Differences in consumption aggregates and poverty estimates in South Asia

In a paper published in the latest edition of Asian Development Review (Vol.38. No.1), Islam, Newhouse and Yanex-Pagans study how differences in the construction of consumption aggregate in South Asian countries contribute to total error (arising out of nonsampling error and the error in the process of determining the international poverty line) in international extreme poverty measurement. Methodology and questionnaire for household survey differ among the countries, contributing to total error of the subsequent international extreme poverty line obtained for each country. They examine how sampling and survey design; spatial deflation to account for cost-of-living differences and intertemporal deflation; and construction of nominal consumption aggregate contribute to total error. 

Some factors that affect total error are incomplete coverage of the country’s population, errors in measuring consumption data, errors in calculating the poverty line, use of the consumer price index (CPI) to deflate prices in a manner that may not be consistent with the consumption patterns of the poor, and geographic differences in prices.

On sampling and survey design, the paper examines (i) sampling design, (ii) monetary welfare measure, (iii) food consumption questionnaire and data collection methods, (iv) self-production and meals outside home, (v) nonfood durables, (vi) durables, (vii) housing expenditures, and (viii) health and education expenditures. 

Among these, there exists significant differences in the way food consumption data are collected, especially the number of food items in the consumption questionnaire. Inclusion of more food items tend to increase levels of reported consumption, leading to lower reported poverty rate. While Pakistan has the lowest number of food items (69) listed in the survey, Sri Lanka has the highest (227). Bangladesh has 141, Bhutan 130, India 143, Maldives 92, and Nepal 74. For nonfood items, Afghanistan has the lowest number of items (38) and Maldives has the highest number of items (483). India has 338 and Nepal 95. 

Consumption data are collected either using diary method (households record all consumption data over a certain period in a notebook) and/or recall method (households list what they consumed over a specific past reference period). Length of consumption recall is also different. Lowering the recall period have increased reported consumption by households, which resulted in poverty rates falling by half in India. The authors note that “this simple change in the method of collecting data “lifted” 175 million Indians out of poverty”. 

The South Asian countries also have different questionnaires for the value of consumption of self-produced food and meals from outside home. For instance, Bangladesh, Pakistan and Sri Lanka do not account for food expenditures on meals outside the household as a part of their consumption aggregate. Note that consumption of food eaten outside the home is shown to raise extreme poverty rate. Similarly, Maldives and Pakistan do not account for consumer durables, and in Afghanistan and Nepal it is imputed. In the case of housing, all countries except Maldives include actual rent for urban and rural areas. They also include imputed rent except for (India and Maldives). All countries include health and education expenditure (except for Nepal in the case of health expenditure). 

Spatial deflation is used to adjust cost-of-living differences, which lowers the possibility of overestimation of poverty in rural areas and underestimation in urban areas (since an urban household needs to spend more to maintain the same standard of living as that of a rural household). Use of appropriate regional price indexes is important in this regard, but this could be challenging to construct. All South Asian countries do spatial deflation when they calculate their national poverty estimates, but when calculating international extreme poverty rates, the World Bank spatially deflates consumption aggregates in Bhutan and Nepal only. Bhutan uses survey-based price index to deflate prices, but Nepal and Bangladesh use an implicit spatial price index to deflate prices. The authors show that using spatial deflation is important in the case of international extreme poverty estimates, especially given the fact that without spatial deflation urban areas have less poverty and rural areas have more poverty. They recommend collecting regional price data for different durable and nondurable goods, and services. They also suggest collecting rental cost of housing at regional level so that imputation for rental rate of owner-occupied housing could be done suitably. 

A third source of total error is the way standardized consumption aggregates are computed compared to the national consumption aggregates. Here, standardized consumption aggregate refers to the one obtained from the standardized consumption datasets created by the World Bank. It basically reclassifies expenditure items into the various categories used in the International Comparison Program (ICP). However, note that the method of data collection and questionnaire design affect standardization. The authors show slightly different average per capita consumption using the standardized and the national consumption aggregates. Not much difference, but in the case of India there is notable difference because of imputed rents for home owners. Also, standardization decreases housing expenditure in Nepal, Bhutan and Sri Lanka. 

The authors shows that standardization of consumption aggregate also changes share of particular item on total consumption expenditure. In Nepal, while food items account for 57% of national consumption expenditure, the standardized value is a bit less at 53%. Standardization reduces the share of food expenditure in consumption aggregate in all South Asian countries except Sri Lanka. 

The standardization of consumption aggregates increases poverty rate in Bangladesh, Bhutan Pakistan, and Sri Lanka. However, they authors show that it decreases the international extreme poverty rate in India, Maldives and Nepal.  

COVID-19 pandemic pushed 1.2 million people below the poverty line in Nepal

According to a news report, which cites a recent study done by National Planning Commission, supply, demand and income shocks due to the COVID-19 pandemic likely have pushed 1.2 million Nepali people below the poverty line (or an additional 4% of the population). This, according to the NPC, increases the number of poor people to 6.8 million (or about 22.7% of the population). The news report was published in Nayapatrika daily on 20 January 2021.

The NPC has also estimated that it would take NRs 668 billion for relief and recovery efforts. Specifically, NRs 69.84 billion for pandemic containment and relief, NRs 92.62 billion for employment, NRs114 billion for project continuity, NRs 111 billion for technology and its implementation, and NRs 73.44 billion for self-reliant initiatives. These are based on immediate term, medium term and long term needs projection. It states that NRs 242 billion is required for the immediate term, NRs 287 billion for medium term, and NRs 135 billion for the long term. 

Covid-19: Impact and response

It was published in The Kathmandu Post, 03 May 2020.

