Intro to National Rural Employment Guarantee Act (NREGA)

NREGA is a flagship rural employment generation and livelihood program of the UPA government in India. This social welfare program guarantees one hundred days of employment per year at the prevailing minimum wage rate for unskilled labor.

The Act[1] came into force on February 2, 2006 with an aim to “directly touch lives of the poor and promote inclusive growth.” Along with the objectives of boosting rural economy and enhancing overall (inclusive) economic growth, this public works program was also designed to prop up purchasing power of poor people; stabilize their household income; assure livelihood security to the most marginalized groups; accelerate the pace of meeting the MDGs; and strengthen natural resource management through works that address causes of chronic poverty like drought, deforestation and soil erosion. One of the objectives of the program is to make the process of employment generation sustainable.

It started with a pilot project in the state of Maharashtra in 1965 with an aim to provide relief to poor farmers during famine and drought. An Employment Guarantee Scheme (EGS) Act was passed in 1979 by the state legislature, widening the reach of the pilot program to the entire state. The federal government picked upon the success of the program and implemented (under Phase I) it in 200 of the most backward districts on February 2, 2006. It was expanded to cover an additional 130 districts in 2007/2008 (under Phase II) and the remaining (under Phase III) 285 districts (in total 615 rural districts) on April 1, 2008.[2] In 34 states, a total of 45,019,215 households (as of September 2, 2009) were provided employment in 2008/09.[3]

Main features:

• It guarantees employment within 15 days if a qualified person applies for employment application at a local administrative authority. The person should be willing to work on a piece-rate basis, which is fixed so that an average person working diligently for seven hours a day would earn an amount equal to the minimum wage.
• Adult members of a rural household willing to do unskilled manual work should have to apply for registration to the local Gram Panchayat, which, after verification, will issue a Job Card to the household. The Job Card has photographs of all adult members of the household who are willing to work under the Act. The Job Card holding household has to submit a written application for employment (with time and duration of work sought) to the Gram Panchayat, which then provides employment for up to at least 15 days.
• Work has to be provided within 5 km radius of the village or else extra wages of 10 percent have to be paid to workers. Moreover, working and living facilities (safe drinking water, shade for children and periods of rest for workers, first-aid box for emergency treatment and minor injuries, and safety equipments and measures for health hazards connected with work) have to be provided.
• The cost structure is designed in such a way that state governments have an incentive to offer unskilled manual work to qualified applicants; else they have to cover unemployment allowance if they fail to provide work within 15 days of application for work. The central government covers wage payment of unskilled manual workers, and three-fourths of material cost, wages of skilled and semi-skilled workers. The central government also bears administrative expenses, salary, and allowances of Program Officers, his supporting staff and worksite facilities. State governments should meet the cost of unemployment allowance, one-fourth of material cost, wages of skilled and semi-skilled workers, and administrative cost of State Employment Guarantee Council.
• One-third of the work is reserved for women.
• Works should be specifically geared toward rural development: water conservation and harvesting, affforestation, rural connectivity, flood control and protection, repair of embankments, construction of drinking water facilities like digging new ponds/tanks and building dams, and micro-irrigation facilities, among others.
• Wages have to be consistent with the Minimum Wages Act 1948 for agricultural labors in the State, unless the federal government notifies a wage rate, which should not be less than Rs 60 per day. The average daily wage of agricultural labors under NREGA has risen from Rs 65 in 2006 to Rs 83 in 2008. Wages are paid on a weekly basis and should not exceed a fortnight in case of delay in payment.
• Each district is allowed to prepare a shelf of projects (see below for the list of permissible works). At least 50 percent of works have to be allotted to Gram Panchayats for execution and a 60:40 wage to material ratio has to be maintained. The use of contractors and labor displacing machinery are prohibited. The Gram Sabha is responsible for social audit.

