Conflict and development in South Asia

Ghani and Iyer have a good note on the relationship between conflict and development in South Asia. This blog post is just jutting down of major points from their note.

Countries that have low per capita income have a higher conflict rate. However, high income does not guarantee peace and stability also. In Nepal, Sri Lanka and Pakistan, for their given level of development, the conflict rates are much higher. The figure does not show causality, i.e. conflict may be contributing to low per capita income, or low income may be contributing to conflict. In Nepal, all the regions had high conflict intensity during the decade-long Maoist insurgency. Poor countries are at a greater risk of being plunged into conflict.

In general, conflict rates are seen to be higher between (in low per capita income ones) and within (in lagging regions) countries. In South Asia, conflict is concentrated in lagging regions, which have lower income per capita than national average. It is easier to recruit rebels in lagging regions because the opportunity cost of conflict is relatively low. Meanwhile, geographic conditions such as forest cover is related to incidence and intensity of conflict. States in India that have higher forest cover have higher conflict intensity. Conflicts can be triggered by low economic growth, unequal distribution in gains from development, political marginalization, shocks from natural disasters, and commodity price shocks.

Reducing conflict is a prerequisite to political stability, which, in turn, is the prerequisite for implementing pro-growth policies. One of the policy options to reduce conflict in South Asia is the deployment of police force, which the authors argue, are underequipped and understaffed. In addition to the police force, armed forces are also deployed depending on the incidence and intensity of conflicts. Another policy option is to conduct negotiations and sign peace pacts with insurgents. An economic solution to conflicts is to expand welfare programs and reduce poverty in conflict-affected areas. Many of the policies launched with this intention have failed due to poor economic policy selection and poor implementation. A right combination of these approaches could be a fruitful policy approach to amicably solve conflicts.

>>More on poverty and conflicts, here are Djankov and Reynal-Querol arguing that poverty does not necessarily cause civil war. Their point is that poverty and civil war could be driven by the same determinants (like colonial history), some of which are missed by in the typical econometric specifications that bat for poverty as a cause of conflict. Meanwhile, Fisman and Miguel argue that in Africa an income drop of 5% increases the risk of civil conflict in the following year to nearly 30%. Short term shocks to income do trigger violent conflicts.

According to a working paper by Iyer and Do, a 10 percentage point increase in poverty is associated with 25-27 additional conflict-related deaths and geographic condition such as elevation and the presence of mountains and forests explain a quarter of the cross-district variation in conflict intensity.

Similarly, Antonio Ciccone argues that a 5% income shock (say by drought) raises the likelihood of civil conflict by 15 percentage points.

Sachs vs. Easterly over MDGs, again!

Jeffrey Sachs bats for “multi-donor pooled funding that has clear timelines, objectives and accountability”.

We need a major change of funding toward pooled donor funding. Bilateral aid would remain, but mainly to promote demonstration efforts and innovations. The core of assistance would use pooled mechanisms to scale up what has been proven to work, avoiding fragmentation and poor accountability. Indeed, there are moves in this direction: a new maternal and child health initiative to be agreed this week saw African leaders specifically request that the support should come through the Global Fund. Similarly, infrastructure funding could be scaled up through new public-private financing pools for roads, rail and power, via the World Bank and African Development Bank.

William Easterly mocks Sachs and argues that only trade-fuelled growth can help the world’s poor. He thinks that private sector is the one that will help in reducing poverty, not aid.

This is all the more misguided because trade-fuelled growth not only decreases poverty, but also indirectly helps all the other MDGs. Yet in the US alone, the violations of the trade goal are legion. US consumers have long paid about twice the world price for sugar because of import quotas protecting about 9,000 domestic sugar producers. The European Union is similarly guilty.

Equally egregious subsidies are handed out to US cotton producers, which flood the world market, depressing export prices. These hit the lowest-cost cotton producers in the global economy, which also happen to be some of the poorest nations on earth: Mali, Burkina Faso and Chad.

According to an Oxfam study, eliminating US cotton subsidies would “improve the welfare of over one million West African households – 10 million people – by increasing their incomes from cotton by 8 to 20 per cent”.

To be fair, the US government has occasionally tried to promote trade with poor countries, such as under the African Growth and Opportunity Act, a bipartisan effort over the last three presidents to admit African exports duty free. Sadly, however, even this demonstrates the indifference of US trade policy towards the poor.

