Farmer's debt relief in India

The Indian government has recently decided to cancel the entire debt of small farmers that will cost it around $15 billion (IRs 600 billion). The farm loan relief is to be offered to all farmers with less than two hectares of land. It is an ambitious program and if it works as planned, then it will provide a huge relief to the debt-crunched poor farmers in rural India, which will help stimulate the rural economy. It is going to be a long shot. It will help farmers free from grips of the feudal societies, reduce suicides rates, and most importantly stimulate rural economy and reduction in poverty. The newest budget has made a great leap forward in social welfare spending, with 20%  increase in education and 15% increase in health expenditures. Along with the loan waiver for the selected group, the government has also decided to  give a 25% rebate for all farm loans regardless of farm size or loan distress.

With growth rates at 8.7% and rising inflation, critics have labeled the new ambitious welfare program a "populist pre-election budget" and have speculated that it will put upward pressure in price level. Though this new move from the government has received some applause (including from me!), some economists are worried about rising fiscal deficit and inflation, competitiveness in the banking sector, and rising inflation. However, this program is supposed to be more effective than previous ones because rebates are to be distributed directly to the targeted groups. Unlike in the past when banks were used as intermediaries to achieve such socio-political goals, this time the exchequer would directly distribute rebates to the genuinely distressed ones.

Critics have argued that it will hamper competitiveness in the banking sector and temper incentives in the market. If you are a farmer and you think that the government is going to give debt relief after some years, then naturally you will be less interested in paying off loans. A distressing form of moral hazard? Meanwhile, if banks know that their loans to farmers are going to be written off in some years, then the quality of the credit market would go downhill. More here, and here

This line of argument is completely valid but one has to consider historical factors and the ability of the farmers before arguing against these new reformative measures by the state. If you look at more than 800 million poor farmers from the rural areas, it is not difficult to realize that they have not been touched by rising economic growth Indian has achieved for the past two decades. The enormous revenue generation in recent years has to be redistributed efficiently so that the poor people do not feel left out. And, given the status quo, the poor farmers would in no way be able to pay off bank loans and loans from landlords (remember the age-old Adhi system, or sharecropping, in rural India). Without debt cancellation, the poor farmers would pass on debt (principal plus exorbitant interest) to their children, thus making debt servicing a generation phenomena. When will they get rid of this vicious cycle? Neither they can do it on their own nor the market would come up with a solution. The government has to step in to break the cycle and relive the farmers from long overdue debts that is holding their progress and keeping them and their families in poverty for years.

Though I believe that market is the best solution in the long run, in cases like this the state has to take a lead role to make sure that the real market forces work as they should in a level playing field. Without correcting the centuries old feudal system, including generation-passing debt structure in rural areas, it is hard to imagine that markets would find a solution to this issue. Markets did not work until now, and if the government plans to intervene then we should support it. I think it will have similar effect, though in varying proportion, as that of a stimulus package in the US. The rural economy needs to be freed from clutches of feudal regressive market structure, corrected immediately, and stimulated to help people fight poverty. There might be some problems and frauds cases of eligibility, but I don't think this move will seriously dampen market incentives. It is a corrective measure and this one is to be done in such a way that implementation bypasses the corrupt state administration.

We can find similar kind of problems in other South Asian nations, including Nepal. Recently, the Nepali government had decided to reserve jobs for marginalized groups in all state ranks. Considering the historical, cultural, and caste-based discriminated job market, I think it is a good move. Still wonder why? Read this article.

Collier on the bottom billion at the TED

What can we do to help the bottom billion? Prof. Paul Collier says, "a combination of compassion and enlightened self interest." More here.

Why compassion? Because the bottom billion are deprived of credible hope

Why enlightened self interest? Because economic divergence plus global integration would be "a nightmare for our children."

I have been particularly interested in Collier's work after reading his book The Bottom Billion. It is so simple, rich, and amazing with all the historical roots to the miseries of Africa and the present day bad governance designed by bad leaders- there are too many traps in Africa! I wish these simple ideas were translated into action in Africa. Also check out the Center for the Study of African Economies, which produces The Journal of African Economies.

...“It requires compassion to get ourselves started, and enlightened self-interest to get serious.”

...What happened the last time we got serious? Well, it was the reconstruction of Europe after WWII via the Marshall Plan. Why did the US get serious? We were worried about the spread of Communism. So what did we do?

...There’s a huge natural resource boom taking place - Uganda and Ghana have both discovered oil, and Guinea has a huge discovery of iron. “These new revenue flows dwarf aid.” In Angola, new oil revenues are $50 billion a year - total aid flows to the bottom billion nations is $34 billion a year.

