Dutch disease and its impact on the economy

How does a sudden favorable shock to the economy affect productivity dynamics and volatility? The favorable shock can be thought in terms of a large natural resource discovery, a rise in the international price of an exportable commodity, or the presence of sustained aid or capital inflows—all of which are hallmarks of Dutch disease. In a brief paper, Brahmbhatt, Canuto and Vostroknutova explore how natural resource wealth (or a Dutch disease) affects the economy. This blog post is largely based on their brief paper.

When there is a favorable shock to the economy, then a sort of structural changes take place though an expansion of the sector that favorably shocks the economy and a contraction or stagnation of other tradable sectors of the economy, which is usually accompanied by an appreciation of the country’s real exchange rate (note that real exchange rate is defined in this context as the price of nontradables relative to the price of tradables). When the booming sector is related to natural resource (like oil or minerals), the declining nonresource tradable sectors include manufacturing and agriculture. This might have severe welfare and development impacts.

How does Dutch diseases occur and real exchange rate appreciation occur?

First, via spending effect. As domestic income increases due to the booming natural resource sector, aggregate demand and spending goes up as well. This puts pressure on nontradables in the domestic market, leading to rise in demand and output. But, due to high demand wages also tend to increase in all the sectors, both tradable and nontradable. It will increase cost of production throughout the economy, leading to squeezing profits in the nonresource tradables sector (manufacturing), whose prices are pretty much fixed in the international market. This means customers will look for substitutes at cheaper price, thus reducing domestically produced nonresource tradables. This gradually erodes the existence of the whole sector itself. Note that price of nontradables are set in the domestic market, but the price of tradables are set in the international market. Second, via resource movement effect. Since wages are higher in booming natural resource sector, capital and labor are attracted to this sector from other sectors of the economy, reducing output in the latter ones.

Both the spending effect and resource movement effect led to a decline in production of nonresource tradables relative to nontradables, and a real exchange rate appreciation (defined as a rise in the price of nontradables relative to that of tradables). The authors argue that there is “relatively robust evidence that terms-of-trade (TOT=export prices/import prices) increases cause real appreciation in natural-resource-rich countries”. This was also seen during the high commodity prices in 2007. However, the evidence on the shrinking of nontradables sector (manufacturing and agriculture) is not as clear cut as the impact of terms of trade increase on real real exchange rate appreciation in natural resource rich countries. Kareem Ismali has shown that a 10 percent increase in an oil windfall is associated with a 3.4 percent fall in value added across manufacturing sectors.

Regarding natural resource abundance and development, while the discovery of natural resources and exploitation of it, and an increase in TOT is good as it provides a crucial source of revenue to government to fund development activities, it also affects long term growth dynamics of the economy because of the resulting weak development nonnatural resource tradable and nontradable sectors (especially after the natural resources are depleted). Regarding growth, Some argue that natural resource abundance has a strong negative impact on growth via a decline in manufacturing sector productivity, while others show a positive effect by questioning if manufacturing sector productivity is any inferior to that in services or natural resource sector productivity.

Regarding appreciation of exchange rate and growth, it is generally accepted that exchange rate overvaluation has a strong negative impact on growth. If investors think that the rise in terms of trade due to favorable natural resource shock to the economy is permanent, then it will affect growth negatively for a long time. (Subramanian and Rajan argue that aid tends to make a country less competitive, reflected in an overvalued exchange rate, which in turn depresses the prospects of a the more exportable sector). Regarding volatility, the concentration in one particular natural resource (Dutch disease) exposes the economy to greater price and demand fluctuations, thus affecting investment and growth.

Overall, commodity price boom has a positive short-term impact on growth and negative long-term impact on growth. The negative impact is restricted for natural resources like oil and minerals and in countries with bad governance. For more see this working paper by Collier and Goderis (2007). This does not mean that natural resources directly worsen governance or institutional quality. If there is bad governance, then natural resources would affect long-term growth. But, natural resource would not necessarily bring about bad governance. For instance, Botswana (large natural resource, good governance and good economic growth) and DPR Congo (large natural resource, bad governance and bad economic growth).

