Feldstein on fiscal policy

Even Martin Feldstein says Keynesian economics work when the credit market is distressed badly:

In a paper, Mr. Feldstein noted that the usual method of reviving the economy — lower interest rates — was failing to work because of “a dysfunctional credit market.”

That left fiscal stimulus to offset what he described as a decline of $400 billion a year in consumer spending. “While good tax policy can contribute to ending the recession, the heavy lifting will have to be done by increased government spending,” Mr. Feldstein said.

He pushed for big spending, carried out quickly. Among his proposals: replace depleted military supplies and equipment and step up financing for “useful research.” He also said that the shortage of “shovel ready” projects should not be a deterrent in a recession that is likely to last long enough to plan and execute new projects.

“It is of course possible that the planned surge in government spending will fail,” Mr. Feldstein said. But he expressed the “hope that the new program of fiscal spending in combination with mortgage market reforms will be sufficient to return the economy to full employment.”

Constraints to industrial sector growth in Nepal

At present, the major constraints to growth of industrial sector in Nepal seems to be poor appropriability of returns to investment and power crisis. Poor property rights and contract enforcements caused by the extralegal bullying behavior of the politically indoctrinated and militant youth wings and unions are falling heavy on the already ailing industrial sector. Meanwhile, more than 12 hours of power cuts has brought industrial activities to a grinding halt. Due to power crisis, productivity in the industrial sector has decreased by 50%. So the bust factors for the industrial sector at present in the Nepali economy are poor appropriability and load-shedding. That is the main point of my latest opinion piece.

Bust factors: Poor appropriability and load shedding

…Broadly speaking, at present two problems – low private appropriability of returns to investment and load shedding – bedevil the industrial sector in particular and the economy in general. The first one is the direct result of the ruling party’s inability to discipline its militant youth wing (YCL) and trade union that are headstrong in waging an all out war against the private sector under the pretext of labor rights and better working conditions. The second problem is engendered by the previous government’s visionless energy policies and withdrawal of investment in hydropower due to senseless sabotage of projects by the Maoists during their rebellion. Despite earning high returns on investment, as indicated by the eagerness of new firms to secure contracts, one wonders why private investment is still low in the potentially lucrative hydropower sector.

…All these are issues related to lack of property rights and contract enforcement, which have fuelled uncertainty over retaining profit and return to investment. Illegal occupation of industrial districts and manufacturing plants by politically motivated, militant youth wings is an encroachment on private property rights. Furthermore, incessant pressure (often threats to life and property) on the business sector to permanently hire temporary staff is a mockery of contract enforcement mechanism in the economy. The unjustified demand for increasing wages at a time when the industrial sector is going bust is beyond sound economic reasoning. Worse, some lawmakers are encouraging the extralegal acts of the militant youth wings and trade unions by eulogizing their terror campaign as a war against the oppressive and exploitative bourgeois class, a wrong-headed belief hinged on the outdated Marxist philosophies.

…On top of the poor appropriability problem stays the load-shedding issue. Power outage, which is expected to exceed 15 hours daily from next month, is severely crippling the industrial and service sectors. Businesspersons complain that power outage in every six hours is negatively affecting efficiency and productivity of the industrial sector. Already, productivity has slowed down by 50%. More worrisome is the fact that several small and medium-size enterprises (SMEs) are going out of business. These SMEs not only produce final goods but also supply intermediate goods to big firms. A sudden halt in this process means that the industrial sector will soon be in short supply of intermediate goods which would then affect final industrial output. It is impossible for the private sector to increase wages and hire staff permanently at a time when both production and demand are declining and profits are razor thin. These factors will not only decrease domestic investment but also scare away foreign investment, a sign already visible in the economy. Already, several domestic jute mills, local FM radio stations, cyber business, paper factories, and tourism sector are going bust.

Read the full opinion piece here.

Oh, did I mention that I wrote this piece while in Amtrak train ride from NY to my college! For some reason, I love writing (and thinking) while traveling!!

Sub-Saharan Africa fact of the day

Sub-Saharan Africa has just over 10% of the world’s population, but is home to more than 60% of all people living with HIV—25.8 million.An estimated 1.9 million people were newly infected with HIV in sub-Saharan Africa in 2007, bringing to 22 million the number of people living with HIV. Two thirds (67%) of the global total of 32.9 million people with HIV live in this region, and three quarters (75%) of all AIDS deaths in 2007 occurred there.

