Monday, September 27, 2021

Agriculture productivity shocks and nonagricultural employment in India

Abstract from Jonathan Colmer's published paper in American Economic Journal: Applied Economics, 13(4):101-24


To what degree can labor reallocation mitigate the economic consequences of weather-driven agricultural productivity shocks? I estimate that temperature-driven reductions in the demand for agricultural labor in India are associated with increases in nonagricultural employment. This suggests that the ability of nonagricultural sectors to absorb workers may play a key role in attenuating the economic consequences of agricultural productivity shocks. Exploiting firm-level variation in the propensity to absorb workers, I estimate relative expansions in manufacturing output in more flexible labor markets. Estimates suggest that, in the absence of labor reallocation, local economic losses could be up to 69 percent higher. 



Wednesday, August 11, 2021

Short-term priorities for the economy

It was published in The Kathmandu Post, 09 August 2021.


The focus now should be on executing the budget and curtailing wasteful spending.

The current coalition government led by Prime Minister Sher Bahadur Deuba has inherited a challenging economic situation that continues to be affected by the Covid-19 pandemic and related lockdowns. Finance Minister Janardan Sharma faces an uphill task to revive economic activities, which remain subdued with little likelihood of a convincing rebound beyond the base effect after a contraction in fiscal 2019-20. Specifically, a short-term economic recovery strategy to reap 'low hanging fruits' has to be rolled out and implemented in such a way that it does not deviate much from the 2021-22 budget ordinance and 15th Five-Year Plan.

The major constraint here is the availability of resources amidst unprecedented expenditure pressure while the country stares at a third wave of the pandemic. The government cannot drastically increase expenditure, both actuals and allocations, due to its implementation capacity and funding constraints. The latest data shows that the government fell short of targets in pretty much all fiscal indicators. In 2020-21, while recurrent spending was about 90 percent of the target, capital spending was just 65 percent. Tax revenue mobilisation was about 95 percent of the target, but foreign grants just 34 percent. A relatively slower pace of spending compared to revenue mobilisation meant that the fiscal deficit decreased to 4.8 percent of the gross domestic product (GDP) from 5.5 percent in 2019-20. In the 2021-22 budget, a large increase in expenditure compared to receipts is set to provisionally widen the fiscal deficit to about 6 percent of GDP.

Low-hanging fruits

Against the backdrop of slow economic activities, tight fiscal space, inflationary pressures and deteriorating external sector, the new finance minister faces a challenging task of stimulating broad-based and inclusive economic activity. He perhaps wants to deliver visible results in a short period of time given financing and implementation constraints. Unfortunately, the options are limited.

First, ensuring availability of funds, as and when needed, to respond effectively to the healthcare crisis should be the utmost priority. The most visible outcome for the government right now is an orderly process of testing, tracing and treatment; availability of vital medicines used for the treatment of the coronavirus; and widespread vaccination in the shortest time possible.

Second, the pandemic-hit industry and services sectors need continuous support—be it in the form of tax concessions or utility discounts or direct wage subsidy or social security contribution—until the situation stabilises. A third wave of infections and related mobility restrictions will further affect cash flows. It may actually permanently cut off the struggling small and medium enterprise from production networks. This will have long-term economic consequences as gaps in supply chains cannot be filled immediately. So, the government could prop up aggregate demand not only by increasing public spending, but also by supporting the private sector wade through the crisis so that they can achieve at least pre-pandemic levels of capacity utilisation.

Third, given fiscal and time constraints, a supplementary budget or major amendment to the budget ordinance is not ideal. The focus now should be on executing the budget and, if possible, curtailing some of the wasteful spending and ad hoc projects and programmes included in the budget. With earnest efforts, Sharma could make a difference by prioritising operation and maintenance of dilapidated roads and bridges, water supply and drainage system, electricity distribution lines, school and hospital buildings and other public infrastructure. These initiatives yield quick, visible results, and help to enhance productive efficiency of public spending. Funding for additional operation and maintenance expenses could be arranged through reprioritising and repurposing of existing budget allocations.

