Labor disputes leading to strike-unemployment cycle in Nepal

Why I think the militant youth wings, unions and politically motivated disruptive activities in and around industrial complexes and manufacturing plants are creating more unemployment, which is feeding more of such destructive activities, more closure of firms, more unemployment … the process is developing like a vicious strike-unemployment cycle in Nepal. Read the op-ed here for more discussion.

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Strike-unemployment Cycle

Amidst abysmal political bickering and numerous days of sudden, undeclared holidays, thanks to regular bandas and strikes, the country has lost track of economic activities that provide jobs and contributes revenue to the government. The political leaders hardly show interest in economic issues that foster jobs creation, increase investment, and absorb the increasing number of youths and migrants into the workforce. Unsurprisingly, due to poor appropriability, the inability of investors to retain returns on investment, investors have lost faith in the economy.

Why is there stalemate on new investment and winding down of existing economic activities, leading to loss of jobs and revenues? The answer is a no-brainer: Labor militancy and strikes, whose causes transcend economic reasoning and ground reality in the industrial sector. Forcefully shutting down production and operational activities has been the most popular form of industrial strikes. This is probably the prime cause of industrial decline in Nepal. What the politically affiliated militant labor unions and youth wings do not realize is that the more they engage in such disruptive activities, the greater would be the probability of them being laid off ultimately.

This is how it works. Labor unions devise ridiculous demand and pressure firms to fulfill them. In most cases, the management would not want to yield to unjustified union demands on wage, bonuses, and employment status. The unions forcefully shut down production. The firms lose income and profits, and pay less revenue to the government. After profits nosedive to negative domain, the management shuts down factories and lays off workers. Thus, beings the demise of productive and efficient industries!

At the end of the day, the workers lose the most. Due to freeze in hiring in the industrial sector, the laid off workers won’t find new jobs. Additionally, the government, having lost a major source of revenue, cannot employ laid off workers in public sector. The unemployed, idle workers resort to strikes of various forms, disrupting production of existing firms. This further scares away investment from the economy. Slowly, firms begin to stop production. More unemployment and idle workers, more strikes and disruptive activities. The process develops as a vicious strike-unemployment cycle.

The political instability and labor union militancy in the industrial sector have chased away multinational companies that have been providing hundreds of jobs and supporting numerous households. The Maoist-affiliated labor unions, through their idiotic demands, chased away Colgate Palmolive, a multinational company, from Nepal. Now, they have stopped Varun Beverage Nepal Ltd, the bottler of Pepsi, from operation and expansion. Worse, the company said that it is not making further investments worth around Rs 1 billion. This has deprived labors from securing potential new jobs. At a time when the country needs more foreign investment, the drama led by the Maoist-affiliated trade unions and militant youth wings is further scaring away not only existing companies but also potential ones. Their activity is already contributing to the demise of the garment and textile industry, once the main component of Nepali exports. Unjustified demand for wage increase and insistence for permanent employment status disrupted production at a time when the industry was losing markets abroad.

Recently, the Maoist-aligned All Nepal Trade Union Federation (Revolutionary) put forward preposterous demand of increasing salary by 40 percent and dearness allowance by 100 percent. Note that the previous Maoist government had already increased minimum salary in consultation with the private sector. Now, after revision of salary, the unions are again demanding an increase in wages, which will do nothing but increase cost of production. One of the most ludicrous things about the trade union’s demand is that they want an increase in wages irrespective of worker’s qualification, productivity, and efficiency. In general, wages are paid on the basis of marginal productivity of labor. However, in our case, wages are determined not by labor’s productivity but by how violently the unions can put pressure on the board of directors. Furthermore, the unions want workers to be given permanent, life-long employment status without even considering their productivity and longevity of firms they are working in. This runs contrary to all the economic logics associated with labor and wages. Also, how can dearness allowance increase by 100 percent when general prices have not even increased at the same rate?

Add to this the war on private property waged, again, by the Maoist-affiliated sister organizations. The infamous land grab incidents and occupation of various industrial complexes by YCL have further scared investors. They are building their own enterprise out of the profits gained from such unlawful, disruptive activities. There is no stability in contract enforcement and upholding of property rights, one of the most important factors required for a sustained economic growth.

Not surprisingly, these incidents are also reflected on key international reports like Doing Business Reports and Global Competitiveness Reports, which are looked upon by investors before considering investment. Nepal ranks 123 among 183 countries in terms of ease of doing business. Hiring and firing regulations are the most investment-unfriendly in South Asia. In terms of competitiveness of the economy, Nepal ranks 125 out of 133. The standing in labor market efficiency is 122 out of 133 countries.