The biggest success story was textile exports from Madagascar to the US – but the US kicked Madagascar out of the AGOA at Christmas 2009. The excuse for this tragic debacle was that Madagascar was failing to make progress on democracy; an odd excuse given the continued AGOA eligibility of Cameroon, where the dictator Paul Biya has been in power for 28 violent years. Angola, Chad and even the Democratic Republic of the Congo are also still in. The Madagascan textile industry, meanwhile, has collapsed.

It is already clear that the goals will not be met by their target date of 2015. One can already predict that the ruckus accompanying this failure will be loud about aid, but mostly silent about trade. It will also be loud about the failure of state actions to promote development, but mostly silent about the lost opportunities to allow poor countries’ efficient private businesspeople to lift themselves out of poverty.

This kind of ideological battle will be fought for a long time to come. Similar form of battle was fought in the past, is being fought right now, and will be continued in the future. In a way, both are right, and both are wrong. Sometimes ideology blinds sensible reasoning. It is seen vividly in economics (incessant right and left tussle) than in any other subject. Perhaps, this is what adds spices to economics!

The human cost of Maoist insurgency in Nepal

Preliminary estimates (number):
Killed - 16,791
Disappeared - 1,327
Internally displaced - 78,708
Widowed - 9,000
Disabled - 4,305
Property lost - 11,775


It would be interesting to see the economic costs as well. Is there any that I missed?

Neoclassical models (plus economists) failed!

A good narrative about how neoclassicals and rational expectationists assumed general equilibrium in everything (and created an economic mess, emanating from the Wall Street):

[...] New thinkers say they are still having trouble breaking in. Among the new NSF grant awardees is J. Doyne Farmer, a physicist at the Santa Fe Institute who is trying to bring the idea of complexity back into economics by making use of advanced computing power to map human economic behavior the way weather or climate change is tracked. But Farmer says he got his $450,000 grant for a three-year study of systemic risks in markets only after a sympathetic NSF case officer overruled negative assessments by “neoclassical economists” who reject any model that doesn’t tend toward general equilibrium. “The established view just holds this stuff back,” Farmer says. “One of the dangerous cultural patterns that economics has fallen into is an excessive emphasis on theorem proof for its own sake rather than what gives you scientific results. That’s led to a disdain for computer simulation.” Johnson, who is director of the new Institute for New Economic Thinking funded by George Soros, says: “You do see some new thinking, but it doesn’t get traction in terms of policy. It’s a symptom of how far right society has gone.”

The great names in the profession have not necessarily helped. The top economists in the Obama administration—Summers; Christina Romer, the just-departed chair of the Council of Economic Advisers; and her replacement, Austan Goolsbee—are all part of the orthodoxy. Critics say Summers should know as well as anyone how the old thinking has been outstripped. As a Harvard professor, Summers wrote after the 1987 stock-market crash that it was impossible to believe any longer that prices moved in rational response to fundamentals. He even cautiously advocated a tax on financial transactions. Yet Summers, one of the world’s most astute economists, later abandoned these positions in favor of Greenspan’s view that markets will take care of themselves. And in the current era, Summers and the rest of the Obama team seem to have underestimated the depth and systemic nature of the economic crisis. Stimulus spending was timid (in deference to political antipathy to big government), mortgage workouts meager, and financial reform minimalist. The administration maintains it did as much as it could under the political constraints, but others disagree. “The financial-reform bill and other changes in the regulatory landscape are more incremental,” says MIT’s Lo. “It’s a reaction to the most immediate set of events as opposed to a more profound rethinking about the underlying causes of the crisis.”

A little history is in order here: it was largely because the field of economics came to be dominated by “neoclassical” thought—or the idea that markets are rational and can reach “equilibrium” on their own—that so-called financial innovation on Wall Street was allowed to run amok in recent decades. That led directly to the crisis of 2007–09. No matter how crazy or complex the products got, the theory was that, with little government oversight, the inherent stability of markets would keep things from getting too out of hand. It was in large part because of this way of thinking that government intervention of any kind in the markets, including regulation, came to be seen as a kind of heresy, especially after the Soviet Union collapsed and command economies and “statism” were thoroughly discredited.

