Links of interest (2011-03-30)

• Rameshore Khanal, an honest civil servant working as finance secretary of Nepal, resigned due to undue pressure from Deputy Prime Minister and Finance Minister Bharat Mohan Adhikary and his cronies (including businessmen who were about to be charged for tax evasion).  God knows how much Adhikary and the political parties are being paid by the crooked businessmen to oust Khanal from the finance ministry. This is corruption and dirty lobbying at its height. The morale of civil servants will further go down. The optimal solution right now is to take moral responsibility by Adhikary, resign immediately, and recall Khanal without any preconditions. He should also apologize to Khanal and to the nation for discouraging an honest and dignified civil servant from working to his fullest capacity. Meanwhile, Khanal writes on his facebook profile: “Paid Civil Service is not the only place where one can work for Change, Change for Good. There is a wider civil society where we can work together. We can work collectively for a change that our country needs.”
• South Asia and food crisis (About 75% of South Asia’s poor live in rural areas and agriculture sector employs about 60% of the labor force. With global food and fuel prices rising again, South Asia will be affected disproportionally. Regional inflation is already high and countries have limited fiscal space to maneuver.)
• Managing the food crisis in South Asia
• Exchange rate and trade regimes (Results suggest that both currency unions and direct pegs promote bilateral trade in Africa vis-à-vis more flexible exchange rate regimes, and that their effect is almost double for the region than that for an average country in the world sample.)
• Climate Change Risks and Food Security in Bangladesh
• The Middle East political crisis and remittances flows to South Asia (The small share of South Asian workers and limited remittance flows from Libya, Egypt, and Tunisia mean that direct and immediate impacts on remittance flows to South Asian countries overall will be limited. Gulf States employ more than 11 million expatriate workers, an estimated 8 million or more from South and East Asian countries. Saudi Arabia, the U.A.E, and Qatar are top destination for South Asian migrants and are main sources of remittance inflows.)

• Urgent actions needed to prevent recurring food crisis: Seven proposed initiatives by Shenggen Fan, Maximo Torero, and Derek Headey are as below:

1. Effective policies and technology investments to minimize food–fuel competition.
2. Social protection, especially social safety nets, for the most vulnerable groups.
3. Transparent, fair, and open global trade.
4. A global emergency physical grain reserve.
5. Policies and investments to promote agricultural growth, in particular smallholder productivity, in the face of climate change.
6. Investments by national governments in climate change adaptation and mitigation using the full potential that agriculture offers.
7. An international working group to regularly monitor the world food situation and trigger action to prevent excessive price volatility.

Energy crisis in Nepal

Declaring “energy crisis” for the next four and a half years, the Nepalese government launched a $275 million initiative to supply 2500 MW of electricity within that period. This drastic move comes after years of power outages (load-shedding) in a country that has one of the highest potentials of hydropower. Note that the previous UML-led government had set an ambitious target of generating 25,000 MW of hydroelectricity in the next two decades, much above the past Maoist-led government´s target of generating 10,000 MW of power in 10 years. Progress in this front is almost nil.

During fiscal year 2009/10 the annual peak demand reached 885.28 MW, a 8.96 percent growth over the peak demand in previous fiscal year. Annual energy demand recorded 4367.13 GWh out of which 3076.69 GWh was met by domestic power generation, 612.58 GWh was imported, and 667.860 GWh was managed through load-shedding (Nepal Electricity Authority 2010). Currently, power outages have reached up to 14 hours a day.

Since supply of electricity is trailing behind demand for electricity by over 50 percent (on an average the demand is 900 MW, but supply is around 450 MW), especially during dry season, it has affected pretty much everyone in the country. Due to acute power crunch cost of production of industries is going up, cost competitiveness of Nepalese products is decreasing, industries are closing down, production is being winded down, a shortfall in domestic production is leading to an increase in imports of even the most basic goods and services (contributing to widening trade deficit), and future growth potential is being severely crippled. It will take years to make up for the lost growth potential due to the ongoing energy crisis even if the power outages are solved in five years time.

Some of the strategies of the present government:

• Begin on a war footing the repair works at 39-megawatt multi-fuel plant in Duhabi, 14-megawatt diesel plant in Hetauda, and six-megawatt thermal plant in Biratnagar, and supply an additional 59 megawatt.
• Reduce the current electricity leakage form 26 percent to 20 percent.
• Encouraging the usage of CFL lamps, the customs duty in CFL import has been reduced from the current 15 percent to one percent.
• Add an additional 150 megawatt to 200 megawatt by repairing the powerhouses and increasing their capacities, and also by controlling leakages.
• Prioritize construction of one hydro project in each of the five development regions.
• Encourage the private sector to produce power from rubbish.
• Waive tax on private investors building new hydroelectric power plants.
• Provide special security for investors and introduce laws to make it a crime to hamper energy construction projects, punishable by five years in prison.

