Nepal doesn’t have the highest proportion of poor people in South Asia

So says the latest poverty estimates released by the World Bank. For the  curious minds, here is a previous post that compares US$1.25 a day of the WB and national poverty line of CBS.

The chart below shows comparable data of South Asian countries in 2008. In South Asia, Bangladesh had the highest proportion (46.62%) of people living below US$1.25 a day, followed by India (37.37% in aggregate) and Nepal (33.9%). The Maldives has the lowest figure.

Now, if you look at the latest available data, then the figures are:

• Bangladesh: 38% in 2010
• Bhutan: 10.22% in 2007
• Rural India: 34.28% in 2010
• Urban India: 28.93% 2010
• Maldives: 1.48% in 2004
• Nepal: 24.82% in 2010
• Pakistan: 21.04% in 2007
• Sri Lanka: 7.04% in 2006

The chart below compares the CBS’s and WB’s data. In poverty estimate for the latest year, there isn’t much difference in the two estimates.

Extractive political and economic institutions are the reasons why Nepal is poor

So say Daron Acemoglu and James Robinson. The interesting question now is that if extractive political institutions are breeding extractive economic institutions, which is slowing down the country’s march on the path to prosperity, then how does this justify the recent rise in purchasing power of the poor and the decline in equality? How could this happen with such a subdued growth rate? Is growth a sufficient condition for poverty alleviation? Where do remittances fit in all these extractive processes?

Anyway, the thesis that extractive political institutions are hindering growth holds much water because it is precisely due to the lack of political will and the myopic, selfish vision of political leaders that the country is in this miserable state. They extracted the resources to the last bit and tried to create institutions to institutionalize the extraction processes. See this in the hiring and transfers of civil servants, bureaucracy, real estate and housing, agriculture and industrial sectors, education and health sectors, sports, the relationship between politicians, businessmen and goons, and so forth. Despite the talk of inclusive political and economic institutions, they are not implemented in reality. You have reservation quotas and promotion policies in the name of inclusiveness, but all these are snatched by the cronies of political parties and the elites. In Nepal, you have extractive institutions hiding behind the veil of inclusive institutions, which are institutionalizing extractive processes for the benefit of a few and at the cost of many.

Anyway, below is the entire blog post copied from their blog:

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Caste and Coercion

DARON ACEMOGLU AND JAMES ROBINSON

Slavery in Nepal was abolished only in 1921. Corvée, forced labor, was made illegal in 1952, but survived. It was only in 2000 that various sorts of coerced and bonded labor finally disappeared.

As late as the early 1990s in the Western parts of Terai, the lowland forest area of Nepal which borders India, many rural people were forced to work 30 to 35 days a year in unpaid labor services. The most important institution in this region was that of Kamaiya labor. Kamaiya was a particular type of servile labor relation where superficially workers and landlords freely entered into contractual relations during the festival of Maghesakranti (first day of the Magha month of the Nepali calendar), which starts on January 14. In practice, the majority of the workers were in debt to various masters, and debts are passed between generations with landlords buying and selling Kamaiya, a situation akin to chattel slavery. In 1992 a government report estimated that there were still about 20,000 Kamaiya households, possibly 116,000 adults and children. The report found that on the average, a Kamaiya worked about 13 hours a day and a male adult worker might receive a daily income of only around 11 Rupees, about 14 US cents. Using the legal minimum wage of 60 rupees for eight-hour work per day, such a worker ought to be getting 102 Rupees for the 13-hour work, about US$1.29, not exactly a fortune but better than 14 cents. Other research by the International Labour Organization using data from Banke district suggests much longer work hours, with a working day for men of as much as 17 hours a day during the heyday of the Kamaiya system.

Figure: Time Use for Bonded Male Laborer

Source: Bhadra, Chandra (2006) “Gender Dynamics in Bonded Labour in Nepal,” International Labour Organization.

All these bonded laborers had something else in common, they were all either Dalits (‘untouchables’) or Janajatis which is a collective term for people speaking Tibetan-Burmese languages such as Magars, Gurungs, Tamangs and Sherpas.  Right up to the present day Nepal has been dominated by high caste elites, known as the Parbatiyas, made up of the Brahmin and Chettri castes. Brahmins and Chettris comprise only 28% of the population according to the 2001 census, but they are massively overrepresented in politics (e.g., as ministers, members of parliament and leaders of political parties), the legal profession, the civil service, and professional fields. Dalits and Janajatis, though they make up 45% of the population, have historically had more or less no representation in any of the areas. The caste system is a rigid form of occupational segregation, handed down from parents to children and severely blocks the opportunities and life chances of those at the bottom of the hierarchy. A society with a caste system wastes a vast amount of its economic potential.Right up to the present day much of the economy of Nepal has been based on labor coercion, repression and exclusion – that is, on highly extractive economic institutions.