The new financial-reform law has changed that to some degree, but it still leaves most of the major decisions about government oversight to the same regulators who failed last time. We are still, to a large extent, flying blind in conceptual terms. Just as the Great Depression demonstrated to John Maynard Keynes and his followers that markets often behaved badly—leading to the Keynesian reinvention of economics in the ’30s—this present crisis drove home the truth, or should have anyway, that rational models of markets don’t work well because there are too many unknowns. People most often don’t behave as rational actors. There is no real equilibrium in the real world. Above all, market economies are capable of destroying themselves. This is especially true in the world of finance, which has always worked according to different rules than other sectors of the economy and is much more prone to panics and manias. In 1983, a young Stanford economist named Ben Bernanke published the first of a series of papers on the causes of the Great Depression. The financial system, Bernanke said, was not unlike the nation’s electrical grid. One malfunctioning transformer can bring down the whole system. “I’ve never had a laissez-faire view of the financial markets,” Bernanke told me, “because they’re prone to failure.” Even Friedrich Hayek, the godfather of 20th-century laissez-faire thinking, believed that financial markets were more subject “to bouts of instability,” says one of his biographers, Bruce Caldwell of Duke University, a self-described libertarian scholar.

Yet amid the free-market triumphalism of the post–Cold War era, all this hard-won wisdom about the differences in finance was forgotten or ignored. To policymakers in Washington, it seemed silly and nitpicky to treat finance as a different animal. The dominant thinkers were the “rational expectations” economists of the Chicago school who simply assumed capital flows, no matter how open, would be stable.

Consequences of high-skilled “brain drain”

This paper presents the results of innovative surveys which tracked academic high-achievers from five countries to wherever they moved in the world in order to directly measure at the micro level the channels through which high-skilled emigration affects the sending country. The results show that there are very high levels of emigration and of return migration among the very highly skilled; the income gains to the best and brightest from migrating are very large, and an order of magnitude or more greater than any other effect; there are large benefits from migration in terms of postgraduate education; most high-skilled migrants from poorer countries send remittances; but that involvement in trade and foreign direct investment is a rare occurrence. There is considerable knowledge flow from both current and return migrants about job and study opportunities abroad, but little net knowledge sharing from current migrants to home country governments or businesses. Finally, the fiscal costs vary considerably across countries, and depend on the extent to which governments rely on progressive income taxation.

More here. The study was done in Tonga, the Federated States of Micronesia, Papua New Guinea, Ghana, and New Zealand. The authors estimate that the best and the brightest gain US$40,000-75,000 per year from emigrating from these five countries. Gains disaggregated are: annual remittances are $2000-7000, trade and FDI effects are close to the remittances value, and annual fiscal impacts are at most $1000 for Tonga and Micronesia, $6000 for Ghana, $10,000 for New Zealand, and $17,000 for Papua New Guinea. They also find that migration leads to large increases in human capital of migrants, but little net knowledge transfers to home governments or business. The gains are estimated to be much higher relative to the magnitude of possible negative externalities.

Nepalese economy still stuck in mess

My latest piece is based on the latest macroeconomic review  2009/10 published by the central bank of Nepal. My point is that despite substantial reduction in BOP deficit, the economy is still in a mess: low growth, low employment, high inflation, growth less investments in few sectors, and consumption fuelled economy, thanks to remittances, among others. The way BOP deficit declined has nothing to do with addressing these important variables.

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Economy still stuck in mess

Last week, the central bank came up with encouraging news that Balance of Payments (BoP) deficit declined from Rs 20 billion in the first quarter of 2009/10 to Rs 2.62 billion when the annual figures were compiled. Commentators were quick to extol stringent steps taken by the central bank to restrain imports of certain goods. The decline in BoP deficit has given some respite to policymakers, at least in the short term with regards to restoring market confidence that they can competently manage transactions between Nepal and the rest of the world.

Though this is welcoming news, it does not mean that other macroeconomic variables are also on the right track vis-à-vis existing monetary and fiscal policies. The core problems that led to BoP deficit beginning first quarter of last fiscal year have not been resolved yet. Worse, fresh indicators about the competitiveness of the economy show that the economy is still plagued by structural constraints, leading to alarming lending and consumption levels without reasonably proportional impact on growth and employment. We are still stuck in the same economic mess as before—widening trade deficit, high inflation, slow economic growth, low employment, and rigid non-economic constraints.

Our economy’s BoP is composed of three sections: Current account, capital account and financial account (there is ‘balancing item’ as well to account for statistical errors). Current account is the sum of balance of trade (exports minus imports of both merchandise goods and services), net factor income (such as interests and dividends), and net transfer payments (such as remittances, foreign aid, and pensions). This is the most important part of BoP with regards to its bearing on our economy’s growth, employment, exchange rate, and inflation. Despite the decline in BoP deficit, our current account is still in a very bad shape, implying that the main economic and non-economic issues are not resolved yet. Unless they are addressed, any fix on BoP accounts is of temporary, unsustainable nature.

