Food prices in 2010-11 and its impact on poverty

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Global food prices have increased substantially since mid-2010, as have prices in many developing countries. In this study we assess the poverty impact of the price changes between June and December 2010 in twenty-eight low and middle income countries. This is done by gathering detailed information on individual households' food production and consumption levels for thirty-eight agricultural and food commodities to assess the impacts on household welfare. This study estimates that this sudden food price surge increased the number of poor people globally, but with considerably different impacts in different countries. The heterogeneity of these impacts is partly related to the wide variation in the transmission of global prices to local prices and partly to differences in households' patterns of production and consumption. On balance, the adverse welfare impact on net buyers outweighs the benefits to net sellers resulting in an increase in the number of poor and in the depth of poverty. We estimate that the average poverty change was 1.1 percentage points in low income countries and 0.7 percentage points in middle income countries with a net increase of 44 million people falling below the $1.25 per day extreme poverty line.

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Full paper by Maros, Martin and Hassan (2011). They find that on an average poverty change was 1.1 percentage points in low income countries and 0.7 percentage points in middle income countries. The net increase in poverty was 44 million people (falling below the $1.25 per day extreme poverty line).

Meanwhile, Carnegie’s Shim and Vera explain the differences between the food price rise in 2010/11 and 2007/08. They argue:

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Several of the factors behind today’s increase parallel those that drove the 2007/2008 food-price crisis—including export controls, biofuels production, high oil prices, and poor harvests. But the prices of cereals, particularly rice, have increased less than in 2008 and domestic prices in some of the world’s poorest countries have actually fallen amid better local harvests. The lower incidence of harmful policy responses, which amplified the crisis last time, likely helped as well.

Although these factors have lowered the surge’s impact, prices are likely to remain elevated and volatile for the next few years. Policy makers must heed the lessons of the past if they are to prevent more hunger now.

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The China of India is…

… the state of Gujarat. Steven Pearlstein explains:

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The biggest obstacle to India’s industrialization remains the lack of infrastructure, and no state is tackling that more aggressively than Gujarat. The entire state has been turned into one large public works project, with billions of dollars in investment being poured into dams, canals, power plants, highways, gas pipelines, electric grids and ports. The state is even assembling the land to create industrial cities along the path of a high-speed rail freight line that the central government is planning between Delhi and Mumbai.

Gujarat’s notoriously efficient, autocratic and incorruptible chief minister, Narendra Modi, is a strong adherent to the Asian-style industrial policy who believes that if you build it, they will come. And they have, bringing oil refineries, shipbuilding facilities, steel and auto plants and LNG terminals. With 5 percent of India’s population, 15 percent of its industrial production, 17 percent of its capital investment and 22 percent of its exports, the joke is that Gujarat has become the China of India.

Rajan Shah started Harsha Engineers in Ahmedabad in 1972, back when textile mills were what passed for Gujarat’s manufacturing base. Harsha got its big break in 1997 when Timkin, the giant ball-bearing maker in Canton, Ohio, decided to stop making the metal cages that are used to hold its bearings and rely on Harsha instead, and the company has grown steadily ever since. Shah figures he still has a 10 to 15 percent cost advantage over global competitors, thanks in part to Gujarat’s low wages and the ready availability of good design and production engineers. But just in case, he’s opening a second plant — in China.

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But economic hurdles remain in India:

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Despite such successes, India has a long way to go to modernize an economy where 80 percent of economic activity takes place in the “informal” sector. Beyond the more obvious problems of corruption, poor infrastructure and a low-productivity workforce, too much of the formal economy is controlled by a handful of family-run conglomerates who are quick to use their political and financial muscle to move into any sector that shows promise. In a nation of naturally entrepreneurial people, this creates headwinds for independent companies trying to attract talent and capital. It contributes to the growing concentration of wealth in the hands of a business elite that by all accounts has grown increasingly disconnected from the rest of the country. And it has encouraged many of the best and the brightest either to leave the country or follow the golden path into real estate and finance rather than manufacturing or government.

It also has an effect on foreign investors, who are keenly aware of the dangers of trying to compete against the local oligarchs. Enron tried it and wound up losing $1 billion on an ill-fated energy project. And I found it telling that Wal-Mart, which for years has been pushing hard for the government to relax rules that prevent foreign firms from opening stores in India, may chose to continue its joint venture with the Bharti family rather than go it alone.

