Growth strategies for Nepal

That’s the title of my latest op-ed published in Republica, the print version of www.myrepublica.com. I am not satisfied with the content and analysis done by the policymakers for the Nepal Development Strategy Paper (NDSP). I discuss seven points that would potentially help Nepal attain a modest growth rate and would like them to be addressed in the final NDSP before it is presented to the donor community on May 15 this year.

First, given the geographical disadvantage, domestic policies should be synchronized with India’s and China’s economic policies in order to maximize neighborhood growth spillovers. Statistical evidence shows that the faster neighbors grow, the faster the landlocked country will grow. …

Second, rather than exclusively focusing on markets in the EU and the US, policies should be designed to maximize trading with our neighbors, India and China—the two emerging giants in the global economy. Tapping the untapped markets along the bordering states, where the transportation costs are low, by producing goods and services that are within the reach of the people residing there would be a fruitful exercise. …

Third, design policies to entice FDI in transport infrastructure and large- and small-scale hydropower projects. The government could substantially ease regulatory structure, ensure security of returns to investment and consistency of hydropower policy, resolve labor disputes, build grids to enhance connectivity and share risks with the private sector, among others. …

Fourth, to give the struggling industrial sector a breathing space so that they can compete in price and quality in the international market, the government should implement the provisions outlined in Investment Board and SEZ ordinances, which were recently passed by the cabinet. …

Fifth, the government should facilitate foreign investment in the tourism sector. Increasing visibility in the international tourism market, easing of visa restrictions, ensuring security, and, most importantly, improving tourism infrastructure such as road transport, airways, and ICT would help a lot. …

Sixth, the government should also facilitate foreign employment and inflow of remittances.  Not much needs to be said about the role of remittances, which already account for almost 20 percent of GDP.

Seventh, the policymakers should not forget that the high population growth rate is also constraining increase in GDP per capita. Either jobs creation in the industrial sector should be rapid enough to outpace the rate at which youths are entering the job market or the government should initiate measures to lower population growth rate.

Read the full op-ed for full discussion on these seven points.

The impact of global recession on poverty

It is estimated that an additional 55 to 90 million people will be trapped in extreme poverty in 2009 due to the worldwide recession. The number of chronically hungry people is expected to climb to over 1 billion this year, reversing gains in fighting malnutrition and making the need to invest in agriculture especially urgent.

The number of people living on under $1.25/day in the developing world in 2005 was 1.375 billion, or 25% of the population. The MDG target is to halve the 1990 poverty rate (41.7 percent) to 20.9% by 2015. With extreme poverty projected to fall to15% by 2015, it still appears the target will be met, but this may change as the poverty reduction rate slows with declining growth. Sub-Saharan Africa will not meet MDG1.

That’s from the Global Monitoring Report 2009: A Development Emergency. The report says that MDG of halving extreme poverty by 2015 from its 1990 level is still reachable but “risks abound”.

Links of Interest (04/22/09)

Is the Washington Consensus dead?

Duflo on what works for AIDS prevention: abstinence or risk reduction

Property rights and economic development

Girl sold for $40 (for prostitution)

Tracking violence using texting and GoogleMaps

Microfinance and gender returns to investment

Interesting finding coming out of this paper, which shows greater returns among men than among women (in the microenterprise sector). This difference is not explained by differences in ability, risk aversion, and entrepreneurial attitudes. It potentially resulted from the way money was invested by men and women.

This paper analyzes data from a randomized experiment on mean returns to capital in Sri Lankan micro-enterprises. The findings show greater returns among men than among women; indeed, returns were not different from zero for women. The authors explore different explanations for the lower returns among female owners, and find no evidence that the gender gap is explained by differences in ability, risk aversion, or entrepreneurial attitudes. Differential access to unpaid family labor and social constraints limiting sales to local areas are not important. However, there is evidence that women invested grants differently from men. A smaller share of the smaller grants remained in the female-owned enterprises, and men were more likely to spend the grant on working capital and women on equipment. The gender gap is largest when male-dominated sectors are compared with female-dominated sectors, although female returns are lower than male returns even for females working in the same industries as men. The authors examine the heterogeneity of returns to determine whether any group of businesses owned by women benefit from easing capital constraints. The results suggest there is a large group of high-return male owners and a smaller group of poor, high-ability, female owners who might benefit from more access to capital.

Crazy Nepali policymakers

How on earth is Nepal supposed to increase exports by 50% in five years? Never mind, this is another criticism of the Maoist government’s hi-fi but shallow strategy!

Few days after presenting a very unrealistic and bombastic development strategy paper, the policymakers in Nepal think they can link trade and poverty (the benefits of trade have gone to corrupt officials and few industrialists in the past) and increase exports by 50% in the next five years!

The government has set an ambitious target of increasing exports of goods and services by 50 percent in the next five years, at an average of 10 percentage points per annum. It has also set a plan of reducing country’s trade deficit by 15 percent in the same period.

“In order to boost exports, we are now trying to identify at least 15-20 potential products and services that have demand in the international market,” Commerce Secretary Purushottam Ojha told the consultation meeting of Nepal Development Forum in Kathmandu on Friday. “In this regard, the government is soon conducting Nepal Export Potential Study.”

The Study is not only expected to identify products and services of competitive and comparative advantage but also determine the impact export of those products and services can have on poverty reduction – the overarching goal of the country.

I doubt this will happen because of this analysis of Nepal’s product space and this condition of export dynamics. Aiming high is good but realistically, living within one’s reach and means is the best way to not build unnecessary expectations that cannot be met.