From UNAIDS

Links of Interest (1/3/2009)

Easterly on The Poor Man’s Burden

Today, just when we were getting over the long, toxic legacy of the Depression and its misguided emphasis on statist plans to fight poverty, this financial crash threatens to take us back to the bad old days. To avoid such a return, we must keep some principles in mind.

First, we must not fall into the trap of protectionism—neither unilaterally nor multilaterally, neither in rich countries nor poor. Protectionism will just make the recession spread further and deeper, as it did during the Depression.

Second, when changing financial regulations to repair the excesses of the past several years, don’t strangle the financial system altogether. You can’t have a Revolution from Below without it. This lesson is especially salient as Washington bails out Wall Street banks and failing industries and intervenes in the U.S. financial sector to an unprecedented degree. This bailout might turn out to be the bitter medicine that saves “finance capitalism” from a stronger form of anticapitalism, but in developing countries, open economies are still an open question.

Third, keep slashing away at the enormous red tape that is left over from previous harebrained attempts at state direction of the economy. Learn from the combined dismal track record of state-owned enterprises but also from the unexpected success stories: Private entrepreneurs are far better than the government at picking industries that can be winners in the global economy. Although fierce opposition will be inevitable, to adopt these policies would be to turn the bad hand we’ve been dealt into an outright losing one.

Fourth, don’t look to economists to create “development strategies,” and don’t back up such experts with external coercion like IMF and World Bank conditions on loans. Such efforts will be either a waste of local politicians’ time or positively harmful. Jeffrey Sachs alone can take partial credit for the rise of two xenophobic rulers hostile to individual liberty—Evo Morales and Vladimir Putin—after his expert advice backfired in Bolivia and Russia. If like-minded experts couldn’t get it done in the 50 years after the Great Depression, they can’t do it in the next 50 years. Nothing in the current crash changes these common-sense principles.

Five economists who gave prophetic warnings about the global financial crisis

Nafta’s unhappy anniversary

Rainfall and the probability of conflict

Antonio Ciccone argues that a 5% income shock (say by drought) raises the likelihood of civil conflict by 15 percentage points.

To see whether impoverishment causes the onset of civil conflict, I take a detailed look at data on rainfall levels in years before the outbreak of civil conflicts in Sub-Saharan African countries between 1980 and 2006. It is well known that living standards in these countries tend to be below trend in drought years and above trend when rainfall levels are above average. If civil conflict is triggered by sudden impoverishment, civil conflict onset in Sub-Saharan Africa should therefore have been more likely following drought years.

…If civil conflict onset is partly driven by sudden impoverishment, conflict outbreak in Sub-Saharan Africa should be more likely following below-average rainfall years. I find this to be the case. This result, combined with the effect of rainfall on income, allows me to estimate the effect of sudden impoverishment on the probability of civil conflict onset. My estimates indicate that a negative 5% income shock raises the likelihood of civil conflict by 15 percentage points.

More here

This is consistent with Fisman and Miguel’s argument that in Africa an income drop of 5% increases the risk of civil conflict in the following year to nearly 30%.

However, Simeon Djankov and Marta Reynal-Querol disagree by arguing that poverty does not have an effect on civil wars.

In Nepal, during the Maoists rebellion (1996-2006), the GDP growth rate averaged 4.1% which is barely different from the average growth rate of one decade before. However, head count poverty rate declined by more than 11 percentage points. This means that conflict did not substantially affect GDP growth rate. This can be explained by the rise in remittances inflow, even during peak time of conflict. This means declining poverty did not affect the likelihood of conflict in Nepal during 1996-2006. The effect of remittances far outweighed the negative effect of conflict on poverty and growth (though growth rate did plunged to –0.1% in 2001).

The figure below shows the increase in remittances:

Financial crisis in one package

Global financial crisis 2008: All the discussions and links summarized here

Lobbying nomads in Nepal

The only “nomadic” tribesmen in Nepal, Rautes, are lobbying to keep their tradition and livelihood alive.

… The Raute tradition comprises of three salient features: they leave the forest looking for a fresh place to settle on immediately after someone in their tribe dies; they don’t cultivate land; and they hate education. The Rautes hunt monkeys for food. And, to get food grains, they fell trees to make wooden utensils that they then barter for grains in the villages near the forest where they live. They use wooden nails in their products and the tools they use to build the products are also very traditional.

… The Rautes, who are in Kathmandu, say they would like to live like that, but want state support as their livelihood is being threatened both by the popularity of plastic utensils, and by the hindrance posed by villagers with regards to their use of forest wood.