Empowerment Line based poverty stands at 56% in India, McKinsey Global Institute (MGI)

McKinsey Global Institute (MGI) has come up with the Empowerment Line (full report here), an analytical framework that determines the level of consumption required to fulfill eight basic needs—food, energy, housing, drinking water, sanitation, health care, education, and social security—that are above the bare subsistence level and are essential to  achieve a decent standard of living.

Using this approach, they show that 56% of the population lacked the means to meet essential needs in 2012—about 680 million Indians, which is 2.5 times higher than 270 million people below the official poverty line. 

The study notes that “if India’s recent weak economic performance continues and no major reforms are undertaken, we project that in 2022 more than one-third of the population will remain below the Empowerment Line and that 12 percent will remain trapped in extreme poverty.”

The study also found that Indian households lack access to 46% of the basic services they need and there is wide geographical disparities in the provision of social infrastructure. It comes from their Access Deprivation Score, which shows the availability of basic services at the national, state or district level.

The study recommends four key inclusive reforms/priorities, which if implemented then India can bring 90% of its people above the Empowerment Line in  decade:

1. Accelerate job creation (Indian needs to add 115 million new nonfarm jobs over the next decade; manufacturing and construction sectors along with labor-intensive services sectors could be the backbone for this)
2. Raising farm productivity (increase investment in agriculture infrastructure and implement reforms to improve market access, rationalize price support measures, adopt new technology, and streamline agriculture extensive services)
3. Increasing public spending on basic services (increases in real terms by at least 6.7% annually through 2022)
4. Making basic services more effective (learn from success stories in basic services delivery in best-performing states; at present half of public spending on basic services does not translate into improved outcomes) 

Quality of electricity supply and income growth

Interesting finding of a new study by Chakravorty and Pelli (2013), who show that 16% increase in households connected to the grid led to an increase in non-agricultural income of about 9%, and 32% increase in quality of electricity supply (decrease in the number of blackouts, or equivalently an increase in the average number of hours per day during which electricity is available) resulted in an increase in income by 28.6%.

Excerpts from the paper:

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In a recent paper, we estimate the effect of a new connection to the grid and of a more reliable power supply for a typical Indian household, using data from a nationally representative sample of about 9,800 rural households (Indian Human Development Survey (IHDS) 2005 and Human Development Profile of India (HDPI) 1994) (Chakravorty, Pelli and Ural Marchand 2013). We construct an index for the quality of supply, in which an improvement in quality is defined as a decrease in the number of blackouts, or equivalently an increase in the average number of hours per day during which electricity is available.

We find that the increase (16%) in the number of households in the dataset that were connected to the grid between 1994 and 2005 led to an increase in non-agricultural income of roughly 9%, which corresponds to about Rs. 574 ($9.5 approx.) per person for the average household. This result is similar to what has been found by studies in other parts of the world. For example, Dinkelman (2011) studies the labour market effects of an electrification project in South Africa and finds that a grid connection leads to an increase of roughly 16% in male earnings. Barham et al. (2013) examine the case of Brazil and show that an increase in the share of electrified households by 10% increases income by 9%.

Our study goes a step further by looking at the effect of the quality of power supply on non-agricultural incomes. There was a 32% increase in the quality of electricity supply in the sample households, between 1994 and 2005. The rise in quality is estimated to have resulted in an increase in income of 28.6% (Rs. 1,852 or approx. $30) per person for the average household. This number includes new connections and the improvement in the quality of electricity supplied to households already connected to the grid. These results suggest that the impact of electrification on households cannot be considered independently of the quality of electricity. While the initial connection is important as it can induce reallocation of labour and capital within the household, this impact increases significantly with improvement in quality. This highlights the importance of providing a high quality supply of power, as the potential benefits of electricity are not completely realised by just providing a grid connection and low quality power.

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NEPAL: 633,000 people to enter job market annually by 2020

In its Least Developed Counties Report 2013, UNCTAD argues that the number of young people of working age in Nepal is currently increasing by 550,000 a year (465,000 in 2005), and by 2020 it will climb to 633,000 a year. Globally, young population is projected to rise to 1.7 billion by 2050. By 2050, one in four young people worldwide will live in an LDC.

The report recommends improving GDP growth via:

• the generation of employment, particularly work that pays a stable living wage and has safe employment conditions
• investment to develop the capacities of economies to produce broader varieties of goods, and goods of greater sophistication and higher value

The report states that employment grew by 2.7% per annum during 2000-2012, higher than the average population growth of 1.7% but below GDP growth of 4%.