And you guessed it: Nepal is a very very poor country, with per capita income only about 40th of the US.

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India’s GDP growth rate in 2011-12 estimated at 6.9% (7.6% in 2012-13 & 8.6% in 2013-14)

The latest Economic Survey 2011/12 released by India’s Ministry of Finance states that GDP growth rate for 2011/12 is estimated at 6.9% (factor cost at 2004-05 prices). The Indian economy is expected to growth at 7.6% in 2012-13 and 8.6% in 2013-14. The main reason for a gradual recovery in the next two years is due to the expected decline in overall investment rate. These projections are based on assumptions regarding factors like normal monsoons, reasonably stable international prices, particularly oil prices, and global growth somewhere between where it now stands and 0.5% higher.

The major highlights of state of Indian economy in fiscal year 2011/12 are as follows:

• Gross capital formation during the third quarter of 2011-12 as a ratio of GDP was at 30%, down from 32% a year ago.
• Agriculture and allied sectors are estimated to achieve a growth rate of 2.5% in 2011-12 with food grains production likely to cross 250.42 million tonnes owing to increase in the production of rice in some States.
• The industrial sector has performed poorly, retreating to a 27% share of the GDP.
• The services sector continues to be a star performer as its share in GDP has climbed from 58% in 2010-11 to 59% in 2011-12 with a growth rate of 9.4%.
• Industrial growth pegged at 4-5 percent, expected to improve as economic recovery resumes.
• Inflation on WPI was high but showed clear slow down by the year-end.
• WPI food inflation dropped from 20.2% in February 2010 to 1.6% in January 2012. Calibrated steps initiated to rein-in inflation on top priority.
• India remains among the fastest growing economies of the world. Country’s sovereign credit rating rose by a substantial 2.98 percent in 2007-12.
• Fiscal consolidation on track - savings & capital formation expected to rise.
• During the first half of 2011-12, India’s export growth was at 40.5%, but it has been decelerating since. Imports have growth rapidly, by 30.4% during 2011-12 (April-December).
• The current account deficit (CAD) has widened to $32.8 billion in the first half of 2011-12, compared to $29.6 billion during the corresponding period of 2010-11.
• The foreign exchange reserves increased from US$279 billion at end March 2010 to US$305 billion at end March 2011. Reserves varied from an all-time peak of US$322.2 billion at end August, 2011 and a low of US$292.8 billion at end-January, 2012. It covered nearly the entire external debt stock.
• In 2010-11, the CAD of US$ 45.9 billion was financed by the capital account surplus of US$ 62.0 billion and it resulted in accretion to foreign exchange reserves to the tune of US$ 13.1 billion (US$ 13.4 billion in 2009-10).
• Central spending on social services goes up to 18.5% this fiscal from 13.4% in 2006-07.
• MNREGA coverage increases to 5.49 crore households in 2010-11.
• Sustainable development and climate change concerns on high priority.

Countries offering Preferential Trade Arrangements (PTA) to Nepal

Here is a chart that shows twelve countries and one economic bloc offering PTAs to Nepal. They are Australia, Canada, EU, Iceland, Japan, New Zealand, Norway, Switzerland, Turkey and the US (offering GSP facility); and China, Chinese Taipei and Republic of Korea (offering LDC-specific PTA facilities).

Don’t confuse PTAs with RTAs. Nepal is signatory to three RTAs (India-Nepal, SAFTA, SAPTA; BIMSTEC is yet to come into force). Here is a brief trade profile of Nepal.

24.8% of population earn less than US$1.25 a day in Nepal (latest year 2010)

[This is an update to this blog post. I will put up comparable data for South Asian countries soon].

Here I will focus on the latest poverty and inequality figures published by the World Bank and compare it with the one published by CBS.

The WB’s estimate is updated with NLSS III (see this updated one as well) data. Check it out here. For Nepal, the poverty headcount at $1.25 a day (PPP) was 24.8% in 2010 [7.4 million people] and 53.1% in 2003 [13.9 million people]. It was 68% in 1995 [14.7 million people].

The table below shows a comparison of the level of poverty as shown by the WB and the NLSS III studies. The figure are pretty close. I don’t have too much of spare time to make charts, so here are is a table that shows the relevant info.

