Developing countries to the rescue...

So say the authors of a new book "The Day After Tomorrow: A Handbook on the Future of Economic Policy in the Developing World" published by the World Bank. The economic size of developing countries is projected to surpass the size of developed countries by 2015. The authors argue that developing countries are the "new locomotives of growth which will move global growth forward while high-income countries remain stagnant." This is somewhat in line with growth projections done by Goldman Sachs (2003), Carnegie Endowment (2010), and Pricewaterhousecoopers (2005). These projections look at either BRIC or the G20 economies.

According to the authors of the new book, growth in developing countries is estimated to reach 6.1 percent in 2010, 5.9 percent in 2011, and 6.1 percent in 2012, while corresponding figures are 2.3 percent, 2.4 percent, and 2.6 percent for high- income countries. These diverging growth prospects continue in the medium term. East Asia, Latin America and South Asia have the potential to turn into 'newly developed' nations.

Five factors account for it:

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  faster technological learning
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  larger middle- class population 
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  more South-South commercial integration
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  high commodity prices
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  healthier balance sheets that will allow borrowing for infrastructure investment

The study states that there will be recovery of remittances in the developing countries, an increase in South-South trade, rising investment by sovereign wealth funds, more conservative debt management, and progress by many governments in gaining public trust.

Reason-wise recommendation:

Sub-Saharan Africa, which saw an additional 7-10 million people thrown into poverty as a result of the global economic crisis, will have to address challenges of infrastructure, job creation, governance and shrinking aid in order to achieve faster growth.


MENA region, which will see around 2.6 million additional people fall into poverty by 2011, needs to "open the door for a new generation of private entrepreneurs and for women to fully join economic life." High oil prices and stable financial sector in the Gulf countries is helping in regional recovery.


East Asia and the Pacific is leading the world out of the economic slump. It recommends China to do some "rebalancing" through scaling up of domestic consumption and expansion of service sector. Meanwhile, middle-income countries like Indonesia, Malaysia, the Philippines and Thailand have to move up into knowledge- and innovation-based markets. Trade facilitation is needed in low-income countries like Cambodia, Lao PDR, and Vietnam. Eastern Europe and Central Asia needs to improve its competitiveness and put its social service provision on a fiscally sustainable path.


Latin America had no economic or social meltdown, mainly due to the progress over the previous decade on macroeconomic management and social policy (the success of social workfare and welfare programs in Latin America is well-known and emulated in other parts of the world). The study projects that the region is well-positioned to enter a path of fast and sustained development, given that it fends off external shocks.


South Asia, which withstood the impact of the crisis reasonably well, needs to make recovery stronger, inclusive and sustainable. It still has around 600 million people below the US$1.25 a day poverty line. Fiscal space (for social programs and infrastructure) has to be created by reducing fiscal deficit and taming public debt accumulation. Trade integration within the region will also be critical in shaping the growth path of this region.

Stay tuned for summary of two of the chapters: one about remittances, and the other about economic policy in South Asia.

Past and present of the Doha Round

Pascal Lamy, Director-General of the World Trade Organization (WTO), explains:

Previous negotiations have also attempted to deal with a lengthening list of issues in a single “package” — with the aim of giving every Member an interest in its overall success.  That is why the Uruguay and Doha rounds have been “single undertakings” — where nothing is agreed until everything is agreed.  But this approach can also complicate negotiations — especially for poorer, capacity-constrained countries. And it can mean that progress on uncontroversial and solvable issues is held hostage to progress on more difficult and intractable ones.

Finally, in the past, transatlantic leadership was central to moving negotiations forward.  But trade power is shifting, and the days — last seen during the Uruguay Round — when the US and Europe could essentially strike a deal on behalf of the entire Membership are long gone.  It is not just that established powers need to accept to share the centre stage; emerging powers also need to recognize their responsibility for a system in which they now have a major (and growing) interest.  The old North-South divide seems increasingly outdated when so much of the future trade agenda will be played out among developing countries.

It is not just the composition of leadership that needs to evolve.  The WTO's impact now goes far beyond the traditional scope of trade policy touching on core national and international interests. Yet despite repeated statements of support and of engagement, world governments seem incapable of marshalling the policies and political will needed to move the multilateral agenda forward.  A worrying leadership vacuum has opened that has — so far — proved difficult to fill.   Let's hope that the G20 can help provide an answer.