A somewhat closed financial system is also restraining growth. India’s central bank is most proud that its tight restrictions on the flow of borrowed money into the country minimized the impact of the recent global financial crisis on India. But business executives complain that those same restrictions also prevent the development of a corporate bond market that is badly needed as a source of infrastructure funding. They require banks to keep so much of their deposits on reserve, or directed to low-return loans to farmers, that the cost of borrowing for businesses and consumers is two percentage points higher than it needs to be. It also doesn’t help that Indians continue to put much of their savings into gold rather than into a financial system that would recycle it into the economy.

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Can Keynesians be anti-Keynesian?

Dave Altig, senior vice president and research director at the Atlanta Fed argues:

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One of the interesting things about the article is that among the economists cited as being among the critics of "Keynesianism," you find the names John Taylor, Robert Mundell, and Kenneth Rogoff. I find that list interesting because if you follow the links I attached to those names you will find work with models that are decidedly Keynesian in structure. Works by Taylor and Rogoff are, in fact, seminal contributions to the "New Keynesian" paradigm that dominates macroeconomics today.

As far as I know, none of these men have repudiated the basic worldview that motivates the referenced work. In fact, as recently as last year John Taylor approvingly described, as he has many times, a key characteristic of the paradigm for monetary policy that was in place the decades before the financial crisis:

"… the central bank has a strategy, or rule, to adjust the interest rate depending on economic conditions: In general, the interest rate rises by a certain amount when inflation increases above its target and the interest rate falls when by a certain amount when the economy goes into a recession."

I added the emphasis to the last part of that passage as it is a feature of the so-called Taylor rule that is entirely built on the foundation of the New Keynesian model.

How, then, to explain the Keynesian predilections of the economists mentioned as presumed carriers of the anti-Keynesian mantle? The source of the confusion, I think, goes back to the historical, but somewhat obsolete, distinction between so-called Keynesianism and monetarism. The latter was, of course, personified in Milton Friedman and his dispute with what was the orthodoxy in the three decades following the Great Depression. Lost in the early-days labeling, however, was the fact that the disputes were more about the empirical details of theory rather than the theory itself.

In particular, Friedman did not deny the effectiveness of policy in principle but rather its wisdom or impact in practice. This sentiment is exactly the one he expressed in his prescient and transformative 1968 presidential address to the American Economics Association:

"In the United States the revival of belief in the potency of monetary policy was strengthened also by the increasing disillusionment with fiscal policy, not so much by its potential to increase aggregate demand as with the practical and political feasibility of so using it."

[…] My point is not to dispute or defend the truth of the Ricardian proposition. My point is that it has absolutely nothing to do with whether one believes (or does not believe) that the New Keynesian framework is the right way to view the world. The essential policy implications of the New Keynesian idea (like the old Keynesian idea) is that changes in gross domestic product can be driven by changes in desired spending by households, businesses, foreigners, and the government in sum. You can believe that and still believe in fiscal policy ineffectiveness, as long as you believe that total spending is unaltered by a particular policy intervention.

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Size of shadow economy in Nepal

In terms of ranking, Nepal has 76th largest shadow economy (p.31) among the 120  countries considered by Schneider, Friedrich, Andreas Buehn and Claudio E. Montenegro (2010). The size of Nepal’s shadow economy is equal to about 37.5 percent of GDP, according to new estimates in WDR 2011. It is increasing since 2002. The average size of informal economy in South Asia is 34 percent of its GDP.