Few comments:

• While it is good to know that the government is getting serious about solving the power crisis, the latest moves are just an attempt to apply balm on a deep wound that needs a complete surgery of the whole structure/body. Grandiose plans had been put forth before as well, but in terms of implementation and action nothing substantial happened.
• Why is there such low investment even when there is high return to investment in this sector? Simple answer: business unfriendly policies, red tapes, politicization of both NEA and licensing procedure, and corruption, among others reasons. The power market in Nepal is deeply distorted (in terms of price, politics and socio-economic dimensions).
• Security of investment is a major concern among investors. Labor unions, politically-indoctrinated cadres, and affected villagers (who at least have genuine concerns about sharing outcomes and getting compensated for lost livelihoods and dwellings) are complicating security of investment.
• The purchasing agreement between NEA and producers is another contentious issue. NEA has been offering an average rate of Rs 4.50 per unit for private developers. However, the developers are demanding that the NEA purchase electricity at Rs 6 per unit. The NEA is importing electricity from India at Rs 9.80 per unit, which is double the rate offered to the private sector. How come NEA is willing to offer higher price per unit on imports than from that generated from domestic sources? Why such discrimination against domestic producers?
• About 26 hydro projects are ready to sign PPA but the developers are hesitating to negotiate purchase agreement at such a low price. Commercial banks have jacked up interest rates for hydropower projects to 13-14 percent, up from about 11 percent a few months ago. It means NEA should be offering higher price than the existing one to incentivize private sector to start investing in this underinvested sector. The late it is, the higher will be the cost of production as domestic bank loans will have higher interest rates due to their own problems, and construction machinery might be expensive as a result of increasing infrastructure investment in developing and emerging countries.
• Promoting the use of CFL bulbs and solar panels can only take us so far. It might encourage efficiency and reduce usage of hydroelectricity marginally, but it won’t address the main issue, which is the structural problems in NEA and politicization in the whole hydropower sector. Similarly, increasing electricity prices will also not help the nation overcome the underlying problems of this sector. It might just help NEA cover some of the losses (almost Rs 19 billion as of now) and save it from going fully bankrupt.
• The bottom line is that the power market in Nepal is deeply distorted, primarily due to excessive political interference and the corrupt, inefficient NEA, which has monopoly (and monopsony) over production, distribution, and purchase of electricity. Ironically, it is barred from adjusting electricity prices. The monopoly and monopsony powers of NEA should be axed. It should be given a supervisory/regulatory role only. Leave the rest to the private sector. The political interference in this sector should be outlawed.
• Nepal needs an impartial independent energy commission (something like the CIAA) with competent human resources and equipped with the latest technology to save the country from further plunging into darkness. NEA should be made just a regulator/supervisor of the energy sector. Political interference in this sector should be constitutionally outlawed. This might help Nepal overcome some of the hurdles in the power sector, but not all.
• Note that the lack of energy is one of the major binding constraints to economic activities in Nepal. For higher growth rate, enough power for households, enterprises and industries is a must.

Transplanting the Chinese model of growth

Here is a response from Justin Lin:

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“We can learn many lessons from other countries’ experiences. But I try never to expect to transplant other countries’ models to China, because the specific opportunities in China will be different from other countries. And you know, I think we cannot directly transplant China’s models to any other country, including other middle-income countries or developing countries, even less so in high-income countries. But there’s always something that we can learn from other people. As the Confucian saying goes, if you walk with two people, you can always draw inspiration from the successful one and avoid the mistakes of the unsuccessful one.”

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On replicating the process of structural transformation in China:

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“One is that economic development in any country is a process of continuous technological innovation, industrial upgrading and diversification, and structural transformation. Any country starts with more than 85 percent of its population living on agriculture when its income level is low. To become a high-income country, the population living on agriculture will reduce down to 10 percent or less. This structural transformation is inevitable. In this process, a well-functioning market will be necessary for improving resource allocation. But at the same time, the market alone will not be enough.

For example, at the agrarian stage, farmers produce mostly for their own consumption. Only a small amount of produce is traded in the nearby market with people known to each other. Under such a situation, the need for infrastructure—such as roads for transportation—is limited, and a legal system for contract enforcement is not required. When the production moves to manufacturing, the economies of scale become larger, and producers will mostly produce for other people and not for themselves any more. The market range will expand, and trading becomes arms-length. To facilitate the transaction, roads are needed for transportation, and legal contract enforcements are needed. Capital for equipment investment and maintaining operations will also increase with the improvement of technology and the increase in the size of the market. So to make the change in the structure of production feasible, the infrastructure, legal system, and financial system also need to be changed accordingly.”