[..]But the central priority remains concluding the Doha Round — and here too we need to be realistic about the magnitude both of the challenge and of what is at stake.  Early GATT rounds which focused on tariff cutting among a small group of countries, could be wrapped up in a matter of months.  But with expanding issues and participants, and more effective and active dispute settlement, trade rounds have inevitably become more difficult and drawn-out.  The Kennedy Round — which started grappling with development issues and involved 60 countries — took three years to complete.  The Tokyo Round — which addressed “non-tariff” barriers and involved 102 countries — lasted six years, twice as long.  And the Uruguay Round — which created the WTO and involved 133 countries — turned into a negotiating marathon lasting eight years.

With 153 Members now at the table and the most ambitious negotiating agenda yet, the only thing surprising about the length of the Doha Round is that anyone is really surprised.  Not without reason does the term “trade round” takes its inspiration from the boxing ring!

What is at stake is more than the economic benefits that would flow from a successful Doha deal.  The real issue is the relevance of the multilateral trading system itself.  With its global Membership, comprehensive rules, and “world trade court”, the WTO is more central than ever to international economic relations. But this also means that the costs of failure are higher — with ramifications that could be felt more widely. Bringing the Doha Round to a successful conclusion would send the strongest possible signal that the WTO is relevant to today's new world economy, that it remains the focal point for global trade negotiations, and that it will be a key forum for international economic cooperation into the future.  But if Doha stumbles, then doubts will grow, not just about the WTO, but about the future of multilateralism in trade.

In many ways,  the Doha Round marks a transition from the old governance of the old trade order to the new governance of a new trade order.  Covering classic trade issues such as the reduction of import tariffs and subsidies, as well as innovative new chapters on trade facilitation and fisheries subsidies, the Doha Round is a turning point for the system. 

The politics of this Round have had to adjust to the changes that happened since it was launched in 2001. And we all know we need to conclude it in order to address tomorrow's challenge.

Is China’s growth export dependent?

Yes and No. A new Mckinsey note states that China’s export sector contributed 19 to 33 percent of total GDP growth between 2002 and 2008. That’s only about half of the export contribution indicated by traditional total-exports measures.

Using ‘DVAE analysis’-- which is what you get after subtracting from total exports only those imports used in the production of goods and services that are subsequently exported-- the authors of the note argue that exports have been an important driver of China’s growth, but not the dominant one, and that most common wisdom overestimates the role of exports while underestimating the role of domestic consumption for China’s growth.

The authors of the note estimated that imported goods accounted for 40 to 55 percent of the value of total exports from 2002 to 2008. This means that roughly half of China’s exports represent domestic value added. Concurrently, DVAE’s share of exports generally has risen over time, suggesting that China has become less of a pure assembler of imported goods—a publicly stated government policy goal.

Arguments over the true nature of China’s economic reliance on exports have been rooted in the difficulty of appropriately measuring the export sector. The traditional measure governments and most analysts use is the growth of total exports as a share of GDP growth. This measure indicates that export growth has accounted, on average, for almost 40 percent of the total growth in real GDP since 1990—rising to almost 60 percent since 2000.

Yet these numbers, portraying a dominant and growing role of exports, are at odds with the fact that China was one of the few countries that escaped the great 2008–09 global downturn without a major economic slowdown—suggesting that internal growth played an important role. That’s one reason other economists have used a very different measure: growth in net exports (total exports minus total imports) as a share of GDP growth. By that metric, exports contributed only between 10 and 20 percent of China’s annual 10 percent GDP growth in recent years.

We contend that both measures are misleading. Using total exports neglects the fact that many of China’s export shipments include a fair number of imported goods that are reassembled, combined with domestic content, or otherwise modified before being exported. Failing to remove these imports from the total export figure overstates how much value exports contribute to GDP. On the other hand, a strict net export measure (exports minus imports) underestimates the contribution of exports to GDP, because many imports aren’t used in assembly and exported but rather sold to Chinese consumers and businesses.

