agencies. The grant funding gap identified by the Access to COVID-19 Tools (ACT) Accelerator amounts to about $22 billion, which the G20 recognizes as important to address. This leaves an estimated $13 billion in additional grant contributions needed to finance our proposal. Importantly, the strategy requires global cooperation to secure upfront financing, upfront vaccine donations, and at-risk investment to insure against downside risks for the world.

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Nepal's economic performance in FY2021 and outlook for FY2022

It was published in The Kathmandu Post, 17 May 2020. 

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The economy has been eroding

Given the rapid spread of Covid-19, CBS’s growth projection will most likely be an overestimation.

With the deadly second wave of Covid-19 spreading throughout the country, the likelihood of a quick economic recovery as expected by the government, which until recently was insisting on achieving a 7 percent growth target, is almost nil. Economic scarring, or the persistent effect of the pandemic on economic activities, has deepened, and already weak economic fundamentals have exacerbated.

This is reflected in the recent national account data released by the Central Bureau of Statistics (CBS), which projected the country’s GDP to grow at 4 percent in 2020-21, up from a 2.1 percent contraction in 2019-20. Given the assumption behind the estimation and the rapid spread of Covid-19, CBS’s growth projection will most likely be an overestimation. The onus to stabilise economic activities and chart out a viable recovery path is now on the government, as consumption demand and private investment remain subdued.

Slower than expected

The bureau projected agricultural, industrial and services output to grow at 2.6 percent, 5 percent and 4.4 percent respectively in 2020-21. This is a reversal from industrial and services sector contraction last year. These projections are based on eight to nine months of data and the assumption that economic activities will gradually pick up from mid-May 2021 as lockdowns ease and accommodation and food service activities (basically, travel and tourism) quickly bounce back.

Agricultural output, especially paddy, is projected to increase due to a favourable monsoon and a surge in agricultural labour, thanks to reverse migration from cities due to the lockdowns. Within the industry sector, electricity, gas and utility supplies are projected to increase by 7.7 percent, substantially down from the 25.6 percent growth in 2019-20 as new hydroelectricity addition to the national grid slowed down. This is partly due to the repeated delay in the completion of the Upper Tamakoshi project.

Mining and quarrying activities are estimated to grow at 7.5 percent, up from 2.2 percent contraction in 2019-20 as mining and quarrying of stones, sand, soil and concrete affected by the lockdowns were allowed to operate after the substantial easing of lockdown restrictions in September 2020. Moreover, a boost in the construction of housing and infrastructure projects is expected to positively affect mining and quarrying activities.

Construction activities are projected to increase by 5.6 percent, up from a 5 percent contraction in 2019-20 as household, commercial and infrastructure projects pick up pace after a slack last year. Manufacturing activities, which are projected to increase by 3.9 percent from 8.6 percent contraction last year, continue to be affected by lockdowns and containment measures in addition to low private sector investment and high costs of production. Manufacturing activities might actually remain subdued at least till the medium-term.

Within the service sector, which accounts for about 54 percent of GDP, there is an expectation that high-contact activities will recover quickly. Wholesale and retail trade, transport and storage, and accommodation and food service activities are projected to increase by a rate of over 5 percent. These activities contracted the most last year. The CBS is especially bullish about the resumption of domestic tourism activities starting this month and is expecting accommodation and food service activities to grow by 11.2 percent, the highest amongst all subsectors.

Stabilisation and recovery

The latest growth projections indicate an economy that was losing steam even before the pandemic. Growth was already decreasing since a high of 9 percent in 2016-17, which itself was largely due to base effect, as economic activities came to almost a standstill in 2015-16 owing to crippling border blockade. The base effect refers to the tendency of achieving an arithmetically high rate of growth when starting from a very low base. This time, in addition to weak economic fundamentals and unrealised political and peace dividends, the inadequate infrastructure provision and a collapsed healthcare sector have laid bare economic and social vulnerabilities. Economic scarring is going to be deep, due to diminishing labour force participation, impending household and firm bankruptcies, and disruption of production networks both domestically and externally.

Given the lack of preparedness for a surge in cases (due to the overwhelmed healthcare system and a lack of adequate fiscal and monetary lifelines during the second wave) disruptions to labour, capital and product mobility, supplies disruptions, and political instability, economic activities may not actually recover beyond the base effect in 2020-21. Capacity utilisation of firms will be hit due to lockdowns, and supplies and market uncertainties will dissuade private investment, which is also being affected by political instability, bureaucratic hassles, bad governance, and low public capital spending.