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And, the role of the state:

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“No matter how smart they are, individual entrepreneurs will not be able to carry out all those changes by themselves. You need to have a state to help them—to coordinate those kinds of changes. The problem I see is that, to be successful in economic development, one needs to understand the nature of this process, and to allow the market to play a fundamental role. But at the same time you need to have a government to facilitate the workings of the market, in order to make this kind of technological innovation, as well as structural transformation, feasible—to help carry it out smoothly and rapidly. This is one lesson that we can learn from China.”

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Big is good: Firm heterogeneity and exports

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This paper contributes to the more recent strand in the analysis of trade flows that uses data on exports of individual firms. In all countries of the world, relatively few firms participate in world trade, thus suggesting that besides country level barriers to trade, characteristics of a firm such as its size and productivity are relevant for participation in trade. Using firm level data, this study attempts to model and estimate the decision of Indian firms on their participation in trade. Firm heterogeneity is an important determinant of the decision to export. Exporting firms are significantly larger, more r&d-intensive, low wage-intensive, more productive and more profitable than non-exporting firms. The multinomial results reveal that the probability of survival of new firms in export markets is lower when compared to those which have been exporting in the previous years.

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Here is a piece by Srinivasan and Archana 2011.

Dangers of uncontrolled real estate plotting

Raping one of the hills in Budhanilkantha (Kathmandu Valley) with real estate plotting. Uncontrolled urbanization first, environment last priority for the builders. It is wrong. Period.

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Nepalese industrialists and unions strike a deal

Good news! Seems like most of the issues related to industrial strike and labor-related industrial woes are being addressed in the latest deal between the three main trade unions and industrialists (represented by FNCCI). The deal will go into effect beginning March 15.

Main features of the deal:

• No industrial strike for four years.
• Increase in monthly salary and daily wage plus social security for workers. Remuneration per month has been increased by Rs 1500 (monthly salary increased by Rs 50 and dearness allowance by Rs 1450). This has increased minimum wage to Rs 6100 per month from Rs 4600. Daily wages have been increased to Rs 226 from Rs 190. Monthly remuneration has been increased by 32.6 percent and daily wage by 18.9 percent.
• Employers and workers have also agreed to contribute 20 percent and 11 percent of their respective basic remunerations for implementing different social security schemes for workers.
• The trade unions promised to extend their full cooperation to employers in curtailing the work force if any enterprise is forced to fully or partially close operations due to rise in labor cost or other adverse market conditions.
• The workers have committed themselves to fully cooperate with the employers to increase industrial productivity.
• They have also agreed not to take part in any political activities during working hours.

Most of the issues I raised in yesterday’s piece were addressed. Good for both FNCCI and unions. Let us just hope that the terms of the deal will be honored by both sides.

Union strikes and productivity in Nepal

My latest piece is about labor strikes in the industrial sector, its implication for workers and economy, and the productivity issues hinged with these increasing wage and allowance. My point is that if the unions want to industrialists to double minimum wage (instead of simply adjusting existing wage with inflation), they should also guarantee that labor productivity would also double. Else, why double wages when the industrial sector is losing competitiveness and is in a downturn?

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Union strikes & productivity

The trade unions and industrialists, who are represented by Federation of Nepalese Chambers of Commerce and Industry (FNCCI), have locked horns over increasing salary and allowance of industrial sector workers. This has halted production, including in Hetauda Industrial Estate. Meanwhile, the industrialists brave enough to resist the unions’ diktat are being admonished and manhandled by party cadres and union activists. The Maoist-affiliated trade union, All Nepal Trade Union Federation (ANTUF) has been the most active and belligerent in the whole union versus industrialist drama. The other two trade unions that are complicating the matter are CPN (UML)-affiliated General Federation of Nepalese Trade Unions (GFONT) and Congress-affiliated Nepal Trade Union Congress (NTUC).

While the demands of the unions are valid as per the existing labor law, they are far too stretched in terms of the need and ability of firms to fulfill them. The scale of demand for wage increase is beyond the capacity of most of the firms, which are seeing razor thin profit margins and some are falling short of the minimum demand required to keep up their operations running. In such a situation, demanding extremely high wages that are inconsistent with inflation rate and without a guarantee of an increase in labor productivity shows foolhardiness of the unions, who seem to be motivated to go for strike not for labor welfare reasons, but for political ones.