The finance minister could also prioritise public investment management by instituting a mechanism whereby only well vetted and prioritised projects are included in the budget and medium-term plan. This means reworking on the existing National Project Bank, which has guidelines for identification, appraisal, selection and prioritisation of projects but are hardly adhered to during implementation. This will aid in allocative efficiency of public spending.

On domestic resource mobilisation, the bulk of the work needs to be in improving revenue administration so that leakages are plugged. Note that new policy measures related to revenue are expected to contribute only 7 percent of the total estimated revenue for this fiscal. The rest 93 percent is planned to be generated from existing measures, which means increasing the taxpayer base and improving compliance. Harmonisation of IT systems of various tax wings, active risk-based audit for taxpayer compliance, and a monetisation strategy for idle public sector assets will be helpful. Furthermore, assisting sub-national governments in revenue administration as well as public investment management will also be important. On deficit financing, since the cost of external borrowing is lower than that of internal borrowing, the former may be prioritised for the interim period. However, this will require sectoral policy and institutional reform commitments, or improved budget execution capacity.

Fourth, fiscal and monetary policies have to be synced with an objective to ensure demand and supply stabilisation, and an eventual economic recovery. Moderate inflationary pressures are okay during the interim period, but a medium-term plan to tame inflationary expectations, which are trending upward, should not be overlooked. There could also be cooperation in ensuring that the existing support measures related to refinancing schemes, subsidised credit and regulatory forbearance are not prematurely withdrawn. That said, the authorities will have to carefully rein in excessive credit growth that is not consistent with indicators such as GDP growth and deposit growth. An unjustifiably bullish stock market and rising real estate and housing prices are not good signs at the moment for the sound health of the financial system.

Minimal physical interface

Fifth, external sector needs to be monitored carefully, especially the direction of remittance inflows amidst a decline in the number of outgoing migrant workers as well as weak demand for them in the destination countries. This, along with widening trade and current account deficits, could put external sector stability at risk. Adjusting import tariffs and tightening bank financing to dissuade demand for expensive foreign vehicles and gold could be considered.

Finally, the finance minister can push for new measures that could have an immediate impact on struggling households and businesses, and aid the recovery process. For instance, a partial credit guarantee scheme with an umbrella framework to cover all guarantees, including credit subsidy to various sectors is helpful. Similarly, digitisation of public services so that there is minimal physical interface between the public and businesses and bureaucrats is another promising area for quick results. Addressing youth unemployment through reskilling, vocational training and temporary employment guarantee schemes is also going to be fruitful.

Brief highlights from IPCC's Sixth Assessment Report

AR6 Climate Change 2021: The Physical Science Basis, the IPCC’s Sixth Assessment Report submitted by Working Group I is out now. The report includes the most updated physical understanding of the climate system and climate change, and includes regional climate simulations as well. It provides evidence on how and why climate has changed and the effects attributable to human actions. 

Excerpts from the report:

The evidence regarding human influence on warming of atmosphere, ocean and land is unequivocal. Widespread and rapid changes in the atmosphere, ocean, cryosphere and biosphere have occurred.  Observed increases in well-mixed greenhouse gas (GHG) concentrations since around 1750 are unequivocally caused by human activities. Each of the last four decades has been successively warmer than any decade that preceded it since 1850. Global surface temperature in the first two decades of the 21st century (2001-2020) was 0.99 [0.84-1.10] °C higher than 1850-1900. Global surface temperature was 1.09 [0.95 to 1.20] °C higher in 2011–2020 than 1850–1900. 

The likely range of total human-caused global surface temperature increase from 1850–1900 to 2010–2019 is 0.8°C to 1.3°C, with a best estimate of 1.07°C.

Globally averaged precipitation over land has likely increased since 1950, with a faster rate of increase since the 1980s (medium confidence). It is likely that human influence contributed to the pattern of observed precipitation changes since the mid-20th century, and extremely likely that human influence contributed to the pattern of observed changes in near-surface ocean salinity.

Human influence is very likely the main driver of the global retreat of glaciers since the 1990s and the decrease in Arctic sea ice area between 1979–1988 and 2010–2019 (about 40% in September and about 10% in March).

It is virtually certain that the global upper ocean (0–700 m) has warmed since the 1970s and extremely likely that human influence is the main driver. It is virtually certain that human-caused CO2 emissions are the main driver of current global acidification of the surface open ocean.

