Understanding inclusive growth: High and sustainable growth

Inclusive growth is one of the most talked about issues in developing countries, especially those in transition, these days. It has been pretty much widely accepted that growth alone is not sufficient; it has to be followed by wider access to economic opportunities and provision of social protection for those left out of the growth process.

ADB has come up with a framework for inclusive growth, which has three main components:  (i) High and sustainable growth; (ii) Access to economic and social development opportunities; and (iii) Stronger social protection. 

It also has a list of 35 indicators to quantify (either directly or via proxies) inclusive growth. It is not yet clear what benchmark to use: either within country benchmark relative to earlier years or regional average or both. Anyway, any quantifiable indicators to measure inclusive growth is good to get thoughts straight on this hugely important yet not entirely clear (definition wise) issue.

The first pillar of inclusive growth emphasizes high and sustainable growth to create and expand economic opportunities. Its components include strengthened

• Infrastructure
• Technology
• Human capital
• Private sector
• Finance sector
• Public sector management
• Regulatory regimes

The table below shows the quantifiable indicators for high and sustainable growth (first pillar of inclusive growth). The information and data in this blog comes from ADB’s FIGI 2012 and the related dataset (Nepal only; for other countries, see this one).

Growth and Expansion of Economic Opportunity	1990 or Nearest Year		2010 or Latest Year
Economic Growth and Employment
Annualized growth rate of GDP per capita at PPP (constant 2005 PPP$)	2.6	(1990–1995)	2.5	(2005–2010)
Annualized growth rate of average per capita income or consumption (2005 PPP$)
Total	4.7	(1996–2003)	3.4	(2003–2010)
Lowest quintile	2.3	(1996–2003)	6.8	(2003–2010)
Highest quintile	6.7	(1996–2003)	0.4	(2003–2010)
Employment-to-population ratio
Youth (Aged 15–24)	78.8	(1991)	73.1	(2011)
Male	81.0	(1991)	73.3	(2011)
Female	76.5	(1991)	72.8	(2011)
Aged 15 years and over	67.2	(1996)	91.6	(2003)
Male	71.0	(1996)	90.0	(2003)
Female	63.7	(1996)	93.0	(2003)
GDP per person engaged (constant 1990 PPP$)	...		...
Number of own-account and contributing family workers per 100 wage and salaried workers	...		290.6	(2001)
by Sex
Male	...		185.1	(2001)
Female	...		654.7	(2001)
Key Infrastructure Endowments
Electricity consumption  per capita kWh	35		91	(2009)
Paved roads  percent of total roads	37.5		53.9	(2008)
Number of cellular phone subscriptions per 100 people	0.0	(2000)	43.8	(2011)
Depositors with commercial banks per 1,000 adults	...		...

In the next blog post, I will share information about the second pillar of inclusive growth (access to economic and social development opportunities).

Ginger and middlemen in Nepal

We have heard of cases where intermediaries (middlemen, syndicates, etc.), who do not add much value in production and processing processes, have raked in huge margin and inflated wholesale and retail prices in Nepal. More on this here and here.

Here is a new case of ginger production (Nepal is the third largest producer of ginger in the world) and role of middlemen, who take more than 50% of total retail value of ginger in the market. Per kg cost of ginger production is estimated at Rs 18 and is higly labor intensive.

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Nepal has become the world’s third largest producer of ginger after India and China, according to the statistics of the Food and Agriculture Organization (FAO) of the United Nations. The country produced 216,289 tonnes of ginger in 2011 compared to the global output of 2.02 million tonnes.

Based on the average market price of Rs 62.29 per kg in 2010-11 at the Kalimati Fruit and Vegetable Market, Nepal’s ginger output was worth Rs 13.47 billion. Officials said that farmers only get Rs. 25-30 per kg out of this while the rest is gobbled up by middlemen.

Ginger production increased marginally by 2.6 percent in 2011 compared to 2010. However, output has jumped 146 percent in the last decade. In 2002, ginger production was recorded at 87,909 tonnes.

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In FY2011, Ilam produced 44,310 tonnes of ginger, followed by Salyan with 23,500 tonnes, Nawalparasi 12,255 tonnes and Palpa 12,226 tonnes.

