Current state of Nepali economy (2014 edition)

Here are the presentation slides from a recent talk on the current state of Nepali economy. Similar presentation done in 2012 here.

Current State of Nepali Economy 2014

Remittances and tax mobilization in Nepal

Consumption tax and customs duty make up about 72% of Nepal's tax revenue mobilization. Too reliant on remittances-backed imports and consumption for tax revenue.

Agglomeration or business environment: Which is more important for job creation?

Abstract of a working paper by Clarke et al (2013):

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Based on a comprehensive worldwide firm survey, this paper looks at how the business environment and economic agglomeration affect job creation, holding constant conventional determinants of firm growth, such as firm ownership, size, and age. The analysis finds that economic agglomeration is most important, especially modern telecommunications, access to export markets, concentration of economic activity in large cities, and capacity agglomeration (the concentration of large firms in a city). Although the business environment affects job growth less than agglomeration does, some elements of the business environment matter, such as labor flexibility, unionization, and local skill levels. There is strong heterogeneity in job creation across firm size and age.

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Nepal's and Africa's structural transformation

Africa's ongoing structural transformation is strikingly similar to Nepal's slow structural transformation. It is characterized by the shift of workers and economic activities from agriculture sector to low productive, low-value added services sector activities, resulting in a slowdown in transformation. Eventually, there aren't enough jobs for the youth and the economy is stuck in a low growth trap.

Most of the GDP growth is coming from non-tradable sectors such as construction, retail and wholesale trade and real estate and housing. The demand for these services sector activities are in turn driven by public expenditure, and remittances. Tradable sectors such as manufacturing and high-value agriculture activities are not prominent. Worse, more and more workers are shifting to informal activities in services sector until they find jobs overseas. Addressing this will be one of the major economic challenges for the Constituent Assembly II, if the country wants to realize its goal of graduating from LDC status by 2022. 

Dani Rodrik writes about Africa's structural transformation:

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As researchers at the African Center for Economic Transformation in Accra, Ghana, put it, the continent is “growing rapidly, transforming slowly.”

In principle, the region’s potential for labor-intensive industrialization is great. A Chinese shoe manufacturer, for example, pays its Ethiopian workers one-tenth what it pays its workers back home. It can raise Ethiopian workers’ productivity to half or more of Chinese levels through in-house training. The savings in labor costs more than offset other incremental costs of doing business in an African environment, such as poor infrastructure and bureaucratic red tape.

But the aggregate numbers tell a worrying story. Fewer than 10% of African workers find jobs in manufacturing, and among those only a tiny fraction – as low as one-tenth – are employed in modern, formal firms with adequate technology. Distressingly, there has been very little improvement in this regard, despite high growth rates. In fact, Sub-Saharan Africa is less industrialized today than it was in the 1980’s. Private investment in modern industries, especially non-resource tradables, has not increased, and remains too low to sustain structural transformation.

As in all developing countries, farmers in Africa are flocking to the cities. And yet, as a recent study from the Groningen Growth and Development Center shows, rural migrants do not end up in modern manufacturing industries, as they did in East Asia, but in services such as retail trade and distribution. Though such services have higher productivity than much of agriculture, they are not technologically dynamic in Africa and have been falling behind the world frontier.

[...]The African economic landscape’s dominant feature – an informal sector comprising microenterprises, household production, and unofficial activities – is absorbing the growing urban labor force and acting as a social safety net. But the evidence suggests that it cannot provide the missing productive dynamism. Studies show that very few microenterprises grow beyond informality, just as the bulk of successful established firms do not start out as small, informal enterprises.

[...]Two decades of economic expansion in Sub-Saharan Africa have raised a young population’s expectations of good jobs without greatly expanding the capacity to deliver them. These are the conditions that make social protest and political instability likely. Economic planning based on simple extrapolations of recent growth will exacerbate the discrepancy. Instead, African political leaders may have to manage expectations downward, while working to increase the rate of structural transformation and social inclusion.

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Trade liberalization and informal sector

Abstract of a working paper by Arias et al (2013), who argue that the entry costs to informal employment is significantly lower and that trade liberalization leads to a rise in the number of informal sector workers as previously idle workers enter the labor market:

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Informal employment is ubiquitous in developing countries, but few studies have estimated workers' switching costs between informal and formal employment. This paper builds on the empirical literature grounded in discrete choice models to estimate these costs. The results suggest that inter-industry labor mobility costs are large, but entry costs into informal employment are significantly lower than the costs of entry in formal employment. Simulations of labor-market adjustments caused by a trade-related fall in manufacturing goods prices indicate that the share of informally employed workers rises after liberalization, but this is due to entry into the labor market by previously idle labor.