So, the impact of natural resources on economy will depend on the kind of policies in place. Fiscal policy should be designed in such a way that there is smoothening of spending by keeping in place a sound spending mechanism out of the revenue from natural resource sector. Also, institutional arrangement should favor judicious management of revenue from natural resource sector. Strict fiscal discipline is a must. Also, direct spending towards tradables rather than nontradables would help slow the impact through the spending effect. Policies aimed at improving productivity in nontradable sectors should also be instituted. Also, trade liberalization would help reduce pressure on the nontradables sector. Instituting a mechanism to channel revenue from resource abundance sectors to developmental activities would help in judicious redistribution.

Owen Brader has a very useful policymakers’ guide to Dutch disease. Contrary to some of the studies, he argues that “it is unlikely that a long-term, sustained and predictable increase in aid would, through the impact on the real exchange rate, do more harm than good, for three reasons.”

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First, there is not necessarily an adverse impact on exports from Dutch Disease, and any impact on economic growth may be small. Second, aid spent in part on improving the supply side--investments in infrastructure, education, government institutions and health--result in productivity benefits for the whole economy, which can offset any loss of competitiveness from the Dutch Disease effect. Third, the welfare of a nation's citizens depends on their consumption and investment, not just output. Even on pessimistic assumptions, the additional consumption and investment which the aid finances is larger than any likely adverse impact on output. However, the macroeconomic effects of aid can cause substantial harm if the aid is not sustained until its benefits are realized. The costs of a temporary loss of competitiveness might well exceed the benefits of the short-term increase in aid. To avoid doing harm, aid should be sustained and predictable, and used in part to promote economic growth. This maximizes the chances that the long-term productivity and growth benefits will offset the adverse effects--which may be small if they exist at all--that big aid surges may pose as a result of Dutch Disease.

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Car Transport in Nepal in 1948

Source: Patan Museum

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“Instead of cars carrying workers, Nepal has workers carrying cars on the rocky, hilly trails of the country. Here automobiles, stripped of wheels and bumpers, are shoulder-borne to and from Kathmandu, the only Nepalese city with modern roads. Some 80 coolies, moving to the rhythm of a chant, balance it on long poles, heavier than the car itself.”

“This German-made Mercedes Benz is of the same series, made between 1936 and 1940, as the one given to King Tribhuvan by Adolf Hilter, which is now at the Narayanhiti Palace Museum.”

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Since the luxurious lifestyle, at the expense of poor Nepali people, of the autocratic Rana regime, the country has come a long way. There are better roads, though still in short supply. However, it seems vehicles are not in short supply. The supply of vehicles has not matched with the supply of road infrastructure, i.e. the growth rate of vehicles plying on the roads of Nepal is far higher than the growth rate of new road infrastructure. This disequilibrium has led to traffic congestion and created supply bottlenecks. Note that infrastructure has been one of the most binding constraints to economic activities in Nepal. Well, things are changing now. Hopefully, the policymakers will properly address the binding constraints in the coming days.

Impact of climate change on global agriculture

William Cline (2007) argues that climate change will have potentially severe agricultural damages in developing countries, but milder effects in rich countries. He shows that under business as usual approach (refers to a situation where there is the absence of serious international programs of emissions taxes or restraints) the aggregate world agricultural impact will be negative by late this century. The damages will be disproportionately concentrated in developing countries. (This blog post contain the main points of Cline’s book.)

He argues that temperatures in developing countries are already close to or beyond thresholds at which further warming will reduce agricultural potential. Since a large proportion of population depends on agriculture, a given percentage loss in agricultural potential would impose a larger proportionate income loss in developing countries.The magnitude of global land surface warming by the 2080s under business as usual warming would be 4.4°C (weighting by farm area), and precipitation would rise only 2.9 percent. This combination would go far beyond optimal temperatures in the low latitudes and also in the mid-latitudes.