Permissible works:

• Water conservation and water harvesting
• Drought proofing (including afforestation and tree plantation)
• Irrigation canals including micro and minor irrigation works
• Provision of irrigation facility to land owned by SC/ST/beneficiaries under Indira Aawas Yojana (which was launched in 1997-78 with the aim to help construction of new dwelling units as well conversion of unserviceable weak houses to solid houses for use by the marginalized sections of the society who are living below the poverty line)
• Renovation of traditional water bodies including desalting of tanks
• Land development
• Flood control and protection works including drainage in water logged areas
• Rural connectivity to provide all weather access
• Other works notified by the Central/State government

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[1] On October 2, 2009, NREGA was renamed as Mahatma Gandhi Rural Employment Guarantee Act.

[2] "Employment guarantee quickening India’s march towards MDGs." UNDP. www.undp.org.in/index.php?option=com_content&view=article&id=536&Itemid=593 (accessed September 3, 2009).

[3] NREGA Implementation Status Report for the financial year 2008-2009 (http://nrega.nic.in/writereaddata/mpr_out/nregampr_0809.html). A total of 45430187 households demanded employment in 2008-2009.

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Impact of NREGA:

• The increase in wage earning has led to strengthening of livelihood resource base of the rural poor. A total of 45112792 households were provided jobs in 2008-2009 and 21632.48 lakhs persondays of employment were generated. Women participation equaled to 10357.27 lakhs persondays of work.

• Some states saw rise in minimum wages after the implementation of NREGA (see below).

1. -Maharashtra (Rs 47 to Rs 72)
2. -Utter Pradesh (Rs 58 to Rs 100)
3. -Bihar (Rs 68 to Rs 81)
4. -Karantaka (Rs 62 to 74)
5. -West Bengal (Rs 64 to Rs 75)
6. -Rajasthan (Rs 73 to Rs 100)
7. -Madhya Pradesh (Rs 58 to Rs 85)
8. -Himachal Pradesh (Rs 65 to Rs 75)
9. -Nagaland (Rs 66 to Rs 100)
10. -Jammu & Kashmir (Rs 45 to Rs 70)
11. -Chhattisgarh (Rs 58.73 to Rs 72.23)

• The program has high work participation of marginalized groups like Scheduled Caste/ Scheduled Tribe (SC/ST) and women. In FY 2008-2009, the SCs, STs, and women were provided with 6335.9 and 5501.64 and 10357.27 persondays (in lakhs) of work respectively.

• It has strengthened natural resource base of rural India. Water conservation and water harvesting, provision of irrigation facility to the land owned by labors, and rural connectivity were the top physical assets constructed in FY 2008-2009.
• The central government has tried to include the poor into the financial system by encouraging states to make wage payment through bank and post office accounts of wage seekers. A total of 33027094 and 5361037 individual and joint bank accounts respectively were opened in FY 2008-2009. Similarly, a total of 28137985 and 2073898 individual and joint post office accounts respectively were opened last fiscal year. In total, Rs 1083270 lakhs were disbursed through bank and post office accounts.
• The government claims that NREGA has led to enhancement of agricultural productivity (through water harvesting, check dams, ground water recharging, improved moisture content, check in soil erosion, and micro-irrigation), stemming of distressed migration, increased access to markets and services through rural connectivity works, supplementing household incomes, increase in women workforce participation ratios, and the regeneration of natural resources.

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Concerns about NREGA:

• Assets created by the poor people might be used primarily by elites, thus benefiting the poor little from the projects they themselves created.
• Public assets created by the program might simply crowd out or substitute private investment, thus net benefit might be very small.
• Participation rates are low because of the nature of projects undertaken, elaborate registration procedures, long distances to work-sites and low financial outlays[4].
• Potential benefits of assets may not be fully realized because there is no follow-up maintenance.
• A larger funding allocation to the poorest regions would help improve targeting, as well as confer substantially larger income stabilization benefits.

