Impact of COVID-19 in East Asia and the Pacific

In its latest East Asia and Pacific Economic Monitor (April 2020), the World Bank argues that COVID-19 presents an unusual combination of disruptive and mutually reinforcing events, and that significant economic pain seems unavoidable in countries with excessive indebtedness. It presents an unusual combination of a supply and demand shock due to the preventive behavior of individuals and the transmission control policies of governments. 

Three types of activities are immediately affected: (i) collective high-density production (workers work closely together in manufacturing factories); (ii) collective high-density consumption (services activities such as sport, music, restaurant, travel, etc); and (iii) proximate production and consumption (suppliers meeting consumers activities such as personal care, health care, restaurants, retails, etc). 

The immediate effect was first on the Chinese economy, where lockdown and transmission control policies disrupted supply and froze demand, and affected other countries through flows of trade and tourists. As the virus spread beyond China, other governments took similar actions, leading to severe dent in demand and supply. This is amplifying the mutual shocks through trade and tourist flows, and finance stress. 

Under a baseline scenario, developing EAP growth is projected at 2.5% for 2020, but -0.5% under lower case scenario. PRC’s is expected to grow at 2.3% and 0.1%, respectively under the two scenarios. Baseline refers to a scenario of severe growth slowdown followed by a strong recovery. Lower case refers to a scenario of deeper contraction followed by sluggish recovery. 

The COVID-19 shock will also have impact on poverty and welfare through illness, death and lost incomes. Under the baseline scenario. About 24 million fewer people are estimated to escape poverty across developing EAP in 2020. However, under the lower-case scenario, poverty is estimated to increase by about 11 million people. Poverty rate refers to US$5.50 per person per day (2011 PPP) threshold. 

Effect on households is country-specific: households in Vietnam linked to manufacturing reliant on imported inputs will see poverty rates double but households depending on tourism income will be the hardest hit in the Pacific Islands. Developing EAP refers to Cambodia, China, Indonesia, Lao People’s Democratic Republic (PDR), Malaysia, Mongolia, Myanmar, Papua New Guinea, the Philippines, Thailand, Timor-Leste, Vietnam, and the Pacific Island Countries.

The WB recommends countries to flatten two kinds of curves: (i) flatten the pandemic curve by limiting transmission through lockdowns and travel bans, and (ii) flatten the recession curve by taking appropriate monetary, fiscal and structural measures. It also recommends augmentation of health capacity to fulfill potentially overwhelming demand. 

On macroeconomic policy, it argues that an expansionary policy is less effective given that the lockdown and social distancing limit production and employment. So, fiscal measures should initially focus on social protection to cushion against shocks, especially for the most economically vulnerable. These include subsidies for sick pay, expenditure on healthcare, expanded safety nets, cash and in-kind transfers when the informal sector is large, schooling feeding programs, and employment support to reintegrate into the economy among others. These would help to limit long-term human capital losses due to temporary deprivations. Also note that marginal propensity to consume of low-income households is reasonably high. 

On financial sector, it recommends easier access to credit for households to smooth consumption, and easier access to liquidity for firms to help them survive the disruption. However, regulators should ensure risk disclosure and clearly communicate supervisory expectations to avoid financial instability, especially when debt levels are high. For low-income countries, debt relief will be essential. 

On trade policy, the recommendation is to stay open and not resort to export restrictions, especially export of coronavirus-related medical products. 

Coronavirus affects travel, trade and supply chains worldwide

Eswar Prasad writes in NYT that there is little hope for a global economic rebound in 2020.  Excerpts:

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The spread of the virus is hurting travel, trade and supply chains worldwide. The Baltic Dry Index, a forward-looking indicator of global trade, has fallen by half and oil prices are down by about a quarter so far this year. U.S. stock markets, after initially taking the epidemic’s fallout in stride, are now experiencing a major sell-off.

[...]Financial markets are prone to large, sentiment-driven swings that sometimes seem out of line with economic fundamentals. But the news of the last few days suggests that, rather than coming under control and being confined to China, the outbreak is spreading and could get far worse. Stock markets in the United States and elsewhere are reflecting this reassessment of the epidemic’s future trajectory and the risks it poses.

The notion of this outbreak being a short-lived negative shock to global demand now looks unrealistic. It is not just spending on restaurants and travel that is suffering, but also investment by businesses while they wait for the uncertainty to be resolved. This will have long-term effects on growth even if the outbreak proves short-lived.

