Nepal’s sovereign rating

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

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

Transatlantic economies whipsawed by globalization

Jeff Sachs writes:

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

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

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

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

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

Labor issues cost closure of another garment factory in Nepal

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

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

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

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

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

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

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

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

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

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

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

IMF’s assessment of Nepal’s economy in 2010/11

An IMF staff team has concluded 2011 Article IV Consultation in Nepal. The report is yet to be out but here is what the IMF sees going on in Nepal right now. Below are the major points copied from the IMF statement.

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• GDP growth is expected to remain below 4 percent in the near term but in the absence of other shocks, inflation should decline somewhat.
• The balance of payments should show a small surplus, though it will remain vulnerable to the weak global environment.
• The delayed adoption of the 2010/11 budget contributed to the weak economic outturn. The timely presentation of the 2011/12 budget to Parliament is therefore welcome.
• The authorities’ plans to limit domestic financing of the fiscal deficit to 2 percent of GDP is appropriately consistent with macroeconomic and debt sustainability. However, achieving the deficit target will not be easy. Despite the impressive gains in revenues in recent years, slower economic growth could result in lower receipts than envisaged. At the same time, current spending is budgeted to rise substantially, and additional unbudgeted spending pressures could arise, including for reintegrating former combatants. Taking into account all of the above, the authorities are advised to prepare contingency plans to ensure the domestic financing target is met. These should focus on collection of VAT arrears, further improvements in tax administration, and reductions in unproductive subsidies, while safeguarding spending on priority poverty reduction and infrastructure.
• At the same time, large losses that arose at the Nepal Oil Corporation (NOC) in 2010/11 are unsustainable. Adoption of an automatic price adjustment mechanism that ensures the NOC avoids future losses is strongly recommended.
• As regards monetary and exchange rate policy, the peg should remain the key policy priority. This requires that monetary policy be conducted in a manner that ensures interest rates in Nepal do not fall below those in India. In the current environment, generalized liquidity injections would be inconsistent with this objective.
• Risks in the financial sector have been building up for some time as financial institutions proliferated in an environment of weak supervision. Excessive exposure of banks and other financial institutions to the real estate sector, where an asset price bubble has now burst, have brought many of these risks to the fore. Well targeted and fully collateralized temporary liquidity support to solvent individual institutions at penalty interest rates is warranted.
• On the other hand, relaxation of prudential and accounting regulations or blanket provision of liquidity assistance would only postpone addressing the deterioration in financial institutions’ balance sheets, with potentially significant untoward consequences for the economy. The authorities are encouraged to put in place a comprehensive and multi-faceted program of financial sector resolution that includes, among other things, better diagnostic assessments, strengthened supervision and enforcement of prudential regulations, and stronger intervention powers for the NRB.

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Contribution of small and young firms to employment & growth

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This paper describes a unique cross-country database that presents consistent and comparable information on the contribution of the small and medium enterprises sector to total employment, job creation, and growth in 99 countries. The authors compare and contrast the importance of small and medium enterprises to that of young firms across different economies. They find that small firms (in particular, firms with less than 100 employees) and mature firms (in particular, firms older than 10 years) have the largest shares of total employment and job creation. Small firms and young firms have higher job creation rates than large and mature firms. However, large firms and young firms have higher productivity growth. This suggests that while small firms employ a large share of workers and create most jobs in developing economies their contribution to productivity growth is not as high as that of large firms.

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Full paper by Ayyagari and Demirguc-Kunt (2011) here.

Update: More from the paper and a chart:

• SMEs contribute more to employment in low-income countries than in high-income countries.
• Small firms not only employ the most people, they also generate the most new jobs. SMEs with 250 or fewer employees generate a median 86.01 percent of the jobs.

The emergence of India as a donor

India is planning to set up its own aid agency to distribute its own US$11 billion over the next five to seven years, according to The Economist. South-South aid is increasing and the aid dynamics is changing. Here is a post on South-South aid to Nepal (India being the largest donor).

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For decades, India was the world’s biggest aid recipient. Now, it is likely to join Brazil, Russia and China in using aid to win friends and influence people abroad. The rules of aid are being turned inside-out and long-standing donors—governments and non-governmental organisations (NGOs) alike—must change, too.

[…] But India’s proposal shows that donors, like generals, are still fighting the last war. The old binary division of the world—between rich countries which give aid and poor ones which get it—is gone. Fewer countries are poor and eligible for cheap loans. Two-thirds of the world’s poorest people—those with less than $1.25 a day—live in middle-income countries, such as India, which increasingly are donors as well as recipients.

[…] As India also shows, middle-income countries no longer need financial transfers to help their own people. That was clear before: India has a space programme and $300 billion of foreign reserves. A new aid agency would ram the point home. Once, Westerners could say they needed to help India’s poor because India’s own government could not afford to. Not now.

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Now, the Southern and the Northern donors should focus on their comparative advantage—the former in infrastructure and the latter in promoting good governance.

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In this new world the justification for aid and the behaviour of donors must change. For India and others, it is far from clear why the government should send aid abroad when it has so many poor people at home. No doubt, aid will be defended as a boost to global influence. The risk for India is that, just like the West did in the 1960s, it will pour money into grand projects which fail—and encourage bad government.

For Westerners, justifying aid will be harder. But there is a reason to give: like trade, aid benefits from specialisation and comparative advantage. Emerging countries, with recent experience to draw upon, might do a better job of infrastructure spending. The West should focus more on policies and good governance (something many poorer Indian states are crying out for). There is a new world of aid but over a billion people remain poor; they still need help, even if some of them live in countries that now give aid as well as get it.

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