A lack of employment opportunities both in the formal and informal sectors will curtail household income and consumption. Similarly, the inability of the government to boost capital spending will also affect mining and quarrying, and construction activities—thus impacting industrial growth. Manufacturing and exports are not expected to recover anytime soon. Against this backdrop and that lockdowns happened in the third and fourth quarters—the time when most economic activities take place—the economy might hardly grow. Or, it may even contract for the second year in a row.

Unfortunately, there is hardly any fiscal space left to launch temporary social protection schemes and relief measures targeted at households and businesses because the fiscal deficit is projected to hit around 6-7 percent of GDP in 2020-21. If the government allocates funds for new elections, then it might lead to a decrease in public spending as revenue mobilisation slows down in tandem with the expected decline or muted growth in economic activities.

It might also affect the banking sector, which might see demand for new credit decrease after a slight increase in the first half of the year. Firm bankruptcies due to cashflow problems and a subsequent rise in non-performing assets are real possibilities, particularly after the regulatory forbearance on loan payments is lifted and refinancing opportunities dry up. Micro, small and medium enterprises, which do not have much cash reserves to cushion against negative shocks, will bear the brunt of the crisis. It means economic and employment outlook over the medium-term do not look promising.

The upcoming budget needs to squarely focus on relief and recovery measures, and scaling up investment in the healthcare system. Given the tight fiscal conditions, only projects that can be completed in the next two to three years should be prioritised for capital investment. Furthermore, operations and maintenance of existing assets should be prioritised so that the impact on employment generation and growth is quick. This requires active reprioritisation and reallocation of spending. All expenses related to the pandemic should be listed as a separate heading in the budget so that this could be mobilised quickly and accounted for properly. This is the time for economic and livelihoods stabilisation measures. Economic recovery strategy anchored on medium-term expenditure and revenue frameworks should be included in subsequent budgets.

Effect of fiscal expansion and adjustment on sustainable development

Aizenman et al (2021) outline four stylized patterns from large fiscal impulses (expansions and adjustments) in Chile, Poland, South Africa, and Thailand:

• Fiscal expansions led to higher growth rates and reduced negative trade-offs, e.g., pollution and poor-health mortalities associated with economic growth. 
• Fiscal adjustments led to a more inclusive economy, lowered poverty headcounts, improved sanitation, and cleaner technology access. 
• Fiscal expansions followed an increase in direct taxes (especially corporate taxes) and a decline in social contributions, and preceded a decline in other direct taxes and an increase in wage bills. 
• Fiscal adjustments followed a decline in other direct taxes and social contributions, an increase in wage bills, and preceded a decline in government consumption expenditure and transfers.

Key takeaways include:

• Countries have distinct fiscal challenges, underlined by their economic and institutional structure. VAT accounted for 30%-60% of total revenues in the countries. Domestic public resources of commodity-exporting countries are vulnerable to commodity TOT shocks. The fiscal conditions of manufacturing-exporting countries are dependent on the GVCs, the global business cycle, and supporting services.
• The associations between fiscal expenses, taxes, and sustainable development outcomes (prosperity, resilience, and inclusivity) differ across countries.
• DRM should consider the time paths of the taxes and expenditure components to understand their empirical linkages with the sustainable development outcomes in the respective countries.
• It is practically useful to have a template for tracing the linkages between fiscal stance and the sustainable development outcomes.
• More data may shed more light on correlations between the fiscal conditions and DRM for sustainable development in the coming years.

Some basic definitions used in the working paper (all % of GDP):

• Primary deficit = Primary expense (wage+non-wage+subsidies+transfer)-total tax revenue (personal income tax+corporate tax+payroll and workforce tax and property tax+indirect tax+social security contributions
• Fiscal episode is defined as significant change in primary deficit (% of GDP) from the previous year.

Cyclically adjusted variables:

• Fiscal impulse = Cyclically adjusted primary deficit in year t – primary deficit in year t-1.
• Cyclically adjusted primary deficit = Cyclically adjusted primary expenses – Cyclically adjusted total tax revenue
• Cyclically adjusted total tax revenue = Summation of cyclically adjusted components of total tax revenue.
• Cyclically adjusted primary expense = Cyclically adjusted transfer + wage + non-wage + subsidies.

Cyclically adjusted variables are computed by first regressing each fiscal variable on time trend and unemployment, followed by estimation of each fiscal variable in year t if unemployment rate were to remain the same in the previous year t-1.