Global mean sea level increased by 0.20 [0.15 to 0.25] m between 1901 and 2018. It increased by .7 [3.2 to 4.2] mm yr–1 between 2006 and 2018 (high confidence). Human influence was very likely the main driver of these increases since at least 1971.

Global surface temperature has increased faster since 1970 than in any other 50-year period over at least the last 2000 years (high confidence). Temperatures during the most recent decade (2011–2020) exceed those of the most recent multi-century warm period, around 6500 years ago13 [0.2°C to 1°C relative to 1850–1900] (medium confidence).

Human-induced climate change is already affecting many weather and climate extremes in every region across the globe. Evidence of observed changes in extremes such as heatwaves, heavy precipitation, droughts, and tropical cyclones, and, in particular, their attribution to human influence, has strengthened since AR5. It is virtually certain that hot extremes (including heatwaves) have become more frequent and more intense across most land regions since the 1950s, while cold extremes (including cold waves) have become less frequent and less severe, with high confidence that human-induced climate change is the main driver of these changes.

The frequency and intensity of heavy precipitation events have increased since the 1950s over most land area for which observational data are sufficient for trend analysis (high confidence), and human-induced climate change is likely the main driver. Human-induced climate change has contributed to increases in agricultural and ecological droughts15 in some regions due to increased land evapotranspiration (medium confidence).

Decreases in global land monsoon precipitation from the 1950s to the 1980s are partly attributed to human-caused Northern Hemisphere aerosol emissions, but increases since then have resulted from rising GHG concentrations and decadal to multi-decadal internal variability (medium confidence). Over South Asia, East Asia and West Africa increases in monsoon precipitation due to warming from GHG emissions were counteracted by decreases in monsoon precipitation due to cooling from human-caused aerosol emissions over the 20th century (high confidence).

Heating of the climate system has caused global mean sea level rise through ice loss on land and thermal expansion from ocean warming. Thermal expansion explained 50% of sea level rise during 1971–2018, while ice loss from glaciers contributed 22%, ice sheets 20% and changes in land water storage 8%. The rate of ice sheet loss increased by a factor of four between 1992–1999 and 2010–2019. Together, ice sheet and glacier mass loss were the dominant contributors to global mean sea level rise during 2006-2018.

Global surface temperature will continue to increase until at least the mid-century under all emissions scenarios considered. Global warming of 1.5°C and 2°C will be exceeded during the 21st century unless deep reductions in CO2 and other greenhouse gas emissions occur in the coming decades. Global warming of 1.5°C relative to 1850-1900 would be exceeded during the 21st century under the intermediate, high and very high scenarios considered in this report (SSP2-4.5, SSP3-7.0 and SSP5-8.5, respectively).


Many changes in the climate system become larger in direct relation to increasing global warming. They include increases in the frequency and intensity of hot extremes, marine heatwaves, and heavy precipitation, agricultural and ecological droughts in some regions, and proportion of intense tropical cyclones, as well as reductions in Arctic sea ice, snow cover and permafrost. Every additional 0.5°C of global warming causes clearly discernible increases in the intensity and frequency of hot extremes, including heatwaves (very likely), and heavy precipitation (high confidence), as well as agricultural and ecological droughts in some regions (high confidence).

Monsoon precipitation is projected to increase in the mid- to long term at global scale, particularly over South and Southeast Asia, East Asia and West Africa apart from the far west Sahel (high confidence). A warmer climate will intensify very wet and very dry weather and climate events and seasons, with implications for flooding or drought (high confidence). It is very likely that rainfall variability related to the El NiƱo–Southern Oscillation is projected to be amplified by the second half of the 21st century.


From a physical science perspective, limiting human-induced global warming to a specific level requires limiting cumulative CO2 emissions, reaching at least net zero CO2 emissions, along with strong reductions in other greenhouse gas emissions. Strong, rapid and sustained reductions in CH4 emissions would also limit the warming effect resulting from declining aerosol pollution and would improve air quality.