Merchandise exports are down by 9.7 percent to Rs 61.13 billion in 2009/10. Last year, it was up by 14.2 percent reaching Rs 67.70 billion. Exports to both India and other countries declined. Meanwhile, merchandise imports have surged to Rs 378.80 billion, a growth of 33.2 percent. It grew by 28.2 percent, reaching Rs 284.47 billion in 2008/09. Imports from India and other countries grew by 34.2 percent and 31.8 percent, respectively. Consequently, trade deficit widened by 46.5 percent, reaching Rs 313.67 billion. In 2008/09, it rose by 33.3 percent and amounted Rs 216.77 billion. Trade deficit with India and other countries rose by 46.75 percent and 46.7 percent, respectively. This indicates an unfavorable balance of trade situation. It is simply unsustainable as we cannot forever import more than what we can afford to.

The reason why BoP was in surplus in previous years (Rs 44.66 billion in 2008/09) was because of high inflow of remittances, which checked current account from deteriorating amidst rising negative balance of trade. As growth rate of remittances inflows went down, thanks to declining demand of Nepali workers following the global economic crisis, current account went into the red, dragging overall BoP in its direction.

Current account deficit amounted to Rs 32.35 billion as against a surplus of Rs 41.44 billion in FY 2008/09. Capital account, which reflects a net change in national ownership of assets, surplus doubled this year to Rs 12.58 billion, up from Rs 6.23 billion in 2008/09. Financial account deficit was Rs 3.70 billion as against Rs 21.20 billion surplus in 2008/09. As a result, the overall BoP situation came down from a deficit of about Rs 20 billion in the first quarter to Rs 2.62 billion by the year’s end. The transfers and earnings from capital account are insufficient to negate widening trade deficit, which is dragging overall BoP in the negative terrain.

The decline in BoP deficit by the fourth quarter of 2009/10 looks like progress, isn’t it? Yes, but there is nothing to cheer about. There is no major change in indicators that will keep BoP accounts in a comfortable space in the coming years. Unless we find a way to narrow down the trade deficit – primarily by exporting more, and encouraging domestic production and consumption instead of imports of pretty much everything ranging from luxurious to non-luxurious goods and services – the problems associated with BoP deficit will not be adequately addressed. Continuing to bank on remittances and trade credit liabilities to even out BoP account is not a smart idea and policymaking.

It should be realized that in terms of productive capacity of the economy, prospect of future growth and employment scenarios, we are still very much deep in the same mess we were at the beginning of this year when BoP deficit was record high. In fact, we are actually going deeper into the mess. The ratio of exports to imports has declined from 23.8 to 16.1. Economic growth rate plunged from 3.9 percent to 3.5 percent. Inflation is still double-digit. Worse, amidst supply side constraints, cartelling and increasing money supply, inflation will probably creep up and stagnate at high level. Additionally, consumption has increased by 0.3 percentage points to 90.6 percent of GDP, and domestic savings is worryingly low at 9.4 percent of GDP.

The message is clear: We are still deep into economic mess, and the way BoP deficit declined by the fourth quarter of 2009/10 has not and will not contribute to us getting out of low growth, low employment, high prices and remittances-fueled impact-less investment cycles. This is further substantiated by the latest Global Competitiveness Report which ranks Nepal as the least competitive nation in South Asia. Globally, Nepal is 125th (out of 139 countries) most competitive nation!

[Published in Republica, September 16, 2010, pp.7]

South Asia (and Nepal) in 2012

What would South Asia look like two years from now? The World Bank’s GEP has forecast for some of the South Asian countries. Nepal is expected to grow at 4.2 percent in 2012. Its current account balance is expected to be the second best, albeit negative, in 2012. Bangladesh is the only country in South Asia whose current account is expected to be positive in 2012. Also, in 2012 Bangladesh is expected to be the second highest growing economy (at 6.1 percent), following India, which is expected to grow at 8.2 percent in 2012.

Source: GEP, 2010-09-16

In 2012, Nepal will be around US$ 20 billion economy, (nominal GDP) with imports higher than exports. With population of 31 million, its per capita GDP is expected to be US$ 579.

Source: GEP, 2010-09-16