Global financial crisis, developing countries and global governance reform

I attended two interesting events today in DC. The first one was about a report by Stiglitz Commission (UN) and how the fallout of the global financial crisis on the developing economies. Jomo KS, Assistant Secretary-General for Economic Development in the United Nation’s Department of Economic and Social Affairs (DESA) went over the Stiglitz Commissions’ recommendations and the way forward in the aftermath of the global financial crisis. As some economists have been arguing earlier, the crisis was expected and world leaders were warned, even by the United Nation.

However, the IMF and the WB largely ignored the warning and downplayed pessimistic assessment of the economy before the crisis, he argued. The belief on excessive deregulation and self-regulation (including that of capital account liberalization and leaving little fiscal and monetary space for domestic policy maneuver) promoted by the IFIs and BWIs, without adequate and appropriate regulation set the stage for the crisis. After the aftermath of the crisis, the policy responses have been inadequate, mainly in the part of the developing countries, and the IMF has been using double standards in dealing with the affected countries (like the one in Costa Rica, where it argued for stimulus and at the same time ‘forced’ the central bank to hike interest rate, leading to little effect on stimulating the economy). The whole discussion somehow focused on how the IMF is screwing up things, how it needs to do things, and how it can be a part of the solution after being a part of the problem.

Some of the recommendations by Stiglitz Commission (immediate measures):

• Stable additional funding (SARs, regional liquidity schemes) without conditionalites, for developing countries
• Additional development funds via new credit facility
• Developing countries need more policy space (including financial policy to pursue countercyclical policies)
• Rectify lack of coherence between trade and finance policies
• Meaningful regulatory reforms urgent for financial stability, growth, inclusion, and development
• Financial support measures need to be globally coordinated

Systemic reforms recommended by Stigltiz Commission

• Create new Global Reserve System (multi-country system with greatly expanded SDRs)
• Reform governance of BWIs and other IFIs
• Better and more balanced surveillance
• Reform central bank policies to promote development (rather than just being too obsessed with controlling inflation)
• Financial market policies (create Financial Products Safety Commission, Comprehensive financial regulation, Regulate derivatives trading, Regulate Credit Rating Agencies, Host country regulation of foreign subsidiaries)
• Crate sovereign debt restructuring mechanism, improve framework for handling cross-border bankruptcies
• Need for more stable and sustainable development finance

Jomo argued that developing counties responses are constrained by their exposure to systemic, market, and institutional pro-cyclicality, monetary policy is less effective (made worse by independent central banks???), IMF’s fiscal requirement for stimulus and its consistent drumbeating on the highly likelihood of developing economies failures, restricted policy space, and loss of productive capacities due to openness. He argued that there has been a high disconnect between NY (UN) and Washington (IMF and WB), despite the latter being under the UN system. The emphasis should be on sustaining growth, employment creation, reconstruction, development and not just financial stability.

Another speaker Johannes Linn, Executive Director of Wolfensohn Center at Brookings Institution, was a bit skeptical about the policy recommendations by Stiglitz Commission because he thinks most of them are not politically feasible. He argued that tax financed ODA is not likely to be increased and most of the leading would be loans. He thinks there has to be reform in IMF governance and soft-loan windows were needed to finance stimulus in developing countries. It is possible to give more policy space to developing counties but it is unlikely that conditionalities would be eliminated. Also, the talk about replacing the dollar as a reserve currency at a time of this crisis would further destabilize the markets. He argued for a need to focus on linking G8, G20 and the UN and also create secretariat offices for representation. While arguing for more financial regulation, he argued that it is not good to kill a goose by plucking more and more feathers!

Steve Suppan, Senior Policy Analyst at Institute for Agriculture and Trade Policy, talked about financial crisis and commodity price volatility. He made pretty interesting notes:

• Net capital outflows in 2008 from developing countries to developed countries equaled between $1 trillion (WB) to $2 trillion (UN)
• Global unemployment by 2010 is expected to reach 100 million
• More than 30 developing countries have reserves to fund imports for less than three months
• Between June 2008 and November 2008, commodity prices dropped by 60 percent
• In 2007, food import bill of 37 percent of LDCs increased

He argued that commodity price volatility is caused primarily because of low reserves, high demand and tight supplies leading to more speculation; and over the counter “weight of money” from financial institutions that bet on commodity prices in the international market.

The other event was about the reforms needed at the IMF and was organized by New Rules for Global Finance. The speakers pretty much repeated the same stuff from an earlier event.