Investors have lost faith in the Nepali economy not because there is no potential business opportunities but because there is no guarantee of property rights, stability of policy reform, and business-friendly labor laws and regulations, among others. Maoist leader Baburam Bhattarai knows how hard it is to coax investors to invest in the economy. He spent the last few months of his stint as finance minister trying to convince domestic and foreign investors to invest in Nepal. He failed! It will take years to convince potential investors to invest in the economy where instability prevails and unions rule the industrial sector.

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. By corollary, if you are getting poorer each day, due to loss of purchasing power triggered by loss of jobs, blame the youth wings and their dirty drama staged in and around industrial complexes!

[Published in Republica, December 17, 2009, pp5]

The impact of aid on manufacturing exports

Aid tends to depress the growth of exportable goods.

We categorize goods by how exportable they could be for low-income countries, and find that in countries that receive more aid, more exportable sectors grow substantially more slowly than less exportable ones. The numbers suggest that in countries that receive additional aid of 1 percent of GDP, exportable sectors grow more slowly by 0.5 percent per year (and clothing and footwear sectors that are particularly exportable in low-income countries grow slower by 1 percent per year).

We also provide suggestive evidence that the channel through which this effect is felt is the exchange rate. In other words, aid tends to make a country less competitive (reflected in an overvalued exchange rate) which in turn depresses the prospects of the more exportable sectors. In the jargon, this is the famous “Dutch Disease” effect of aid.

Paper by Subramanian and Rajan here

Court approves liquidation of NDB. Finally!

Finally, the Patan Appellate Court has given a green signal to liquidate the troubled Nepal Development Bank (NDB). Initially, I wrote an op-ed arguing for immediate liquidation of the bank as the process was going to take too long through the usual court procedure.

The decision by the court is to allow the central bank to liquidate NDB is contrary to recommendation by chartered accountant Tirtha Raj Upadhaya, who was appointed to assess if it is necessary to liquidate the bank. However, he raised the idea that despite being in deep trouble, NDB could be revived with extra capital injection from new promoters. I also wrote another op-ed arguing that the bank should not be revived, no matter what Upadhaya recommends. And, it turned out to be exactly that way. Extremely important and a wise decision by the judges. Deserves two thumbs-up!

Issuing a verdict on the case lodged by the central bank, the court on Thursday endorsed NRB´s decision to liquidate the bank and instructed NRB to appoint a liquidator for steering the liquidation process ahead.

The court also named Chartered Accountant Narayan Bajaj as the liquidator, and instructed him to complete all tasks related to liquidation within three months.

Going by the court’s decision, Bajaj would now assess the assets of the bank and identify how much he can recoup from their disposal. Based on the amount he recovers, Bajaj will then repay its debtors.

Interesting comparison!

Source: Duncan Green

Links of Interest (12/15/2009)

Remembering Paul Samuelson

Paul Krugman reflects back on the life and career of the incomparable economist-- Paul Samuelson

Read Samuelson’s work, and what you get is the sense of a man who, rather than sitting down to write Very Serious Papers, was having fun with ideas. Sometimes the playfulness boiled over into inspired silliness. Look at footnote #9 in his overlapping-generations paper, where he writes: “Surely, no sentence beginning with the word ‘surely’ can validly contain a question mark at its end? However, one paradox is enough for one article …” It seems clear to me that Samuelson’s playfulness liberated his imagination, and fueled his creativity.

And yet Samuelson was at the same time always grounded in reality. No ivory-tower academic, he remained deeply interested in events and policy, played the markets, and never let his theories override his sense of the way things actually were.

Chris Blattman fleshes out his thoughts on aid and growth (exactly what I think is problem with the way economists look at the relationship between aid and growth. Building a coherent short-run and long-run model to show that aid can aid growth in the long-run is possible through this logic; I am eagerly waiting for Owen’s paper. His earlier blog post on the issue here)

So if aid has been good at saving lives now, but not (in the short term) at spurring industry, then we shouldn’t be surprised that we don’t see take-offs. Rather, in most countries aid might actually lower the short term, measured number.

But by almost any measure, though, aid would still be a huge success. Maybe the “failure of aid” is really a failure to industrialize, disguised.

IR theories behind Obama’s Nobel speech (well, its an art how to fit the views with the models)

Interpreting the Maoist’s vocabulary right (hypocrites, distorting, populist, self-interested and self-fulfilling!)

Nepal’s future in regional integration (Nepal gains more from regional integration with India and China. I had written a very similar piece on the same issues two weeks ago.)

Can data tell the determinants of economic growth?

