How ready is Nepal for change?–Not so much!

According to a new index (Change Readiness Index) that provides insight into which countries are better able to manage and mitigate the risks associated with change and capitalize on the new resulting opportunities, it looks like Nepal is ranked (overall) 50 out of 60 countries, meaning that it is well below the average in terms of its readiness to cope with change. Lower rank means better readiness for change.

Specifically, the ranking in economic sub-index (relating to economic policies and frameworks), governance sub-index (relating to the capacity of government and the institutional arrangements that have been established) and social sub-index (relating to the characteristics of a society, such as literacy, social support networks and civil society) is 50, 38,  and 57 respectively.

The top five countries in the CRI are Chile, Tunisia, Taiwan, Jordan and Kazakhstan. The bottom five countries are Venezuela, Honduras, Zimbabwe, Mozambique, and Bolivia. In South Asia, Sri Lanak is ranked at 22, followed by India at 23, Bangladesh at 45, Nepal at 50 and Pakistan at 54.

Change Readiness Index (CRI) captures government capability and the capability of a country as a whole - including the private sector and civil society - to manage and respond effectively to change. The Index combines data from a number of existing indicators with new measures that have been identified to capture specific elements of change readiness that are not currently being captured, including risk management capabilities, efforts to promote economic diversification, strong governance, and social safety nets. The study also considered the impact of recent food, fuel, and financial crises on countries around the world to asses country’s change readiness. The assumption is that a country’s capability for managing change might be an important factor in supporting sustained growth in the long term.

Dimensions of capability to manage change:

Economic capabilities

• Macro framework
• Investment climate
• Economic openness
• Labor markets
• Economic diversification

Governance capabilities

• Public administration
• Financial regulation
• Risk management
• State business relations

Social capabilities

• Entrepreneurship
• Safety nets
• ICT and innovation
• Human capital
• Civil society

While the report gives a sense of a country’s capabilities to cope with change and exploit the resulting opportunities, it also states that “when assessing growth prospects, this data must be viewed in combination with other information on issues that will affect economic prospects such as political stability, sovereign debt, sustainability or endowments of capital, labor and natural resources”.

Can storage help ensure food security?

Larson et al. argue that it can if the target is set high and reserves are adequate. Here is the abstract from their paper:

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In times of highly volatile commodity markets, governments often try to protect their populations from rapidly-rising food prices, which can be particularly harsh for the poor. A potential solution for food-deficit countries is to hold strategic reserves, which can be called on when international prices spike. But how large should strategic stockpiles be? This paper develops a dynamic storage model for wheat in the Middle East and North Africa (MENA) region, where imported wheat dominates the average diet. The paper uses the model to analyze a strategy that sets aside wheat stockpiles, which can be used when needed to keep domestic prices below a targeted price. This paper shows that if the target is set high and reserves are adequate, the strategy can be effective and robust. Contrary to most interventions, strategic storage policies are counter-cyclical and, when the importing region is sufficiently large, a regional policy can smooth global prices. This paper shows that this is the case for the MENA region. Nevertheless, the policy is more costly than the pro-cyclical policy of a targeted intervention that directly offsets high prices with a subsidy similar to food stamps.

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Meanwhile, Gouel and Sebastien recommend an activist policy to stabilize the impact of high food prices. They argue that the optimal trade policy for a single low-income country is to subsidize imports when domestic availability is low and tax exports when world prices are high, which will benefit consumers at the expense of producers, because it reduces the likelihood of high prices. Meanwhile, a pure storage policy might have an opposite effect: it raises the average domestic price because of the increased stock accumulation, and is detrimental to consumers. They argue that to protect consumers from food price volatility in an efficient way, storage policies need to be complemented by trade policies, which would provide some isolation from the world market.

Evolution of industrial policy in India, China and Germany

The economies that liberalized early on with strategic support to boost capabilities and competitiveness of industries also achieved high growth rate and high prosperity. Germany liberalized in 1950s, China in 1978, and India in 1992. [Nepal is trailing far behind in comparison to these economies—even when compared to the Indian economy as it liberalized its economy in tandem with the liberalization drive in the Southern neighbor. Here and here are two articles related to industrial policy in Nepal.]

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Chart source is WEF

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This statement by Dani Rodrik is highly relevant here: “The right model for industrial policy is not that of an autonomous government applying Pigovian taxes or subsidies (i.e. lump sum taxes or subsidies), but of strategic collaboration between the private sector and the government with the aim of uncovering where the most significant obstacles to restructuring lie and what type of interventions are most likely to remove them.”

Determinants of manufacturing competitiveness

Here is a nice chart that shows the determinants of manufacturing competitiveness. A combination of government action, manufacturing capabilities, market forces, and resources is needed for successful enhancement of manufacturing competitiveness. It is based largely on exports sophistication and complexity of products.