Fiscal adjustment and fiscal stimulus:

• Strong fiscal adjustment is referred to as fiscal impulse (% of GDP) less than -1.5.
• Strong fiscal stimuli is referred to as fiscal impulse (% of GDP) larger than 1.5

CBS projects Nepal's GDP to grow at 4.0% in FY2021

On 30 April 2021, Central Bureau of Statistics (CBS) estimated that Nepal’s economy will likely grow by 4% in FY2021, up from 2.1% contraction in FY2020 (this is revised estimate). The projected growth rate is far less than the government’s target of 7% owing to the severe impact of COVID-19 pandemic on economic activities and mobility of labor and capital. If we factor in the base effect, there is hardly any steam left in the economy in FY2021. The data is based on latest rebased national accounts, which are now reported in FY2011 prices instead of FY2001 prices.  FYI, fiscal year (FY) starts from mid-July of t-1 year and ends on mid-July of t year (for instance, FY2021 refers to the period between mid-July 2020 and mid-July 2021). 

According to FY2020 revised data, while industrial and services output contracted by 3.7% and 4.0%, respectively, agricultural output increased by 2.2%, which is lower than 5.2% in FY2019, owing to delayed monsoon, shortage of chemical fertilizers, use of substandard seeds, and an armyworm invasion. A country-wide lockdown in Nepal started on 24 March 2020 (which was towards the end of second month of third quarter) and lasted well into the fourth quarter. Lockdown was relaxed in September 2020. The country did not fully open at least until the end of 2020 (international travel remains restricted though).

Overall, in FY2021, agricultural, industrial and services sectors are projected to grow at 2.6%, 5.0% and 4.4%, respectively. Agricultural sector will likely contribute 0.8 percentage points, industrial sector 2.4 percentage points, and services sector 2.4 percentage points to the overall projected GDP growth of 4.0%. These projections are based on eight to nine months data and the assumption that economic activities will gradually pick up from mid-May 2021. 

Several local administrations imposed lockdown in April 2021 in response to the increasing number of Covid-19 cases as the second wave sweeps the nation. The CBS made the latest projections based on the (unrealistic) assumption that lockdowns and economic activities will ease after two weeks and that there will be substantial improvement in accommodation and food service activities (basically, domestic tourism). Given the unrealistic nature of this assumption and that most of the economic activities typically happens in the last two quarters of fiscal year, the actual growth estimate will likely be revised downward in subsequent revisions. In fact, it may actually either show contraction or near zero growth.

Agricultural output is projected to grow at 2.6%, up from 2.2% in FY2020, largely due favorable monsoon and a surge in agricultural labor (lockdowns forced reverse migration and contributed to more migrant workers’ engagement in agricultural work) having a positive effect on paddy output. 

Industrial output is projected to grow at 5.0%, up from a contraction of 3.7% in FY2020. Within industrial sector, electricity, gas and air conditioning subsector is expected to grow by 7.7%, down from 25.6% growth in FY2020 (this was due to substantial addition of new hydroelectricity to the national grid). All other industrial activities are expected to grow at a modest pace, mainly thanks to the base effect. 

Mining and quarrying activities are estimated to grow by 7.5%, up from a contraction of 2.2% in FY2020 as mining and quarrying of stones, sand, soil and concrete affected by the lockdowns were allowed to operate as restrictions eased. A boost in construction activities is expected to positively affect mining and quarrying as well. Construction activities are projected to grow by 5.6%, up from 5.0% contraction in FY2020 as supplies of construction materials normalize, and households, commercial and infrastructure projects pickup pace after a slack last year. 

Manufacturing activities are projected to increase by 3.9%, up from 8.6% contraction in FY2020. In addition to the COVID-19 related lockdowns and containment measures, manufacturing sector has been suffering from low private sector investment, and loss of both domestic and external markets due to eroding cost and quality competitiveness. Stable supply of electricity and improved industrial relations were not sufficient to drastically boost manufacturing output as expected. Manufacturing activities may not actually recover to the pre-pandemic level in the short-term. 

Electricity, gas, steam and air conditioning supply is expected to increase by 7.7%, down from 25.6% growth in FY2020, on expectation that a part of Upper Tamakoshi hydroelectricity projects will come online by mid-July 2021. Water supply, sewerage, waste management and remediation activities are expected to increase by 1.6%, down from 2.1% growth in FY2020, thanks to the expected supply of drinking water to households from the Melamchi water supply project. Both Upper Tamakoshi and Melamchi proejcts have faced multiple time and cost overruns. 