Sector-wise employment breakdown shows the following:

• Agriculture accounted for 71% of total employment, down from 75% in 2000.
• Industry accounted for 12% of Nepal's total employment in 2013, up by 2% compared to 2000.
• Services accounted for 17% of employment in 2013, up by 2% compared to 2000.

The figure below shows LDC’s employment elasticity to GDP growth. Nepal has elasticity below 1, which suggests that employment growth is dominated more by labor productivity growth than broad-based employment generation. Elasticity greater than 1 indicates that employment grows in more proportion than GDP growth. Employment elasticity to GDP growth in LDCs is found to average 0.7.

It seems growth in per capita GDP is accounted more for by the change in share of working age population (demographic structure) in Nepal and less by output per worker. Other developing countries have seen growth in per capita GDP coming more from productivity growth (output per worker). In Nepal, demographic transition (alternatively, decreasing dependent population) generated per capita growth equivalent to 42.8% of the actual observed growth in per capita GDP.

Furthermore, rather than within sector productivity growth, contributions to growth in per captia GDP came more from inter-sectoral shifts (structural change) in Nepal, especially from a shift to service sector. Exogenously, about 42.8% contributions came from demographic shifts. These are pretty unique to Nepal when compared to other LDCs, where growth in per capita GDP is driven largely by productivity growth within sector, i.e. moving from lower productivity to higher productivity activities within sectors (and then across sectors).

For more on Nepal's structural transformation, see this blog post and the links within.

Nepal’s sovereign (shadow) credit rating in 2012

Nepal does not have a sovereign credit rating and it does not borrow from the international financial markets. A large part of its budget gap is met through foreign grants and concessional loans. Some of it is met through domestic borrowing. Now, what would Nepal’s credit rating look like if it were rated by the major credit rating agencies?

In a latest working paper, Basu, De, Ratha and Timmer (2013) compute shadow ratings of countries, including the unrated ones, by making it a function of macroeconomic, structural and governance variables. They find that even after the financial crisis, which led to lowering of credit ratings of a majority of the developed countries, several unrated countries appear to be more creditworthy than previously thought and may actually access international capital markets. The latest paper uses a modified version of the methodology used by Ratha, De and Mohapatra (2011). Here they use a ‘relative risk rating’ and find that even if absolute rating is downgraded, relative risk rating can still improve.

In this context, Nepal has a rating of CCC+ (with positive outlook), the same shadow rating as in 2011. In fact, Nepal’s shadow credit rating is as good as Ethiopia’s, and better than Lao PDR, Nicaragua, and Kyrgyz Republic to name a few. In South Asia, Bhutan has B stable and Maldives has B- stable. In 2008 (before the financial crisis), the authors predicted B- stable for Nepal. The lower than expected rating in 2012 is attributed to the worsening rule of law. The major contributor to Nepal’s CCC+ positive rating is the good debt indicator. Positive outlook indicates the possibilities of an upgrade.

The specific variables used to come up with a shadow sovereign rating are GDP growth [3-year moving average], log of GNI per capita, ratio of reserves to imports plus short term debt, ratio of external debt to export plus remittances, GDP volatility [5-year standard deviation], rule of law [from World Governance Indicators], inflation [CPI annual % change], government debt [gross debt as % of GDP], log of GDP, and high income dummy.

Locational and technological transformation to overcome labor costs in manufacturing sector

Very interesting article about manufacturing competitiveness over at Mckinsey. It argues that the “proximity to demand and innovative supply ecosystems will trump labor costs as technology transforms operations in the years ahead.” Companies are increasingly shifting production close to demand (for example, rising consumer demand in India has prompted many MNCs to open factors there to tap the Indian market itself and to produce goods at competitive prices). New innovation and local knowledge will help create a competitive manufacturing ecosystem.

Excerpts from the article:

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[…]For some products, low labor costs still furnish a decisive competitive edge, of course. But as wages and purchasing power rise in emerging markets, their relative importance as centers of demand, not just supply, is growing.

Global energy dynamics too are evolving—not just the now-familiar shale-gas revolution in the United States, but also rising levels of innovation in areas such as battery storage and renewables—potentially reframing manufacturers’ strategic options. Simultaneously, advances stemming from the expanding Internet of Things, the next wave of robotics, and other disruptive technologies are enabling radical operational innovations while boosting the importance of new workforce skills.

