Links of Interest (11/20/2009)

China will become of the world’s largest economy in 2032 (but not in terms of income per capita!)

Forecasting macroeconomic developments (Also, see top-down versus bottom-up macroeconomics)

An interesting Turkish blog

Gambling on a sinking nation (remember a Cabinet meeting underwater in Maldives)

The effectiveness of fiscal and monetary stimulus in depression (In short, analysis of budgets and central bank policy rates for 27 countries covering the period 1925-39 shows that where fiscal policy was tried, it was effective.)

Chavez slams GDP methodology after his economy contracted in 3Q

The impact of the Doha Round on Kenya (Kenya’s GDP will boost by a 0.2 percent; it will see losses in the manufacturing and mining sectors but gain in agricultural and processed food sectors)

Zedillo Commission Report on reforming the World Bank

WDI now in Google search (try the new stuff; its cool; see a sample below)… also, try WB Data Visualizer (you can do similar stuff in Google Spreadsheet plus copy the code and use it elsewhere!)

Not satisfied playing with data? Try WB Data Finder (a sample below):

GDP growth (annual %) - 2008

Source: World Bank Data - Annual GDP Growth Rate

The lessons on reducing poverty from the BRICs

John Perkins on stopping terrorism (trade fairly!)

Global economic crisis and South Asia

Dipak Dasgupta, Lead Economist for South Asia at the World Bank lists four reasons that have helped South Asia's growth rate from plunging down drastically as a result of the global economic crisis, which took South Asia’s growth down by about 3 percentage points (from 8.6% in 2007 to 5.6% in 2009). The World Bank expects GDP growth to recover to nearly 7 percent per annum on average in 2010-2011.

1. Remittances held up much stronger in South Asia than in other regions. In Nepal, the reliance on remittances is the highest, and without these flows, growth in consumption would have collapsed.

2. The resilience of some key export-oriented sectors also helped. Garments in Bangladesh and IT software exports from India, for instance, have held up relatively well.

3. FDI inflows to South Asia suffered a decline during the peak crisis period but have since picked-up sharply in India, Pakistan and Sri Lanka.

4. Policy responded early in the crisis, helped by domestic factors such as the pre-election fiscal spending in India. The size of fiscal stimulus announced was over 3 percentage points of GDP in India and significant also in Bangladesh. Interest rates were lowered sharply in most South Asian countries.

Gupta argues that the region faces two big challenges: food price inflation and fiscal deficits.

Rather than lumping all South Asian countries in the same basket (because high growth from three countries among eight in South Asia jacks up the regional average), there is a need to differentiate the countries into two blocs: high growth countries (India, Bangladesh and Bhutan) and low growth countries that suffer from instability (Pakistan, Nepal, Sri Lanka, and Afghanistan). This way it is easier and accurate to get a clear picture of each country’s constraints on growth, business environment, macroeconomic stability, institutions, governance structure, and bureaucracy . This WB blog post does take a differential look as required, which is not common among South Asian analysts (who actually exclusively look at India and Pakistan and refer it as South Asia; there are six other countries that are member of SAARC!)

Anyway, below are trend of some economic indicators for Nepal (compared with South Asian average).

Institutions, Incentives, Poverty and Inequality

Daron Acemoglu explains why and how there is persistent inequality and what can be done about it (fix incentives and governments):

The question social scientists have unsuccessfully wrestled with for centuries is, Why? But the question they should have been asking is, How? Because inequality is not predetermined. Nations are not like children — they are not born rich or poor. Their governments make them that way.

Economist Jeffrey Sachs, director of Columbia University's Earth Institute, attributes the relative success of nations to geography and weather: In the poorest parts of the world, he argues, nutrient-starved tropical soil makes agriculture a challenge, and tropical climates foment disease, particularly malaria. Perhaps if we were to fix these problems, teach the citizens of these nations better farming techniques, eliminate malaria, or at the very least equip them with artemisinin to fight this deadly disease, we could eliminate poverty. Or better yet, perhaps we just move these people and abandon their inhospitable land altogether.