Cline uses agricultural impact models of two separate types: Ricardian statistical economic models, and process-based agronomic crop models, combined with leading climate model projections to estimate effects on agriculture on over 100 countries. He develops a “consensus” set of geographically detailed estimates for changes in temperature and precipitation by the 2080s and applies these climatic changes to the agricultural impact models.

Two fundamental conclusions of the study:

• By late in this century unabated global warming would have at least a modest negative impact on global agriculture in the aggregate.
• The impact could be severe if carbon fertilization benefits (enhancement of yields in a carbon-rich environment) do not materialize, especially if water scarcity limits irrigation.

(Carbon fertilization: The enhancement of the growth of plants as a result of increased atmospheric carbon dioxide concentration, resulting from the fact that CO2 is an input into the process of photosynthesis.)

There are a lot of estimates about the potential impact of climate change on agriculture. The estimates are derived with varying assumptions of warming and models. Cline derives a “consensus” approach to come up with his own estimates. Africa will suffer the most.

Estimates for impact of global warming on world agriculture output potential by the 2080s (%)
	Without carbon fertilization	With carbon fertilization
Global
Output-weighted	–15.9	–3.2
Population-weighted	–18.2	–6.0
Median by country	–23.6	–12.1
Industrial countries	–6.3	7.7
Developing countries (excluding Europe)	–21.0	–9.1
Median	–25.8	–14.7
Africa	–27.5	–16.6
Asia	–19.3	–7.2
Middle East and North Africa	–21.2	–9.4
Latin America	–24.3	–12.9
Source: Cline 2007, Table 7.1, p.96

A prudent range for impact on global agricultural capacity by the 2080s could easily involve greater damage than the direct preferred estimates in this study and could perhaps lie in the range of reductions of 10 to 25 percent. Even if global productive potential were cut by only 3 percent, the results find an inequitable distribution of the effects, driven by the fact that the poor countries tend to be located in lower latitudes, where temperatures are already at or above optimal levels.

On average developing countries would suffer losses of 9 percent and median losses for these countries would amount to 15 percent. Confirming previous studies, the results here indicate that the losses would be most severe in Africa (estimated here at 17 percent average loss and 18 percent median loss in agricultural capacity) and Latin America (13 percent average and 16 percent median loss). The losses would be much larger if the benefits from carbon fertilization failed to materialize (averaging about 21 percent for all developing countries, 28 percent for Africa, and 24 percent for Latin America).

Although the central estimate in this study finds China a modest gainer in agriculture under business as usual (increase in agricultural capacity by about 7 percent with carbon fertilization), the estimate turns to a loss (7 percent reduction in agricultural capacity) if carbon fertilization effects do not materialize or are offset by excluded damages. For India, there is no ambiguity: Prospective losses are massive (on the order of 30 to 40 percent).

For Australia, one of the two steadfast opponents of the principal international initiative to date against global warming (the Kyoto Protocol), the results also suggest that a more positive position on global warming abatement would be in its long-term interests. The estimates for Australia indicate losses of around 16 percent even with carbon fertilization (with potentially much larger losses suggested by the Ricardian estimates). As for the United States, the other principal opponent, although the estimates show an aggregate gain of 8 percent in the case with carbon fertilization, they indicate a comparable loss (6 percent) if carbon fertilization is excluded. Moreover, regional losses are pronounced: by about 30 to 35 percent in the Southeast and in the Southwest Plains, if carbon fertilization is excluded (and about 20 to 25 percent if it is included; table 5.8).

For an initial phase of modest global warming, average impacts on agriculture are ambiguous and may be benign globally on average, but it would be a serious mistake to infer from such a diagnosis that little should be done to curb climate change. Moreover, it would be a serious mistake to downplay the risks of future agricultural losses from global warming on grounds that technological change, for example in new seed varieties, will offset any negative climatic effects.

Waiting for ‘ghost’ housing and real estate complexes in Nepal

Well, I am not talking about houses where real ghosts, if they exist, reside. I am referring to Nepal’s real estate and housing sector. The realty price is coming down and it is sliding down pretty fast.