Services output is projected to grow at 4.4%, up from 4% contraction in FY2020. Last year, wholesale and retail trade; transport and storage; and accommodation and food service activities within services sector contracted as these high-contact activities were severely affected by lockdowns and social distancing rules. There was also a drastic drop in import and sale of agricultural and industrial goods. In FY2021, however, the CBS is projecting these subsectors, which together account for 22% of GDP, to bounce back (although much of it will be base effect, which refers to the tendency of achieving an arithmetically high rate of growth when starting from a very low base). Wholesale and retail activities are expected to increase by 5.6%, up from a contraction of 5% in FY2020, as supplies disruptions ease and consumer demand pickup. The CBS is also projecting transportation and storage activities to pickup pace, growing by 6.1% from a contraction of 13.4% in FY2020. This as well hinges on the assumption that travel and tourism activities will gradually recover. Accommodation and food service activities are expected to increase by 11.2%, making it the fastest growing subsector in FY2021, as domestic tourism picked up pace after the FY2020 lockdowns were eased. 

Information and communication is expected to grow by 1.5%, down from 2.3% growth in FY2020.  Financial intermediation is projected to grow by 5.8%, higher than 4.8% in FY2020, reflecting improved income of NRB, BFIs, insurance board and companies, securities board, EPF and CIF. Real estate activities are expected to increase by 2.6%, marginally up from 2.4% in FY2020. Human health and social work activities are expected to increase by 6.5%, up from 5.3% in FY2020. The other services sector activities are also expected to grow at a rate higher than in FY2020. 

On the expenditure side, consumption is expected to increase by 5.2%, up from 3.6% in FY2020. Public and private fixed investment are expected to increase by 1.6% and 8.3%, respectively, up from contraction of 4.2% and 15.1%, respectively, in FY2020. Net exports are expected to grow at 5.1%, thanks to muted imports growth but a further contraction in exports. 

Here are quick takeaways from the latest GDP projection.

First, lockdowns, supplies and travel disruptions, and social distancing rules affected almost all sectors, especially industrial and services activities. Consumption increased marginally but investment bounced back from a contraction by 29.5%. In FY2021, lockdowns in many parts of the country started in the last quarter of fiscal year. Note that most of the economic activities happen in the second half of the fiscal year, more so in the last quarter (except for in FY2019 and FY2020). 

Second, given the lack of preparedness for a surge in cases; overwhelmed healthcare system; lack of adequate fiscal and monetary lifelines during the second wave that is ravaging lives and livelihoods; slow vaccination drive; disruptions to labor, capital and product mobility; supplies disruptions; and political instability, economic activities may not actually recover beyond the base effect in FY2021. Capacity utilization of firms will be hit due to lockdowns, supplies disruption and market uncertainties. It will affect private investment. A lack of employment opportunities both in formal and informal sectors will curtain household income and consumption. Similarly, the inability of the government to boost capital spending will also affect mining and quarrying, and construction activities -- affecting the growth of industry sector. Manufacturing and exports are not expected to recovery anytime soon. Against this backdrop, the economy might hardly grow (or it may even contract for second year in a row). So, the CBS’s assumption that economic activities may not be affected much after two weeks of lockdown, i.e., mid-May 2021 (it has already been extended for two weeks more in Kathmandu valley and other parts of the country) is unrealistic. It floated the same assumption when it released provisional national accounts estimate last year. 

Third, agricultural output would have grown higher than 2.6% if it were not for the shortage agricultural inputs, mainly chemical fertilizers. Procurement of chemical fertilizers has been mired in decision-making delays and lack of advanced planning. 

Fourth, the government does not have much fiscal firepower to launch temporary social protection schemes targeted at households and businesses affected by the deadly second wave of COVID-19 that started from mid-April 2021. There is hardly any fiscal space left with fiscal deficit projected to hit around 6-7% of GDP in FY2021. If the government allocates funds for new elections, then it might lead to scaling back of public spending as revenue mobilization slows down in tandem with the expected decline or muted growth in economic activities. It might also affect the banking sector, which might see demand for new credit decrease after a slight increase in the first half of FY2021. Firm bankruptcies due to cashflow problems, and a subsequent rise in non-performing assets of BFIs are real possibilities, especially after the regulatory forbearance on loan moratorium is lifted and refinancing opportunities dry up. MSMEs, which do not have much cash reserves to cushion against negative shocks, will bear the brunt of the crisis.

Fifth, the size of Nepali economy is estimated at USD 36.1 billion. Per capita GNI of USD 1196 and per capital GDP of USD 1191. GNDI (GNI + net current transfers incl remittances) is estimated to reach 124.8% of GDP. Gross domestic savings (GDP – consumption) is around 6.6% of GDP, reflecting high level of consumption. The country’s population in FY2021 is estimated to be 30.3 million.