Two good events!

Nepal’s fiscal year 2009/10 budget

There have been a lot of unfavorable reviews of the fiscal year 2009/10 budget presented by Nepal’s Finance Minister Surendra Pandey yesterday. Here is a link to some of the interesting media highlights of the budget. The budget should have been based on the findings of Economic Survey 2008/09, which was released by the government a day before the budget was presented in the parliament.

I think the Finance Minister Surendra Pandey presented the coalition government’s budget for the fiscal year 2009/10 using a spray-gun approach to tackle almost everything but without any concrete direction and clarity. He broke Dr. Bhattarai’s record by presented a mammoth budget of Rs 285.93 billion, which is approximately Rs 50 billion higher than last year’s budget. For the sake of being distinct, the finance minister has simply morphed the Maoist government’s popular and populist programs to fit UML’s economic and political philosophy. However, unlike his predecessor, Pandey avoided setting highly unlikely target of a double-digit growth rate. I will elaborate what I mean by this in the next op-ed. :)

Here are the targets of the budget for fiscal year 2009/10:

Growth rate	5.5%
Agriculture sector growth rate	3.3%
Non-agriculture sector growth rate	6.6%
Total outlay	Rs 285.9 billion
Recurrent expenditure	Rs 160 billion
Capital formation	Rs 106 billion
Revenue generation	Rs 175 billion
Revenue-expenditures gap	Rs 109 billion
Foreign grant	Rs 57 billion
Foreign loan	Rs 21.6 billion
Domestic borrrowing	Rs 30.91 billion

 

Below are the annex and full text of the budget:

Budget Speech 2009-10 Annex Budget Speech 2009-10 by FM Surendra Pandey

Trade facilitation and corruption at customs in Nepal

My latest op-ed is titled “Dismal progress in trade facilitation”. It is based on The Global Trade Enabling Report 2009, published by World Economic Forum. Last year, I wrote a similar piece (Leaking customs and weak trade)and argued that trade facilitation process in Nepal is one of the worst in the world. Sadly, there has not been much improvement this year as well.

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Dismal Progress In Trade Facilitation

Three weeks ago when the Commission for Investigation of Abuse of Authority (CIAA) directed employees at the Tribhuvan International Airport (TIA) to wear uniform without pockets in order to control theft and corruption, the news made quite a buzz in the media and blogosphere. This move came after numerous reports of irregularities and corruption – though not surprising – at the airport were reported in the media and to the CIAA.

Corruption and irregularities are not exclusive to TIA checkpoints; it is like a pandemic plaguing almost all the sectors in the economy. One of the places where such activities are excessively rampant is at custom departments, which are the key points for trade facilitation and revenue generation. An efficient border administration, supportive business environment and well-developed transport and telecommunication infrastructures help reduce transaction costs, ensure timely delivery of goods and services and realize the benefits of trade and aid growth.

Despite being a member of WTO in 2004 and of two other regional trading blocs, the benefits of trade Nepal has reaped so far are horribly low. The value of merchandise imports are more than three times the value of exports—in 2008, exports and imports amounted to US$ 887.7 million and US$2904.4 million respectively. More than 50 percent of trading activities take place with India alone. Exports to other countries have been decreasing, chiefly because of internal labor disputes, supply bottlenecks and inefficient ‘enablers’ of trade. Note that Nepal does not produce many goods and services that could be exported with comparative advantage. Worse, on the current ‘product space’, there are only a few goods and services that could be potentially exported with comparative advantage, provided that institutional, regulatory and financial conditions are right and relevant infrastructures adequately supplied.

Given this situation, the main task for now is to make the most out of existing goods that are traded through our customs. How successful have we been on this front? Latest evidence shows that we have not made satisfactory progress and a lot needs to be done to facilitate trade across borders. Nepal has barely improved in the trade enabling rankings complied by the World Economic Forum. The Global Trade Enabling Report 2009, which ranks countries based on their efficiency at border administrations and business environments that are conducive to trade, ranks Nepal 110 out of 121 countries considered in the report.

This means that high costs, opaque and prolix custom clearance procedures, and inefficient administrative difficulties in an overly bureaucratic environment have been serious barriers to trade. In the latest rankings, Nepal ranks 113 in border administration, 107 in transport and communication infrastructures and 117 in business environment required for promotion and facilitation of trade. Compare these dismal standing with the impressive ranking on domestic and foreign market access (29 out of 121). This implies that despite good ranking on market access, Nepal’s trade facilitating infrastructure, institutions and regulatory structure are so miserable that they overshadow potential gains from increased market access.