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[4] ODI, Inter-Regional Inequality Facility. "The Maharastra Employment Guarantee Scheme." ODI Policy Brief 6 (2006): 1-4.; Note that if employment place is not within a radius 5 km, transport allowance and 10 percent extra living allowance is provided. This also deters women from actively participating in the program.

Tackling The Last Mile

Very interesting talk by Sendhil Mullainathan.

Costs of strike/shutting down Nepal (bandas)

In my latest Op-ed I estimate the costs of strike or closing down a country. It is called banda in Nepali. Political parties, student unions, ethnic populations and anyone trying to show discontent over government policies call for banda and disrupt normal live and economic activity. There is only loss and pain (and no gain) from bandas.

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Costs of Nepal bandas

Organizing strikes (popularly known as bandas) have been the easiest way to either show discontent over government policies or to press for one that serves the interest of a certain group. The people dislike bandas because it never serves their interest. It costs them their freedom, vocation and income. Frustrated by the disruption of normal life, youths have initiated a campaign DIE Nepal Bandh DIE. Even Mother’s Groups in various cities have protested against bandas.

It has been a cancer to the industrial sector, whose contribution to the GDP has nosedived in recent years. A World Food Programme survey conducted last year in Tarai showed that 93 percent of food traders identified bandas as a major constraint to do business. Almost 14 percent of traders were forced to close down their businesses. According to Enterprise Survey 2009, 62 percent of enterprises think instability is the biggest constraint.

What are the costs of bandas to the country and importantly to the public? By looking at the cost incurred by each sector if it is shut down for a day, I did a quick back-of-the-envelope calculation. The numbers are startling: On an average, one day banda would cost Rs 1.96 billion, which is around 88 percent of the total value of goods and services produced in the country in a day. The industrial sector alone would suffer over Rs 346 million per banda day. Yes, you read it right. The country bleeds enormous amount in lost production and revenue.

The economy is divided into three major sectors: Agriculture, industry and service. The agriculture sector consists of two sub-sectors: Agriculture and forestry, and fishery. The industrial sector consists of mining and quarrying; manufacturing; electricity, gas and water; and construction sub-sectors. The service sector is composed of nine sub-sectors: Wholesale and retail trade; hotels and restaurants; transport, storage and communications; financial intermediation; real estate, renting and business; public administration and defense; education; health and social work; and other community, social and personal services. Each sub-sector’s contribution to GDP is different. Depending on the level of market integration, bandas impact these sub-sectors either fully or partially.

I look at two scenarios to estimate the cost of bandas. In the first scenario, agriculture and forestry; public administration and defense; education; and health and social work sub-sectors are not affected by bandas. In the second scenario, all sectors except 40 percent of agriculture and forestry sub-sector are affected by bandas. This is a reasonable assumption because bandas do not affect market transactions of all agricultural goods. No matter what, people do trade and consume bare minimum goods for survival. The rigidity value, which I define as the responsiveness of agricultural sector to bandas and assume it to be 40 percent, varies depending on the intensity and breadth of bandas. The less responsive the agricultural sector (i.e. the more rigid), the less it is affected.

Under the first and second scenarios, the cost would be at least Rs 1.23 billion and Rs 1.96 billion per banda day respectively. The second scenario is most likely when there is a nationwide strike. The first scenario is likely when there is a strike in certain parts of the country. Though these numbers might differ from other estimates with different assumptions, they nevertheless give a fairly good picture of the costs associated with bandas.

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On an average, one day banda would cost Rs 1.96 billion, which is around 88 percent of the total value of goods and services produced in the country in a day. The industrial sector alone would suffer over Rs 346 million per banda day.

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Based on the second scenario, let me put the costs in perspective. On average, one hour of banda would cost at least Rs 82 million to the economy. In other words, each person in the country would lose Rs 69 per banda day. If we consider the working population only, i.e. 15-64 years, then the cost would be Rs 117 per banda day. Furthermore, if there were a rural employment program that provides jobs and pays Rs 100 per day to people below the poverty line during the lean agriculture season, then one day of banda would have cost over 218,190 rural jobs.