The latest WDR 2011 notes: “Shadow economies are a near universal phenomenon throughout the world. The shadow economy is commonly defined to refer to all market-based legal production of goods and services that is deliberately concealed from public authorities. The empirical method used in this paper is based on the statistical theory of unobserved variables, which considers multiple causes and indicators of the phenomenon to be measured, i.e. it explicitly considers multiple causes leading to the existence and growth of the shadow economy, as well as the multiple effects of the shadow economy over time. In particular, we use a Multiple Indicators Multiple Causes (MIMIC) model – a particular type of a structural equations model (SEM) – to analyze and estimate the shadow economies of 162 countries around the world. These estimates over the period 1999 to 2006/2007 suggest that shadow economies accounted for as much as 35 percent of official gross domestic product, on average, in 98 developing countries, 38 percent in 21 Eastern European and Central Asian countries, and 18 percent in 25 high-income countries in 2006. The major driving force toward informal economies seems to be high taxes (direct and indirect), combined with labor market regulations, the quality of public goods and services, and the condition of the “formal” economy. Across a broad set of countries, the model suggests that reducing taxes followed by a reduction in fiscal and business regulation will enhance of the appeal of work in the formal sector. However, the relative importance of these driving forces differs significantly across country groups.” [Source for WDR 2011: Schneider, Friedrich, Andreas Buehn and Claudio E. Montenegro (2010), Shadow Economies all over the World: New Estimates for 162 Countries from 1999 to 2007, Background paper for the World Bank study of the informal sector in Central, Southern Europe and the Baltic countries (Task number P112988).]

Mr. Cooperative-Distributor Finance Minister Adhikari’s White Paper

Finally, rather than following the media about news concerning white paper brought out by the Finance Minister (FM) Bharat Mohan Adhikari, I read the white paper itself (sorry, no English version yet). After widespread opposition from pretty much all fronts (except the UCPN(M) party), Adhikari eventually dropped the idea of bringing out a supplementary budget. But, as a reporter from Kantipur daily argued (sorry, couldn’t find the online link!), the white paper is a clever ploy to incorporate all the stuff that were to be in the supplementary budget and is largely along the UCPN(M)’s diktats. This might be an alternative to the supplementary budget Adhikari was talking about.

At the outset, let me argue that the white paper, which will form the basis for the upcoming budget of an expected size of over Rs 350 billion, is heavily distorted towards promoting cooperatives in any form and in any sector where specifics of financial flow can’t be precisely tracked. Private sector development appears as a halfhearted initiative left at the backburner of the entire initiative. If the upcoming budget comes up in line with this white paper, then FM Adhikari can safely be called Mr. Distributor. The budget might be a one-sector inclined cooperative budget at the cost of private sector and the crucial investments needed in sectors that are the binding constraints to growth in our economy. I can envision a slew of moral hazard issues with this kind of expenditure plan.

Aim of the white paper

• To redistribute economic sources and resources so that it is not concentrated on the hands of few people. To give priority to domestic private and public enterprises to ensure an independent, self-reliant and progressive economy.
• To induce socio-economic transformation by rolling out scientific land reform and ending feudalistic land distribution.
• To give priority to local communities while exploiting the country’s natural resources and to encourage farmers to increase production. Marginalized communities, women, children, elderly, and handicapped to be cared of and to be imparted scientific knowledge and given education and training.
• To overhaul existing economic and social structures, which are major constraints to economic development. To decrease poverty and inequality, production would be increased and poor people’s reach to it will be ensured.
• Public, cooperative and private sectors would be the drivers of progressive, prosperous, modern, justified, and inclusive New Nepal.