The Enabling Trade Index measures institutions, policies and services facilitating free flow of goods over borders and to destinations by looking at performance of individual countries in four key areas: Market access, border administration, transport and communication infrastructure, and business environment. The top 10 countries that have the necessary attributes for enabling trade are Singapore, Hong Kong, Switzerland, Denmark, Sweden, Canada, Norway, Finland, Austria and Netherlands.

Specifically, Nepal’s ranking in efficiency of customs administrations, efficiency of import-export procedures and transparency of border administrations are 119, 105 and 100 respectively. Transparency is crucial for gaining faith of traders and promoting trade across borders. Regularly publishing and distributing entry and exit rules, notifying trading community in advance about any changes to existing rules and publishing Department of Customs’ data and analysis in a timely manner would help to promote transparency and accountability. In terms of effectiveness and efficiency of clearance at customs, Nepal ranks third from the last (119).

An equally important factor in facilitating trade is the supply of infrastructure. However, Nepal’s ranking in quality and availability of transport and communication infrastructures is not that encouraging—availability and quality of transport infrastructure (101), availability and quality of transport services (88) and availability and use of ICTs (120). The availability of adequate and quality infrastructure is vital for reducing transportation costs, linking markets and production sites, increasing investment and stimulating growth. In fact, a recent study done by this author (and a separate one done by ADB) showed that bad infrastructure is the most binding constraint on economic growth in the Nepali economy.

In addition, given the level of disturbances and supply bottlenecks in the economy, it is not surprising that Nepal’s rank is 104 in regulatory environment and 121 in physical security, the worst among countries incorporated in the report. Between January and June 2009, there were 532 transport obstructions and bandas (closures) in different parts of the country. The inability of traders to supply goods, mainly because of supply bottlenecks and insecurity, in time has already cost the garment and textile industry, once the major foreign currency earning sector, dearly.

In the Doing Business Reports ranking as well, Nepal’s position is not that encouraging. There has not been any improvement in ranking under the heading ‘trade across borders’ in the past three years (157 out of 181 countries). It still takes nine documents, 41 days and US$ 1764 per container for completion of a normal export process. Meanwhile, it takes 10 documents, 35 days and US$ 1900 per container for completion of import process.

Improving trade facilitation would help reduce transaction costs, effectively monitor border controls, enhance trade competitiveness, discover new tradable goods and attract FDI, among others. At a time when the economy is losing grounds on price and quality competitiveness in the international market, promoting and reforming trade facilitation procedures would at least help to aid the struggling exports industry. Properly addressing these issues in the upcoming fiscal budget would not only foster confidence in our corrupt and inefficient customs but also realize the benefits of trade.

Source: Republica, July 14, 2009

Links to news about Nepal’s fiscal budget 2009/10

Nepal’s Finance Minister presented Surendra Pandey fiscal budget 2009/10 yesterday. The total budget is Rs 285.93 billion, which is a record-breaking amount. I will write a review of the budget tomorrow. Below are some of the links to news about the budget from the Nepalese media.

Text of budget speech

What the budget means for you

Budget 2009: Nothing but promises

Hydropower gets huge budget boost

Mixed bag in borrowed template

Govt promises ‘half-hearted’ reforms

25,000 MW hydroelectricity in 20 years

A budget with many upsides

Income tax exemption raised

FM steps on higher ground than Dr Bhattarai

The year of the roads

Ambitious budget, populist thrust

Nepalese economy in trouble-- Economic Survey 2008/09

Almost all the economic indicators registered negative growth rate in the last fiscal year, according to Economic Survey 2008/09 release by the Ministry of Finance (see the tables below). The forecast for this fiscal year does not look any better. The plunge in manufacturing and agricultural sectors is very troubling for a struggling economy. Troubles in growth rate, balance of trade deficit, inflation rate, national debt…

The economy grew at 3.8 percent against a forecast of around 7 percent (last year the growth rate was 5.3 percent). GDP growth rate is estimated to be 4.7 percent next fiscal year (2009/10). GDP per capita reached US$473 (Thank God, Nepal remittances inflow continued to increase!). Agricultural sector grew at 2.1 percent (last year it was 4.7 percent) and non-agricultural sector grew at 4.8 percent (last year it was 5.7 percent). Inflation rate hit 13.1 percent in mid-March 2009 as against 7.2 percent in mid-March 2008. GDP deflator (a measure of the level of prices of all new, domestically produced, final goods and services-- expressed as (nominal GDP/real GDP)/100) rose from 6.3 percent to 12.2 percent.