Value added export and global trade landscape

The OECD and WTO have come up with trade in value added database covering mostly OECD countries. It presents an entirely different picture of the ongoing trade related debate, especially the huge trade surplus (gross) of China and the charges about currency manipulation (deliberately keeping value of currency low). The RCA, which gives an indication of comparative advantage in export of individual product, is also quite different than what is shown by gross trade figures. Value added data could be a better measure of trade flows.

Source: Oxford Analytics

The new value added database shows that China might not have the as large balance of trade surplus as it appears to be when we look at gross trade figures. In fact,  the US deficit with China appears to be 25% smaller than is suggested by conventional gross trade figures. Surprisingly, Japan's surplus with the US is 60% larger than suggested by gross trade figures. Even more surprising is the revelation that only 4% of the value of an iphone is attributable to China itself, with the rest being imported for final assembly (physical components and technical services).

It will be interesting to see the value added export of Nepal when the database includes Nepal as well.

What should post-2015 development framework include?

Varun Gauri of the WB argues that the post-MDG goals and targets should be “easier to grasp and have embedded within them a causal narrative about the causes and remedies of global poverty”. Excerpt from the latest working paper:

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The Millennium Development Goals, which expire in 2015, were a global agreement to promote human development and reduce poverty. But they did not create a legalized institutional regime, in which precise obligations would be delegated to specific actors, nor were they, in many respects, compatible with the incentives of the countries whose heads of state endorsed them. They most resembled international human rights treaties, which are also not legally coercive, and which achieve their effects largely through their role in social and political mobilization. But unlike human rights treaties, the Millennium Development Goals' targets and goals were not psychologically, morally, and politically salient. The goals and targets for the proposed second round of Millennium Development Goals should be easier to grasp and embed within them a causal narrative about the causes and remedies of global poverty. Their formulation and implementation should also draw on national institutions and processes, which most people find more persuasive than discussions at the international level. The paper develops these ideas and presents examples for how post-2015 development goals and targets might be presented in ways that are more compelling.

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The future of manufacturing

Excerpts from a very important report on the future of manufacturing, which approximately constitutes 16% of global GDP and 14% of employment, by the McKinsey Global Institute.

State of manufacturing:

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[…]manufacturing remains critically important to both the developing and the advanced world. In the former, it continues to provide a pathway from subsistence agriculture to rising incomes and living standards. In the latter, it remains a vital source of innovation and competitiveness, making outsized contributions to research and development, exports, and productivity growth. But the manufacturing sector has changed—bringing both opportunities and challenges—and neither business leaders nor policy makers can rely on old responses in the new manufacturing environment.

[…]in today’s advanced economies, manufacturing promotes innovation, productivity, and trade more than growth and employment. In these countries, manufacturing also has begun to consume more services and to rely more heavily on them to operate.

[…]We find that when economies industrialize, manufacturing employment and output both rise rapidly, but once manufacturing’s share of GDP peaks—at 20 to 35 percent of GDP—it falls in an inverted U pattern, along with its share of employment. The reason is that as wages rise, consumers have more money to spend on services, and that sector’s growth accelerates, making it more important than manufacturing as a source of growth and employment.

[…]The largest segment by output (gross value added) includes industries such as autos, chemicals, and pharmaceuticals. These industries depend heavily on global innovation for local markets—they are highly R&D intensive—and also require close proximity to markets. The second-largest segment is regional processing, which includes industries such as printing and food and beverages. The smallest segment, with just 7 percent of global manufacturing value-added, produces labor-intensive tradables.

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Future of manufacturing:

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[…]By 2025, a new global consuming class will have emerged, and the majority of consumption will take place in developing economies. This will create rich new market opportunities. Meanwhile, in established markets, demand is fragmenting as customers ask for greater variation and more types of after-sales service. A rich pipeline of innovations in materials and processes—from nanomaterials to 3-D printing to advanced robotics—also promises to create fresh demand and drive further productivity gains across manufacturing industries and geographies.

[…]In some low-cost labor markets, wage rates are rising rapidly. Volatile resource prices, a looming shortage of highly skilled talent, and heightened supply-chain and regulatory risks create an environment that is far more uncertain than it was before the Great Recession.

[…]Labor-intensive industries will almost always follow the path of low wages, but others, with more complex needs, must weigh factors such as access to low-cost transportation, to consumer insights, or to skilled employees. The result could very well be a new kind of global manufacturing company—a networked enterprise that uses “big data” and analytics to respond quickly and decisively to changing conditions and can also pursue long-term opportunities.

