Corruption takes toll in Nepal: Acute energy crisis hits the country

The Nepali government has declared energy crisis and has approved operation of thermal plants to add 200 MW to the national grid. The present demand of electricity is 770 MW but the supply is just 420 MW. The country is in deficit of 2.8 million units power per day. Imagine this happening in a country with the second highest potential to generate hydroelectricity in the world. It is estimated that Nepal can produce 83,000 MW of electricity.

The question is why is Nepal still lagging behind? Is it a lack of funds? I think no given the level of investment and investor’s interest in this sector. Is it appropriability? Yes, it was for around five years back when the Maoists rebellion reached its peak and they attacked hydropower plants. But, now no one is doing that. So, appropriability is not a constraint. Returns to investment and appropriability are not holding back progress in this sector. What could be? Corruption comes on the top of my list. It was estimated that almost 30% of the total estimated cost is actually invested in real project. Where does 70% go? In the pockets of bureaucrats at Ministry, regional offices, and local administration! Corruption is a form of red tape and future tax on people. At present, there is 10 hours of load shedding per week in Nepal.

I wish the corruption investigation (CIAA) body was a little bit more powerful and independent!!

What economics needs now? Search for more of Keynes

Robert Skidelsky, author of John Maynard Keynes 1883-1946: Economist, Philosopher, Statesman, discusses the ideological flaws of the present crisis- the tussle between the left and the right about regulation and markets. Time now for a middle path, which Keynes argued in the 30s by recognizing that markets are not always efficient and when they are not government can help the economy grow. This does not mean that government has to replace markets—only when there is inefficiency and markets cannot work, the government can help. He also argues that economists need to admit now by saying that the benefits of globalization are real, but have often been exaggerated. Keep it real!

…The enquiry must start with economics. If the case for the deregulated market system is intellectually sound, it will be very hard to change. Free- marketeers claim, contrary to Soros, that the crisis is the fault of governments. US money was kept too cheap for too long after the technology bubble burst in 2000 and the attacks of 11th September 2001. The market was temporarily fooled by the government. This is a shaky defence, to say the least: if the market is so easily fooled, it cannot be very efficient.

…But the main source of instability lies in the financial markets themselves. And here it is clear that the battle of economic ideas still needs to be fought. Keynes is important in this because he produced the most powerful case for supposing that financial markets are not efficient in the sense required by efficient market theory. As he explained in The General Theory of Employment, Interest, and Money (1936), classical economics had ignored the two main causes of systemic financial failure: the existence of (unmeasurable) uncertainty and the role of money as a "store of value." The first led to periodic collapses of confidence; the second led investors to hoard cash if interest rates fell too low, making automatic recovery from collapses difficult. The function of government was to remove the depressive effect of both by giving investors continuous confidence to invest.

…Opinion as to the degree of supervision, regulation and control needed to make a market economy well-behaved is to be found along a continuum. At one end are the free-marketeers who believe only the lightest touch only is needed; at the other are classical Marxists who believe it requires public ownership of the whole economy. In between are varieties of social democrats and middle wayers, the most famous of whom is Keynes. This territory is sure to be extensively explored over the next few years as the pendulum starts swinging back. For the question of making markets well behaved goes beyond the question of securing their efficiency. It involves making the market economy compatible with other valued aspects of life. The French social democratic slogan of the mid-1990s—"market economy yes, market society no"—encapsulates the idea that limits should be placed on the power of the market to shape social life according to its own logic.

…But to ensure we have an ordered system requires us to make globalisation efficient and acceptable. In the course of that debate, I expect one crucial point to emerge: the benefits of globalisation are real, but have been exaggerated. Improvements in the allocation of capital and reductions in opportunities for corruption are offset by increased volatility. Globalisation also raises huge issues of political accountability and social cohesion that are scarcely considered by economists, and only lazily by politicians.

…There seem to be four main reasons for this blind spot. The first is the intellectual domination of economics in this debate, with its individualistic and developmental perspective. Globalisation—the integration of markets in goods, services, capital and labour—must be good because it has raised many millions out of poverty in poorer countries faster than would otherwise have been possible. Any interference with this process is impious. A second idea is that it is inevitable: technology—most conspicuously the internet—abolishes national frontiers. Technology cannot be undone. So, whether we like it or not, globalisation is our fate, and our morals and social conventions must adapt to it. The third idea is that globalisation is evolutionary; any check would be regressive. Fourthly, globalisation forces us to think of the world as a unit, which is necessary if we are to solve planet-wide problems.