The disruption of supply chains, especially those that pass through Asia, is hurting businesses in multiple dimensions. Countries such as China, South Korea and Japan are critical to the supply chains for products ranging from plastic toys to iPhones to high-tech machinery. In these countries, manufacturers can’t get raw materials delivered reliably, are facing worker shortages and are having difficulty shipping out products. Rejiggering supply chains takes months, if not years. If the coronavirus spreads and causes disruptions to other major economies, it could wreak further havoc on supply chains.

[...]There is no easy way out. The Federal Reserve and other central banks could cut interest rates. This might not do much good, as uncertainty will restrain consumer spending and business investment even if cheap loans were available. Government spending might be more potent. Any assistance that reaches small businesses and allows them to stay afloat or goes directly into the hands of low-income consumers will help. But consumers and businesses are as likely to stash away any extra cash as they are to spend it.

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Book review: Unleashing the Vajra

It was published in The Kathmandu Post, 11 January 2020

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A peek at historical underpinnings of economic governance

Sujeev Shakya’s ‘Unleashing the Vajra’ attempts to find a way forward to Nepal’s economic transformation.

Like politicians, most economic analysts in Nepal invoke historical perspectives or dated ideologies to justify present policies or political alliances. Learning from past successes or failures to consistently argue about the future is largely missing in both academic and political circles.

Sujeev Shakya, a prolific writer on socio-economic issues in Nepal, stands out in his latest book Unleashing the Vajra. He tries to understand the past—particularly starting from Nepal Sambat or 879 CE, which was replaced by the Rana rulers with Bikram Sambat in the 1850s—to make the future right. The book is a continuation of the hugely popular Unleashing Nepal, and a recent one in Nepali language titled Arthat Arthatantra. These two books focus on unleashing the economic potential of Nepal, advocacy of a capitalist welfare state, and suggestion to lay the groundwork for youths to reinvigorate the economy.

In the new book, with a grand belief that “economic transformation required not just financial and management skills, but also societal transformation, moving towards an equitable society with sound civic behaviour, empathy and integrity”, Shakya questions the basics of Nepali culture, consumerism, conduct, and convergence of economic activities with the two neighbours—India and China. He asserts that if Nepalis focus on their own cleanliness and the cleanliness of their houses, surroundings and politics, then such collective behaviour could lead to a cleaner neighbourhood, city and finally the country.

As always, Shakya starts with an optimistic tone. He reminds readers Nepal got wealthy by being a notable trade link between India and China during the 17th century. The country now has the opportunity to unleash its economic potential and take advantage of the two most populous countries and emerging economic powerhouses in our neighbourhood. Unfortunately, according to Shakya, we barely have two decades to realise the glorious past.

The past

Just a year after the death of Prithvi Narayan Shah, Adam Smith’s economic principles rooted in the magic of the invisible hand in creating market equilibrium and efficiency gains started gaining popularity in the West. In contrast, the rulers in Nepal, who thought of the economy as their sole privilege, imposed a state-directed heavy-handed approach, which stifled economic growth and prosperity. The restrictions imposed on land ownership, constraints on private enterprises, limits on the workforce, and the emergence of rent-seekers with tacit or explicit backing from the leaders are still the core features of our economy.

The modern-day rent-seeking feudal lords, both in politics and the private sector, have relied on extractive political and economic institutions to stifle prosperity—to advance their own interests in critical sectors such as agriculture, healthcare, education, construction, finance, and transportation.

Shakya calls them “cartelpreneurs.” There are “donorpreneurs” too. They have mastered the art of thriving on mediocrity—“too much success threatens their own employment, too little threatens loss of funds”. The donorpreneurs tend to set the development narrative and do not prefer the country to graduate out of foreign aid.

Shakya is equally critical of the private sector. He argues a section of the Nepali private sector thrived by taking advantage of preferential tariff between Nepal and India. Specifically, they imported goods from third countries via India, and either sold it to visiting Indian tourists by charging higher prices or re-exported them to India. This trading practice based on tariff arbitrage is prevalent to this day.

In response, India sometimes imposes quota and slaps countervailing duty on our exports. Recently, palm oil has become the top export to India although it is not even produced in Nepal. Similar was the case with betel nuts, whose export volume outstripped total domestic production. Shakya argues the Nepali private sector lobbied for a protectionist regime so that they could earn supernormal profits, which they shared with the political class. A recent example of this is the sugar cartel that successfully lobbied for import ban, increased prices to the surprise of the prime minister, and dilly-dallied repayment to poor sugarcane farmers. Similar is the case with milk, taxis, construction, and agriculture cartels.