The total cost would be even higher if we add indirect costs. For instance, bandas are complemented with destruction of public and private infrastructures, which costs millions to rebuild. Also, a few hours of economic activity are lost before the sub-sectors bounce back to full gear after bandas. Besides affecting the existing as well as future potential of tourism industry, one of the major sources of foreign exchange for the country, it also causes external migration and decline in exports. Rapid decline in exports is one of the reasons for Rs 20 billion balance of payments deficit in the first quarter of this fiscal year.

Frequent bandas trigger capital flight, which is detrimental to long-run economic growth. Partly due to bandas, multinational companies like Colgate Palmolive ceased production last year. The garment industry is near extinction. It is also putting upward pressure on general prices of goods and services, thus contributing to a double-digit inflation rate.

It is frustrating to see political leaders, who promised to develop Nepal like Switzerland, encouraging and initiating bandas. They are depriving citizens of the potential for an increase in per capita income, freedom to pursue one’s dream and vocation, and to live a peaceful life with a hope for a bright future. Bandas have ripped people off the very things that the organizers promised to bring them. Enough is enough. Say NO to bandas!

[Published in Republcia, January 30, 2010, pp.4]

Book Review - Unleashing Nepal: Past, Present and Future of the Economy

Liberating Nepal

In depressing times like these, Shakya offers a number of reasons to remain optimistic

Trying to grasp the multitude of problems that our economy faces is nearly an impossible task. The roots of these problems are all intricately linked, leading to multiple constraints on growth. In order to track the sources of these constraints, it might be helpful to go back to the time when Prithivi Narayan Shah spearheaded the unification campaign and look at how political, social, and economic lives were designed to facilitate the status-quo.

In his new book Unleashing Nepal: Past, Present and Future of the Economy, Sujeev Shakya, a business executive who writes the popular column Arthabeed in the Nepali Times, not only discusses economic and social issues from a historical perspective, but also examines the present economic climate and proposes ambitious reform agendas to unleash the potential of the economy.

Shakya explores the origins, causes, and consequences of the tumultuous economy and offers recommendations based on the centrist economic model, which he calls “capitalist welfare state”. According to this model, the state takes care of welfare related issues and regulates the market, while leaving the remainder of economic activities in the hands of the private sector. He sees the Nepali youth as the most likely candidates to steer Nepal into an era of high productivity, efficiency, and growth.

The most interesting part of the book is the discussion on how the economy was kept in isolation with a protectionist mindset before 1950. It led to preservation of the status quo, severely stagnating economic growth and depriving millions of people from rising above the poverty line. In the name of land reform, the Shah kings and the Rana rulers — who presumed that the economy belonged to them and that the citizens unreservedly served for their interests — arbitrarily distributed land for their own gain.

Liberal economic policies never became the main agenda of the Shahs, the Ranas, and the political parties. This, along with the lack of favorable social and institutional conditions, kept capitalism away from the economy. The rise of militant youth wings and their disruptive activities in industrial sites further distanced investors and entrepreneurs, costing low income people their jobs and the much-needed revenue to fund development and employment programmes.

Shakya argues that given the level of political interference, it is understandable that the public sector did not deliver on its promises. However, an indigestible fact is that the private sector also failed to live up to its promises.  It was driven by the level of concessions extracted from bureaucrats — often by paying bribes — and special treatment in markets. He contends that value addition, productivity, and efficiency were not the main variables of their business equation. A case in point is the fate of beleaguered garment and textile industry after the end of Multi-Fiber Agreement (MFA) of 2005.

Shakya also blames the aid industry for instituting a “business of development”. He argues that the aid industry, which has already spent over US$ 15 billion in four decades, has not only failed to deliver intended results, but skewed the human resource distribution. The great minds are drawn to the aid industry primarily because of high wages with respect to the one prevalent in public and private sector. Instead of creating a new model based on local condition, they ended up fitting local data with an alien model. Consequently, they produced more reports (approximately 270,000 in the past eighteen years) than results.  He also highlights success stories such as community forestry and biogas programs that were funded by donors.