Jared Diamond, the famous ecologist and best-selling author, has a different theory: The origin of world inequality stems from the historical endowment of plant and animal species and the advancement of technology. In Diamond's telling, the cultures that first learned to plant crops were the first to learn how to use a plow, and thus were first to adopt other technologies, the engine of every successful economy. Perhaps then the solution to world inequality rests in technology — wiring the developing world with Internet and cell phones.

And yet while Sachs and Diamond offer good insight into certain aspects of poverty, they share something in common with Montesquieu and others who followed: They ignore incentives. People need incentives to invest and prosper; they need to know that if they work hard, they can make money and actually keep that money. And the key to ensuring those incentives is sound institutions — the rule of law and security and a governing system that offers opportunities to achieve and innovate. That's what determines the haves from the have-nots — not geography or weather or technology or disease or ethnicity.

Put simply: Fix incentives and you will fix poverty. And if you wish to fix institutions, you have to fix governments.

Unemployment numbers for Nepal

It has been reckoned that around 350,000 new work forces enter into the job market each year and around 200,000 of them are finding jobs in foreign countries. Finding jobs for fresh 150,000 youths that enter the employment market is one of the major problems…

The Labor Survey conducted last year had showed 49 percent of urban and 26.9 percent of rural population was underutilized, which means they are not getting sufficient works. It also showed that unemployment has gone up to 2.1 percent of the total population from 1.8 percent in 1998/99.

Source here

Don’t believe that there are just 0.588 million people unemployed (out of about 28 million) in Nepal. The real number is much more higher. It has to do with how we calculate unemployment rate (=percentage of total labor force who are unemployed but are actively seeking and willing to do a job). Students, military personnel, retired people, parents staying at home, prisoners, people working in places that do not report income, and discouraged workers are not included. This means a whole lot of people are not included. A lot of the people in Nepal are discouraged workers, who gave up searching for jobs, thus excluding them from the labor force (which is the sum of employed and unemployed people).

Moreover, millions of workers in the agricultural sector (such as ‘hidden’ unemployed, non-wage workers, in-kind contract workers, etc) are not counted because their status does not fit within the definition of unemployed people. There are many of them because over 70 percent of the population depend on agriculture for living. Otherwise, won’t you be surprised to hear that unemployment rate in the US is 10.2% and in Nepal it is only 2.2%!

Trade distortions, the Doha Round, and food price volatility

Kym Anderson has an interesting piece about the relationship between trade distortions and food prices. He argues that sudden rise in global food prices are driven by major policy shifts like tariffs and subsidies, leading to a tit-for-tat behavior by countries that produce them.

Trade-related policies contribute to agricultural market volatility and the volatility around the long-run-trend terms of trade slows national economic growth, he argues. The main point of the piece: continue with agriculture liberalization. Here is a similar argument. The disagreements on agriculture liberalization has been holding up Doha for eight years now. The author says that the more barriers in this sector, the more volatility. So, seeking a Special Safeguard Mechanism (SSM) is not good to reduce volatility. [But, how can the Doha Round pass without addressing these issues?]

The price hike of 2008 was also partly a consequence of policy changes in the US and EU, namely their decision to subsidise biofuels and set mandates/targets for their use domestically in response to rising fossil fuel prices. It led other governments to impose food export restrictions to insulate somewhat their consumers from the price rise, which pushed international food prices even higher and, domino-like, drove more exporting countries to follow suit. Some food-importing countries also lowered temporarily their import tariffs, to reduce the rise in their domestic food prices.

The parallel movement of food and energy prices is consistent only after the previous half-century. The author finds that the coefficient of correlation between 1960 and 1999 is -0.18, compared with 0.84 for 2000-07. The comparison may not be quite accurate because of the timeframes between these two periods but the high and positive R-squared value for 2000-07 gives us some information about the way food and energy prices move (in tandem). Note that agriculture constitutes around 3% of global GDP, 6% of global trade, and 8% of global exports (exports of non-farm primary products is 31% and all other merchandise exports is 25%).

Governments of many developing countries harmed their farmers directly by taxing their exports and indirectly by encouraging manufactures and overvaluing their currencies. This meant that price incentives facing farmers in many developing countries were depressed by both own-country policies and the protective policies of high-income countries.