The future

The section focusing on events after 2008 is more interesting and perhaps relevant to get a clue of what the future holds for the Nepali economy.

Shakya thinks hydropower, agriculture, tourism, services and infrastructure are the keys to unlocking and unleashing Nepal’s economic potential, i.e. the vajra. Exploiting this potential to enhance our prosperity requires Nepal to hitch its “wagon to the fast-moving engines” of our two giant neighbours. Eventually, he wants to see InChiNep collaboration that creates win-win-win situation for the three countries. It makes strategic sense since India and China are coming closer despite the occasional foreign policy hiccups. For instance, Indian Prime Minister Narendra Modi and Chinese President Xi Jinping met sixteen times between 2014 and 2019, and the two countries aim to increase trade volume to $100 billion by 2020.

Belt and Road Initiative offers an opportunity for Nepal to not only secure financing for infrastructure projects, but also to get out of the ‘India-locked’ mentality. Meanwhile, making procedures easier for Indian investors, tourists and traders in Nepal could boost investment in key sectors and strengthen people-to-people relationship. Additionally, he thinks there are more opportunities if Nepal deepens integration with ‘East South Asia’— a region comprising Bangladesh, Bhutan, Nepal, and north-east India. Enhancing borders to promote trade and commerce, better and well-connected infrastructure, and easier movement of labour with proper documentation should facilitate integration in this bloc. Shakya ambitiously bats for Border Economic Zone, which could facilitate connectivity clusters along the border and substantially ease rules for flow of labour, capital and goods.

On the nature of economic governance, rather than choosing between capitalism and socialism, Shakya prefers a capitalist welfare state, where free enterprises are regulated as per global standards and that the government will have enough revenue to tackle chronic poverty and inequality. This is a hotly and perpetually debated topic in economics. Unfortunately, the discussion on this topic in the new book is a rehash of the arguments already made in the previous two books. Similar is the case with the discussion on long-term economic vision, which pretty much narrates what is already being drafted by the National Planning Commission. Readers may find something refreshing in the chapters where he passionately discusses the need for societal transformation via individual transformation, i.e. bring changes at individual level and then collectively at the neighbourhood, city and country levels.

The book does not offer an in-depth analysis of how and why Nepali economy is the way it is now and the future direction. Inquisitive readers may seek answers beyond the usual narrative of potential for economic transformation by utilising internal resources and by promoting trade and connectivity with India and China. Unfortunately, the book does not offer much beyond the assertion that Nepal has only two decades to realise the glorious past. It would have been more informative if the author dug deeper on why the specific two decades timeframe, what needs to be done, and what happens if we don’t.

That being said, the book provides a good overview of the historical underpinnings of today’s achievements or impediments, and the opportunities that may be utilised. It provides thoughtful perspectives for readers who have an interest in economic and foreign policies, and plenty of food for thought for those who want to explore the issues academically. The book is primarily targeted for general readers who are interested in comprehending the successes and mistakes in the past, and opportunities going forward. 

Tariff war and policy uncertainty leading to synchronized global slowdown

In its latest World Economic Outlook (October 2019), the IMF argues that the global economy is in a synchronized slowdown, thanks to rising trade barriers and increasing geopolitical tensions. It has downgraded global growth for 2019 to 3%, the slowest pace since the global financial crisis a decade ago. Specifically,

• US-China trade tension will reduce the level of global GDP by 0.8% by 2020
• Growth is affected by idiosyncratic country-specific factors in emerging market economies. Growth in Argentina, Iran, Turkey, Venezuela, Saudi Arabia, India, Russia, Brazil, Mexico, China, etc are expected to slowdown
• Growth weakened in China because of regulatory efforts needed to rein in debt and macroeconomic consequences of increased trade tensions
• Growth slowed down in India because of corporate and environmental regulatory uncertainty in addition to the concerns regarding the soundness of nonbank financial sector. 
• Growth is also affected by structural factors such as low productivity growth and aging demographics in advanced economies

So, what is causing the weak growth? 

• Sharp deterioration of manufacturing activity 
• Global trade affected by higher tariffs
• Prolonged trade policy uncertainty affecting investment and demand for capital goods

What is supporting growth?

• Services sector is keeping labor markets afloat and wage growth and consumption spending healthy in advanced economies. This may not last long due to weaknesses in the US and Euro area.
• Monetary policy is supporting growth by easing policies amidst the absence of inflationary pressures and weakening economic activity. 

What are the risks to growth?