Crazy policymakers! Anyway, good luck to those who are tasked to come up with a paper to fulfill this purpose. The funny thing is that this claim has been made without first studying the potential of attaining this goal! It is like stating that a hypothesis is correct, and then proceeding to prove it assuming that it is right!!

Stiglitz on global stimulus

Stiglitz argues for a global stimulus package with grants made available to the poor countries, else as much as 200 million people will go down the poverty line, plus rethinking on having a new global reserve system.

if we are to avoid winding up in another debt crisis, some, perhaps much, of the money will have to be given in grants. And, in the past, assistance has been accompanied by extensive "conditions," some of which enforced contractionary monetary and fiscal policies – just the opposite of what is needed now – and imposed financial deregulation, which was among the root causes of the crisis.

One of the more important medium-term initiatives urged by the UN commission is the creation of a global economic coordinating council, which would not only coordinate economic policy, but would also assess impending problems and institutional gaps. As the downturn deepens, several countries may, for example, face bankruptcy. But we still do not have an adequate framework for dealing with such problems.

And the US dollar reserve-currency system – the backbone of the current global financial system – is fraying. China has expressed concerns, and the head of its central bank has joined the UN commission in calling for a new global reserve system. The UN commission argues that addressing this old issue – raised more than 75 years ago by Keynes – is essential if we are to have a robust and stable recovery.

Nepal floats very unrealistic development strategy paper

I wonder when the policymakers in Nepal will realize that high investment will guarantee high economic growth only when there are complementary factors in place to ensure that the investment is properly utilized, i.e. creating an ‘equilibrium’ of demand for and supply of goods and services being produced.

I say this because the Maoists government has released National Development Strategy Paper (NDSP), which it will present as the main strategy paper in the upcoming Nepal Development Forum (NDF) scheduled to take place in May. The NDF is a forum for donors to review NDSP and determine if the donor community wants to invest in some of the projects outlined by the government of Nepal. What’s in NDSP? The main theme of the paper is INVESTMENT. The government will tell donors to pour in money, cough up some of its own, and make (unrealistic) promises that it will deliver growth! How many times have this kind of forums been successful in delivering the outcomes? Has anyone tracked the efficiency of donors- say, output and investment ratio in the sectors they are investing in? (The drama of donor community in Nepal, its activities, outcomes, and efficiency deserves an extended analysis in another blog post!).

The NDSP, which also forms the second part of the Three-Year Interim Plan, has set a target to achieve an average economic growth rate of 7.6 percent and lower the national poverty level to 21.5 percent over a period of the next three years starting from mid-July 2009. According to the strategy paper, the government plans to invest Rs 1151.6 billion (US$ 14.5772 billion) from domestic resources for formation of fixed assets (in 3 years time). Of this, private sector is expected to invest Rs 324 billion (US$ 4.10127 billion) while remaining Rs 827.7 billion (US$ 10.4772 billion) is anticipated to come from government´s sources. Note that planned total investment is double the size of GDP of Nepal. If this is not overly ambitious and unrealistic, then I need to relearn the difference between reality and dream! Also, I doubt if the private sector would invest US$ 4.1 billion at a time when the very existence of their survival is in question.

Among the sources of funding, the strategy paper aims to mobilize Rs 532.2 billion (US$ 6.69362 billion) worth of revenue, Rs 233.3 billion (US$ 2.93422 billion) of foreign aid and Rs 70.8 billion (US$ 0.890453 billion) worth of internal loans. I doubt on the calculation of these numbers. What are the assumptions and facilitation process?

What else? The strategy paper also aims to achieve agriculture growth of 5.2 percent and non-agricultural growth of 8.8 percent during the period. At a time when the whole industrial sector is going bust and there is a decline in agriculture production, I am surprised how the guys at the National Planning Commission (NPC) came up with these numbers. Again, this projection does not reflect reality. The Maoists government has a tendency to talk highly but deliver poorly. See this and this.

It is very unlikely if the government will be able to garner the proposed amount of investment. Additionally, we simply do not have the complimentary factors that are needed to realize the fruits of this investment. The biggest hurdles are poor institutional setting and bad infrastructure, corruption and appropriability concerns. Moreover, the industrial sector has never been this uncompetitive (blame labor disputes, increasing competition, power cuts, defunct supply chains, …). Mend these, and the fallout will be favorable!

The WB has rightly criticized NDSP as being ambitious. They also should say it is unrealistic and seek a complete revision of the objectives, revise long-term projects and include more short-term projects heavily focused on infrastructure, governance aspects, and, most importantly, make the government clearly identify how it is going to boost private sector confidence and not let its militant cadres disrupt their business activities.

Regarding the proposed investment, Goldmark, country director of Nepal’s largest lender, said that it would be challenging to mobilize the planned investment as long as investors do not feel considerable improvements in the environment for doing business. The strategy paper should pay due attention to checking erosion of business confidence and this can be done by improving the law and order situation, she said.

Apart from a long-term energy development program, Goldmark also urged the government to bring in short-term projects to develop hydropower and added that the NDSP needs to have different case scenarios to address future global and domestic economic conditions, which are difficult to predict.

She also said the NDSP is silent on public finance management and public procurements and stressed the need to focus on issues and to improve government accountability towards the people. “Promise less and improve deliveries,” she advised the government.

I will write more on this issues in the next op-ed. The bottom line: the whole paper should be revised and the goals should be made realistic. All the procedures and steps should be clearly identified so that tracking the progress of projects and investment flow is rational and accountable.