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Real estate dealers, who long resisted selling pressure for fear of a downward price spiral, have started to cut prices in a bid to lure buyers and recoup possible investment at the earliest. On Tuesday, Uddav Raj Bhattarai, chairman of Kapan Housing, placed an advertisement in a national daily offering to sell land at a lowered rate of Rs 350,000 per ana (342.25 square feet).

Just a couple of months ago, he had sold numerous plots of the same land at half a million rupees. "Not only that, I have slashed the rate of a 800 square feet stand-alone groundfloor house to Rs 5.5 million from Rs 6.5 million,” he informed Republica. Laxmi Neupane, chairman of Manakamana Housing, has a similar story. He recently reduced prices of residential plots at Hattigaunda which he had developed, to Rs 800,000 per ana from Rs 1 million. Till a month ago, he was adamant he need not review the prices even though transactions had nosedived.

In general, real estate dealers have slashed prices by as much as 30 percent in Kathmandu, said realty experts. “Unfortunately, most of them are failing to lure buyers even at the lowered rates,” said Neupane. As the realty market wore a deserted look, Raj Kumar Maharjan of Indreni Real Estate told Republica he is facing trouble managing cash even to pay his office rent whereas his monthly income was running at a million last year.

Owing to the dip, the government´s revenue collection from realty transactions in the month from mid-September to mid-October dropped to Rs 90.08 million. It had collected Rs 317.20 million in the same month last year. Although NRB in September 2010 relaxed its cap on housing loan exposure, it continued to tighten real estate loans, including loans issued for land plotting and procurement.

“As the directive seeks BFIs to limit their realty portfolio to 10 percent of total loans by 2011/12, most of them have stopped renewing loans in the sector,” said Sudhir Khatri, chief executive of DCBL Bank. Some financial institutions are even seeking parties to repay as early as possible. This has upped the selling pressure and some 75 percent of real estate dealers, who trade with loans and informally borrowed money, are under severe stress, said Shrestha, adding that he foresees many of them jumping into the selling current soon.

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Thanks to easy loans from the banking sectors and multiple refinancing of the same piece of land and building, the real estate sector grew unnaturally in the past few years. In the last five years, construction and real estate sectors grew at an average of 4.5 percent and 7 percent annually, respectively. In real estate, credit flow doubled from Rs 7.71 billion to Rs 14.92 billion in the past two fiscal years. Unfortunately, GDP growth rate was around 3 percent and industrial sector growth just over 1 percent.

As this sector threatened to derail macroeconomy and the banking sector itself, the central bank and the Ministry of Finance started squeezing oxygen supply (i.e. loans, finance, and investment) to this sector. Now, it is cooling down. My hunch is that it will chill to the extent that the banking sector will feel the pinch. Real estate and housing prices, especially in the urban areas, will potentially come down even further.

Well, this is better than to put the whole economy in peril due to one particular sector. Remember what happened in the US, Ireland, Spain, Iceland, … housing markets? The existing Nepali real estate and housing sector bear similar hallmark. We might end up with ghost housing complexes if the rate of expansion of the real estate and housing sector continues at the same rate it is happening right now. The logic is that there is excess liquidity, thanks to the uber-generous banks aiming for quick return without properly valuing risks, in the real estate and housing sector. It has led to a situation where supply is fast outstripping demand in just a matter of few years. Now, when there is excess supply and no further absorption capacity, then prices falls down. Simple logic from the first few chapters of introductory microeconomics!

As prices come down the real estate and housing sector will start to hear an unpleasant music from the banking sector, who, for them, suddenly turn into a foe from a very friendly friend. The investors in real estate and housing markets will miss interest payments on loans and the banks themselves will see less return on investment on this sector. The banks will up interest rates and squeeze further funding to this sector. What will happen then? Easy guess. Loan default by investors in the real estate and housing sector, followed by bankruptcy. The banks will be left high and dry. A crucial and easy source of income for them will probably be the hardest sources of income. Then all they can do is to take ownership of ghost houses and real estate complexes on hope that they could be sold later at high prices. The entire economy could be affected by this. Fortunately, the policymakers are watching. Or, are they? 