• Heightened trade and geopolitical tensions including Brexit-related risks
• These could lead to shift in risk sentiment, financial disruptions, and a reversal of capital flows to emerging market economies 
• Low inflation is constraining monetary policy and its effectiveness

What is needed to rejuvenate growth, especially to boost confidence and reinvigorate investment, manufacturing, and trade?

• Undo the trade barriers, rein in geopolitical tensions, and reduce domestic policy uncertainty. Tariffs should not be used to target bilateral trade balances. Cooperation to resolve roots of dissatisfaction is needed (resolve deadlock over WTO dispute settlement mechanism; modernize WTO rules to encompass e-commerce, subsidies and technology transfer, etc)
• Monetary policy needs to be coupled with fiscal support where fiscal space is available. If borrowing costs are low, then countries should borrow more to invest in social and infrastructure capital 
• If monetary policy is supporting growth, then macroprudential regulation should be the norm to prevent mispricing of risk and excessive buildup of financial vulnerabilities
• Sustainable growth requires structural reforms to boost productivity, improve resilience, and lower inequality. These reforms are more effective when good governance is already in place (applies to emerging market and developing economies)

Although global growth will inch up to 3.4% in 2020 it is still a downward revision from the April 2019 projection. This is supported by growth rebound in emerging market and developing economies. The ‘recovery’ is not broad-based and remains vulnerable because of the expected slowdown in major economies like the US, Japan, and China.

South Asian outlook

• Nepal is clocking in the highest GDP growth in FY2019. In FY2020 Bhutanese economy is expected to grow at 7.2%, followed by Indian economy 7.0% and Nepali economy 6.3%.
• Nepal is projected to have the highest inflation rate, 6.1%, in FY2020.
• Maldives is expected to have the highest current account deficit, 15.7% of GDP, in FY2020, followed by Nepal (10% of GDP)

GDP growth
Economy	FY2019	FY2020
Bhutan	5.5	7.2
India	6.1	7.0
Nepal	7.1	6.3
Maldives	6.5	6.0
Bangladesh	5.9	6.0
Sri Lanka	2.7	3.5
Inflation
Economy	FY2019	FY2020
Nepal	4.5	6.1
Bangladesh	5.5	5.5
Sri Lanka	4.1	4.5
Bhutan	3.6	4.2
India	3.4	4.1
Maldives	1.5	2.3
Current account balance (% of GDP)
Economy	FY2019	FY2020
Maldives	-20.4	-15.7
Nepal	-8.3	-10.0
Bhutan	-12.5	-9.6
Sri Lanka	-2.6	-2.8
India	-2.0	-2.3
Bangladesh	-2.0	-2.1

New cross-border transmission line, 762 MW Tamor reservoir project, projected GDP growth of 6.4%

Nepal, India agree to build New Butwal-Gorakhpur transmission line with equal equity investment

From The Kathmandu Post: Nepal and India have agreed to fund a second high-capacity cross-border transmission line connecting Butwal to Gorakhpur in India through a commercial entity with both countries pledging equal equity in funding of the project. The agreement on Tuesday followed a two-day, Seventh Joint Steering Committee and Joint Working Group meeting on Nepal-India Cooperation in the Power Sector in the southern Indian city of Bengaluru. The meeting concluded with agreements on implementation and financing modality of the 135 kilometre-long, 400 kV transmission line and formalisation of an energy banking mechanism between the two South Asian neighbours.

“The sides have agreed to build the transmission line with 20 percent of equity investment and 80 percent debt,” said Energy Minister Barsha Man Pun. It was decided that a company would be formed under the modality within three months and to have a project implementation agreement, within six months.The decision came a month after the Nepali and Indian energy ministers expressed optimism over both sides coming to terms on the development modality of the proposed 400 kV New Butwal-Gorakhpur transmission line project.

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HIDCL, Power China to build 762MW Tamor hydel

From The Himalayan Times: The government has awarded the 762-megawatt Tamor reservoir hydropower project to a Nepali and Chinese joint venture firm. Hydroelectricity Investment and Development Company Ltd (HIDCL) of Nepal and state-owned Power China Corporation will construct the project on government-to-government (G2G) basis. Construction of the Tamor project is expected to start from next fiscal and be completed by 2025.

During Chinese President Xi Jinping’s two-day state visit to Nepal, the Investment Board Nepal (IBN) and Ministry of Energy, Water Resources and Irrigation (MoEWRI) awarded the contract to HIDCL-Power China to build the project under the public-private-partnership (PPP) model. Minister for Energy, Water Resources and Irrigation, Barsha Man Pun, informed that the government has also signed an agreement with Power China to build the 156-megawatt Madi multipurpose hydropower project which is located in Rolpa district. As per an initial study, the project cost is around $39 million.