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The Bali Package: Benefits worth $400 billion to $1 trillion over the years

At the Ninth Session of the Ministerial Conference of the WTO in Bali, the 159 member countries agreed to a deal (the Bali Package) whose benefits to the world economy are estimated to be between $400 billion and $1 trillion over the years, mainly through reduction in costs of trade by between 10% and 15%, increasing trade flows and revenue collection, creating a stable business environment and attracting foreign investment. The deal is expected to be adopted by the General Council by 31 July 2014.

It is described as the first major WTO agreement since 1995. The main highlight of the package is the trade facilitation part aimed at cutting red tape and speeding up port clearances. The other features of the package relate to food security and cotton production in developing countries, and a political commitment to reduce export subsidies in agriculture.

Some of the major highlights below:

Trade facilitation:

• A multilateral, legally binding deal to simplify customs procedures by reducing costs and improving their speed and efficiency.
• Specifically, it will speed up customs procedures; make trade easier, faster and cheaper; provide clarity, efficiency and transparency; reduce bureaucracy and corruption; and use technological advances.
• Includes provisions on goods in transit, which is of interest to landlocked countries like Nepal.
• Assistance for developing and LDCs to update their infrastructure, train customs officials, or for any other cost associated with implementing the agreement.

Agriculture and cotton:

• An interim, until a permanent one is agreed upon, solution related to the shielding of public stocking programs for food security. [Solution: “Members would temporarily refrain from lodging a legal complaint (“due restraint”, sometimes also called a “peace clause”) if a developing country exceeded its Amber Box limits as a result of stockholding for food security. Work on finding a longer term solution would continue after the ministerial conference. Countries using these policies would provide up-to-date data and other information on what was involved, so that other countries could see what was happening.”] It commits countries using the new flexibility to ensure that their food stockholding scheme does not “adversely affect the food security of other Members.”
• Tariff quota administration measures include a combination of consultation and provision of information when quotas are under-filled.
• Export subsidies and other measures with similar effect to be low.
• Improving market access for cotton production from LDCs along with development assistance for boosting production.

Development issues:

• No changes in other provisions (from Geneva versions) such as duty-free, quota-free access for LDCs, simplified preferential rules of origin for LDCs, and services waiver for LDCs, among others.
• Monitoring of special and differential treatment.
• Preferential rules of origin will make it easier for LDCs to export their goods.

Full Bali Ministerial Declaration here. Not all Doha Development Agenda issues are sorted out. These will be taken up in further trade negotiations. Earlier rounds of negotiation and Nepal’s interest here.

Reimagining Nepal!

The following paragraphs are pertinent to the Nepalese context. All are related to a recent book titled "Reimagining India: Unlocking the Potential of Asia’s Next Superpower".

Sheridan Jobbins (Extracted from a review of the book):

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The complexity of India is picked up by Coca Cola’s Muhtar Kent, the son of a diplomat who spent his formative years in India. “If you come to India with some grand, predetermined strategy or master plan, prepare to be distracted, deterred, and even demoralized.” If that sounds daunting, he proceeds with optimism by detailing a plan for success: focus on training and talent recruitment, and source products from within India to deepen ties to the market. Among his stories is that of the 5by20 initiative, “which seeks to bring additional business training, finance opportunities, and mentoring to five million women entrepreneurs across our global value chain by 2020. Indian women make up a significant focus of this program.”

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Fareed Zakari:

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I remain optimistic. We are watching the birth of a new sense of nationhood in India, drawn from the aspiring middle classes in its cities and towns, who are linked together by commerce and technology. They have common aspirations and ambitions, a common Indian dream—rising standards of living, good government, and a celebration of India’s diversity. That might not be as romantic a basis for nationalism as in days of old, but it is a powerful and durable base for a modern country that seeks to make its mark on the world.

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Anand Mahindra:

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All Indian states will have to improve their infrastructure and climate for doing business if they want to contend for major projects. In this way, investment will drive innovation and changes to the system much more efficiently than any edict from Delhi could. Tata Motors’ decision to shift its Nano project from West Bengal to Gujarat illustrates the point.

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Yasheng Huang:

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You have to include the workers, the women, villagers, and the rural Indians into the growth machine. We’re talking about simple manufacturing. We’re talking about simple service-sector jobs that require basic reading, a little bit of math, functional capabilities. And labor regulations in India are killing those potentials. They don’t kill the IT, they don’t kill the high tech, but they do kill the blue-collar manufacturing jobs, which India needs the most.

The other area that would require more government intervention is in the social sector—health and education. If the government doesn’t provide health and education, nobody can come close to matching the government. And this is where you actually want more government intervention. You want more tax money to go in those sectors. And the Indian government is not able to collect enough taxes to spend on health and education; it is also constrained administratively and politically in terms of scaling up education.

If India doesn’t fix the problem of education—primary-education, first-tier education—they are going to undermine their success in the high-tech sector. The reason is very simple. The tertiary education requires a long pipeline of college-ready students. If you don’t fix your primary education, if you don’t fix your high school, primary school, you’re going to have a very narrow pipeline.

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