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Covid-19: Impact and response

The strict lockdown to contain the spread of SARS-CoV-2 and supplies disruptions are wreaking havoc on the economy. It is going to push many vulnerable households below the absolute poverty line and will likely increase inequality. According to the latest projections, gross domestic product growth will fall sharply to 2.3 percent in the fiscal year 2019-20, much lower than the 7.1 percent last fiscal and the government’s pre-Covid-19 target of 8.5 percent.

A sudden lockdown, coupled with the lack of contingency plans to smoothen consumption, supplies and housing, has inflicted appalling hardships on migrant workers and the poor and vulnerable. Similarly, businesses are facing financial stress or are outright bankrupt. The economy urgently needs a fiscal relief package for the vulnerable population and micro, small and medium enterprises (MSMEs), followed by a recovery package after the spread of Covid-19 is largely contained. However, effective last-mile delivery—that actually reaches the intended beneficiary households and businesses—is a huge challenge due to weak accountability and targeting mechanisms.

Economic impact

During the lockdown, over 90 percent of economic activities have come to a grinding halt. The latest projections show that the agricultural, industrial and services sectors are projected to grow by 2.6 percent, 3.2 percent and 2 percent, respectively. These numbers are drastically lower than the growth these sectors experienced last fiscal year.

The economy was already weak before the lockdown and social distancing measures were implemented. For instance, a delayed monsoon, shortage of fertilisers, use of substandard seeds and an armyworm invasion dented agricultural output before the Covid-19 pandemic. The pandemic exacerbated the situation through agricultural inputs crunch (such as workers and fertilisers), especially to harvest winter crops, connect to agricultural markets, and prepare for summer crops.

Similarly, weak capital spending and the lack of an investment-friendly environment affected industrial output before the pandemic. The Covid-19 outbreak in Nepal happened to exacerbate the situation as it hit in the second half of the fiscal year—the period when a majority of economic activities occur. No wonder, mining and quarrying, manufacturing and construction activities are expected to contract in the current fiscal year. Work from home norms do not apply to these activities and productivity losses will continue to linger for some quarters.

Within the services sector, a deceleration of remittance income and decline in imports were already affecting retail and wholesale trade, which has the second-largest share in the GDP. After the pandemic, this sub-sector is expected to grow by just 2.1 percent, down from 11.1 percent last fiscal. Travel and tourism-related activities such as hotels and restaurants, and transport, storage and communications are expected to contract. Other services activities that are badly hit are financial intermediation, real estate and business activities, and education. Note that casual workers and informal sector firms, mostly MSMEs, are concentrated in the services sector.

Overall, consumption has been subdued, and fixed public and private investments are contracting. The government’s 2.3 percent growth estimate for the fiscal year might itself be a bit optimistic because it assumes that the affected economic activities, except for international tourism-related activities, will start to pick up pace from mid-May. But this is highly unlikely, owing to the uncertainties over Covid-19 contagion, unfavourable external factors (decline in remittances and foreign direct investment), difficulty to quickly reverse the dispersal of workers, and supply disruptions.

This crisis will increase the fiscal deficit because of lower than expected revenue mobilisation and nominal GDP growth, and higher than expected expenditure needs. Inflation may rise, but not to the extent seen during previous crises as depressed consumer demand will somewhat counteract cost-push inflationary pressures arising from a shortage of goods and services. Similarly, a decline in exports as well as imports, and deceleration of remittance inflows might have a net effect of reducing the current account deficit. However, foreign exchange reserves will fall. This is not good, as it jeopardises external sector stability.

Importantly, since a large proportion of the households are clustered just above the absolute poverty line, an income shock due to the Covid-19 will push many of them below the poverty line. It will also potentially widen inequality because the poorest households are disproportionately affected. Note that over 62 percent of the employed workforce is in the informal sector and about 85 percent of them are employed informally—that is, those who do not have paid annual leave or sick leave benefits and whose employers do not contribute to their social security. Social protection problems, as well as unemployment, are going to exacerbate as mass internal layoffs and returning migrant workers increase in the coming weeks. The unemployment rate was already over 11.4 percent and the labour underutilisation rate, which includes unemployed, time-related unemployed and potential labour force, was even higher at 39.3 percent.

Crisis response

Given the enormity of the emerging health, social and economic problems, a well-coordinated and synchronised relief and recovery package is of urgent need. Extraordinary circumstances require exceptional measures, but the government’s economic response has been ordinary at best.

A detailed relief and recovery package is missing. The immediate-term focus should be to stabilise aggregate demand and to lower the burden on workers due to unemployment and income shock. These are best done through the expansion of social protection measures and easing regulatory as well as liquidity constraints faced by MSMEs. After Covid-19 pandemic subsides and is largely contained, a full economic recovery package is required to help struggling businesses and workers. This is also a time to think of import-substituting production and the diversification of sources of economic growth and poverty reduction.

Further, although the fiscal space is already tight, thanks to expansionary redistributive budgets in the previous years, there should be no confusion about financing Covid-19 related measures by tweaking expenditure allocation. Of course, revenue mobilisation will be lower than projected and so will be spending. But, a repurposing of the recurrent budget (especially those allocated to use of goods and services) and capital budget (allocated for vehicle purchase, consultancy, land acquisition and some civil works) is still possible. The government can issue bills and bonds as planned and raise the required money for immediate needs.

It can be used to expand unemployment and other social security-based direct cash transfers, boost healthcare spending, provide relief to farmers, subsidise food and daily essentials, guarantee credit on additional working capital for MSMEs, subsidise employee retention, cover the short-term interest on loans taken by MSMEs, expand insurance coverage, and pay premium perks for frontline workers, among others. Similarly, the government can use funds related to social security, foreign employment welfare, constituency development, and prime minister employment scheme. It could also use funds lying idle at various autonomous authorities. These measures do not necessarily jeopardise fiscal sustainability.