The good news is that many developing countries have reduced hugely their anti-agricultural export policies, and even some high-income countries have lowered their trade-distorting assistance to their farmers – albeit replacing part of it with more-direct assistance to farmers that are only somewhat decoupled from production.

The argument against SSM and giving some policy space to deal with contingencies in the developing countries are not consistent with the evolving consensus among experts that such measures need to incorporated in the Doha Round. Without these measures it would be hard to deal with national crisis triggered by disruptions in agriculture production and trade. For instance, what happens if there is extended drought in a country and producers chase after higher priced markets abroad-- this will lead to starvation. To check the population from starving, some contingency measures are essential. Some hooks to full agriculture trade liberalization is required for the survival of the Doha Round.

Even a recent WTO World Trade Report emphasized for inclusion of “trade contingency measures”. The report argues for “trade contingency measures” that would give some policy maneuver for countries to deal with domestic pressure to prop up domestic markets affected by the crisis. The contingency measures discussed in the report include safeguards measures, anti-dumping and countervailing measures, the re-negotiation of tariff commitments, the raising of tariffs up to their legal maximum levels, and the use of export taxes. These are needed because too little flexibility in trade agreements may render trade rules unsustainable.

Also, note that the drastic rise in food prices was not necessarily triggered by protectionist measures, which was the resulting response to the food crisis (which was especially caused by demand factors).Trade distortion is one of the many causes of the drastic rise in food prices:

• Rising incomes per head in the emerging economies
• Changing pattern of food consumption (shift from food to meat reduces food supply as it is being used to rear animals)
• Subsidised biofuels production in the West raise demand for maize
• Aggregate maize, rice, and soybeans production stagnated in 2006 and 2007 (partly due to drought)
• Increasing speculation because of declining stock

Martin Wolf dismisses the idea that liberalization is the only answer:

The political focus of the Doha round on lowering high levels of protection is largely irrelevant. The focus should, instead, be on shifting the farm sector towards the market, while cushioning the impact of high prices on the poor.

The move towards genetically modified food in developing countries is as inevitable as that of the high-income countries towards nuclear power. At least as important will be more efficient use of water, via pricing and additional investment. People will oppose some of these policies. But mass starvation is not a tolerable option.

Futile efforts to regain the lost glory of Nepalese garment industry

In my latest op-ed, I argue that exclusively chasing for duty-free access for Nepali garment and textile exports to the US markets is not a panacea for the problem associated with this dying industry. I think nothing is going to move forward even if Nepali exporters gets preferential treatment in the US market because after the end of MFA in 2005, the market is already flooded with similar exports from other countries that enjoy economies of scale in production and are more efficient and competitive (price and quality) than Nepali exporters. Last year, I wrote an op-ed (Times up for garment industry) arguing why the garment and textile industry cannot be depended upon for export-led growth.

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Futile efforts

CHANDAN SAPKOTA

During her visit to the US late September, Deputy Prime Minister and Foreign Minister Sujata Koirala touted that her delegation lobbied hard with some US Congressmen to pass a bill that would treat Nepali garment and textile sector preferably in the US market. She boasted that there were “positive and promising” responses from the US regarding duty-free access, which could, in principle, resuscitate the dying export-based garment and textile industry.

Each time a high-level delegation visits the US, they implore for preferential treatment of Nepali garment and textile industries. This fruitless effort has been continuing since the end of Multi-Fiber Agreement (MFA)—which established a system of quotas to limit the quantity of imported textiles and apparel products from specific countries to the US, Canada, and the EU — in 2005, after which the Nepali garment and textile industry has seen drastic decline in exports and market share in the West.

The value of garment exports between January-April 2009 was less than 10 percent of what was exported in the same period in 2004. This sector has already shed over 90 percent of jobs and 98 percent of firms. In the first five months of 2009, the value of readymade garment exports was US$3.4 million, a 49 percent drop from the same period last year. Recall that the garment sector was once the highest foreign currency exchange earning sector. Now, its contribution is minimal and agricultural goods like pulses have more weight on the export basket.