	CBS 2011				WB_Feb 2012
	Poverty (%)	Inequality	Income or consumption share by deciles (%)		Poverty (%)	Inequality	Income or consumption share by deciles (%)
	Below national poverty line	Gini index	Poorest	Richest	Below $1.25 a day, PPP 2005)	Gini index	Poorest	Richest
2010	25.2	32.94	9.09	26.82	24.82	32.82	3.63	26.52
2003	30.8	41.4	9.09	35.57	53.13	43.83	2.9	36.69
1995	41.8	32.2	9.10	27.09	67.97	35.23	3.41	29.1
1984					78.15	30.06	4.04	25
2008					33.9	Interpolated using two sets of survey data
2008					29.37	using survey data of 2010
2008					43.57	using survey data of 2003

Here, for CBS’s figure, the years are 2010/11, 2003/04, and 1995/96 (based on NLSS series). Note that the CBS’s poverty figure in 2010/11 cannot be compared with the previous years because of the change in consumption basket used to compute poverty level. Further, be careful with the total figures as total population is considered to be 30 million in 2010, but the Census 2011 says it is just 26.6 million. Also, for the World Bank, the default poverty line is $38.00 per month, which translates to $1.25 per day poverty line($38=$1.25*365/12). For CBS, based on current market prices, a person needs to earn at least Rs 19,261 (Rs 11,929 for food items and Rs 7,332 for non-food items) every year to buy basic food calories to stay above the national poverty line.

Anyway, the figures of CBS and WB are very close.  If we look at data for comparable year, then Nepal had the third highest headcount poverty (US$1.25 a day) in 2008.

Congratulations (major credit to remitters and very little credit to policymakers and governments) for such a remarkable feat in reducing poverty. Here is a country where you can have encouraging poverty reduction with a miserable growth rate of below 4 percent!

Total convertible foreign exchange income of Nepal

Here are interesting charts showing total convertible foreign exchange income of Nepal over the past six years. The total convertible foreign exchange income of Nepal in fiscal year 2010/11 was Rs 312 billion, up from Rs 157 billion in 2005/06 (a whooping 98 percent increase between the two periods). The share of convertible foreign exchange income from merchandise trade and services trade (consider exports earning in convertible currency only as some of the income from exports to India is in Indian rupee) is 12.34 percent and 87.66 percent respectively. The convertible foreign exchange income from services trade overshadows the one from merchandise trade.

Don’t confuse total convertible foreign exchange income with gross foreign exchange reserves, which is the one you have been hearing about in the media and reading in the central bank’s periodic statements. For comparison, total convertible foreign exchange income in 2010/11 was Rs 311.66 billion, and gross foreign exchange reserves was Rs 263.13 billion (the total fiscal budget was around Rs 384 billion). Similarly, don’t confuse with total convertible forex income from merchandise trade, service trade and remittances with total value of merchandise trade, service trade, and remittance inflows.

The biggest contributor to total convertible foreign exchange income is remittances, which comes under the services trade heading. In 2010/11, the share of remittances, tourism and investment in total convertible foreign exchange income of services trade was 85.27 percent, 11.35 percent, and 3.38 percent respectively. In numbers, these translate to Rs Rs 214 billion, Rs 29.39 billion, and Rs 5.42 billion respectively. The total convertible foreign exchange income of merchandise trade and services trade was Rs 38.45 billion and Rs 248.80 billion respectively. Now, these are different from the total value of total merchandise export and total services exports (Rs 64.33 billion and Rs 53.01 billion respectively—see the table).

Convertible forex income in 2010/11 (Rs billion)
Total convertible forex income	311.66
Convertible forex income from merchandise trade	38.45
Convertible forex income from service trade	248.80
Convertible forex income from remittances	214.00
Convertible forex income from tourism	29.39
Convertible forex income from investment	5.42
Total value in 2010/11 (Rs billion)
Gross forex reserves (provisional)	263.13
Total merchandise export	64.33
Total services export (BOP)	53.01
Total remittance income (provisional)	253.55
Total budget for fiscal year	385.00

The total share of remittances, tourism and investment in total convertible forex income was 74.75 percent, 9.95 percent, and 2.97 percent respectively. The income from tourism was 2.1 percent of GDP in 2010// and that from remittances was 20 percent of GDP.

[The data source is MoF and NRB. Computation and charts are done by myself].