The existing labor law has a provision that allows the government to revise minimum wage every two years by consulting with both workers and employers. Two years ago, the government had fixed monthly salary of Rs 4600 (Rs 3050 basic salary and Rs 1550 dearness allowance) and wage of Rs 190 per day. The usual trend is that minimum wage is adjusted with inflation. Since inflation is hovering around 10 percent, it would have been justified if the unions’ demanded for an increase in salary and allowances by the same percent. However, they have asked for an increase in daily wage by more than double the existing amount. The industrialists argue that they can increase salary by 23.7 percent only. But, the trade unions want monthly salary to be increased to Rs 10,000 and daily wage to Rs 400. Furthermore, they are demanding additional provisions like insurance, provident fund and social security of workers. So, employers and unions are at loggerheads over wage, allowance and labor welfare issues.

Given the state of our ailing industries, it is pretty much impossible for them to fulfill the unions’ demands. If the unions stick to their guns, then there is no prospect for amicable solution to industrial discord, which is not only reducing production, but also labor productivity and eroding competitiveness of domestic industries. If the industries close down, then it will be the poor workers who will lose jobs, not the union leaders who are basking on political blessing and stash of cash from membership fees and (forced) donation. The trade unions should first consider the state of our industries and economy before making wild demands and going on for a strike that will do nothing but decimate our ailing industrial strength, which is essential for bringing about structural transformation in the economy.

Allow me to highlight some of the issues the unions leaders and union members should keep in mind before heedlessly going on strike demanding something that cannot be fully fulfilled, at least right now.

First, demanding pay hike during prosperous industrial periods is reasonable. Unfortunately, this is not such a time. No firm will increase salary beyond the mandatory adjustment of basic wages with inflation if profits do not rise. Worse, for some companies that are just making break-even increasing salary without corresponding increase in sales revenue will mean losses. Going on strike and halting production will further decrease firm’s revenue, which means not only employment and wage freeze, but also layoffs. By vehemently going into strike, the unions are not only depriving their own members of a potential salary hike in the future, but also employment opportunities to aspiring employees. The tragic fate of the garment and textile industries is still fresh in our memories.

Second, the industrial sector is growing at a very slow pace. It registered negative growth rate (-0.2 percent) in 2009, down from a peak of 18.8 percent in 1992. Fortunately, it recovered slightly last year. Also, the industrial sector contributes just around 16 percent to our GDP and the manufacturing sector just about 6 percent. Against such a backdrop, how can the industries increase salary and allowance whose scale that is being demanded is not justified by the performance of any industrial variables right now? The willful act of the unions will further worsen the performance of the industrial sector.

Third, factors such as load-shedding, supply bottlenecks and donation campaigns are increasing cost of production of firms. It was reported that according to Small Factory Foundation Survey 2066, load-shedding has already forced closure of 41 percent of medium-scale factories. Furthermore, about twenty thousand workers lost jobs when five dozen big and small firms closed own in Birgunj-Pathalaiya industrial corridor of Parsa district. In such situation, without a decrease in cost of production, increase in profits is unimaginable. The pay hike (plus bonus and allowance) of workers depends on the rise in profits, which simply is not the case right now, thanks partly to destructive activities of the unions themselves. In fact, these factors have led to an increase in cost of production, eroded competitiveness both domestically and abroad, and led to a decrease in exports.

Fourth, low appropriability of private returns, i.e. the inability of the private sector to retain returns on investment, is taking its toll in industrial activities and economic growth. Poor property rights and slack contract enforcements engendered by the extralegal bullying of investors by the politically indoctrinated and militant youth wings and unions are falling heavy on the already ailing industrial sector. This is scaring away investors, both foreign and domestic. It will eventually cost jobs of the union members. The more destructive the unions get, the more it is going to cost the workers, industries and the country.

Fifth, remember that the militant activities of Young Communist League (YCL) severely crippled productive capacity and production in the industrial sector. It scared away foreign companies like Colgate Palmolive and shut down several garment firms. They not only harassed businessmen and terrorized business community by launching donation campaigns and confiscation of private property, but also illegally occupied industrial districts and disrupted production in several manufacturing plants in 2008. The very institution (private property) required for economic growth was handicapped by the YCL and Maoist-affiliated trade unions. In 2009, this was reflected in negative growth rate of industrial sector and a decline in annual GDP growth rate. Furthermore, net foreign direct investment inflow has been just 0.3 percent of GDP. The recent activities of the unions in the industrial sector bear the hallmark of the infamous industrial campaign launched by YCL in 2008. There is no benefit, but all loses in this endeavor.

Finally, can the unions guarantee that labor productivity will rise by the same proportion if salary and allowance are increased by the amount they are demanding? If not, then there is no point increasing salary and allowance beyond the one set by the minimum wage law and a simple adjustment with inflation. Note that, Nepal has the lowest labor productivity in South Asia. The labor unions should first convince the government and industrialists that labor productivity will increase if salary and allowance are increased. Then only their demands have logic. Else, there is every reason to speculate that all the drama staged by the unions has vested interests and are politically motivated.

[Published in Republica, March 24, 2011, p.6]

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