In a way, the political and financial resources invested so far in securing preferential access to the US market sounds reasonable. However, after more than four years of lobbying, there is hardly any progress. The policymakers are bogged down into this issue as if this is the only sector that would help stimulate export-led growth and employment generation. Exploration of other comparatively advantageous sectors have been overshadowed by the obsessive focus on securing preferential access to a market that is already flooded with similar goods from countries which enjoy huge cost and competitive advantage over Nepali exporters.

At this juncture, we need to ask two questions: What is the chance of getting preferential access to the US markets under present circumstance? If it does, will Nepali garment and textile exporters then be able to regain the lost market share?

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The illusionary notion that securing duty-free access to the US market would revive the garment and textiles sector is fundamentally flawed. Policymakers and investors should be a bit more realistic about our real manufacturing and export capacities.

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Unfortunately, there is no positive answer to these questions. A senior diplomat, who is quite familiar with these issues, from the State Department opined that it is very “unlikely” that Nepal would get preferential access to the US market under the present circumstance. Unfortunate this might be but it is not surprising. By now the Nepali lobbying troupe has a fair idea of how hard it is to secure preferential treatment from the US Congress; despite over four years of lobbying, things have not moved a bit in the positive direction. It should have been a clear indication that the entire effort might be a lost cause, not because we don’t need to prop up this sector but because we can’t do it under present labor and economic conditions in particular and the incapacity to fulfill enhanced labor, quality and environmental requirements brought about by increasing globalization in general. The senior official advised Nepali leaders and lobbyists to be a bit more realistic and not chase for something that is not attainable. Now, revert back to what DPM Koirala touted while she was in DC in September? It seems like she has not fully fathomed this issue.

Now, let us assume that Nepali garment and textile exporters get preferential access to the US market. Will this help revive the lost glory of this industry? It seems unlikely because of five reasons. First, due to persistent labor problems ranging from bitter disputes on minimum wage to hiring and firing provisions, the firms are simply unable to supply pre-ordered goods on time.

Second, investors are discouraged to invest in this sector due to unmanageable red tapes and irresolvable industrial relations. Third, the problem is further compounded by frequent bandas and transport strikes. The cumulative effect is that delivery is costly and not possible within the stipulated timeframe, leading to loss of valuable customers like WalMart and Gap Inc. This is more of supply than demand issue.

Fourth, exporters from China and India, among others, are more competitive in terms of price and quality than Nepali exporters. They enjoy economies of scale and their governments have elaborate plans to prop up production and distribution efficiently. This is clearly lacking in Nepal because of the lackluster response from government and myopic business vision of investors. Until 2005, the government and exporters basked on preferential treatment and completely disregarded the need to upgrade the old production structure into a new, consolidated one so that it can compete with more efficient exporters from abroad. Fifth, Nepal cannot jump successfully into the highly-competitive US market because exporters from other countries have already eaten up the pre-2005 market pie of Nepali exporters.

This does not mean that we need to abandon the promotion of garment and textile industry abroad. It would be fruitful to look at regional markets, which has higher potential than markets abroad because of lower transportation and transaction costs. This sector could gain more if the same amount of political and financial capital is invested in lobbying to eliminate countervailing duty (CVD) of 4 percent in the recently signed Nepal-India trade treaty.

Expediting establishment of GPZs and giving tax credits and subsidy incentives to investors would also aid the process, though, to be frank, no one knows how much this will help the dying sector regain its past glory. To satisfy the never-ending fascination with Western markets, the government and the exporters need to look into niche markets rather than the entire garment and textile market, which, as argued before, are already conquered by competitive firms from other countries. Promoting selected products that reflect Nepali tradition and heritage would be one of the potential niche markets.

The illusionary notion that securing duty-free access to the US market would revive the garment and textiles sector is fundamentally flawed. Policymakers and investors should be a bit more realistic about our real manufacturing and export capacities. A preferential treatment, which is very unlikely in the present context, will not be a panacea to the multiple, intricate problems of the garment and textiles sector.

[Published in Republica, November 10, 2009]

The promise of mobile phones