Moreover, the government can request the Asian Development Bank and the World Bank—the largest multilateral lenders to Nepal—to repurpose existing assistance towards the government’s new immediate and medium-term priorities. It can also seek additional concessional loans, given the enormity of the crisis and the fiscal burden in the next few years. Multilateral lenders have rapid disbursement facilities for emergency assistance and policy-based loans for budget support to help the government’s agenda.

Finally, the government could issue a pandemic bond and request the central bank to purchase it under a special one-off mechanism. For instance, the central bank can repurchase government bonds from the market and return the funds to the government’s account when they are due. Or it can perpetually roll it over.

Fiscal deficit in India and rebooting the economy

Govt needs clear 'entry and exit plan' on fiscal expansion: Shaktikanta Das

From Business Standard: The coronavirus pandemic will expand the government’s fiscal deficit beyond 3.5 per cent of India’s gross domestic product (GDP), said Reserve Bank of India (RBI) governor Shaktikanta Das as he called for a "well calibrated roadmap” to manage finances. “The 3.5 per cent fiscal deficit target for this year will be very challenging to meet,” Das told news agency Cogencis in an interview. "It has to be a judicious and balanced call keeping in mind the need to support the economy on one hand and the sustainable level of fiscal deficit that is consistent with macroeconomic and financial stability.” “There has to be a very well calibrated and well thought out roadmap for entry and exit.” The RBI has not yet taken a view on monetising the government deficit.

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Rebooting the economy: India needs a stimulus package of at least 5% of GDP

Ashok Gulati writes in Financial Express: My humble assessment is that this may not take us far enough as the real problem is collapse in demand. And, that demand may not pick up easily as the virus is likely to stay with us for quite some time, and we may again have lockdowns as and when the viral infection surges. This will surely limit our travels and shopping for non-essentials. However, there is one demand that can easily revive, and that is food. The NSSO survey of consumption expenditures for 2011-12 revealed that in an average Indian household, about 45% of the expenditure is on food, and almost 60% of the expenditure of the poor is on food. We do not have information about consumption patterns in 2020, but my guess is that an average Indian will still be spending about 35-40% of their expenditure on food; for the poor, this expenditure would be about 50%. And, herein lies the scope to reboot the economy.

[...]But, eastern Uttar Pradesh, Bihar, Jharkhand, West Bengal, and Odisha, from where much of the migrant labour goes to other parts of India, will face a double challenge. In these states, agriculture, with tiny farm holdings, was already saddled with large labour force, engaging almost 45 to 55% of their total labour force. Non-farm income from wages and salaries, through migrant labour, was one important source of their income. This is now severely hit. In all probability, these staes’ overall per capita incomes in rural areas may shrink, at least in the short run, raising issues of swelling poverty, hunger, and malnutrition. In such a situation, how does one reboot the economy and also take care of a worsening situation on the hunger and malnutrition front?

A special investment package, a la USA’s Marshall Plan in 1948, for the eastern belt of India to build better infrastructure, agri-markets and godowns, rural housing and primary health centres, schooling, skilling will go a long way to revive the economy, and augment incomes of returned migrant labourers in these states. Rising incomes will generate more demand for food as well as manufactured products, giving a fillip to growth engines of agriculture as well as the MSME sector. Building better supply chains for food, directly from farm to fork, led by the private sector will not only augment export competitiveness of agriculture but also ensure a higher share of farmers in consumers’ rupee. This broad-based development in the hitherto laggard region of India will lay down the foundation for the long-term, demand-driven growth of industry in India.

Economic impact of COVID-19, policy measures required and how to finance deficit in India

Adapted from McKinsey & Company's latest brief on Getting ahead of coronavirus: Saving lives and livelihoods in India

In scenario 1, the economy could contract by about 10 percent in the first quarter of fiscal year 2021, with GDP growth of 1 to 2 percent in fiscal year 2021. In this scenario, the lockdown would be relaxed after April 15, 2020 (when the 21-day deadline is due to expire), with appropriate protocols put in place for the movement of goods and people after that. Our economic modeling suggests that even in this scenario of relatively quick rebound, the livelihoods of eight million workers, including many who are in the informal workforce, could be affected. In other words, eight million people could have their ability to subsist and afford basic necessities, such as food, housing, and clothing, put at severe risk. And with corporate and micro-, small-, and medium-size-enterprise (MSME) failure, nonperforming loans (NPLs) in the financial system could rise by three to four percentage points of loans. The amount of government spending required to protect and revive households, companies, and lenders could therefore be in the region of 6 lakh crore Indian rupees (around $79 billion), or 3 percent of GDP.

In scenario 2, the economy could contract sharply by around 20 percent in the first quarter of fiscal year 2021, with –2 to –3 percent growth for fiscal year 2021. Here, the lockdown would continue in roughly its current form until mid-May 2020, followed by a very gradual restarting of supply chains. This could put 32 million livelihoods at risk and swell NPLs by seven percentage points. The cost of stabilizing and protecting households, companies, and lenders could exceed 10 lakh crore Indian rupees (exceeding $130 billion), or more than 5 percent of GDP.

Scenario 3 could mean an even deeper economic contraction of around 8 to 10 percent for fiscal year 2021. This could occur if the virus flares up a few times over the rest of the year, necessitating more lockdowns, causing even greater reluctance among migrants to resume work, and ensuring a much slower rate of recovery.

What policy measures are required?

[...]Several measures have already been announced to provide liquidity, limit the immediate NPL impact, and ease personal distress for needy households in India. These amount to around 0.8 percent of GDP. Additional measures could be considered to the tune of 10 lakh crore Indian rupees, or more than 5 percent of GDP in fiscal year 2021. All the estimated requirements may not necessarily be reflected in the fiscal deficit of the current year—for example, some support may be structured as contingent liabilities that only get reflected when they devolve. However, a package of this order of magnitude may be essential in supporting those dealing with the possible steep declines in aggregate demand and in protecting the financial system from the possible solvency and liquidity risks arising from stressed companies if scenario 2 or scenario 3 plays out.