Foreign banks allowed to enter Nepalese banking industry (initial capital requirement of US$ 30 million plus US$ 5 million for each branch)

The Doha Round is not breathing but is still alive

Determinants of growth

This paper revisits the cross-country growth empirics debate using a novel Limited Information Bayesian Model Averaging framework to address model uncertainty in the context of a dynamic growth model in panel data with endogenous regressors. Our empirical findings suggest that once model uncertainty is accounted for there is strong evidence that initial income, investment, life expectancy, and population growth are robustly correlated with economic growth. We also find evidence that debt, openness, and inflation are robust growth determinants. Overall, the set of our robust growth determinants differs from those identified by other studies that incorporate model uncertainty, but ignore dynamics and/or endogeneity. This underscores the importance of accounting for model uncertainty and endogeneity in the investigation of growth determinants.

More here

R.I.P. Paul Samuelson

Paul Samuelson (1915-2009) requires no introduction among people studying economics. He will be sorely missed!

Extracts from an obituary published in the NYT below:

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His textbook taught college students how to think about economics. His technical work — especially his discipline-shattering Ph.D. thesis, immodestly titled “The Foundations of Economic Analysis” — taught professional economists how to ply their trade. Between the two books, Mr. Samuelson redefined modern economics.

The textbook introduced generations of students to the revolutionary ideas of John Maynard Keynes, the British economist who in the 1930s developed the theory that modern market economies could become trapped in depression and would then need a strong push from government spending or tax cuts, in addition to lenient monetary policy, to restore them. No student would ever again rest comfortably with the 19th-century nostrum that private markets would cure unemployment without need of government intervention.

That lesson was reinforced in 2008, when the international economy slipped into the steepest downturn since the Great Depression, when Keynesian economics was born. When the Depression began, governments stood pat or made matters worse by trying to balance fiscal budgets and erecting trade barriers. But 80 years later, having absorbed the Keynesian preaching of Mr. Samuelson and his followers, most industrialized countries took corrective action, raising government spending, cutting taxes, keeping exports and imports flowing and driving short-term interest rates to near zero.

Remarkably versatile, Mr. Samuelson reshaped academic thinking about nearly every economic subject, from what Marx could have meant by a labor theory of value to whether stock prices fluctuate randomly. Mathematics had already been employed by social scientists, but Mr. Samuelson brought the discipline into the mainstream of economic thinking, showing how to derive strong theoretical predictions from simple mathematical assumptions.

Early in his career, Mr. Samuelson developed the rudimentary mathematics of business cycles with a model, called the multiplier-accelerator, that captured the inherent tendency of market economies to fluctuate. The model showed how markets magnify the impact of outside shocks and turn, say, an initial one-dollar increase in foreign investment into a several-dollar increase in total domestic income, to be followed by a decline.

In a famous theorem, known as Stolper-Samuelson, he and a co-author showed that competition from imports of clothes and similar goods from underdeveloped countries, where producers rely on unskilled workers, could drive down the wages of low-paid workers in industrialized countries.

Mr. Samuelson also formulated a theory of public goods — that is, goods that can be provided effectively only through collective, or government, action.

His “correspondence principle” showed that information about the stability or instability of a theoretical economic system — whether, after a disruption, the economy returns to fixed levels of prices and output or, instead, flies out of control — could be used to predict the aggregate outcome of decisions taken by consumers and business firms. He showed, for example, that only a stable economic system would undergo ordinary business cycles like those captured by Mr. Samuelson’s multiplier-accelerator model.

He also helped develop linear programming, a mathematical tool used by corporations and central planners to calculate how to produce pre-set levels of various goods and services at the least cost.

Mr. Samuelson wedded Keynesian thought to conventional economics. He developed what he called the Neoclassical Synthesis. The neoclassical economists in the late 19th century showed how forces of supply and demand generate equilibrium in the market for apples, shoes and all other consumer goods and services. The standard analysis had held that market economies, left to their own devices, gravitated naturally toward full employment.

Mr. Samuelson’s resulting “synthesis” amounted to the notion that economists could use the neoclassical apparatus to analyze economies operating near full employment, but switch over to Keynesian analysis when the economy turned sour.

But Mr. Samuelson regarded the teaching at Chicago as “schizophrenic.” This was at the height of the Depression, and courses about the business cycle naturally talked about unemployment, he said. But in economic-theory classes, joblessness was not mentioned.

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Here is the last paper Samuelson wrote about Hayek and the epic, unsettling battle of ideas in economics.

Here is Krugman on Samuelson:

It’s hard to convey the full extent of Samuelson’s greatness. Most economists would love to have written even one seminal paper — a paper that fundamentally changes the way people think about some issue. Samuelson wrote dozens: from international trade to finance to growth theory to speculation to well, just about everything, underlying much of what we know is a key Samuelson paper that set the agenda for generations of scholars.