That’s a preview of a disaster waiting to strike the Nepali urban economy under business as usual scenario!

Meanwhile, good news is that the paddy cultivation is going up. Its contribution to GDP has now reached 7.5 percent. It is pleasant to read agricultural sector giving a positive jolt to the economy than potential troubles by unproductive sectors!

Martin Ravallion is unhappy with HDI

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The 20th Human Development Report has introduced a new version of its famous Human Development Index (HDI). The HDI aggregates country-level attainments in life expectancy, schooling and income per capita. Each year's rankings by the HDI are keenly watched in both rich and poor countries. The main change in the 2010 HDI is that it relaxes its past assumption of perfect substitutability between its three components. However, most users will probably not realize that the new HDI has also greatly reduced its implicit weight on longevity in poor countries, relative to rich ones. A poor country experiencing falling life expectancy due to (say) a collapse in its health-care system could still see its HDI improve with even a small rate of economic growth. By contrast, the new HDI's valuations of the gains from extra schooling seem unreasonably high -- many times greater than the economic returns to schooling. These troubling tradeoffs could have been largely avoided using a different aggregation function for the HDI, while still allowing imperfect substitution. While some difficult value judgments are faced in constructing and assessing the HDI, making its assumed tradeoffs more explicit would be a welcome step.

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Full policy research working paper here.

Climate Change, Agriculture & Poverty in South Asia

[This blog post is adapted from Upali Wickramasinghe’s article on Trade Insight Vol.6, No.3-4, 2010, p.43-45. For a piece on the impact of climate change on agricultural trade in South Asia click here.]

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Climate Change, agriculture and poverty: South Asian agenda

“Most severe flooding the country has seen in over 100 years”, is a heading that appeared in newspapers across the globe several times in the recent past. Two most vivid recent examples are the floods in October 2009 in India and in mid-2010 in Pakistan. The number of such floods has quadrupled between 1980 and 2006. The intensity of other natural disasters such as heat waves and severe cold spells has increased manifold.

The Fourth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC) states that climate change will have severe impacts on South Asia. The 2010 Climate Change Vulnerability Index, compiled by the British firm Maplecroft on the basis of 42 social, economic and environmental factors, corroborated this recently. Of the 16 countries listed as being at “extreme” risk over the next 30 years, five are from South Asia, with Bangladesh and India in the first and second places, Nepal in fourth, Afghanistan in eighth and Pakistan in 16th. These disasters disproportionately affect the poor, as they depend on agriculture for livelihoods—an activity heavily dependent on nature.

South Asian countries, individually as well as regionally, have made significant efforts towards tackling the challenges posed by global warming. The Thimpu Statement on Climate Change issued on 28–29 April 2010 during the 16th Summit of the South Asian Association for Regional Cooperation (SAARC) covers most of the critical concerns on climate change and the environment, and proposes an action-oriented programme. However, it does not explicitly recognize the impact of climate change on agriculture and food security although adaptation and mitigation are mentioned.

Vulnerability of South Asia

According to the IPCC’s Fourth Assessment Report, the future impacts of climate change on South Asia include the following: the glacier melting in the Himalayas causing increased flooding and affecting water resources; increased pressures on natural resources and the environment; increased mortality due to diarrhoea primarily associated with floods and droughts; and increased threats from sea-level rise resulting in inundation, storm surge, erosion, and other coastal hazards.

The Himalaya ecological system, comprising the upper Himalaya glaciers and the Ganges, Indus, and Meghna river systems, was the cradle of civilization in South Asia. It allowed some 1.5 billion people to cultivate lands, rear animals and prosper. With climate change, this seemingly endless cycle of life is likely to transform itself. The Himalayan-Hindu Kush glaciers have been receding since 1800, but the pace has accelerated in recent years. If this trend continues, melting ice will increase flood risks in the short term and threaten water supplies in the long run. The effects are magnified due to the fact that 75 percent of the poor live in rural areas and 60 percent of the labour force relies on agriculture for livelihood.