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 Government forces

• Education policies
• Energy policies
• Economic, trade, labor, financial and tax policies
• Science and technology policies
• Manufacturing and infrastructure policies

Capabilities

• Innovation
• Technology
• Process
• Infrastructure

Market forces

• Demographic
• Macroeconomic

Resources

• Human
• Materials
• Energy
• Financial

By the way, Nepal’s manufacturing sector is going downhill. If you look at the list of determinants of manufacturing competitiveness, almost all of them are either missing or inadequately supplied in Nepal. Here is an earlier discussion on the state of Nepali economy, industrial sector, and exports.

Latest on India’s largest poverty alleviation and rural employment generation program: MGNREGS is working

In a new working paper, Dutta, Murgai, Ravallion, and van de Walle argue that poorer families tend to have more demand for work on the scheme, and that (despite the un-met demand) the self-targeting mechanism allows it to reach relatively poor families and backward castes. The extent of the un-met demand is greater in the poorest states — ironically where the scheme is needed most. Labor-market responses to the scheme are likely to be weak. The scheme is attracting poor women into the workforce, although the local-level rationing processes favor men.

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We do not find that the local-level processes determining who gets work amongst those who want it are generally skewed against the poor. There are sure to be places where this is happening (and qualitative field reports have provided examples). But it does not appear to stand up as a generalization. We do find evidence that the poor fare somewhat less well when it comes to the total number of days of work they manage to get on the scheme. However, despite the pervasive rationing we find, it is plain that the scheme is still reaching poor people and also reaching the scheduled tribes and backward castes.

Participation rates on the scheme are higher for poor people than others. This holds at the official poverty line, but the scheme is also reaching many families just above the official line. It is only at relatively high consumption levels that participation drops off sharply. This should not be interpreted as indicating that well-off families in rural India are turning to MGREGS. There may well be shocks that are not evident in the household consumption aggregates. And there may be individual needs for help that are not evident in those aggregates.

Targeting performance varies across states. Some of those living above the official poverty line in better-off states will no doubt be relatively poor, and need help from the scheme. The overall participation rate seems to be an important factor in accounting for these inter-state differences in targeting performance, with the scheme being more pro-poor and reaching scheduled tribes and backward castes more effectively in states with higher overall participation rates.

While the allocation of work through the local-level rationing process is not working against the poor, there are clearly many poor people who are not getting help because the employment guarantee is not in operation almost anywhere (Himachal Pradesh, Rajasthan and Tamil Nadu could be counted as the exceptions, where 80% or more of those who want work got it). And other potential benefits of the scheme to poor people are almost certainly undermined by the extensive rationing, notably the empowerment gains and the insurance benefits. The first-order problem for MGNREGS is the level of un-met demand.

While the scheme is clearly popular with women—who have a participation rate that is double their participation rate in the casual labor market—the rationing process does not appear to be favoring them. We also find evidence of a strong effect of relative wages on women‘s participation—both wages on the scheme relative to the market wage and the male-female differential in market wages. As one would expect, poor families often choose whether it is the man or the woman who goes to the scheme according to relative wages.

It has been claimed by some observers that the scheme is driving up wages for other work, such as in agriculture; some observers see this as a good thing, others not. For India as a whole, we find that the scheme‘s average wage rate was roughly in line with the casual labor market in 2009/10. This might look like a competitive labor market equilibrium, but that view is hard to reconcile with the extensive rationing we find. Interestingly, we do find a significant negative correlation between the extent of rationing and the wage rate in the casual labor market relative to the wage rate on the scheme. Although this is suggestive, on closer inspection we are more inclined to think that other economic factors are at work. Indeed, the correlation largely vanishes when we control for the level of poverty. Poorer states tend to see both more rationing of work on the scheme and lower casual wages—possibly due to a greater supply of labor given the extent of rural landlessness.

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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 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. In 34 states, a total of 45,019,215 households (as of September 2, 2009) were provided employment in 2008/09.

For more on NREGA, see this. It looks like cost of Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), the largest employment guarantee public works program in the world, is coming down. Its cost as a share of GDP, total expenditure and revenue receipts is decreasing and is expected to be 0.45 percent, 3.19 percent, and 5.08 percent respectively in fiscal year 2011-2012. Here is more on MGNREGA.

NREGA budget (Rs Crore)
	2006-07	2007-08	2008-09**	2009-10**	2010-2011*	2011-2012*
GDP, current prices#	4,293,672	4,986,426	5,582,623	6,550,271	7,877,947	8,980,860
Total expenditure	583,387	712,671	900,953	1,020,838	1,108,749	1,257,729
Revenue receipts	434,387	541,864	562,173	614,497	682212	789892
NREGA allocated budget	11,300	12,000	30,000	39,100	40,100	40,100
NREGA/GDP	0.26	0.24	0.54	0.60	0.51	0.45
NREGA/Exp	1.94	1.68	3.33	3.83	3.62	3.19
NREGA/Rev	2.60	2.21	5.34	6.36	5.88	5.08

Source: Calculation based on data from Union Budgets; *estimate; **revised estimate'; # Economic Survey 2010-11

In FY 2010-2011, 5.49 crore households were provided employment (100 days employment  on demand to each household during lean season). The total persondays of employment created was 257.15 persondays (crore). Of this, the share of SCs, STs, and women accounted for 30.63%, 20.85%, and 47.73% respectively.