[...]Consideration could be given to an income-support program in which the government both pays for a share of the payroll for the 60 million informal contractual and permanent workers linked to companies and provides direct income support for the 135 million informal workers who are not on any form of company payroll. India’s foundational digital-identity infrastructure, Aadhaar, enables effective mechanisms for direct support, including through the Pradhan Mantri Jan-Dhan Yojana (PMJDY) and Pradhan Mantri Kisan Samman Nidhi (PM-KISAN) programs and to landless Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) beneficiaries. Concessions for home buyers, such as tax rebates for a time-bound period, could stimulate the housing market and unlock the job multiplier.

For bankruptcy protection and liquidity support, MSMEs could receive liquidity lines from their banks, refinanced by the Reserve Bank of India and a loan program for first-time borrowers could be administered through SIDBI.3 Substantial credit backstops from the government could be instituted for likely new NPLs Timely payments to MSMEs by large companies and governments could be encouraged by promoting bill discounting on existing platforms.

For large corporations, banks could be allowed to restructure the debt on their balance sheets, and procedural requirements for raising capital could be made less onerous. The Indian government could consider infusing capital through a temporary Troubled Asset Relief (TARP)-type program (such as through preferred equity) in a few distressed sectors (such as travel, logistics, auto, textiles, construction, and power), with appropriate conditions to safeguard workers and MSMEs in their value chains. Banks and nonbanks may also require similar measures to help strengthen their capital, along with measures to step up their liquidity and the liquidity in corporate-bond and government-securities markets.

How to finance?

Given that India’s fiscal resources are constrained, the Reserve Bank of India may need to finance a portion of such incremental government spending. The spending could be tracked as a COVID-19 portion of the budget to boost transparency. The inflationary effects may be low, as lockdowns severely constrict demand and the fiscal support provided would be a substitute for expenditure rather than additional stimulus. Price increases could, however, occur in some sectors, such as food, so appropriate steps would be needed to maintain harvests and keep the food supply chain operating smoothly.

Overall, devising a credible, systemwide, stabilization package would benefit from being executed in a timely fashion so it can influence the pace of recovery and help avoid severe damage to livelihoods, the economy, the financial sector, and society.

Following the first wave of stabilization measures, attention could shift to implementing the structural reforms needed to increase investment and productivity, create jobs quickly, and improve fiscal health. This could mean introducing further reforms in infrastructure and construction and accelerating investments in health, affordable housing, and other urban infrastructure. States could accelerate spending, and institutions such as NIIF4 could deploy domestic and long-term foreign capital faster. Such reforms could also enable Make in India sectors to become globally competitive and boost exports (such as electronics, textiles, electric vehicles, and food processing), strengthen the financial sector, deepen household financial savings and capital markets, and accelerate asset monetization and privatization to raise resources.

Impact of COVID-19 in East Asia and the Pacific

In its latest East Asia and Pacific Economic Monitor (April 2020), the World Bank argues that COVID-19 presents an unusual combination of disruptive and mutually reinforcing events, and that significant economic pain seems unavoidable in countries with excessive indebtedness. It presents an unusual combination of a supply and demand shock due to the preventive behavior of individuals and the transmission control policies of governments. 

Three types of activities are immediately affected: (i) collective high-density production (workers work closely together in manufacturing factories); (ii) collective high-density consumption (services activities such as sport, music, restaurant, travel, etc); and (iii) proximate production and consumption (suppliers meeting consumers activities such as personal care, health care, restaurants, retails, etc). 

The immediate effect was first on the Chinese economy, where lockdown and transmission control policies disrupted supply and froze demand, and affected other countries through flows of trade and tourists. As the virus spread beyond China, other governments took similar actions, leading to severe dent in demand and supply. This is amplifying the mutual shocks through trade and tourist flows, and finance stress. 

Under a baseline scenario, developing EAP growth is projected at 2.5% for 2020, but -0.5% under lower case scenario. PRC’s is expected to grow at 2.3% and 0.1%, respectively under the two scenarios. Baseline refers to a scenario of severe growth slowdown followed by a strong recovery. Lower case refers to a scenario of deeper contraction followed by sluggish recovery. 

The COVID-19 shock will also have impact on poverty and welfare through illness, death and lost incomes. Under the baseline scenario. About 24 million fewer people are estimated to escape poverty across developing EAP in 2020. However, under the lower-case scenario, poverty is estimated to increase by about 11 million people. Poverty rate refers to US$5.50 per person per day (2011 PPP) threshold. 

Effect on households is country-specific: households in Vietnam linked to manufacturing reliant on imported inputs will see poverty rates double but households depending on tourism income will be the hardest hit in the Pacific Islands. Developing EAP refers to Cambodia, China, Indonesia, Lao People’s Democratic Republic (PDR), Malaysia, Mongolia, Myanmar, Papua New Guinea, the Philippines, Thailand, Timor-Leste, Vietnam, and the Pacific Island Countries.

The WB recommends countries to flatten two kinds of curves: (i) flatten the pandemic curve by limiting transmission through lockdowns and travel bans, and (ii) flatten the recession curve by taking appropriate monetary, fiscal and structural measures. It also recommends augmentation of health capacity to fulfill potentially overwhelming demand. 

On macroeconomic policy, it argues that an expansionary policy is less effective given that the lockdown and social distancing limit production and employment. So, fiscal measures should initially focus on social protection to cushion against shocks, especially for the most economically vulnerable. These include subsidies for sick pay, expenditure on healthcare, expanded safety nets, cash and in-kind transfers when the informal sector is large, schooling feeding programs, and employment support to reintegrate into the economy among others. These would help to limit long-term human capital losses due to temporary deprivations. Also note that marginal propensity to consume of low-income households is reasonably high. 