Good in the white paper

• A renewed focus on agriculture sector and land reforms (yet these are lofty goals that have been with us for a long time). Plenty of programs to boost agriculture production and distribution of food in food deficit areas. Demarking agricultural land and incentivizing people to produce food there. Discouraging real estate expansion in agricultural land. Food security is given priority.  A lot of support programs to increase agriculture production in some VDCs and communities. Various kinds of agriculture cooperatives (animal, vegetable, fishery, herbs, etc) are given priority.
• Protection of forests and promotion of forestry sector, especially entrepreneurs in this sector. Also, irrigation projects (small, medium and large) are to be promoted.  Increase fertilizer subsidies (hope there won’t be much leakages) and promotion of organic manure and fertilizers using byproducts from animal shed.
• Encouraging cooperatives of small farmers so that their combined land can be used to produce one product by using tractors, power tiller, and other small scale machinery and techniques. This could increase production and productivity, if it works as intended.
• Promotion of tourism sector. Commitment to book all tax evaders. Establishment of Infrastructure Development Fund with the involvement of private sector. Loads of big infrastructure projects.
• Tax break (both VAT and income tax) for the first 15 years if agriculture, vegetable, herbs and fruit processing plants are established in hilly region. Herbs Center to be established in Nepalgunj. Cardamom Development Center to be established in eastern hilly region.
• While acknowledging that high inflation is negatively affecting the people and even farmers, it argues that low food production, and political instability and uncertainty are driving general prices upward. It promises stronger market supervision against manipulation of prices. However, it never touches the issue of how black marketeering, deliberate withholding of inventory, and manipulation of prices by agents other than producers, wholesalers and retailers are contributing to push up general price level. (Note that on an average a 10 percent increase in food prices increases inflation by one percentage points.)
• Acknowledges that the rise in imports is unsustainable. Import of petroleum products constitute 17% of total imports and it is expected to rise further as power crisis intensifies. Almost 98 percent (up from 61% in FY 2065/66) of the the existing export earnings is being used to import petroleum products. Ease imports of petroleum products (but HOW?). Is the government ready to reform Nepal Oil Corporation (NOC) by breaking its monopoly and monopsony powers in the petroleum market? I guess NO because of the political and union pressures.
• Power generation (chiefly hydroelectricity) is given priority, but the details are dodged to a body that is to be formed to address the “energy crisis”.
• Increasing migration to urban areas and abroad for jobs is draining labor force in rural areas. Policies to address them are outlined but they might not be enough to provide enough incentives for youths to stay back in the villages. Expansion of youth self employment program could produce a number of entrepreneurs (mind you, like in other programs there will be some mis-utilization of this fund for sure).
• Providing food products at discounted prices from government depots. (Well intentioned, but media reports show that the price of rice set by Nepal Food Corporation is expensive than the price of rice in the market, especially after the construction of rural roads.)
• Addressing water shortage problem in Kathmandu and constructing overhead bridges. Also, funds allocated for feasibility study of various infrastructures such as city metro, railways, fast track roads, hydroelectricity, tunnel roads and more. Cooperatives are also to be promoted to work in these areas (but, one wonders how can cooperatives find massive amount of money required for even small infrastructure projects, especially low capacity community hydropower projects?).

Bad and ugly in the white paper

• The economic problems are not fully examined. Some of the major macroeconomic problems are not even mentioned there. It acknowledges that GDP growth rate will be 3.5%, below the target of 4.5%. Similarly, inflation would be 10%, higher than the expected 7%. It does not mention that we are running a BoP deficit, primarily due to increasing balance of trade deficit and a slowdown in the growth rate of remittances. It does not mention the fact that the industrial sector’s growth is one of the lowest in decades. So is the case with FDI and the reasons for low economic growth rate. The underlying causes of these are not even mentioned.
• The whole aim of the paper is to make grounds for massive redistribution of taxpayers’ and donor’s money in the name of cooperatives (whose nature and scope is as broad as the sky!). It will be reflected in the upcoming budget. This was the most prized aspect of the budget rolled out by former FM Babu Ram Bhattarai of UCPN(M) party. This is not only be continued but will be massively expanded by FM Adhikari. Any argument that aids the case for a huge cooperative sector is explored and included. Now, who is playing the music and who is dancing to it? You guess!
• Cooperatives are seen as a solution to the macroeconomic problems faced by the country. It is not a good idea. Even balance of trade deficit is being considered to be addressed by promoting cooperatives.
• The issue of power crisis is mentioned and solution is easily alluded-- as if everything in there will work-- to a recent decision by the cabinet to declare “energy crisis” and give a governing body sweeping powers that transcend the domain of several line ministries and Nepal Electricity Authority (NEA). The fact is that despite having so much potential for high rate of return, investors, both domestic and foreign, are disinclined to invest in this sector. The reason: unfair PPA agreements, disruption of already ongoing projects by villagers and workers who are usually incited by political parties, and threat to disruption of investment (especially Indian) by the UCPN(M), which sees India as the chief foe that is not letting Nepal grow and become prosperous. To a large extent, it has become a self-fulfilling prophesy in the Maoist party and the answer of last resort to all the pinning questions faced by its leadership.
• There is more emphasis on domestic production and domestic consumption. It is fine for the agriculture sector. But, it is not quite the right policy for non-agriculture sector. Some of the goods and services that we don’t and can’t produce should be imported and these are the goods and services on whose imports taxes have to be decreased to ease pressure on general price level. For those that can be produced but cannot compete with international prices, the market should not be distorted outright, but enough incentives should be given to domestic producers to produce the goods and services at a competitive price so that consumer welfare is not compromised.
• There is no mention of NTIS 2010. How can exports be promoted without even making policies in line with NTIS 2010, our main export promotion document and strategy? No strategies to support the entire supply/value chain involved in making an exportable product is outlined.
• Distribution of taxpayers’ money to sections of population (marginalized, conflict-stricken, women, dalits, …) without even creating benchmark for who qualifies and until when, i.e. no sunset clause. Are we going to distribute money to them for life or for a certain period so that they have incentives to get on their own foot for living? Okay, I get the idea of supporting this section of population. But, not forever. It has to end as some point of time so that there is no moral hazard problem in this well-intentioned policy move. It might well turn up into an easy way to dole out massive amount of state resources to party cadres and political activists. A better and productive way could be to blend these support programs with employment generation scheme like NREGA. Similarly, the programs of providing support for shallow tube well, irrigation, fertilizers and canals could be blended with rural employment generation schemes.
• Sloppy slogans like “Increase production, become self-independent”; “One Village, One Product”. Slogans alone won’t do any good. Did “Your village, build yourself” produce any significant result (other than increase in development expenditure as money was easily doled out to VDCs, but never tracked if it was properly used). Massive leakages occur when effective supervision is not there. Also, capture of such money by the elites is a typical phenomena in developing countries.
• Virtually no new programs and incentives for the private sector, which is left cold and dry by FM Adhikari. No sign of including the private sector even in infrastructure building, apart from the Infrastructure Development Fund.
• Resurrection of sick industries, especially small and medium ones. For what purpose? It will drain state resources for unproductive purposes.