…In the early 1930s, Keynes thought that the international division of labour could be carried too far. "Let goods be homespun," was the title of an article he wrote in 1932. He wanted a "well-balanced" or "complete" national life, allowing a country to display the full range of its aptitudes, and not simply to be a link in a value-adding productive chain spanning the globe. Moreover, the economic benefits of offshoring are far from evident for richer states.

…Keynes's warning that the pursuit of export-led growth is bound to set nations at each others' throats is still relevant. But that does not mean just sticking as we are. Some rowing back of financial globalisation and cross-border financial institutions is required to rebalance market and state. This process is underway, as national regulators take a tighter grip over the financial institutions they are bailing out. Regulators are increasingly sceptical of banks that depend excessively on wholesale funding. Without this, there will be a natural tendency for banks to shrink back within their own frontiers.

…The crisis has rightly led to a revival of interest in Keynes. But he was a moralist as well as an economist. He believed that material wellbeing is a necessary condition of the good life, but that beyond a certain standard of comfort, its pursuit can produce corruption, both for the individual and for society.

He reunited economics with ethics by taking us back to the primary question: what is wealth for? The good life was one to be lived in harmony with nature and our fellows. Yet "we destroy the beauty of the countryside because the unappropriated splendours of nature have no economic value. We are capable of shutting off the sun and the stars because they do not pay a dividend." Not everything should be sacrificed for efficiency. And Keynes was a liberal nationalist.

In terms of our pendulum analogy, he was someone who instinctively sought an equipoise: not in the timeless equilibrium of classical economics, but in a balance in political economy between freedom and control, national and international wellbeing, efficiency and morality. He was an Aristotelian, who believed that vices are virtues carried to excess. This is a good philosophy for today.

Financial development and the Doha Round

Here is a nice piece about the future of Doha, financial development, and the current financial crisis. The increase in volume of trade mindset has to be replaced with developing country-specific development mindset. Also, there are dangers of decreasing ODA due to the current financial crisis, whose epicenter is located in the North.

The effectiveness debate must move on from its narrow focus on growth – the new obsession among some bilateral donors – towards its impact on poverty. This is especially so for chronically poor people, many of whom get left behind by growth, even if aid does help to raise the recipient’s growth rate.

As it turns out, the shock has come from the North, first. This demonstrates an iron law of globalization: expect the unexpected. How far the present financial crisis damages the poor economies of the South, and the poor of the South, remains unclear. This is certainly not a good time for countries to mobilize private capital flows via either equity or debt, and foreign direct investment (which has been on the rise) will be threatened by a prolonged global downturn.

Poor economies will therefore need more ODA not less. The G-8 has not delivered on its Gleneagles promises. This is especially disappointing given the hard work that many poor countries have put into building better institutions, especially in the area of public finance management, to absorb and effectively use aid for development and poverty reduction. With climate change now firmly on the development finance agenda, the need for innovative financing mechanisms can only grow. This is not the time to be timid. Can the policymakers of both North and South meet the challenge? Or will narrow political agendas prevail? And will the needs of the world’s poorest people – the 1.4 billion – prevail? Time will tell.

Hausmann on the financial crisis and the future of USA’s financial clout

Ricardo Hausmann argues that the financial crisis might empower the US, if it plays its hand well. The US is not the only one suffering from this crisis- capital flows to emerging and developing countries has stopped, threatening to destabilize their growth, financial systems, and balance of payments. He disagrees with Nouriel Roubini, who predicted that the widening US current account deficit would erode other countries’ willing to hold dollars, because the US is still the only remaining super-borrower able to issue billions of dollars in debt at very low rates.

First, the US is already running a large current account deficit, a reflection of the fact that domestic spending is well above output. Using the capacity to borrow just to spend it domestically is going to aggravate this deficit and leave the US with a worsened external balance that will limit growth down the line.

Second, net public debt is rising sharply just as baby boomers will begin to collect their social security cheques, worsening long-run fiscal solvency.

Third, many countries across the world are going to suffer the consequences of the lack of access to finance at a time where the decline in their export earnings would have warranted more borrowing to smooth things out. If unchecked, this will cause their economies to shrink and their imports to decline, hurting US exports just when they are most needed. Under these conditions, there is the risk that countries will shut themselves off from the global economy and impose the financial equivalent of the protectionist Smoot-Hawley Act of 1930 . This can lead to an unravelling of the consensus for globalisation that has characterised the post-cold war era.

Fourth, if the US re-circulates financial resources, by on-lending to well behaved countries that have lost access because of the financial crisis, it would not increase its net debt but instead would make money for the US taxpayer while helping increase demand for US exports.