The likelihood of an outcome is expressed in the following way: virtually certain 99–100% probability, very likely 90–100%, likely 66–100%, about as likely as not 33–66%, unlikely 0–33%, very unlikely 0–10%, exceptionally unlikely 0–1%. Additional terms such as extremely likely 95–100%, more likely than not >50–100%, and extremely unlikely 0–5% are also used. A level of confidence is expressed using five qualifiers: very low, low, medium, high and very high.

  • Heatwaves and humid heat stress will be more intense and frequent during the 21st century (medium confidence)
  • Both annual and summer monsoon precipitation will increase during the 21st
  • century, with enhanced interannual variability (medium confidence).
  • Over most of the Hindu Kush Himalayan region, snow cover has reduced since the early 21st century, and glaciers have retreated and lost mass since the 1970s.
  • The Karakoram glaciers have remained either in a balanced state or slightly gained mass. During the 21st century, snowcovered areas and snow volumes will decrease in most of the Hindu Kush Himalayan, and snowline elevations will rise and glacier volumes will decline (high confidence).
  • A general wetting across the whole Tibetan Plateau and the Himalaya is projected, with increases in heavy precipitation in the 21st century.
  • Extreme precipitation is projected to increase in major mountainous regions (medium to high confidence, depending on location), with potential cascading consequences of floods, landslides and lake outbursts in all scenarios (medium confidence).
  • With few exceptions, mountain glaciers have retreated since the second half of the 19th century (very high confidence). This retreat has occurred at increased rates since the 1990s, with human influence very likely being the main driver. This behaviour is unprecedented in at least the last 2,000 years (medium confidence). Furthermore, glaciers will continue to lose mass at least for several decades even if global temperature is stabilized (very high confidence).
  • Mountain glaciers will continue to shrink and permafrost to thaw in all regions where they are present (high confidence). Mountain glaciers are projected to lose more mass in higher greenhouse gas emissions scenario over the 21st century (medium confidence).
  • It is virtually certain that snow cover will decline over most land regions during the 21st century, in terms of water equivalent, extent and annual duration.

Friday, July 30, 2021

Conditional or unconditional convergence

In their latest NBER working paper on economic convergence, Kremer, Willis and You (2021) argue that there was a trend towards unconditional convergence (GDP per capita today depends on its GDP per capita in the past) since 1990 and absolute convergence since 2000 owing to broad faster catch-up growth and slower growth of the frontier economies. They also show that many of the correlates of growth such as human capital, policies, institutions, and culture also showed convergence with higher income country groups.  As both correlates and growth have changed, their relationships (coefficients of growth regressions) have also changed. The shrinkage of growth regression coefficients has led to the narrowing of the gap between unconditional and conditional convergence. Absolute convergence has converged towards conditional convergence.


Major highlights from the working paper:

There was a steady trend towards unconditional convergence since the late 1980s and absolute convergence since 2000. Between 1985 and 1995, income per capita diverged by an average 0.5% annually, but between 2005 and 2015, it converged at a rate of 0.7%. The richest quartile of countries had the fastest growth in the 1980s, but the slowest growth since then as it became flat in the 1990s and then declined since 2000. However, the three other quartiles all experienced accelerating growth through 1990s and early 2000s. 

They argue that the conditional convergence could be due to (i) faster spread of technologies due to globalization as well as greater capital and labor mobility (accelerates convergence), and (ii) convergence in growth correlates themselves such as human capital, policies, institutions and culture (these could narrow the gap between unconditional and conditional convergence). 

The authors also explore whether growth correlates have changed over time by looking at four groups. First, enhanced Solow fundamentals, namely investment rate, population growth and human capital, which are fundamental determinants of steady state income. Second, short-run correlates, namely policies (political and financial institutions, fiscal policy) that can change in relatively short period of time. Third, long-run correlates, namely historical determinants of institutions and geography that change slowly, if at all. Fourth, culture (they consider 10 cultural variables such as views on inequality, political participation, the importance of family, traditions, work ethics, etc). They find that these correlates have not been highly persistent as many have undergone large changes and themselves converged substantially across countries, especially towards those of rich countries.

Establishing relationship between two trends -- towards convergence in income and the convergence of many of the correlates of growth itself-- is a bit challenging because causality can run both ways (for instance, converging income causes policies, institutions and culture to converge or it could be the other way round). By using omitted variable bias formula, they decompose the gap between absolute convergence (convergence across countries without conditioning on determinants of steady state income) and conditional convergence by looking at the product of the slopes of two relationships: correlate-income slopes and growth-correlate slopes. 