“If your governance is good enough, there’s no resource boom.” That’s happened in places like Norway, Australia, and Canada. “The resource curse is entirely confined to a threshold of governance.” Nigeria is a great example of what can go wrong if you don’t have enough governance. You need a level of governance around where Portugal was in the 1980s.

..new democracies don’t have these checks and balances - they’re “instant democracies”.

Inequality in Nepal

By Kamal Raj Dhungel in The Kathmandu Post:

...Three years ago the government estimated that Gini coefficient of Nepal was 0.47. This was the highest among SAARC countries, with Pakistan having the lowest 0.31.

...The Nepal Living Standard Survey (NLSS, 2003/04) also stated that the bottom 80 percent of the population earned 47 percent of total income; the richest 20 percent of the population earned 53 percent while the poorest 20 percent earned only 5 percent of income. 

...This shows that there is an extremely unjust distribution of income where the richest 20 percent earns more than half of the total income. The annual mean and median income of the richest 20 percent of the households accounted to Rs 156,486 and 112, 962 respectively, while the same for the poorest 20 percent accounted to Rs 37, 243 and 31,147 respectively. The mean and median income of the richest 20 percent of the households is 4.2 and 3.6 times more than those of the poorest 20 percent.

South-South FDI rising

Though South-South FDI is rising in recent years (particularly massive investment plans of China and India, China more so), a new report points out that political risks is a principal constraint to doing business in emerging markets. It is argued that South-based companies have higher tolerance than North-based companies to political risks.

...Foreign direct investment (FDI) originating in developing countries and destined for other developing countries is on the rise, but the growing development potential of this so-called “South-South” investment is inhibited by political risks, according to a new report by the Multilateral Investment Guarantee Agency (MIGA).

...Political risks are cited by South-based investors as a principal constraint to doing business in emerging markets. The MIGA review—“South-South FDI and Political Risk Insurance: Challenges and Opportunities”—looks at perceptions of political risk by companies based in emerging markets that are seeking to invest abroad, as well as challenges in mitigating those risks.

...FDI flows going to emerging markets are expected to reach US$535 billion in 2007, decline somewhat in 2008, and continue growing in the subsequent three years at an annual rate of 3-4 percent.

...FDI flows from emerging markets increased from US$12 billion in 1991 to US$99 billion in 2000,6 and are estimated to be around US$210 billion as of 2006.

...“South-South” FDI (investment outflows from emerging markets to other emerging markets) has been growing even faster, increasing from under US$5 billion in 1994 to over US$50 billion in 2000.

Remittances, poverty, and employment in South Asia

An interesting paper, authored by Prof. Sudhir K. Khatri, on the role of remittances in poverty alleviation and employment in South Asia. He argues that remittances have played a crucial role in lifting people out of poverty in Nepal, Sri Lanka, and Bangladesh, despite conflict and insurgency. Particularly, noteworthy is the discussion on who migrates and through which channel? He argues that the very poor people, who lack migration information and cannot pay the cost of migration, are usually left out of this cycle. So, despite poverty reduction is taking place due to increasing inflow of remittances, the incidence and intensity of poverty among the poorest is still as rigid as it was before. Also, he argues that workers who go to the Gulf countries remit almost 100% of their savings back home, while workers who go to the USA, the UK, and Australia, among others do not remit in the same proportion. More on remittances by Prof. Khatri here. Interestingly, this pessimistic-sounding paper from the IMF concludes that higher remittances has a negative impact on the quality of institutions in a country.

Notable stats and observations:

...a 10 percent increase of migrant flow from the sending country will lead to 1.6 percent decline in the share of people living on less than $1 a day.

...10 percent increase in the share of remittance in a country’s GDP can lead to a 1.2 percent reduction in poverty.

...the households receiving remittances increased from 23 to 33 percent in the same period, and the share of remittance in total household income increased from 26 to 35 percent during 1996 to 2003 in Nepal.

...migrants in Pakistan avoid investing in areas that they do not know (such as business) in favor of committing their resources to what they know best (namely land).

...restrictions on migration can increase inequality, as has been the case of the unskilled female migrants from Bangladesh who have been forced to use ‘illegal’ methods to migrate and thus become vulnerable to exploitation and subjected to gender income inequality.

...The group going to the Gulf States and Malaysia are the ones that remit the money back home since they cannot keep the money there indefinitely. They are the ones that sustain Nepal’s economy since they send back home 100 percent of the money they save. Those going to UK, USA, Canada, or Australia do not usually remit the money to Nepal.