Policymakers and politicians should seriously consider Shakya’s six reform agendas (land, tax, capital market, financial sector, labour, and fiscal) that will potentially help unleash the latent potential of the economy. The underlying themes are liberalization with strong oversight and regulation; promotion of incentives instead of corruption; and creation of a system where value-addition is paramount to yes-man chakari and jagire mentality. He asserts that attaining economies of scale in agro-based, hydropower, infrastructure, and tourism industries must be explored.

Shakya recommends that the private sector be ambitious; the government be pragmatic; and the development community be more supportive in aiding projects that would enhance efficiency and productivity. Furthermore, galvanising the youths’ energy and guiding them in the right direction should become Nepal’s economic focus. He advocates that the education sector reform be consistent with the demand of the globalising world, independent of politics, and free from the clutches of militant trade unions.

The past and present states of the economy as outlined in the book are crucial to understand the turbulent economic history. However, sweeping generalisations of the economy without adequate literature reviews and research makes some sections of the book a bit superficial. Comparing Nepali economic issues vis-à-vis Malaysia is hardly appropriate as these countries vastly differ in terms of geography, endowment, culture and mobility of labour across political, social and economic lines. Also, the reforms advocated in Nepal by the Bretton Woods institutions were nowhere close to the Keynesian model. They were more akin to Hayekian and Friedmanite principles. Furthermore, the highest GDP growth rate occurred in 1984 (9.2 percent), not in1994 (7.9 percent).

Despite these minor glitches, Shakya’s book sets out a baseline for people of all age, color, creed, race, ethnicity and political affiliation to see the past, present, and future of the economy in as clear terms as possible. In depressing times like these, Shakya offers plenty of reasons to be optimistic!

(Published in The Kathmandu Post, January 30, 2010)

Boom and Bust--Keynes and Hayek Rap Econ

 

Fantastic! Awesome!! More at EconStories

Is there limits to growth?

To make the argument, Growth isn’t Possible uses a hamster to illustrate what would happen if there were no limits to growth. Hamsters double in size each week until around 6 weeks old. But if it grew at the same rate until its first birthday, we’d be looking at a 9 billion tonne hamster, which would eat more than a year’s worth of world maize production every day. As things are in nature, so sooner or later, they must be in the economy. Growth is pushing the planet ever closer to, and beyond some very real environmental limits. Yet politicians and economists are seemingly convinced that the economy can grow without end in a finite planet, no matter what the costs.

Interesting stuff from The Impossible Hamster Club

RCTs, Micro and Macro tussle in development

"There is no magic bullet for sources of growth; growth regressions have not produced anything substantial to identify the sources of growth."

Thats from Bill Easterly an event in Brookings last week. Based on the title of the event, I thought it would focus on what works on development -- either a smaller grassroots development approach (micro approach) or a traditional top-down development approach (macro approach) or a combination of both. Unfortunately, the whole discussion focused on Randomized Controlled Trial (RCTs). Is RCT a grassroots development approach? Jessica Cohen and Easterly debated discussed the pros and cons of RCTs. To be very fair, Cohen's talk was extremely boring (may be thats the drawback of powerpoint-less presentation). She kept on forgetting questions asked by Raj Kumar, the moderator of the event, and the audience.

Meanwhile, Easterly was to the point narrating his dislike for top-down, expert-led approach in development. [After the event, one development economist asked me: “Ain't Easterly behaving like an expert himself despite his dislike for expert’s advise in development?”]. Basically, he favors (in fact, most of the economists do but they differ in the working modalities) bottom-up approach to development that is more attuned to market principles. There is (potentially) more accountability and transparency. However, micros do not add up to macro. So, we might need both approaches-- in fact, there are some complementariness between the micro and macro approaches.