On financial sector, it recommends easier access to credit for households to smooth consumption, and easier access to liquidity for firms to help them survive the disruption. However, regulators should ensure risk disclosure and clearly communicate supervisory expectations to avoid financial instability, especially when debt levels are high. For low-income countries, debt relief will be essential. 

On trade policy, the recommendation is to stay open and not resort to export restrictions, especially export of coronavirus-related medical products. 

Universal Basic Income in the Developing World

Banerjee, Niehaus and Suri (February 2019, wp22598) have a new NBER working paper out on the what we know and don’t know so far about universal basic income, particularly 

1. what recipients would likely do with the incremental income
2. whether this would unlock further economic growth
3. the potential consequences of giving the money to everyone (as opposed to targeting it)

They consider UBI as an incremental anti-poverty intervention and argue that UBI is unlikely to be cost-effective at achieving any particular narrow policy goal (health, education, nutrition, etc) or to relax any particular constraint (financial constraints such as credit or insurance market imperfections, psychological constraints such as hopelessness, or limited bandwidth). 

This blog post summarizes the main takeaway from their working paper. 

What recipients would likely do with the incremental income?

What we know

• Little evidence of UBI’s effect in developing countries. 
• Three schemes closely align with UBI: one for two years in nine villages in the Indian state of Madhya Pradesh (2010-2011), one in two villages in Namibia (January 2008-December 2009), and Iran’s nation-wide cash transfer introduced in 2011 to offset the withdrawal of food and fuel subsidies. 
• Existing transfers have not been universal but rather targeted, both to subsets of households (through means testing, ordeals, conditions, etc.) and to specific adults within those households (often the female head). Existing transfers typically last for relatively short time periods, as opposed to the long-term commitment envisioned by UBI advocates.
• Many transfers (particularly in South and Central America) were paid out conditional on certain conditions being met, but many others (particularly in Africa) were not. Pensions are also transfers and have structure (size, frequency and duration) quite similar to UBI payments. As of 2018, there were 552 million people living in the developing world who received some form of cash transfer.
• Evaluations generally have not found the negative impacts that many feared. Transfers had on average reduced expenditure on temptation goods. There is no systematic evidence that transfers discourage work. 
• Evaluations have also shown a great diversity of positive impacts on income, assets, savings, borrowing, total expenditure, food expenditure, dietary diversity, school attendance, test scores, cognitive development, use of health facilities, labor force participation, child labor migration, domestic violence, women’s empowerment, marriage, fertility, and use of contraception, among others.

What we do not know

• Examining impacts on entire populations is important to understand the effects of a UBI. Universality could change impacts if there are interactions between the effects of one’s own and one’s neighbors (basic) income. We can say little about this at the moment as very few studies have simultaneously varied individual treatment status and the overall intensity with which communities are treated, and then tested for interaction effects. 
• There is relatively little evidence to date on how transfers affect local markets through general equilibrium effects (transfers affect prices and wages too).
• Delivering a UBI to each adult in a household (which is what many basic income proposals contemplate) could have different effects from delivering the same amount of money to a single adult representative of the household (which is how most existing cash transfer programs function). What evidence exists does suggest that the identity of the recipient matters, but not that one type of recipient is unambiguously better” than others.
• Committing to deliver basic incomes for a long period of time could have effects that differ from the effects of shorter-term transfers themselves. To understand whether and how duration matters, a key issue is separating the effects of current transfers from the effects of anticipated future transfers.

Can UBI unlock economic growth?

UBI is unlikely to be the most cost-effective way to alleviate any one of the underlying constraints on investment. But we currently know little about which constraints bind for whom, or how in practice to target interventions to the specific people who need them. This is what makes UBI, which does not try to step on any specific lever, interesting as a pro-growth policy.

Several strands of research suggest that lack of access to capital constrains some more than others. Where they do, a UBI potentially provides a source of capital to relax the constraint. Firm marginal products are much more dispersed in India and China than in the US. There are various possible reasons for such results, but the most obvious theory is that some firms are (differentially) credit constrained and therefore underinvest relative to others.

At the micro level, an extensive literature on the returns to capital suggests that they are widely dispersed and very high in some cases, over 100% a year. There is also strong prima facie evidence of inefficiencies in the financial sector in most developing countries. Borrowing interest rates in the non-banking sector are often extremely high. These data co-exist with estimates from randomized trials of microcredit showing that borrowers on average do not use loans to grow their businesses. Grants also seem to have (widely varying) effects on investment.

For some, lack of insurance markets may be a binding constraint. Entrepreneurs may shy away from investing borrowed or owned capital because they want to avoid exposing themselves to business risk. Evidence that uninsured risks distort investment and production is mixed.

External constraints such as missing markets for credit or insurance have been development economist’s traditional bread and butter. But what if some people face constraints within their own minds? For some, poverty may simply tax the mental and emotional bandwidth needed to think through important decisions. 

UBI could be transformative for people bound by internal constraints. Not having to worry about making ends meet could free up the mental and emotional bandwidth needed to focus on getting ahead, or re-set hopes and beliefs about the future. Whether this is true or not is, of course, still to be seen.

Targeted or universal transfer?

A central question about UBI is whether universality is in fact efficient. For any given budget, is it better to spread those resources evenly or to give larger amounts to the poorest? There has been a large literature on different approaches and their effectiveness, ranging from by far the most common, a proxy means test (PMT), to community targeting to self-selection. Universality has several under-appreciated benefits, and targeting several underappreciated limitations. 

Work quantifying the relationship between impacts and targeted characteristics is limited, as is work on the potential disincentive effects of targeting. It is also unclear how effectively targeting poor households succeeds in targeting poor people, taking into count the unequal distribution of resources within households and redistribution of resources across them.

Universality could reduce administrative costs. Targeting well requires data collected repeatedly, given significant shares of people in developing countries change their poverty status from year to year. The administrative costs of universality are likely to be far lower, especially given the ongoing investments emerging market governments are making in digital ID and payment systems.