Summary of macroeconomic indicators:

Annual growth rate of GDP by economic activities:

As a percentage of GDP, domestic savings is down to 8 percent from 11.21 percent last fiscal year. Thanks to increasing remittances gross national savings has increased to 32.32 percent (% of GDP) from 31.53 percent last fiscal year. Exports have increased by around three percentage points to 15.70 percent from the first eight months of last fiscal year’s 12.08 percent. However, imports have increased to 37.42 percent from last fiscal year’s 32.66 percent, thus increasing the hole in balance of trade (BoT). Note that balance of payments (BoP) has been in positive territory. Revenue/GDP increased to 14.8% from 13.2% last fiscal year but total government expenditure/GDP increased to 22.2% from 19.7% last fiscal year. Budget deficit/GDP decreased to 3.8% from 4.1% last fiscal year.

Gross fixed capital formation as a percentage of GDP barely increased to 21.25 percent from 21.11 percent from last year. On gross fixed capital investment front, government investment/GDP was 4.1 percent (up from 3.1% last fiscal year) and private investment/GDP was 17.1 percent (down from 18% last fiscal year). Gross investment/GDP stood at 29.7 percent (down from 32.8% last fiscal year). Similarly, the gap between gross domestic savings and gross investments/GDP increased to -21.7% from -21.6% last fiscal year. The resource gap-- saving-investment gap (gross domestic savings minus gross domestic fixed capital formation)-- (% of GDP) was 2.60 percent from -0.26 percent last fiscal year (again, thanks to increasing remittances).

The ratio of investment to GDP decreased to 29.7 percent to 31.8 percent from last fiscal year. Exports/GDP increased to 21.7 percent from 20.6 percent from last year. Due to impressive revenue collection, revenue mobilization/GDP increased to 14.8 percent against 13.2 percent last fiscal year. Outstanding debt/GDP increased to 41 percent from 39.6 percent (first eight month of fiscal year), showing that expenditure continue to outweighed national income. Foreign debt/GDP also increased to 28.5 percent from last fiscal year’s 26.4 percent. Meanwhile, domestic debt/GDP actually decreased to 12.5 percent from 13.2 percent in last fiscal year.

Well, the government admits that it is doing a bad job managing the economy:

A big question mark has emerged on our skill of overall economic management in a situation where the Nepalese economy entangled in the vortex of economic sluggishness amidst the double-digit price rise thereby adversely affecting the purchasing power and living standard of the Nepalese people. Hence, there is the necessity of wider reform initiatives on development efforts, investments, and regulatory areas for expanding the economy. The nation is also being made to bear adverse supply shock due to frequent Bandhs, chakka jams, strikes etc. For this, national imperative is making sufficient legal arrangements and ensuring effective enforcement of those provisions for completely banning Bandhs, strikes especially against transportation and movements of the people for allowing the country's economy move ahead in a smooth and natural way, and also providing relief to the people's livelihood.

The impact of exports delay on trade

On average, each additional day that a product is delayed prior to being shipped reduces trade by at least 1 percent. Put differently, each day is equivalent to a country distancing itself from its trade partners by 85 km on average. Delays have an even greater impact on developing country exports and exports of time sensitive goods, such as perishable agricultural products. In particular, a day’s delay reduces a country’s relative exports of time-sensitive to time-insensitive agricultural goods by 7 percent.

More here. Due to road obstruction and closure (bandhs), the Nepalese export-based manufacturing firms have been unable to supply pre-ordered goods in time. It led to cancellation of contract from companies in the West. This is having a severe impact on the whole exports industry, leading to closure of several firms. Between January and June 2009 alone, there were over 500 road obstructions and closures in different parts of the country. This has been a cancer affecting the whole industrial sector in Nepal.

Links of Interest (07/10/2009)

$20 billion to boost food supplies to the hungry committed by the G8

Olivier Blanchard explains “the perfect storm”

World Economic Outlook July update (economic growth projected to be 2.5 percent in 2010)

More agricultural subsidies for poor farmers in Nepal (the more subsidies Indian farmers receive, the more Nepali farmers need to compete in the heavily integrated market)

Female time poverty reinforces the persistent female income poverty (because the gender division of labour between paid and unpaid activities, distinct from childhood, seems to have important implications to female accumulation of capital)