Trade and Development Reports, 1981-2011 [The defense of UNCTAD]

UNCTAD has released a report looking back at the series of Trade and Development Reports it has been publishing annually since 1981. It boasts that UNCTAD foresaw the mounting influence of globalization on the economies of developing countries, warned of the dangers of unregulated financial flows and volatile exchange rates, and consistently argued – against the free-market orthodoxy of the 1980s and 1990s – that governments have important roles to play in helping national economies achieve steady, long-term progress.The report is being launched during the ongoing UNCTAD XIII in Doha, Qatar.

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The first part of the 30-year review publication shows that the originality of the TDR has been rooted in the discussion of national policies and strategies in relation to the performance of the global economy and its institutions. Taking a novel approach to the prevailing discussion on development challenges and policies, the TDR abandoned the dichotomy between short-term macroeconomic issues and long-term development issues that was shaping "development economics" at the time. From the start, the TDR emphasized the importance of the external environment for development. In a way, it anticipated the notion of globalization.

The hallmark "holistic" view of the TDR on policies related to employment, trade, debt, and monetary, finance, and payment balances has been reflected in its analyses on the debt crisis of the 1980s, in its view of the problems created by conditionalities attached to structural-adjustment programmes of the international financial institutions, and in its warnings on the dangers for developing countries of opening to unregulated capital flows and increased exchange-rate instability. More recently, in examining the build up to -- and the macroeconomic impacts of -- the global economic and financial crisis, the report called attention to the weaknesses of international monetary and financial governance and to the deep inconsistencies among global trade, financial, and monetary policies.

The TDR has called for a balance between multilateral rules and actions and national policy autonomy, or "policy space" in economic matters -- a term coined by UNCTAD´s economists. This point of view has enlivened economic debate in recent years. In defending the need to address specific local needs and challenges, the report has been strongly critical of the "one-size-fits-all" approach to development policies often taken by international institutions.

The discussion of the role of the State in economic development, particularly in promoting capital formation for the diversification of economies, has been a recurrent aspect of the TDR. While taking a prudent attitude towards the merits of free markets -- distinct from that of other organizations -- the TDR has never intended to serve as an agent in favour of an "anti-market" ideology. Rather, the 30-year review publication claims, the TDR’s aim has been to promote a well-targeted pragmatism in policy-making. The concern is not "State vs. market" but effective policy vs. what it calls "market fundamentalism." Accordingly, the TDR has tried to help developing countries create what is sometimes called a "developmental State".

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Earlier, UNCTAD released a statement strongly defending the role of “developmental state”. It batted for the balanced role of the State and market considerations, where the State designs policies and institutions with a view to achieving sustainable and inclusive economic growth as well as creates an appropriate enabling stable, transparent, and rules-based economic environment for the effective functioning of markets.

The UNCTAD has been under pressure from developed nations for criticizing the finance-driven globalization (FDG) model and calling for an overhaul of the system to move to development-led globalization (DLG). The report, titled "Development-led Globalization: Towards Sustainable and Inclusive Development Paths," suggests that FDG has led to uneven, unstable and unfair outcomes. It outlines an agenda for DLG based on three pillars: enabling developing countries to mobilize domestic resources, strengthen productive capacities and share the gains in an equitable manner; creating more robust multilateral structures for collective responses to upcoming challenges, such as taming finance and promoting investment-led responses to climate change; and strengthening regional ties, including through South–South cooperation, to enhance stability and open new growth opportunities.

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Also here is a link to the inaugural Commodities and Development Report (UCDR) 2012.

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The report says mounting financial speculation in commodities and the increasing diversion of agricultural land to biofuel crops has changed the forces underpinning commodity prices, pushing them through a sustained period of increase.

What should be a boon for poor nations, especially the globe’s 48 least developed countries (LDCs) -- whose economies often depend heavily on commodity exports – is on balance a negative development because many of these countries are net importers of oil and staple foods, the study says. Since the food crisis of 2008, prices for basic nourishment have been both volatile and high, the report says – and poor families are acutely vulnerable, as they typically spend 50 per cent or more of their incomes on food.