Earlier, HIDCL and Power China had jointly submitted a project development proposal at the IBN to build both the projects with a share structure of 46:54 per cent for the Tamor project, with the Nepali firm investing 46 per cent and Power China investing 54 per cent of the project cost. Similarly, in Madi multipurpose hydropower project, HIDCL will manage 26 per cent and Power China will manage 74 per cent of the total investment.

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World Bank projects Nepal’s GDP growth rate to average at 6.5%

From myRepublica: The World Bank has projected the growth of Nepal’s gross domestic product (GDP) to average at 6.5% over the current fiscal year – FY2019/20 and the next fiscal year – FY2020/21.The medium-term outlook is supported by government consumption and investment, according to the bank. Reasoning strong services and construction activity due to rising tourist arrivals and higher public spending, the international financial institution made the growth projection for Nepal. 

According to the report, growth on the supply side will be driven by services, underpinned by steady remittance inflows and high tourist arrivals whereas investment and government consumption are expected to be the main drivers of growth on the demand side. The tourist arrivals will be supported by the Visit Nepal 2020 campaign, the completion of the second international airport and the construction of big hotels in the country.

Investment climate assessment and more flights between Nepal and China

NEPAL: 2019 Investment climate assessment

In its latest assessment of investment climate in Nepal, the US Department of State argues that widespread corruption, cumbersome bureaucracy, and weak implementation of laws and regulations have generally kept investors at bay. The recently enacted investment laws and regulations— including FITTA, IEA, SEZA, PPP and Investment Act, revised Labor Act and IPR policy, among others  – have maintained institutional and procedural impediments to smooth business practices, dissuading all but the most risk-tolerant investors. 

The assessment notes that Nepal has considerable investment potential in hydroelectric power, agriculture, tourism, IT and infrastructure sectors. However, the country is attractive only to investors who are willing to accept inherent risks and the unpredictability of business operations. Significant investment barriers include:

• Corruption
• Limitation on operation of foreign banks, repatriation of profits, currency exchange facilities
• Government’s monopoly in electricity (transmission) and petroleum distribution
• Overseas migration and poorly trained workforce
• Proliferation of politicized trade unions and syndicates masked as associations
• Cumbersome and obstructive immigration laws and visa policies for foreign investors
• Political uncertainty due to the continued disregard to addressing the political demands and discontents of political parties representing the Terai region
• Security risk from insurgent groups that have persistently and pervasively using intimidation, extortion and violence
• Poor connectivity due to mountainous terrain and poor infrastructure
• Restrictions on the media and NGOs

The most troublesome barriers are corruption, bureaucracy, lack of implementation of existing procedures and requirements, and a weak regulatory environment. It states that “many of the corruption- or petty bureaucracy-based hindrances impeding the smooth conduct of business, however, remain unaddressed in the absence of pay-offs or personal interventions with cabinet-level officials”. 

Furthermore, “many foreign investors note that Nepal’s regulatory system is based largely on personal relationships with government officials, rather than systematic and routine processes.  Legal, regulatory, and accounting systems are not transparent and are not consistent with international norms”.

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Nepal and China agree to increase weekly flights to 98

From The Kathmandu Post: Nepal and China signed a revised bilateral air services agreement on Friday, which will allow 98 weekly flights between the two countries on a reciprocal basis, an increase from the existing 70 flights per week. Of the increased 28 flights, Chinese carriers will have to operate 21 flights in and out of the two upcoming international airports—Gautam Buddha International Airport in Bhairahawa and Pokhara International Airport, according to Tourism Ministry officials who signed the agreement in Beijing.

The existing pact between the two countries allows flights to seven destinations in China: Beijing, Shanghai, Lhasa, Guangzhou, Kunming, Chengdu and Xi’an. In the revised pact, the Chinese side has agreed to designate eight new destinations for Nepali carriers, according to Pramod Nepal, an under-secretary at the Tourism Ministry. “Nepali carriers will be allowed to operate flights to any new destinations within China at the Nepali airlines’ discretion,” he said. 

Currently, five Chinese carriers—Air China, China Southern, China Eastern, Sichuan Airlines and Tibet Airlines—operate flights to Nepal. However, no Nepali carriers currently fly to China. The national flag carrier used to operate a service to the Japanese city of Osaka, via Shanghai, until 2008 under fifth freedom rights. In 2015, Nepal Airlines applied for landing permission at Guangzhou Baiyun International Airport, but its application is still pending.