Crisis divides macroeconomic schools of thought

Here is Simon Wren-Lewis over at VoxEu:

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So why have schools of thought within mainstream macroeconomics returned? One simple story is that schools of thought are associated with macroeconomic crises, and macro synthesis follows periods of calm. Keynesian theory itself was born out of the Great Depression. The first Neoclassical Synthesis arose from the period of strong growth and low inflation in the postwar period. Monetarism gained strength from the rapid inflation of the 1970s. The more recent synthesis may be a child of the Great Moderation, and now we have the Great Recession, schools of thought have returned. Because these crises are macroeconomic, and there are no equivalent crises involving microeconomic behaviour or policy, then fragmentation of the mainstream into schools will be a macro, not micro, phenomenon.

However I think this is too simplistic a view of what is happening today. One interesting feature of the current divide is that the label ‘Keynesian’ appears to be used more by those opposed to certain policies – and in particular fiscal stimulus – than those on the other side. Typically Keynesians see themselves as putting forward synthesis analysis, without the need for branding. What has become clear is that the New Neoclassical Synthesis was in many ways a celebration of New Keynesian theory which was not shared by many freshwater departments in the US.

There may be good reasons why New Keynesian economists might have imagined that their analysis was now an uncontested part of the mainstream. In particular, it is used in nearly all central banks as their main tool in carrying out monetary policy. With monetary policy somewhat depoliticised through central bank independence, the successful implementation of New Keynesian theory during the Great Moderation allowed divisions among academic departments to remain dormant.

On the other side, there was a belief that New Classical economics had been revolutionary, ie a successful counter-revolution against Keynesian ideas.  Once again there were good reasons supporting this belief. On consumption, rational expectations, the Lucas critique and more, traditional Keynesians had unsuccessfully opposed New Classical ideas. Furthermore, many of the leaders of New Classical thought did not want to update Keynesian thinking; they wanted to destroy it. The label ‘Keynesian’ was associated with much more than a belief that prices were sticky and that therefore aggregate demand mattered. Instead it became associated with state intervention. Wikipedia, in its third paragraph on ‘Keynesian economics’, says: “Keynesian economics advocates a mixed economy – predominantly private sector, but with a significant role of government and public sector...”.

The New Classical counter-revolution failed in one respect. While Keynesian analysis may have suffered a near-death experience, it survived and subsequently prospered. New Classical critiques led to fundamental and largely progressive changes. Yet, for many reasons including ideological ones, the would-be counter-revolutionaries did not want to give up their counter-revolution. Partly as a result, the degree to which New Keynesian theory was taught to graduate students differed widely among academic departments, at least in the US.

So, perhaps unlike the first (postwar) neoclassical synthesis, the New Neoclassical Synthesis was partial in terms of its coverage among academics. This incompleteness was not apparent during the Great Moderation, because in central banks the synthesis was uncontested. The fault lines only became evident when monetary policy became relatively impotent at the zero bound after the Great Recession, and fiscal stimulus was used both in the US and UK. Once that happened, what might be called the Anti-Keynesian school re-emerged.

Using this account, it is perhaps possible to view the current emergence of schools of thought as a historical aberration. The microfoundation of macroeconomics would seem to imply that mainstream macro should be as free from fragmentation into schools as microeconomics. As it becomes clear that the New Classical counter-revolution was not successful, the New Neoclassical Synthesis may yet become complete. (For an argument along these lines, see Economist 2012) After all, New Keynesian models are essentially real business cycle models plus sticky prices, and the addition of price rigidity seems both empirically plausible and inoffensive in itself. Both sides could agree that for economies with a floating exchange-rate monetary policy is the stabilisation tool of choice, with fiscal policy only being used if monetary policy is constrained (Kirsanova et al 2009). When interest rates are stuck at the zero lower bound, synthesis models clearly show fiscal policy can be highly effective at stimulating output (Woodford 2011). What has been called ‘demand denial’ appears not to make academic sense, particularly at a zero lower bound (Wren-Lewis 2011).

This outcome may, however, represent wishful thinking by New Keynesians. An alternative reading is that the Keynesian/Anti-Keynesian division is always going to be with us, because it reflects an ideological divide about state intervention. That divide occurs all the time in microeconomics, but because it involves arguing about many different externalities or imperfections it does not lend itself to fragmentation into schools. In macro, however, there is one critical externality to do with price rigidity, and so disagreements about policy can easily be mapped into differences about theory. Demand denial is attractive because it gives a non-ideological justification for what is essentially an ideological position about economic policy. Unfortunately, there is a danger that dividing mainstream analysis this way makes macroeconomics look more like a belief system than a science.

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