Other areas projected to face severe impacts include the Terrai grasslands and forests of the southern Himalayas, the Western Ghats biosphere of western India; and the Sundarbans wet- lands of West Bengal and Bangladesh. A decrease in wet rainforests and an increase in dry rainforests, prompting more forest fires in places like Sri Lanka, are projected to occur.

The availability of water for human consumption and agriculture is a major concern. It is predicted that a 2–4 percent rise in temperature will expose up to 924 million people to water stress. If climate-induced glacial retreat happens at the predicted rate, the water available from the Himalayan glaciers in South Asia will decline from the current level of 85 percent of total water consumption to 30 percent over the next 50 years.

By 2020, South Asia will have five of the world’s mega cities: Mumbai, Delhi, Dhaka, Karachi and Kolkata. A majority of the people in those cities will also be living in slums with little infrastructure and poor sanitation. Supplying water to these mega cities while allocating enough for agriculture will be a challenge.

Coastal ecosystems, particularly low-lying mega deltas, coastal regions and small islands, are at severe risk from climate change. Land loss due to sea flooding, seawater intrusion into freshwater sources and increased salinity will have a significant impact on economic activities, including fisheries. A one metre rise in sea level can displace several million people in the region’s coastal zones. The social and economic impact will be severe in densely populated areas such as Bangladesh and east India.

Intricacies of climate change and poverty

Climate change, agriculture, poverty and food security are intricately linked, and thus removing constraints for economic development and human well-being will certainly require careful scrutiny of the global environment.

Agriculture contributes a quarter of South Asia’s national income and over 50 percent of employment. South Asia’s population is estimated to exceed 2.2 billion from the current level of 1.5 billion by 2050. Over 600 million people live on less than US$1.25 a day and mostly rely on agriculture and forest resources. It needs only a minor change in the economy for the millions languishing just above the poverty threshold to fall back into poverty, as happened during the 2007–2008 food and financial crises.

Detailed projections based on simulation models¹ suggest a 15–30 percent decline of cereal productivity on average across the region by the middle of the century, but the declines will be higher in arid zones and flood-prone areas where agriculture has reached tolerance limits. Rice yields are expected to decline by 0.75 tons/ha if temperature rises by 2–4 degrees Celsius. If these models include the possible impacts of diseases, pests and microorganisms, crop yields and production will face steep declines. As crops respond to climate change differently, the impact on food security will depend on crop intensity.

Food consumption is determined by the interaction of individual preferences, incomes, prices and other social characteristics, whereas prices are determined by the interaction of demand, supply and the market structure. From 2000 to 2050, population and income growth would push global food prices up by as much as 62 percent for rice, 63 percent for maize, 72 percent for soybeans and 39 percent for wheat.² Climate change expects to raise food prices by 32–37 percent for rice, 52–55 percent for maize, 94–111 percent for wheat, and 11–14 percent for soybeans.

The predicted rise in food prices, particularly cereal prices, due to climate change will further reduce the amount of food that the poor can consume as the share of food expenditure among the poor is already high. They often switch to cheaper food alternatives and give up nutritious food. It should be noted that South Asia will have 52 million undernourished people even under a no-climate-change scenario.

Another group of victims will be female children in societies where female children are less likely to get the same amount of food as male children when faced with shortages.

One silver lining is that South Asia has the potential for further gains in agricultural productivity. If productivity can be increased by the introduction of better technology and institutional innovations, the above scenarios could substantially be altered. Agricultural gross domestic product (GDP) growth is more effective in reducing poverty, compared to non-agricultural GDP growth.

The crucial test will be on how much technology can be transferred and investment is carried out to improve critical infrastructure in rural areas. According to available estimates, South Asia can counter the effects of climate change on nutrition with an additional annual investment expenditure of US$1.5 billion, covering irrigation efficiency, irrigation expansion, agricultural research and rural roads. This should also extend to investment in biodiversity conservation, as in the rice seed bank maintained by the International Rice Research Institute in the Philippines.