They find that while cross-sectional relationships between income and the correlates have changed in levels, their slopes have mostly remained stable. However, growth-correlates regression coefficients have shrunk substantially and show little autocorrelation for correlates (institutional homogenization) except for Solow model fundamentals (investment rate, population growth, and human capital), which have remained stable. This flattening of growth-correlates relationship suggest that absolute convergence converged towards conditional convergence. 

They argue that their results are consistent with neoclassical growth models, particularly after 1990. While conditional convergence held throughout the period (1985-2015), absolute convergence did not initially but as human capital, policies and, institutions improved in poorer countries, their explanatory power with respect to growth and convergence have declined. So, "the world has converged to absolute convergence because absolute convergence has converged to conditional convergence". Policies and institutions used to matter, but that they have converged, they matter less (and their effects are non-linear). Evidence support convergence in policies and institutions, but divergence in income over 1960-1990 (inconsistent with neoclassical growth model). However, convergence changed since 1990 and the outcome is consistent with neoclassical growth models (but not AK models such as endogenous growth models or poverty trap models that predict divergence). 

*******

Meanwhile, Acemoglu and Molina (2021), in a follow up comment, argue that the results of  Kremer, Willis and You (2021) working paper are driven by the lack of country fixed effects controlling for unobserved determinants of GDP per capita across countriesThis "create a bias in convergence coefficients towards zero and this bias can be time-varying, even when the underlying country-level parameters are stable." They find no evidence of major changes in patterns of convergence and no flattening of the relationship between institutional variables and economic growth. 

Pande and Enevoldsen (2021) argue that convergence towards development-favored policies that drove the trend outlined by Kremer, Willis and You (2021) also mean that this has happened with rising within-country inequality, resulting in more of the world's poor clustering in (lower) middle-income countries. 

Monday, July 26, 2021

Entry and exit of informal firms

In a latest NBER working paper, McCaig and Pavcnik (2021) present several stylized facts about entry and exit of informal firms using a nationally representative panel data from Vietnam. 

Most informal firms are often operated only by the owner. Lower wealth and aggregate productivity tend to correlate with smaller average firm size. With economic development, average firm size also increases as self-employed entrepreneurs seek wage opportunities (so informal business is a necessity in part affected by lack of other employment opportunities). It indicates that self-employment decreases and size of firms increases with economic development. Other causes of smaller firms include imperfections in capital markets, barriers to hiring labor, cost of registration and formalization, and lack of business training. 

Major highlights/excerpts from the working paper:

First, informal businesses exhibit rates of entry and exit around 14-18% annually. Entry and exit rates are similar and highly correlated at a point in time, within industries, and within regions. They both decline over time and across space with economic development. 

Second, although market selection influences which firms survive, entry and exit has little net effect on aggregate (revenue) productivity or hiring of workers outside the household. This owes to overlapping labor productivity of entering and exiting firms and low subsequent productivity growth and hiring among the surviving entrants.  Almost half of the entrants exit within two years and the surviving entrants do not significantly improve their performance over time or begin to hire paid workers. This could be due to market-selection, but also due to owner-specific characteristics and shocks, alternative employment options, and household-specific shocks. Business exit and entry is associated with large decreases and increases, respectively, in individual and household income.

Third, the large overlap in revenue of entering and exiting informal businesses and the high correlation between entry and exit rates are related to the education and economic activities (self-employment, wage work or just outside of the workforce) of business owners prior to starting, or after closing down, an informal business. Informal business owners are less educated on average than wage workers in the formal sector, but more educated than agricultural workers. Entering and exiting owners have very similar levels of education. 

Fourth, the transitions in and out of operating an informal business reflect the underlying structure of economic activities of the working age population, with education gaps also playing a role. About one-third of informal non-farm business entrants and exiters transition to and from self-employment in agriculture.  However, the likelihood of this transition declines with economic development, highlighting the role of net entry from agriculture into informal non-farm businesses in structural change.