Third country trade via China, BRI and Nepal, disinterest in SSF and sugar politics

Nepal signs deal with China to access seven Chinese sea and land ports

From The Kathmandu Post: Nepal and China on Monday signed the Protocol on Implementing Agreement on Transit and Transport and six other agreements in Beijing after delegation level talks between President Bidya Devi Bhandari and her Chinese counterpart Xi Jinping at the Great Hall of the People. Minister for Foreign Affairs Pradeep Gyawali and Minister for Transport of China Li Xiaopeng signed the agreement on behalf of their respective governments, according to the Nepali Embassy in Beijing. The protocol had been pending since Nepal and China signed the Transit and Transportation Agreement in March 2016 during Prime Minister KP Sharma Oli’s visit to the northern neighbour.

The Transit and Transportation Agreement was signed just months after an undeclared Indian border blockade was lifted, with a view to diversifying Nepal’s trade and paving the way for landlocked Nepal to carry out third country trade through ports in the northern neighbour. But for the third-country trade via China to commence, the protocol was a must.

The signing of the protocol makes it possible for Nepal to use four Chinese sea ports--in Tianjin, Shenzhen, Lianyungang and Zhanjiang--and three land ports--in Lanzhou, Lhasa and Shigatse--for third-country import. It will also allow Nepal to carry out exports through six dedicated transit points between Nepal and China.

>>Other agreements include:

• Handover Certificate of Grant-Aid for the Repair and Reinforcement Project of the Existing China-aided Projects
• Agreement on Economic and Technical Co-operation
• Minutes of Meeting on Strengthening Assistance Co-operation in the Field of Livelihood in the Northern Region of Nepal
• Agreement on Co-operation and Mutual Administrative Assistance in Customs Matters
• MoU on Co-operation on Standardization between Nepal Bureau of Standards and Metrology (NBSM) and Standardization Administration of China (SAC)
• Agreement on Preventing the Theft, Clandestine Excavation and Illicit Import and Export of Cultural Property

Meanwhile, a joint communique of the Leaders' Roundtable of the 2nd Belt and Road Forum for International Cooperation included "the Nepal-China Trans-Himalayan Multi-dimensional Connectivity Network, including Nepal-China cross-border railway"

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Govt continues sugar import restriction until mid-July

From myRepublica: Though Prime Minister KP Sharma Oli had said that he was ‘tricked’ by sugar mills to restrict the import of sugar, the government has continued the quantitative restriction until mid-July. The restriction that was in place until Chaitra end (April 13) was extended till mid-July. According to a notice published in the Government on Nepal Gazette on April 15, the deadline for the import restriction was extended until July 16. The decision to give the import restriction of sugar continuity was taken a week after Prime Minister Oli’s statement criticizing sugar mills for ‘tricking’ him into imposing the quantitative restriction on import of sugar. 

According to the quantitative restriction which was put in place in April 14 last year, the import of sugar exceeding a total quantity of 94,900 tons was restricted. As sugar of that quantity has already been imported, there won’t be sugar imports anymore. The decision to impose restriction on imports, however, was not free from the controversy. Consumer activists have criticized the government for bowing down to sugar mills’ pressure to restrict imports which prompted price hike immediately after the imports came to a halt. Even Prime Minister Oli, after seven months of the decision, had admitted at a public program that sugar mill owners misled him about the scenario of supply and production of their products to make him impose the restriction. But instead of course correction, the government has not allowed the deadline for the sugar import restriction to lapse. 

Concluding that there was ‘collusion’ between government officials and the sugar mills to artificially drive up prices, the Public Accounts Committee, upon the recommendation of its sub-committee, instructed the Commission for Investigation of Abuse of Authority to investigate.

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Employers hesitant to join Social Security Fund

From Nayapatrika: सरकारले निकै तामझामका साथ सुरु गरेको सामाजिक सुरक्षा कार्यक्रम कार्यान्वयनमै आशंका उब्जिएको छ । देशभर करिब साढे ९ लाख रोजगारदाता रहेको भए पनि अन्तिम दिन शनिबारसम्म सामाजिक सुरक्षा कोषमा आबद्ध हुने रोजगारदाताको संख्या नगन्य छ । सातै प्रदेशका रोजगारदातालाई सूचीकरणका लागि दिएको समय समाप्त भइसक्दासमेत कोषमा शून्य दशमलव २७ प्रतिशत अर्थात् २ हजार ४ सय ८२ रोजगारदाता मात्रै आबद्ध भएका छन् । ऐनको व्यवस्थाअनुसार कोषमा रोजगारदाता आबद्ध नभएपछि कोषको कार्यान्वयनमै आशंका उब्जिएको हो । पछिल्लोपटक रोजगारदातालाई कोषमा आबद्ध हुने म्याद आगामी असार मसान्तसम्मका लागि थप गरिएको छ । 