Universality could improve the “political economy” of redistribution. Government capacity to implement nuanced targeting schemes is often limited, particularly so in the poorest area where it is most important to get it right. In cases like these, making eligibility universal may have a modest effect on the realized incidence of benefits while at the same time substantially reducing the scope for corruption and other abuses of power. 

Broad eligibility could also help build political bases of support for sustained redistribution.

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Given the discussion of costs, it is worth asking about the administration or implementation costs of a universal system, i.e. the costs of distributing the transfers themselves. To avoid double counting, it will be important for developing countries to have a well-functioning universal identification system, preferably digital, though this will be a one-time cost. When state capacity to discipline front-line bureaucrats is limited, targeting can also create opportunities for corruption and other abuses of power. 

The per-person costs of delivering transfers are falling rapidly in many places due to advances in last-mile digital payments infrastructure. All else equal this will tend to further increase the appeal of broad or universal targeting.

Government reduces number of ministries from 29 to 17 and more

Government reduces number of ministries from 29 to 17

The government’s decision to downsize the number of ministries from 29 to 17 will enhance efficiency and lessen the burden on state coffers even if the move does not suffice to sustain funding in the federal structure, officials have said. Officials said the decision will enhance the efficacy of the government, will improve governance and cut state expenditures, among others. But experts point to a more pressing problem—of huge costs in the provinces and the local level. They suggest that the government look for ways to curb regular expenditures in the federal units.

Office of Prime Minister and Council of Ministers (OPMCM)

1. Ministry of Finance
2. Ministry of Foreign Affairs
3. Ministry of Defense
4. Ministry of Physical Infrastructure and Transport
5. Ministry of Health and Population
6. Ministry of Federal Affairs and General Administration
7. Ministry of Information and Communications
8. Ministry of Law, Justice and Parliamentary Affairs
9. Ministry of Culture, Tourism and Civil Aviation
10. Ministry of Education and Sports
11. Ministry of Home Affairs
12. Ministry of Forest and Environment
13. Ministry of Water Resources and Energy
14. Ministry of Industry, Commerce and Supplies
15. Ministry of Labor, Employment, Women and Children
16. Ministry of Urban Development, Drinking Water and Sanitation
17. Ministry of Agriculture, Cooperatives and Land Management

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At this rate of work, it will take another eight years to upgrade Bhairahawa airport to an international airport

The much-delayed international airport project in Bhairahawa has achieved a measly 10 percent physical progress in 2017, and if it continues at the same rate, it would take another 8 years to finish, the project financer Asian Development Bank (ADB) said on Friday. The ADB has expressed concern over the slow performance of the contractor of the Gautam Buddha Airport, which is being upgraded into an international facility, and has raised doubts that the project would be completed by the extended deadline of June 2019. The multilateral development finance institution has already informed the government that it would not be able to finance the project further after its initial deadline in December 2017, in view of its slow progress. However, it has been weighing options that if the contractor improves its performance until mid-March, the project’s financing could continue, according to the officials at the Civil Aviation Authority of Nepal (Caan)—the project’s executing agency.

On November 13, 2013, the Civil Aviation Authority of Nepal (Caan) awarded the Rs6.22 billion contract to upgrade the airport to China’s Northwest Civil Aviation Airport Construction Group. Of the total project cost, the ADB has provided $58.50 million ($42.75 in loans and $15.75 million in grants), the Opec Fund for International Development (OFID) has provided a $15 million loan and Caan will bear the rest of the cost as counterpart funding. The national pride project has been envisaged to serve the fast-rising business and industrial hub of Bhairahawa and facilitate international pilgrimage tourism to Lumbini, the birthplace of the Buddha.

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Poor get identity cards only

The government is planning to distribute “poor ID cards” to those falling below the poverty line. However, there is no concrete plan yet to provide them with social security allowance, medical insurance, skills training, essential goods at subsidized rate, and free education among others. 

The government will distribute such ID cards to poor people from five villages of five districts within this month. It has already done survey in 25 districts. The five villages are Bhagwanpur (1886, Siraha), Fikkal (1604, Sindhuli), Nishikhola (1563, Baglung), Swamikratrik (1638, Bajura) and Mohanyal (2386, Kailali). The government aims to distribute such ID cards to 391,831 poor people identified in 25 districts. The total number of poor people is estimated to be around 1.9 million.

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Poverty based on MPI or income: Which one to look at in the case of Nepal?

National Planning Commission, in collaboration with Oxford Poverty and Human Development Initiative, recently published multidimensional poverty index (MPI), which will be used in measuring progress in SDGs and for policy focus in the provinces. MPI based poverty estimates are different from the traditional cost of basic needs based estimates (the one we usually hear: national poverty line or the latest $1.90 a day (2011 PPP $) poverty line that takes into account the minimum income needed to consume minimum level of calorie requirement, and non-food goods and services). Here is an old blog post based on previous MPI methodology and here is a post on the other measures of poverty. 

The MPI assesses a range of critical factors or “deprivations” at the household level: from education to health outcomes to assets and services.  The index ranges from zero to one, with low value meaning low MPI. It ranks countries based on MPI. The MPI value reflects both the incidence (percentage of people who are poor) and intensity (the average number of depravations each household faces) of poverty. A person who is deprived in 70% of the indicators is clearly worse off than someone who is deprived in 40% of the indicators. Note that MPI is computed as poverty rate (the headcount ratio) times intensity of people’s depravation (average depravation score among poor people)

Education, health and living standard are the three main dimensions. Education is composed of two sub-indicators: years of schooling and school attendance. Health is composed of two sub-indicators: child mortality and nutrition. Living standard is composed of six sub-indicators: electricity, improved sanitation, safe drinking water, flooring and roofing, cooking fuel, and assets ownership. Each sub-indicator in health and education dimensions account for one-sixth weight in MPI and each sub-indicators in living standard dimension has one-eighteenth weight. The poverty cutoff is 33.3%, i.e. anyone deprived in a one-third or more of the weighted indicators is considered multidimensionally poor. 