Tuesday, July 6, 2021

Nepal's largest hydropower project starts operation

Nepal's 456 MW Upper Tamakoshi Hydropower Project started operation on July 5, 2021 from one of its six 76-MW units. Nepal will likely have surplus power for now when all the six units start generating power at full capacity (around mid-October 2021). Even during the dry season (December-February), the project can generate electricity at full capacity for five hours. It is a run-of-the-river hydropower project financed through domestic resources. The project incurred huge time and cost overruns (5 years and NRs50 billion, respectively).

Excerpts from The Kathmandu Post:


Energy Minister Bishnu Paudel, speaking during the inauguration, said the full operation of the project is expected to contribute around 1 percent to the GDP. “It will help boost industrial production,” he said. “This project shows that we can collect the fragmented capital within the country and invest in projects like Upper Tamakoshi.”

The majority share (51 percent) of the Upper Tamakoshi Hydropower Limited is held by four public entities, namely, Nepal Electricity Authority, Nepal Telecom, Citizen Investment Trust and Rastriya Beema Sansthan. “The project has boosted our confidence,” said Prime Minister Oli. “We can now develop these types of projects through our own resources and manpower. We ended the loadshedding in 2017 but that was by importing power.” In May 2018, the Nepal Electricity Authority had officially announced elimination of load-shedding for the industrial sector, a year after relieving residential customers who had suffered never-ending power cuts for decades.

[...]The six years project began in 2011 to end the power shortage. But like other projects of national importance, this too suffered, resulting in massive cost and time overruns. Its price tag has swelled, or more than doubled, to Rs85 billion. Bigyan Prasad Shrestha, chief executive officer of the Upper Tamakoshi Hydropower Project, said that the initial cost of the project was Rs35 billion [without interest]. “Now, the cost of the project [without interest] has reached Rs53 billion. According to him, initially, the interest to be paid was estimated at Rs14 billion. “Now, the bank interest alone stands at Rs32 billion. So, the overall cost is around Rs85 billion.” The annual interest rate has been set at 11 percent.

[..]Nepal, currently, has an installed capacity of 1,385 MW of electricity. According to Timilsina, the country’s peak demand stands at 1,350 MW. This means, when all units of Upper Tamakoshi start production, the country will have nearly 500 MW of surplus energy in the wet season. Around 300 MW of power is currently being imported from India.

[...]“With the average power purchase agreement (PPA) rate of Rs4.06 per unit, it is the cheapest price of electricity for Nepal Electricity Authority,” said Ghising. “So, it is beneficial for the power utility. Even after paying back the loans within a few years, it can generate a good amount of income and more power projects can be developed with it.”


Sunday, July 4, 2021

Emerging consensus on minimum global corporate tax rate

The Economist on global corporate tax:


Officials signed up to a five-page statement with two main elements: a new minimum tax rate on multinationals’ profits; and a reallocation of the right to tax those of the largest, away from places where they register their assets and towards where they make their sales. In return for those new tax rights, governments would refrain from some unilateral measures, notably taxes on giant technology companies. Securing agreement from so many countries on such a touchy issue is a remarkable feat. Even so, there is more work to do before the future of corporate taxation is settled.

[...]The deal is structured to affect more companies as time goes by. At first the reallocation of taxing rights will apply to those with global turnover above €20bn ($24bn). But if all goes well, that threshold could fall to €10bn. To address the common complaint that digital companies can make profits somewhere without registering the physical presence often necessary to tax them, governments will be able to levy some tax if local revenues exceed just €1m. In small, poor countries with GDP of less than €40bn the threshold will be only €250,000.

[...]Having secured a high-level agreement, negotiators have agreed on a deadline of October to settle important details. Some countries are pushing for a minimum tax rate of 15%; others want the floor to be higher. The base of profits subject to the minimum tax, the precise amount of taxing rights to be reallocated and the precise scope of unilateral measures to be withdrawn also have to be hammered out.

After that, in 2022 governments must draw up an international treaty to reallocate taxing rights, to be implemented in 2023. The deal also envisages that minimum taxes might be legislated for in 2022 and implemented in 2023, though countries could do that without waiting for a treaty. The agreement is a big step forward. But plenty of taxing work still lies ahead.