[…]For policy makers, supporting manufacturing industries and competing globally means that policy must be grounded in a comprehensive understanding of the diverse industry segments in a national or regional economy, as well as the wider trends affecting them.For example, shapers of energy policy need to consider which segments will be affected by higher or lower energy costs, how great the impact is likely to be, and what magnitude of difference will trigger a location decision. Policy makers should also recognize that their long-term goals for growth, innovation, and exports are best served by supporting critical enablers for manufacturers (such as investing in modern infrastructure) and by helping them forge the connections they will need to access rapidly growing emerging markets.

[…]Two key priorities for both governments and businesses are education and the development of skills.

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Based on the chart above, it appears Nepal will benefit if it focuses on processing (food, beverage and tobacco; fabricated metal products) and labor intensive tradables (textiles, apparel, leather; and furniture, jewelry, toys and others). Reasons: they are labor intensive and have high trade intensity.

Can the very poor people be transformed into basic entrepreneurs with skills and capital?

A study done by Bandiera, Rasul and Burgess in Bangladesh shows that occupational transformation is possible. They randomized the roll-out of the Ultra Poor program (an asset transfer and skills training components), initiated by BRAC, across 1,409 communities. Half of them received the program in 2007 (the treatment group), and half of which did not receive the program until 2011 (the control groups). 

They also argue that the program, which costs roughly US$300 per household, has greater poverty impact that an unconditional cash transfer of the same magnitude. About expansion of such programs elsewhere, the authors argue that the effectiveness would depend on the implementing agencies and whether a lack of capital and skills are binding constraints to determining occupational choices.

Excerpts from their article in Ideas for India.

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To help extremely poor people overcome the complex barriers they face, one idea is to encourage them to become entrepreneurs who are able to acquire skills and make use of productive capital themselves. The question is whether it can be done. Key to this question is whether giving these people cash or assets (asset transfers) can spur them on to change their occupational choices, as opposed to simply giving them more money to spend in the short term. These questions become more salient as the world is littered with examples of anti-poverty programmes that, despite their best intentions, fail to have any appreciable effect on their intended beneficiaries. 

In recent research (Bandiera et al. 2012), we evaluated an entrepreneurship programme in Bangladesh – the Ultra Poor programme, operated by the Bangladeshi NGO BRAC. The Ultra Poor programme provides asset transfers and skills training to the poorest women in rural communities. The programme aims to move these typically asset-less and unskilled women from low-wage and seasonal jobs to the more secure, self-employment based occupations, which are the choice of middle class women in these communities. We found that the very poor can be transformed from labourers into basic entrepreneurs and that this occupational transformation is associated with dramatic improvements in their economic lives, bringing them closer to the middle classes in their communities on measures such as wages and spending.

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More from their results:

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We find that BRAC’s Ultra Poor programme transforms the occupational choices of the targeted women. In doing so, our research supports the claim that there is indeed a causal link between lack of capital and skills to occupational choice and poverty. We look at the women in 2011 - four years after the programme began - and find that: 

• Labour force participation rises. Ultra poor women who participated in the programme are 7 percentage points more likely to be engaged in at least one income generating activity – in other words, a job. 
• Programme beneficiaries also increase total labour supply (hours per year), by increasing hours in self-employment (by 92% after four years) and reducing hours devoted to insecure wage work (by 26% after four years). 
• They also increase the number of days they work each year by 36 days after four years (a 15% increase), while they decrease the average hours worked per day by 1.15 hours after four years (a 26% decrease).
• Crucially, the programme enables women to spread their labour supply more evenly across the year, and in doing so brings them closer to full employment.

This change in occupational structure is associated with a 15% increase in productivity (measured as hourly earnings) and a 38% increase in yearly earnings, which translates into a substantial increase in per capita expenditure self-reported life satisfaction. All estimated effects are either stable or more pronounced after four years, compared with after two years, indicating that the programme sets beneficiaries on a sustainable path out of poverty.

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Nepal's structural transformation, declining industrial strength and erratic growth rate

The picture speaks volumes about the tumultuous years since 1995/96 and its impact especially on industrial sector (within it manufacturing activities).