Rather than focus on offshoring or even “reshoring”—a term used to describe the return of manufacturing to developed markets as wages rise in emerging ones—today’s manufacturing strategies need to concentrate on what’s coming next. A next-shoring perspective emphasizes proximity to demand and proximity to innovation. Both are crucial in a world where evolving demand from new markets places a premium on the ability to adapt products to different regions and where emerging technologies that could disrupt costs and processes are making new supply ecosystems a differentiator. Next-shoring strategies encompass elements such as a diverse and agile set of production locations, a rich network of innovation-oriented partnerships, and a strong focus on technical skills.

[…]More than two-thirds of global manufacturing activity takes place in industries that tend to locate close to demand. This simple fact helps explain why manufacturing output and employment have recently risen—not only in Europe and North America, but also in emerging markets, such as China—since demand bottomed out during the recession following the financial crisis of 2008.

[…]The regional, ethnic, income, and cultural diversity of markets such as Africa, Brazil, China, and India (where some local segments exceed the size of entire markets in developed nations) is raising the ante for meeting local demand.

[…]in a few labor-intensive, trade-oriented industries, such as apparel production and consumer electronics, labor-cost changes do tend to tip the balance between different geographic regions; manufacturing employment in Bangladesh and Vietnam, for instance, has benefited from China’s wage surge, even as Chinese manufacturers are seeking to raise productivity.

[…]the narrowing labor-cost gap reinforces the importance of local demand factors in driving manufacturing employment. Indeed, factor costs often have the greatest impact on location decisions within a region—for example, Airbus moving to Alabama instead of Texas or North Carolina. These costs interact with policy factors, such as infrastructure spending and tax incentives, to shape a region’s overall economic attractiveness.

[…]Advanced robotics, 3-D printers, and the large-scale digitization of operations are poised to alter fundamental assumptions about manufacturing costs and footprints. To derive value from these shifts, companies will have to make significant investments and ensure access to hubs of innovation, capable suppliers, and highly skilled workers.

[…]Next-shoring isn’t about the shift of manufacturing from one place to another but about adapting to, and preparing for, the changing nature of manufacturing everywhere.

[…]Locating manufacturing close to demand makes it easier to identify and meet local needs. It’s a delicate balancing act, though, to create an efficient global manufacturing footprint that embraces a wide range of local tastes, since economies of scale still matter in many industries.

[…]New combinations of technical expertise and local domain knowledge will become the basis for powerful new product strategies. Responsive, collaborative, and tech-savvy supplier ecosystems will therefore be increasingly important competitive assets in a growing number of regional markets. 

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Challenges to growth

Michael Spence lays out the steps to overcome the challenges to growth (mostly in developed countries):

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• First, expectations are or have been out of line with reality. It takes time for the full impact of deleveraging, structural rebalancing, and restoring shortfalls in tangible and intangible assets via investment to manifest itself. In the meantime, those who are bearing the brunt of the transition costs – the unemployed and the young – need support, and those of us who are more fortunate should bear the costs. Otherwise, the stated intention of restoring inclusive growth patterns will lack credibility, undercutting the ability to make difficult but important choices.

• Second, achieving full potential growth requires that the widespread pattern of public-sector underinvestment be reversed. A shift from consumption-led to investment-led growth is crucial, and it has to start with the public sector. The best way to use the advanced countries’ remaining fiscal capacity is to restore public investment in the context of a credible multi-year stabilization plan. This is a much better path than one that relies on leverage, low interest rates, and elevated asset prices to stimulate domestic demand beyond its natural recovery level. Not all demand is created equal. We need to get the level up and the composition right.

• Third, in flexible economies like that of the US, an important structural shift toward external demand is already underway. Exports are growing rapidly (outpacing import growth), owing to lower energy costs, new technologies that favor re-localization, and a declining real effective exchange rate (nominal dollar deprecation combined with muted domestic wage and income growth and higher inflation in major developing-country trading partners). Eventually, these structural shifts will offset a lower (and more sustainable) level of consumption relative to income, unless inappropriate increases in domestic demand short-circuit the process.

• Fourth, economies with structural rigidities need to take steps to remove them. All economies must be adaptable to structural change in order to support growth, and flexibility becomes more important in altering defective growth patterns, because it affects the speed of recovery.

• Finally, leadership is required to build a consensus around a new growth model and the burden-sharing needed to implement it successfully. Many developing countries spend a lot of time in a stable, no-growth equilibrium, and then shift to a more positive one. There is nothing automatic about that. In all of the cases with which I am familiar, effective leadership was the catalyst.

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Inflation in Nepal: Recent development & outlook

Here is a brief presentation on the recent inflationary development and outlook.

Inflation in Nepal: Recent Development and Outlook