Fifth, re-exporting capital to the rest of the world would prevent the inconvenient strengthening of the dollar.

Finally, exercising this function would give the US enormous soft power in the world. Countries would have to decide whether they want to play ball with market democracy and benefit from access to the financial resources that the US and others can mobilise, or try to form a separate camp with Russia, Iran or Venezuela just as the rug has been pulled from under them.

Catch-up growth

The IMF's latest Finance & Development magazine focuses on the financial crisis. Good stuff about the impact of financial crisis, its nature, and policy responses.

Nobel laureate Michael Spence chaired the Growth Commission, which recently published a The Growth Report after two years of study on the causes of economic growth. The IMF's new F&D magazine has an interview with Spence and Mohamoud Mohielden (Minister of Investment, Egypt)  about the financial crisis. Spence argues that unclogging credit market should be the first priority of Western  governments and this should be followed by "well-thought-out fiscal stimulus that has a time dimension".

Catch-up growth according to Spence:

We called it catch-up growth because of the global economy's contribution to growth—which we found was an essential element after looking at the dynamics of the successful high-growth cases. It is pretty well understood from trade theory and modern growth theory that global markets are big and a country can grow pretty fast without expanding its market share much—and if it has the terms of trade. But the other part, which is emphasized by Paul Romer and other distinguished leaders in the area of growth theory, is that catch-up growth is really about learning. It's about knowledge transfer. It's expanding your potential output based on what the economy—both the private and public sector sides—comes to have expertise in doing, and that is the catch phrase, no pun intended, for catch-up growth. This is what, we believe, more than anything else enables countries to grow at rates in the 7–10 percent range, and nobody else can do that. You can't do it in isolation and you can't do it as an advanced country with no counterexamples because you have to invent all the technology that moves the production possibility out, whereas developing economies can, at least for a period of time, import it. You have to import it and adapt it so it takes a considerable amount of ingenuity, innovation, and adaptation.

What would The Growth Report have focused on if it were published today? Obviously, financial crisis:

If we wrote the report in late 2008, we would have emphasized the volatility and insurance aspects more, because when they get out of control they produce crises. Also, we already know that such crises are debilitating for progress and growth, and do not adequately support growth policies.

Spence thinks the one key policy ingredient for high growth rate is openness to global economy. Mohielden thinks it is human capital.

In an article relevant to the present global financial crisis, this interview with Robert Shiller is quite interesting. Here is IMF's Chief Economist Olivier Blanchard on the financial crisis and policy responses required during and after the crisis.

Here is an interesting piece from real-world economics review: After 1929 economics changed: Will economists wake up in 2009?

Links of Interest (12/12/2008)

- Bad sign: Ecuador defaults on foreign debt saying it won’t pay “illegitimate” debts owned to “monsters” (Does Ecuador feel like Argentina in 2001 and Mexico in 1994 now?)

- Labor  unrest causes 70 factories to close down in Nepal

- Nepal government rejects USAID’s new programs alleging it of being non-transparent and outside of the budgetary jurisdiction

- The Maoist government’s private armed civilian army (aka YCL) vandalizing a college (see the pic):

 

- Why taxes should be low in developing countries?

There is a good rule in setting taxes: the poorer the country, the lower the tax burden. This is for two reasons. First, poorer countries waste more tax money through corruption. Second, lower tax burdens for businesses lead to more economic activity.

- Lost Decade? or Memorable Hangover?

Cholera outbreak and rosy coffin business in Zimbabwe

This is a very sad news. The NYT reports that there has been an increase in coffin business during the cholera epidemic in Zimbabwe.

A bad statesman, corruption, lust for power, and complete disregard to public’s concerns are turning the bread basket of Africa into a basket case of failed state. The whole economy is in shambles, with stagnating GDP growth rate and inflation rate hovering at 231 million percent. (some say it could be around 8*10^18 percent)

President Robert Mugabe is demagogue! At a time when the development agencies are calling for urgent need to address cholera outbreak in Zimbabwe, Mugabe is arguing that cholera outbreak is contained and the Western countries are using cholera epidemic as a tool to cause war.

"Because of cholera, Mr Brown, Mr Sarkozy and Mr Bush want military intervention," Mr Mugabe said. He added: "Let's tell them that the cholera cause doesn't exist any more."

Shortly after Mr Mugabe spoke, the UN Office for the Co-ordination of Humanitarian Affairs said the toll from the disease had risen slightly overnight to 783 and that 16,403 were believed to have been infected.

The WHO has warned that the total number of cases could reach 60,000 unless the epidemic was stopped.