One driving force of the change is the massive influx of financial capital that has flowed into commodity futures markets since 2003, the report says. Financial investors differ from producers or traders in that they are not concerned with the physical delivery of products, but rather in buying delivery contracts and later selling them for higher prices, thus repeating speculative profits. As these financial investors have pulled their money out of troubled bond and equity markets, the number of commodity futures contracts traded worldwide has exploded, climbing from approximately 500 million in 2003 to more than 2.5 billion in 2011. Similarly, the worldwide value of commodity derivatives, including both futures and options, rose from just over US$1 trillion in 2003, to more than $8 trillion in 2007, before subsiding to $3 trillion in 2009 and 2010.

UNCTAD contends that this “financialization” of commodities futures has fundamentally changed the conduct and outcomes of commodities markets in general, for example by changing a producer’s price expectations and reducing his ability to hedge against risk.

The report downplays the impact on climbing commodities prices of growing Chinese demand. […] UNCTAD finds that Chinese demand has indeed dominated the markets for metals such as copper, nickel, and in particular iron ore, for which it accounted for 63 per cent of world imports. But China’s share of world imports of oil (7 per cent) and food commodities (all less than 2 per cent), although significant, is not so high as to drive price movements. UNCTAD identifies biofuels as a third new twist in the current commodities boom. In the 2003-2004 harvest year, world maize farmers devoted 5 per cent of their crops to producing ethanol, which is marketed as an alternative to fossil fuels and mixed with gasoline. By the 2010-2011 harvest year, the proportion of world maize production converted to ethanol had tripled to 15%. Generous subsidy programmes in the USA, Europe, and Brazil played a role in convincing farmers to use maize and sugar crops to produce biofuels instead of food. UNCTAD estimates that competition from biofuels contributed an estimated 15 to 20 per cent to cereal export prices. More fundamentally, biofuels link cereal markets with energy markets, weakening the influence of demand and supply signals on cereal prices.

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Recommendations of UCDR 2012:

• Steps should be taken to invest in national and regional food reserves to help food-insecure countries.
• The recent shift to “finance-driven globalization,” as it applies to commodities, should be reconsidered, especially in comparison to the standard development model in which profits from commodities exports are used to increase domestic investment that can help diversify and expand the capacities of developing-country economies.
• That fiscal and taxation policies be adjusted so that they help developing countries reap stable, long-term economic benefits from commodities exports.
• That measures be taken nationally and internationally to improve the situations of small farmers and other small commodity producers in poor countries.

Elite capture of fuel subsidies

There is a long running debate over elite capture of blanket, across-the-board subsidies in developing countries. Subsidies are primarily meant for people who cannot afford basic necessities or are targeted to those who are below the poverty line. However, there is a danger of elite capture as is seen in fuel subsidies, relief program for rural households, payment for employment schemes, etc. Almost all developing countries subsidize fuel costs to stabilize prices and to help poor households cope with fuel price volatility. However, fuel subsidy is not targeted and widespread leakage is common. Even though the targeted group get subsidized fuel in the market, a large proportion of it is consumed by the elite (because their consumption demand is higher—so will be subsidy). It puts strain on fiscal deficit and trade deficit.

A recent study in seven African countries shows that on average the richest 20% receive over six times more in subsidy benefits than the poorest 20%.

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Expenditure data for seven African countries show that the distribution of these subsidies is disproportionately concentrated in the hands of the rich.  Richer households spend a larger amount on fuel products, and, consequently, benefit more than poorer households from any universal subsidy on these products. On average the richest 20% receive over six times more in subsidy benefits than the poorest 20%.

 

More here.

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The high share of income spent by poor households on fuel relative to well off households means that if fuel subsidies are taken off, then it would hurt poor the most. The poor’s demand for fuel is more price inelastic than rich’s demand for fuel.

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Results of simulating the short-term (assuming no substitution away from fuel) direct impact of a 20 percent increase in energy prices (using SHIP data) show that both rich and poor households would see a substantial negative impact on consumption: a decline of nearly 1 percent for the top quintile and of 0.5 percent for the bottom quintile. Other studies estimate that the total impact—direct and indirect—of higher fuel prices as a percent of consumption is about the same across income quintiles

For nine African countries the average short term direct and indirect welfare impact of a $0.25 per liter increase in fuel price is estimated to be 2 percent and 3.8 percent of per capita consumption respectively. Unlike the rich, the poor have very limited capacity to offset the effects of the price shock on overall consumption by borrowing or drawing on savings.

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The figure below shows size of fuel price subsidy (% of GDP) in select SSA countries.

What is the solution to this? Well, there is no easy fix:

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Removing subsidies and raising prices needs to be well managed. For one thing, social assistance programs need to be strengthened so as to help poor and vulnerable households weather the price shock. Another is to increase public understanding and support for subsidy reform by having a transparent and evidence-based discussion and scrutiny of subsidies: the full cost of the subsidy, the distribution of the subsidy and who is benefiting from the subsidy, and the implications for public spending on priority areas.

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