The other parties, who are not on board with the current shaky and ineffective coalition government, should pressure FM Adhikari to correct the seemingly faulty policies and not let him easily distribute hard earned taxpayers’ money. We should have investment in productive sectors and activities. Short term band aid to the existing problems of low production, exodus of youths, and unemployment is not as sustainable solution to a prolonging crisis. We should bring about structural transformation in the sense that our economy relies less on agricultural sector and more on non-agricultural sector, but at the same time we produce enough to at least feed our population. Higher productivity in the agricultural sector should be the norm, not higher production and rerouting human and financial resources to this low wage sector.

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UPDATE (2011-04-18):  Here is an excellent editorial on the same issue published in Republica national daily. Some of the crucial issues (among them the very rationale for bringing out a white paper) I forgot to touch upon are discussed in the editorial.

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“The white paper on economy that the government unveiled this week seems nothing more than a smart aleck which will not do any good to the yawning economy. In fact, the government, knowingly or unknowingly, has abused the term “white paper”, as governments come up with such a paper after achieving stability following a war or long conflict or undergoes a sea change in governance system.

Thus, bringing such paper is rare worldwide and when done, it becomes an authoritative document shedding lights on all dimensions of the country’s economy, development and social status prevalent so far. However, the government has unveiled the paper even though the country has not undergone any such major changes that compel the government to release a white paper explaining the real status of the economy.

What was really disturbing was that the paper was full of plans and policies the government was eager to adopt, but it was less focused on presenting realistic summation of existing situation of the country’s economy and development,which are the essential components of a white paper. Judged by its contents, we believe it is merely a ‘concept paper’ and not a white paper as said.

And, in the parliamentary system and procedures we have adopted, the State’s plans, policies and programs are tabled at the parliament and widely debated before getting parliamentary endorsement. So, the ‘newly invented’ practice of announcing government policies and programs through a white paper is an unacceptable attempt of undermining the supreme right of the legislator that in the long run will weaken the parliamentary system.

In this context, what should be made out of the white paper that the government unveiled this week? Sadly, we think it carries no meaning at all. It only misleads the people, who are tired of the messy politics and weak law and order situation.