...In Nepal also the poorest of the poor (20 percent of the population) are not in a position to migrate. Labour migration has taken place from areas that are relatively richer, because it also requires investment.

...One study on Sri Lanka suggests that out of the total income, remittance recipient families spend 56 percent on foods and 18 percent on education, which meets the basic needs of the families trying to move out of poverty.

Better outcome through targeted nutrition programs aimed at changing behavior

What happens when nutrition programs are just not aimed at filling hungry or malnourished stomach but are aimed at changing general nutrition behavior like feeding and hygiene practices? Well, obviously the outcome would be much more better and optimal than a simple feeding program. This is corroborated by this new research brief, based on an experimental nutrition program in Madagascar, from the WB research institute.

In a new research brief, Galasso and Umapathi describe a recent impact evaluation study of a community-based nutrition program in Madagascar which targeted the country’s most malnourished and vulnerable districts. The study highlights links between maternal education, knowledge, and community infrastructure that can help achieve improvements in child nutrition. Results show that malnutrition can be improved over the short- and long-term when mothers participate in community nutrition programs that promote behavioral change in nutrition, feeding, and hygiene practices. However, the gains from this program were higher for better-educated mothers and households in the relatively advantaged areas. While knowledge is a necessary condition for achieving progress, direct interventions on the nutrition front, bundled with complementary assistance in other sectors (health, infrastructure, and water and sanitation), is the best way to maximize effectiveness in the neediest areas, the authors say.

The figure to the right shows that communities participating in the program bridged the weight gap with respect to non-participating communities in terms of short-term nutritional outcomes (weight for age z-scores reduced by 0.15-0.22 standard deviations and the incidence of underweight children reduced by 5.2-7.5 percentage points).

The overall share of observed improvements in nutrition nationwide (reduced malnutrition rates) between 1997/98 and 2004 attributable to the program (using the estimates above) ranges between ¼ and ⅓.

The figure to the left on height shows the protective effect of the program on longer-term nutritional outcomes (reversing the trend in stunting). This result is particularly important in light of the fact that program communities had a higher incidence of shocks and experienced higher food insecurity.

The observed program effects were obtained through significant improvements in feeding practices (exclusive breastfeeding, timing of weaning, and proactive and responsive feeding) and hygiene practices (appropriate disposal of garbage and toilet use, and improved methods of water purification).

Two expected, yet significant, results from the study:

1. More educated mothers and households living in better-off areas gain more from the program
2. Knowledge is a necessary but not sufficient condition for improving nutritional outcomes for households with limited access to complementary resources

Are remittances a curse?

An interesting, and surprising, paper from the IMF shows that remittances have a negative effect on the quality of institutions. It is pretty surprising to see that "a higher ratio of remittances to GDP is associated with lower indices of control of corruption, government effectiveness, and rule of law." I am interested in knowing the mechanism through which this negative effect works. Additionally, I would like to know policy implications of this conclusion.

This paper addresses the complex and overlooked relationship between the receipt of workers' remittances and institutional quality in the recipient country. Using a simple model, we show how an increase in remittance inflows can lead to deterioration of institutional quality - specifically, to an increase in the share of funds diverted by the government for its own purposes. Empirical testing of this proposition is complicated by the likelihood of reverse causality. In a cross section of 111 countries we document a negative impact of the ratio of remittance inflows to GDP on domestic institutional quality, even after controlling for potential reverse causality. We find that a higher ratio of remittances to GDP is associated with lower indices of control of corruption, government effectiveness, and rule of law.

A cursory look at the paper hints that the authors start with a mistrust in government, especially by assuming that remittances act as a buffer between government and the people, and the former finds that corruption is less costly for individual households. This assumption is not too realistic, at least for me, because even if households become purchasers of public good (again, I do not totally concur with this idea) due to increased income from remittances, it is not guaranteed that they would not seek accountability and transparency in government's expenditure and activities. Moreover, how can one assume that the public would be purchasers of public goods when household income rises due to remittances. Why won't the public enjoy the commons, I.e. public goods, when they get it for free. Household would not like to pay for public goods if it is provided free, irrespective of the change in income.

The authors also find that remittances have no robust effect on economic growth. However, I would like to know why Nepal experienced decrease in poverty and increase in household income between 1994-2001?  The WB says that this effect was brought about by remittances. And, the IMF says something different; the only difference is technical definition of economic growth and poverty reduction.