Here are few key points:

• MPI poverty headcount: 28.6% of population is multidimensionally poor, largely accounted for by under-nutrition and households with no member who has completed five years of schooling
• MPI poverty has fallen drastically (similar is the scenario in the case of other measures of poverty): 0.313 in 2006; 0.186 in 2011; 0.127 in 2014
• Poverty intensity: Each poor person suffers deprivations in 44.2% of dimensions
• Rural-urban divide: 7% of urban population and 33% of rural population are MPI poor
• Deprivations are highest in cooking fuel, flooring and roofing and sanitation
• Water and school attendance have the lowest deprivations
• Province 6 has the highest MPI poverty rate (51.2%), followed by province 2 (47.9%). Meanwhile, province 3 has the lowest MPI poverty rate (12.2%), followed by province 4 (14.2%)
• In terms of total number of MPI poor, 35% are in province 2, followed by 20% in province 5. 

It is important not to get confused with MPI based poverty estimates and cherry-pick poverty headcount numbers to suit an argument. We need to be careful of the fact that the usual poverty estimates we have been hearing about (the ones published by CBS and WB are based on NLSS data) and uses a cost of basic needs approach in general. The WB aggregated it for a bunch of least developed countries and came up with the global poverty threshold ($1.90 a day at 2011 PPP US$). Meanwhile, the CBS considers any one earning below NRs19,261 (both food and non-food) to be poor. The latest MPI based poverty estimates uses Multiple Indicator Cluster Survey (MICS) 2014.  The earlier MPI estimates were based on DHS 2006 and DHS 2011 data. So, caution much be exercised while comparing one with the other!

The overall message is that poverty is falling rapidly no matter which estimate we look at. Policy intervention message is more clearer in the case of MPI as it disaggregates what contributes more (indicators related to education, health or living standard) to high or low poverty levels in provinces.

Earthquake and Blockade: A wrecked Nepalese economy

Earthquake and economy

The catastrophic 7.8 magnitude earthquake on 25 April and subsequent aftershocks (two of them very strong) crippled the economy on all fronts: agricultural output as well as agricultural land was lost, and industrial and services sectors struggled to keep operation open amidst widespread disruption of production and distribution networks, especially on the main demand centers (urban areas including Kathmandu) and trade routes with China. Consequently, GDP growth came tumbling down to 3.0% from an expected 4.6% in FY2015 (unfavorable monsoon had already lowered GDP growth from 5.1% in FY2014). Meanwhile, the subdued market prices during the first three quarters more than offset the increase in prices of goods and services post-earthquake (which struck in the tenth month of FY2015), leading to inflation of about 7.2%.

External sector strengthened as lower import growth and higher remittance inflows immediately after the earthquake increased current account balance and balance of payments surpluses (5.1% of GDP and 6.8% of GDP, respectively). Fiscal performance remained dismal as estimated actual capital spending was just about 70% of planned capital spending, and revenue mobilization grew at 13.8% against 20.5% in FY2014.  Capital spending remains woefully low at around 3.5 to 4.0% of GDP. The low expenditure performance and relatively high revenue mobilization led to a fiscal deficit of around 0.2% of GDP (with primary surplus of about 1.6% of GDP in FY2015). Migration slowed down immediately after the earthquake, unprecedented scale of international assistance (primarily led by India together with PRC and the US) was mobilized, and the affected folks struggled to normalize household activity. About a million people fell below the poverty line.

The government estimated that the recovery cost would amount to about $6.7 billion (half of it needed for housing and human settlement), almost a quarter of FY2015 GDP. The international community pledged about $4 billion to finance post-earthquake rehabilitation and reconstruction (which is more than the share to be shouldered by the public sector). So, money was not an issue. The capacity to spend it effectively was. To give momentum to this, the government focused FY2016 budget (and monetary policy) on “building back better” and faster. To this end, an ordinance was promulgated to establish National Reconstruction Authority. The ordinance never made it to the parliament within 30 days and hence its life ended drastically. A bill on NRA is pending in the parliament. It has become a victim of political infighting, delaying post-earthquake reconstruction (urgently needed for short-term recovery and for long-term preparedness in this seismically active country). Initial euphoria about post-earthquake reconstruction has dampened. Pledged funds have remained idle (some may get cancelled if there is no progress), affected folks are still struggling to get by normal life, economy is weaker than before, and the lack of direction on reconstruction has raised frustration levels and the attrition of labor force. Meanwhile, political leadership has lost the sense urgency, hastened promulgation of constitution disgruntling some section of the population, and is still engaged in political infighting. Bureaucracy remains confused and increasingly looking for guidance from political leadership even in minor matters.

Now, that’s the story about post-earthquake economic tragedy triggered by the natural disaster that affected the upper and middle belts of western and mid-western administrative regions.

Blockade and economy

Enter the crisis in the Terai region and the debilitating impact on the economy. The crisis was brewing prior to the promulgation of the constitution as some Madhesh-based political parties objected to some provisions included in the draft constitution, which was passed by an overwhelming majority in the Constitution Assembly. The main point was the demarcation of federal states in the Terai region. With no flexibility (both sides) shown to settle the issue politically, the discomfort, disdain (not all but among some) and alienation increased. Consequently, protests and the state’s reaction to protesters (at times excessive on both sides) intensified. India came into the picture to influence changes to the constitution and many analysts allege that it is imposing an ‘unofficial blockade’ on the borders. Supporters of protesting parties picketed the border areas, virtually halting the movement of goods and services. What, how, who, when, etc narrative differ based on the ideological leaning (passion is overpowering reason and cool-headedness) of analysts, consultants, journalists, lawyers, politicians, etc (however ‘independent’ they are).