कोषको अनलाइन प्रणालीमार्फत रोजगारदाताले सूचीकरण गर्न सक्ने व्यवस्था मिलाइएको थियो । रोजगारदाताले आफू सूचीकरण भएको तीन महिनाभित्र आफ्नो रोजगार सम्बन्ध कायम रहेका श्रमिकलाई कोषमा सूचीकरण गराउनुपर्ने कानुनी व्यवस्था छ । कोषका अनुसार आबद्ध केही रोजगारदाताले हालसम्म ४ हजार ६ सय ३८ श्रमिकलाई मात्र कोषमा सूचीकृत गराएका छन् । सरकारी सेवामा बहाल रहेका तथा सरकारी कोषबाट पारिश्रमिक पाउने व्यक्ति, अनौपचारिक क्षेत्रका श्रमिकहरू र स्वरोजगारीसमेत सामाजिक सुरक्षा कोषमा समेट्ने भनिए पनि सरकारले त्यसतर्फ कुनै कदम चाल्न सकेको छैन । 

China's manufacturing transformation

China's trajectory of manufacturing is quite interesting. Here is an abstract from an article in NYT:

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Economic textbooks lay out a common trajectory for developing nations. First they make shoes, then steel. Next they move into cars, computers and cellphones. Eventually the most advanced economies tackle semiconductors and automation. As they climb up the manufacturing ladder, they abandon some cheaper goods along the way.

[...]Look at the evolution of what China sells to the rest of the world. As it ramped up its manufacturing engine in 2000, China was pretty good at making basic products like toys and umbrellas. By 2016, China had moved into more expensive goods like cellphones and computers, while making even more of the cheaper stuff.

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The next phase, which includes the most valuable products in the world, will be harder. China can’t make chips as small and fast as the United States can. Its cars are mostly sold at home. Its manufacturing prowess is built on the back of engineering and expertise from the West.

Both the Apple iPhone and Huawei Mate 10 are assembled in Chinese factories. Both rely on pieces from outside China. The most intricate and expensive technology in the Huawei phone, the motherboard, has a Chinese processor, but it is primarily composed of chips from American, South Korean and Japanese companies. The 2.8-inch board accounts for 52 percent of the cost of the phone, according to data from TechInsights.

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Is moving production out of China to avoid US tariffs feasible?

The Trump administration imposed an addition 10% tariff (will jump to 25% by the end of the year) on $200 billion worth of Chinese imports to the US. This is in addition to 25% tariff on $50 billion worth of Chinese imports. The escalating trade war between the US and its usual trading partners is forcing companies to rethink if it is as appropriate, profitable and reliable to continue producing goods in China as it was before. However, relocation to countries such as Bangladesh, Cambodia, Ethiopia, Thailand, and Viet Nam may not be that easy. 

Companies have two choices: (i) to raise productivity sufficiently so that the gains offset the cost escalation due to additional tariffs (think in terms of marginal effect); and (ii) to relocate production somewhere else to take advantage of cheaper labor and business costs but with no change in tariff structure. The first option is almost impossible in the immediate term. The second option is doable, but are there necessary physical and social infrastructures in place to realize it in other countries?

Convenience and reliability of production, transportation and distribution are of paramount importance. Good roads for workers to commute, reliable and unclogged transportation network for ferrying goods in and out of the country, political stability and disciplined trade unions, good governance, and adequate supply of electricity  are some of the supply-side constraints that need to be addressed in addition to business-friendly policies. This, at least, applies to Nepal.

Excerpt from a news story from NYT:

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Huffing, snorting and in no hurry to move, the big-horned bovines occasionally meander across the Khmer-American Friendship Highway, the dusty, 140-mile route linking Phnom Penh’s factories with the port in the coastal city of Sihanoukville. They are not the only potential obstacles. At quitting time, factory workers heading home on foot and motorbikes clog the road. For factory owners on deadline, those crowded roads can mean frustrating delays.

[…]But China will be hard to quit. From zippers and rivets on jackets and jeans to the minerals used in iPhones, China makes or processes many of the ingredients that go into today’s consumer goods. It has a dependable source of workers who know how to hold down factory jobs. It has reliable roads and rail lines connecting suppliers to assembly plants to ports. Countries like Vietnam and Cambodia, by contrast, lack China’s vast supplier base and dependable roads. More workers have to be trained. Many companies have to start from scratch.