Easterly repeatedly emphasized that the extensive use of RCTs to assess pretty much everything is turning into a social engineering project (he joked: you can do RCTs in pretty much everything but the ones who do it!). He cautioned against conflict of interest among donors who fund RCTs projects and the academicians who evaluate results. His warning: RCTs is going to fail if it gets captured by the aid agencies.

Cohen tried to defend RCTs by arguing that the way it is conducted and the results derived should be noncontroversial; it is a step in the right direction. It is the best way to test any theory. People can learn what works and what does not, paving a way to incrementally do better in implementing projects and increasing effectiveness. She argued that the strong feedback mechanism derived from RCTs could potentially help in aid effectiveness.

I was more interested in Easterly thoughts on HRV's Growth Diagnostics approach, a policy-oriented approach to growth studies that looks at a set of strategies to identify the binding constraints on economic activity and tries to figure out relevant policy to relax the constraints so that the resulting change in the objective function (growth) is the highest.

More precisely, "the strategy is aimed at identifying the most binding constraints on economic activity, and hence the set of policies that, once targeted on these constraints at any point in time, is likely to provide the biggest bang for the reform buck." This approach takes into account the fact that different countries have different binding constraints on growth and that the same policy used to relax a constraint in one country might not work in another country; it is time, context and country specific, in general. This approach to growth studies differs from other approaches like cross-country panel growth regression, growth accounting, and international rankings/benchmarking. It is heavily policy-oriented. It seeks answer to the question: "what is constraining growth?" instead of "what causes growth?" I find this approach very neat, easy to follow and reality-based.

I wanted to ask Easterly what he thinks of growth diagnostics approach as it basically addresses almost all the concerns he has with previous growth studies. Before I could raise my hand, someone from the Woodrow Wilson Center asked him the same question I had in my mind. Easterly's reply: "It is a good approach but if your whole point is that policy effect differs in countries, it does not lead too far." First, if it does not lead too far, then it also means that it leads somewhere, usually in the positive direction; it might not lead way too far on the expected long run growth curve but it does lead in that direction in the short run, which is what policymakers are concerned with. I was expecting a stronger and weighty response from Easterly. Got disappointed :((

Here is Rodrik:

I know from my own experience that there is still a lot that we need to learn about how to do this right. To those who say that the framework is difficult to implement in practice, my answer is "right, it is indeed hard to determine policy priorities, but this approach at least forces you to confront those difficulties in a systematic way."

Instead, Easterly said what he always says: "outside experts cannot figure out what drives growth... rather than experts from HKS and NY, local people know it better"--its a classic Easterly bash. I like his work but feel uncomfortable with his strong inclination to Hayekian principles. It reminds me of this paper where Samuelson and Hayek debate (not through emails but snail mails and publications) on the 'inevitability thesis' (a summary of the paper is here).

The event was organized to launch a book "What Works in Development?: Thinking Big an Thinking Small". The book has contributions from a range of eminent development economists. You can find papers presented at the Brooking Development Conference here.

• The New Development Economics: We Shall Experiment, But How Shall We Learn? by Dani Rodrik (Harvard University, Kennedy School of Government)
• Breaking Out of the Pocket: Do Health Interventions Work? Which and in What Sense? by Simon Johnson (MIT) & Peter Boone (London School of Economics, Centre for Economic Performance)
• Pricing and Access: Lessons from Randomized Evaluations in Education and Health by Michael Kremer (Harvard University and the Brookings Institution)
• The Policy Irrelevance of the Economics of Education: Is ‘Normative as Positive’ Just Useless, or is it Worse by Lant Pritchett (Harvard University, Kennedy School of Government)
• High Bandwidth Economic Policies: Strategies To Speed Up Productive Transformation by Ricardo Haussman (Harvard University, Kennedy School of Government)
• Big Answers For Big Questions: The Illusions of Macroeconomics by Author: Abhijit Banerjee (Massachusetts Institute of Technology)