We calculated a measure we call domestic value-added exports (DVAE) to assess more accurately the role of exports in GDP growth. DVAE is what you get after subtracting from total exports only those imports used in the production of goods and services that are subsequently exported. In automobiles, for example, finished imports are not subtracted from our measure of exports. But engine parts imported to manufacture motor bikes for export would be.

The value of lobbyists

Once the politician for whom they [lobbyists] worked leaves office, their revenue falls 20%, or $177,000 per year, suggesting that lobbyists are paid more for “who they know” than “what they know”.

Very interesting finding. More here.

Maoists’ hydro madness in Nepal

My latest piece is about UCPN(M)’s decree to stop all hydropower projects funded by foreigners and that are export-oriented. I think it is wrong. Period. Why does not this party do something that will boost morale and incentives of investors so that we have badly-needed infrastructure and industrial investment in the economy. It is one of the quickest ways to create jobs and stimulate the stagnant economy. If they think all electricity will be exported, then let the terms and conditions be revised in such a way that electricity produced in our country will first have to fulfill domestic demand and then be allowed to export the surplus. I just do not see the logic in restricting foreign investment, for whatever investment and consumption purposes it may be, in Nepal. I don’t think they will invade our resources and snatch our sovereignty. It is maniac thinking in this century! Additional discussion in my previous blog post.

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Maoists’ hydro madness

The demand of Unified Communist Party of Nepal (Maoist)’s water resources and energy department to cease all projects with foreign investment in hydropower sector and let them be reviewed by the parliament’s committee on natural resources was a bombshell. It shook the confidence of domestic as well as foreign investors. They have explicitly argued that the party will oppose any investment in hydropower that is export-oriented and funded by foreign investors.

This wrongheaded and senseless decision, if implemented, will cost the nation dearly in terms of investment, employment, economic growth and, above all, macroeconomic health of our fragile economy. Furthermore, it will exacerbate the existing power crunch.

This decree from the UCPN (M) shows that the party does not have a viable and coherent agenda to steer the economy toward a long-term sustainable growth path. Their failed Marxist ideology reeks of opportunism and hypocrisy. Recall that it was the Maoist government that announced a plan to generate 10,000 MW of electricity in 10 years time beginning 2008. Since the investors were not convinced that their investment deals will be honored by UCPN (M) party cadres and youth wings, they had lack of confidence in the Maoist government and hesitated investing. The then Finance Minister Baburam Bhattarai had to implore with investors, both domestic and foreign, to invest in the country as their dream of leapfrogging to double-digit growth rate in three years’ time had no chance of being realized. Out of power and unable to win confidence of other parties to officially run the state machinery again, they are doing exactly opposite of what they promised to the public and investors.

The average economic growth rate in the past five years has been below 4 percent. Unemployment in the formal sector is stagnating. The industrial sector growth rate declined for three consecutive years since the Maoists joined mainstream politics. It is recuperating after hitting a negative growth rate last year. Similarly, foreign direct investment has tanked. The incessant interference in the industrial sector by militant youth wings and politically-indoctrinated, belligerent trade unions has compelled both domestic and multinational firms to shut down operations, reduce production, and severely affected competitiveness of Nepal’s industrial sector. The result has been devastating: Job market has stagnated, exports have decreased while imports skyrocketed, shortage and carteling have led to unusually high prices of goods and services, and economic growth rate suppressed below 4 percent.

Amidst this unfortunate situation deliberately inflicted by misguided and naive approaches of UCPN (M), the only hopes of reviving the economy rests on two sectors Nepal is naturally endowed with: Tourism and hydropower. There is pretty much a consensus among political parties, including the Maoists, that they will let Nepal Tourism Year 2011 run smoothly. Excellent. Unfortunately, we do not have similar agreement for hydropower sector. It might be because this sector offers a fertile ground for hefty commission for an extended period of time. The UCPN (M) might also be planning to use this issue as a bargaining chip with India as most of the hydropower projects are to be constructed by Indian companies or joint ventures involving Indian companies. Whatever the political motive behind this move, one this is certain: With the Maoists basically against all foreign-invested hydro projects, the prospect of fulfilling domestic power demand and exports of surplus electricity look dim. It will severely affect our ability to create jobs, spur infrastructure investment-led growth, and narrow down negative balance of trade.