Anyway, the focus here is economy. Since Nepal is a landlocked country and trade with India accounts for about 60% of imports and exports (plus it provides access to its ports), the activities on the border have severely crippled the economy, which was already hamstrung by the impact of the earthquake and the government’s and the bureaucracy’s inability to initiate rehabilitation and reconstruction swiftly.

The supply disruptions (some allege it as official/unofficial blockade by India) have affected pretty much every economic activity. The Terai belt is considered an important agricultural and industrial hub, and it has all the major custom points along the major border crossings with India. The Terai region accounts for about 51% of agricultural output, 52% of industrial output and 40% of services output. The population of Terai (quite diverse in terms of ethnicity, class, language, income, vocation, etc) is about 50% of total population.

The subnormal monsoon was already affecting plantation and hence potential agricultural output. The disruption to household agricultural activities and shortage of chemical fertilizers along with uncertainty over timely harvesting have dented the outlook for agricultural output. Industrial activity has come to a grinding halt. Mining and quarrying, and construction works have not progressed much due to the delay in post-earthquake reconstruction. The shortage of supply of raw materials or intermediate goods (including petroleum fuel and LPG cooking gas) along with the closure of manufacturing plants have affected manufacturing and construction activities. Industrial sector will most probably grow at a negative rate.

Meanwhile, services sector, which is largely based on remittance-financed imported goods, has been severely crippled. Wholesale and retail trade (which is by far one of the most important and stable drivers of growth in addition to agricultural output) has been severely disrupted. Hotels and restaurants are struggling to cope with the acute shortage of cooking gas and diesel (fires up generator during load-shedding hours). Tourist arrival has plummeted. Real estate and associated businesses are in doldrums. Education institutions are shut down or are partially operational. Hospitals are running out of emergency as well as normal items. Services sector will also most likely grow at a negative rate.

So, the economic outlook looks very grim. As of now (with uncertainty over the resolution of the crisis), the growth rate in FY2016 will most likely be negative (it hasn’t happened so far and the lowest growth [0.2%] was registered in FY2002 immediately after the intensification of Maoist insurgency; services growth was negative 1.8%). My estimate is that GDP growth will plunge to around negative 0.8% in FY2016. Importantly, subject to the longevity of ongoing supply and production disruptions, the effect of the disruption to and dislocation of economic activities as a result of the earthquake and subsequently the crisis in Terai (including blockade) are going to linger on for the next few years if the response from the government is not swift (after the resolution of Terai crisis, which lets hope will happen sooner). The rate of exit from the labor force will be high and potentially migration for overseas work will increase. The existing growth rate is already too low. With the weak state of infrastructure supply and institutional fundamentals, the economic and employment potentials are further constricted. Not a good sign to bring back production and economic activities back to normal!

The food as well as non-food inflationary pressures will likely shoot up overall inflation above 10% and it might linger at higher levels in the following year(s). On the external front, trade deficit will come down along with the plunge in both exports and imports. Remittance inflows may remain strong and hence current account surplus may be remain at high levels. Lower lending compared to deposit will likely lead to liquidity surplus. Lower expenditure and lower revenue growths may result in not much deterioration of fiscal position. However, lower expenditure as well as lower revenue growth will mean some of the fiscal targets will be beyond the reach for this year and the next. Lets hope FY2017 will be better!

In a nutshell, tough times for the economy, the poor and the middle class throughout the country!

Finally, the issue about what needs to be done?

• Economic outlook will continue to be bleak if the supply disruptions continue. Speeches about self-sufficiency right now are useless. The country cannot simply become self-sufficient [self-reliant(?)] in food and energy in one or three years. Hydroelectricity production is not going to be sufficient over the medium term (within 5 years). While some are awaiting repairs following the earthquake, others are struggling to accelerate construction. However, the issue here is of raw materials/intermediate goods, which need to be imported (ranging from fuel to nuts and bolts and cement to heavy equipment). With the blockade in place, all construction work is already delayed by many months because it will take more time to restore pre-crisis (plus pre-earthquake) pace of work, which will partially depend on the clearance at the border and transportation of inputs to construction sites. So, resolve the Terai issue pronto to rescue the economy. No other way out!
• Rather than giving pompous statement about self-sufficiency and ending load-shedding, the government should bring out a time-bound strategy on how to achieve them. This would require taking tough decisions: taming unruly labor unions and interest groups hindering reform, enhancing productivity of workers, better community relations (think of obstruction caused due to the demand for shares by locals, etc), expedited construction of transmission and distribution lines (these have been trailing behind hydroelectricity construction affecting expected return on some of the investment), reforming NEA and NOC (and a slew of other moribund public enterprises), promoting the use of alternative sources of energy, updating the relevant Acts and implementing them in earnest, creating stable institutions and manning them with competent human resources, etc. The list is long and very challenging to do over the medium term given the will of political leaders and interest groups rallying behind them. See this piece on why Nepal is poor?
• Enough has been said already about National Reconstruction Authority. Just pass the Act, appoint a competent CEO, bring all implementing ministries on board and do the reconstruction within a stipulated timeframe.
• Boost public sector’s capacity to spend money. The availability of funds in the short-term is not an issue. The country is running a primary surplus already. Just use the funds wisely and in an accelerated way in productivity-enhancing investments (physical and social infrastructure).
• Revitalize the private sector and provide it with adequate incentives to focus on domestic production as opposed to trading of imported goods. Here also comes in the strategy to diversify the production base to reduce dependence on a single country for export and import. Upgrade customs points located in the northern and southern borders. Promote value chain development (intra and inter sector) and facilitate supply chains.
• Good governance is very important in all of these. Enough has already been said about it. Time to introspect and do the right thing.