We believe that the government’s sole motive behind unveiling such a deceptive white paper is to hide its series of failures. Despite much commitment to take the ongoing peace process to a logical end and completing the peace process, the Maoist-UML government has not managed to induct even a Home Minister and given the cabinet a full shape. Even after two months in office, it has done nothing tangible to take the peace process and the constitution drafting process ahead, nor has it managed to deal with major economic problems, like taming high inflation and accelerating development works.

It has not devised any programs to revive the hope of the people. In such a situation, through the paper the government seems to be trying to be perceived as doing better by at least engaging the people with shallow promises. But, we think such a ploy will only add to people’s disenchantment. Hence, we urge the government to concentrate on making tangible progress on the ground, rather than making false promises."

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Interesting stats from WDR 2011: Conflict, Security and Development

Below are some of the interesting facts and figures from World Development Report 2011: Conflict, Security and Development:

• No low income fragile or conflict-affected country has yet achieved a single Millennium Development Goal. Violence is the main constraint to meeting the MDGs. 
• Poverty rates are 20 percentage points higher in countries affected by repeated cycles of violence over the last three decades.  Every year of violence in a country is associated with lagging poverty reduction of nearly one percentage point.
• 1.5 billion people live in countries affected by organized violence, either currently or recovering from political violence, fragility and/or high levels of homicide.
• People living in countries currently affected by violence are twice as likely to be undernourished and 50 percent more likely to be impoverished. Their children are three times as likely to be out of school.
• 42 million people (roughly equivalent to the entire population of Canada or Poland) are displaced today as a result of conflict, violence or human rights abuses. Of these, 15 million are refugees outside their country and 27 million are displaced internally within their own country. 
• Countries with recent human rights abuses are far more likely to experience conflict than countries with a strong history of respect for human rights. Each one-step deterioration on the five point Political Terror Scale - which measures arbitrary detention for nonviolent political activity, torture, disappearances, and extrajudicial killings - resulted in a more than 43 percent increase in the risk of civil war in the following five years.
• Countries with weak government effectiveness, rule of law, and control of corruption have a 30 - 45 percent higher risk of civil war, and significantly higher risk of extreme criminal violence than other developing countries.
• 90 percent of civil wars in the 21st century occurred in countries that already had a civil war in the previous 30 years.
• The global trade in cocaine and heroin, which are largely produced in countries affected by conflict and violence, is valued at $153 billion. The drug trade is the largest income component of global organized crime and is roughly comparable to the global total of official development assistance (ODA, which equaled $110 billion in 2010).
• It took the 20 fastest reforming countries in the 20 century between 15 and 30 years – a generation – to raise their institutional performance from very fragile to more resilient levels.  Specifically, it took 17 years on average to reduce military interference in politics and 27 years to reduce corruption to establish rules-based controls against corruption.
• Over the last 20 years, on average, a country with 20 years of violence experienced twice the volatility in aid flows of a country that did not experience violence. Revenue volatility has considerable costs for all governments, but particularly for fragile situations where it may derail reform efforts and disrupt institution building. 
• Maritime piracy is estimated to have direct economic costs of between $5.7 billion and $11.2 billion, including ransoms, insurance and re-routing. Global efforts to contain and deter it are estimated at between $1.7 and $4.5 billion in 2010.
• The economic spillover effects for countries affected by conflict are often huge. Countries lose an estimated 0.7 percent of their annual GDP for each neighbor involved in civil war.
• What drives people to join rebel movement and gangs?  In surveys conducted in six countries and territories affected by violence, the main reasons cited for why young people become rebels or gang members are very similar—unemployment predominates for both. This is not necessarily the case for militant ideological recruitment.
• What are citizens’ views on the drivers of conflict? In surveys conducted in six countries and territories affected by violence, involving a mix of nationally representative samples and subregions, citizens raised issues linked to individual economic welfare (poverty, unemployment) and injustice (including inequality and corruption) as the primary driver of conflict.

Story of Nepali migrants in the Middle East

Political instability in Nepal, too many unemployed youths, few opportunities for unskilled and low skilled labors, and the government’s apathy toward this group of population are forcing youths to do anything to go abroad for jobs. There risks of being swindled by agents and being deported are there, but they take a gamble. Eventually, some of them land in worse condition than they were in Nepal. The remittance inflows is keeping the economy afloat, but how long can this last, especially amidst the political turmoil in the Middle East?