Writing a column in one of the leading dailies, a Maoist-affiliated member of parliament and analyst accused those opposing this new stance of his party saying that they are ignoring domestic power crunch and industrial development, and are hell-bent on exporting hydropower to narrow down trade deficit with India. He alleges that critics are not thinking of using electricity domestically to produce goods, which then can be exported at a high value instead of cheaply and directly exporting electricity. He argues that electricity is a ‘raw material’.

This stance reflects his party’s wrongheaded, naive and contradictory analysis about the use of our natural resources. First, no investor will export electricity if domestic demand is very high, which means the price domestic consumers are willing to pay is also very high.

Second, since this is an oligopolistic market – where there are few sellers and many buyers – low supply, high demand, and high price means that there is abnormal profit. No sensible investor would want to ignore profits in the domestic market. Even if they ignore, terms and conditions for purchase of electricity can be revised so that power is not exported until domestic demand is satisfied. With so many big hydropower projects on the anvil, exporting surplus electricity makes a perfect business sense, whose positive externalities, among others, would be a potential reduction of trade deficit and high economic growth rate. Bhutan is doing exactly this.

Third, running rivers are our raw materials. Harnessing latent energy out of this and transacting it within and outside of our border comes under services sector. Fourth, at present neither the government nor the domestic investors have financial resources and expertise to fund big hydropower projects. Hate it or love it, we will need foreigners to invest in the hydropower sector. There is no alternative to it. Small hydropower projects could be funded by domestic investors, but not big ones, which is the need of the hour for high and sustained growth. The country has already wasted way too many scarce resources in funding small hydropower projects that cannot fulfill increasing electricity demand in the domestic economy. We need to look for economies of scale to remain competitive.

The seemingly opportunistic, wrongheaded and senseless stance of the largest party in the parliament should be shelved for good. Else, investors will shy away from investing in Nepal, job market will not grow, and economic growth will continue to stagnate at a low level. If investments are made in line with the laws and regulations of the hydropower sector, then there is no logical justification to disallowing foreign investment in hydropower sector, be it for domestic use or exports.

[Published in Republica, September 30, 2010, pp.7]

Can India’s growth rate take over China’s?

Latest edition of The Economist says it might because of two factors: demography and democracy.

Its economy is expected to expand by 8.5% this year. It has a long way to go before it is as rich as China—the Chinese economy is four times bigger—but its growth rate could overtake China’s by 2013, if not before (see article). Some economists think India will grow faster than any other large country over the next 25 years. Rapid growth in a country of 1.2 billion people is exciting, to put it mildly.

There are two reasons why India will soon start to outpace China. One is demography. China’s workforce will shortly start ageing; in a few years’ time, it will start shrinking. That’s because of its one-child policy—an oppressive measure that no Indian government would get away with. Indira Gandhi tried something similar in the 1970s, when she called a state of emergency and introduced a forced-sterilisation programme. There was an uproar of protest. Democracy was restored and coercive population policies were abandoned. India is now blessed with a young and growing workforce. Its dependency ratio—the proportion of children and old people to working-age adults—is one of the best in the world and will remain so for a generation. India’s economy will benefit from this “demographic dividend”, which has powered many of Asia’s economic miracles.

The second reason for optimism is India’s much-derided democracy. The notion that democracy retards development in poor countries has gained currency in recent years. Certainly, it has its disadvantages. Elected governments bow to the demands of selfish factions and interest groups. Even the most urgent decisions are endlessly debated and delayed.

India’s state may be weak, but its private companies are strong. Indian capitalism is driven by millions of entrepreneurs all furiously doing their own thing. Since the early 1990s, when India dismantled the “licence raj” and opened up to foreign trade, Indian business has boomed. The country now boasts legions of thriving small businesses and a fair number of world-class ones whose English-speaking bosses network confidently with the global elite. They are less dependent on state patronage than Chinese firms, and often more innovative: they have pioneered the $2,000 car, the ultra-cheap heart operation and some novel ways to make management more responsive to customers. Ideas flow easily around India, since it lacks China’s culture of secrecy and censorship. That, plus China’s rampant piracy, is why knowledge-based industries such as software love India but shun the Middle Kingdom.

Understanding basic statistics for policymaking

Compilation of several brief tutorials in a single file. Original source here. Refreshing and very useful! View it on full screen for clarity.

Reading Statistics 101