Agenda for action

The Thimpu 16-point agenda provides a useful framework to think through how SAARC member states can collaborate to thwart the potential disastrous consequences of climate change on agriculture and food security, although it does not mention agriculture and food security explicitly.

A key concern is how to feed close to 2.2 billion people who will inhabit South Asia by 2050 while also meeting the challenges of climate change. This is in addition to the higher demand for food generated by higher income. The answer lies in investment in adaptation, enhancing productivity of agriculture and science-based technology such as the development of plant varieties with higher adaptability under severe weather conditions and capacity to perform in a broad set of climate conditions.

Regional investment will help the most vulnerable nations with capacity limitations. Mechanisms such as the SAARC Development Fund should be fully exploited towards this end. In line with other regional development banks, South Asia should also establish a regional bank to mobilize resources for economic development. Adaptation to climate change is easier when individuals have better options to cope with disasters. The best way to ensure that is through the implementation of a pro-agricultural development policy with climate mitigation and adaptation as key components. While efforts towards adaptation are carried out, South Asia should also be ready with sufficient funds to pay for resettlement, rehabilitation and provision of services to climate refugees.

Similar to the proposal made elsewhere (e.g., in the Association of Southeast Asian Nations) to create a fund to pay for efforts towards adaptation, it would be in the interest of South Asia to set up a fund for such an eventuality. This could perhaps be part of the negotiating agenda along with a fund for agricultural adaptation. Among others, the fund could be used for technology transfer, a key component in the struggle against global climate change.

Collective action plays a significant role in adaptation and mitigation. Farmers who are willing to adapt to changes are outnumbered and thus forced to follow outdated techniques and farming cycles for fear of pest at- tacks, if faming activities are not synchronized with the rest. The extent of collective decisions taken and the use of community adaptation strategies will determine the success of adaptation. South Asian countries have both the capacity and resources to help one another in developing adaptable crop varieties. Expansion and support for using the already available advanced technology for monitoring the impact of climate change on agriculture and food security, e.g., remote sensing, will be needed urgently. Developing countries need support from regional and international organizations for new technology and training.

As South Asia is recognized as the worst affected region from climate change, it is legitimate to call for more assistance as committed by the Annex I industrialized countries for developing countries under the United Nations Framework Convention on Climate Change. Such a fund can assist communities or regions that have shown remarkable success in adapting to new situations and still protect the environment.

As climate change has no political boundaries, it is in the best interest of all in South Asia to collaborate both within the region and in international forums. Emissions targets need to be specified in quantitative terms with time-frames, rather than mere commitments to making “deep cuts” in the future, to ensure binding agreements rather than vague statements and commitments. The voice in international forums on climate change will have added strength if it is also in line with the commitments and actions taken within the region to address climate change concerns.

[Dr. Wickramasinghe is Regional Adviser on Poverty Reduction and Food Security, UNESCAP-Centre for Alleviation of Poverty through Sustainable Agriculture (CAPSA), Bogor.]

Notes

¹ Lobell, D.B. and C.B. Field. 2007. Global Scale Climate-crop Yield Relationships and the Impacts of Recent Warming. Environmental Research Letters 2.

² Gerald, C. N, M. Rosergrant, et al. 2009. Climate Change: Impact on Agriculture and Costs of Adaptation. October. Washington, D.C.: International Food Policy Research Institute.

Capping microfinance interest rates?

Not a good idea, argues The Economist.

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The rush to impose restrictions on MFIs also betrays a fundamental misunderstanding about how the poor use credit. Many politicians cite the existence of clients with loans from several MFIs at once to argue that the poor are over-indebted. This ignores the fact that most microcredit loans are tiny, so that several are needed to meet the needs of even a small business. Indeed, the poor often use microloans to pay off far more expensive loans from village moneylenders. This suggests that restricting people’s access to microcredit by capping rates could have the perverse effect of driving more poor people into the arms of village loan-sharks, who still provide the bulk of rural credit in poor countries. (In rural AP, 82% of households have such informal loans, whereas only 11% have loans from MFIs.) That would be good news for these moneylenders, but is surely not the outcome that policymakers want.

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