[…]One day a few years ago Mr. Bobrovizki arrived at his factory to find several unions had locked it. Negotiations took weeks. In Cambodia some unions are backed by the party of Hun Sen, the prime minister, adding to political risks for foreign companies.“I lost half a million dollars in those two weeks that they blocked my gate,” Mr. Bobrovizki said.

[…]One American company recently told a supplier with a factory in Phnom Penh that it wants to take its China production down to zero as soon as possible in order to avoid tariffs, said Bradley Gordon, a lawyer who advises multinational companies in Cambodia. That Phnom Penh factory plans to hire 1,000 more workers in the next month and employ nearly 10,000 workers by next year.

Still, China remains an efficient place to do business. Its logistics network is vast and quick-moving. Over the past three decades, China has built 4.7 million kilometers, or about 2.9 million miles, of highways. It has 13 of the world’s 50 largest ports, and three of the top five. China’s sheer manufacturing capabilities are unrivaled. One measure of its output, called manufacturing value added, shows that China makes roughly as much as the United States and Japan combined.

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Meanwhile, companies producing electronic goods are already thinking of moving part of production value chain out of China. Here is a news story from Reuters:

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[…]Several companies, including SK Hynix of South Korea and Mitsubishi Electric, Toshiba Machine Co. and Komatsu of Japan, have been plotting production moves since July, when the first tariffs hit, and the shifts are now underway, company representatives and others with knowledge of the plans said. Others, such as Taiwanese computer-maker Compal Electronics and South Korea’s LG Electronics, are making contingency plans in case the trade war continues or worsens.

[…]The quick reactions to the U.S. tariffs are possible because many large manufacturers have facilities in multiple countries and can move at least small amounts of production without building new factories. Some governments, notably in Taiwan and Thailand, are actively encouraging companies to move work from China.

[…]At SK Hynix, which makes computer memory chips, work is underway to move production of certain chip modules back to South Korea from China. Like its U.S. rival, Micron Technology, which is also moving some memory-chip work from China to other Asian locations, SK Hynix does some of its packaging and testing of chips in China, with the chips themselves mostly made elsewhere. Most of SK Hynix’s production will not be affected, the source added, since China’s dominance in computer and smartphone manufacturing makes it by far the largest market for DRAM chips.

[…]Toshiba Machine Co. says it plans to shift production of U.S.-bound plastic molding machines from China to Japan or Thailand in October. The machines are used for making plastic components such as automotive bumpers. “We’ve decided to shift part of our production from China because the impact of the tariffs is significant,” a spokesman said. Mitsubishi Electric, meanwhile, says that it is in the process of shifting production of U.S.-bound machine tools used for metal processing from its manufacturing base in Dalian, in northeastern China, to a plant in Nagoya.

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Budhi Gandaki project re-awarded to Chinese firm, MPs to execute 20 projects, and more

PM asks ministry to rehire Chinese firm

From The Kathmandu Post: Budhi Gandaki Hydropower Project, once again, has fallen into politicking. The KP Sharma Oli administration last week decided to rope in China Gezhouba Group Corporation (CGGC), reverting the erstwhile Sher Bahadur Deuba government’s decision to develop the 1200MW project with internal resources. The Cabinet meeting on Friday directed the Energy Ministry to initiate the process to award the project to the Chinese developer. As per the Cabinet decision, the ministry has been asked to hold talks with the Gezhouba, prepare a proposal, and strike a deal to execute the $2.5 billion reservoir project.

Following the government decision, the Energy Ministry will now invite the Chinese company for talks and prepare a draft of the memorandum of understanding (MoU) before signing it, according to multiple sources at the ministry. “The understanding will be signed to execute the project under the engineering, procurement, construction and financing (EPCF) model,” said one senior official.

Multiple sources at the Energy Ministry said the proposal was taken to the Cabinet directly by the Prime Minister’s Office (PMO) without involving Energy Ministry officials. “We came to know that the Chinese developer had filed an application at the prime minister’s office, expressing interest in executing the project under the EPCF model,” said another official who spoke on condition of anonymity because he wasn’t allowed to discuss details of the proposal. Energy Secretary Anup Kumar Upadhyay, however, said he was unaware of the recent development and has yet to receive instructions from the PMO.

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Local Infrastructure Development Partnership Programme: Guideline allows MPs to execute 20 projects in single constituency

From The Kathmandu Post: Going against the budgetary provision, the government on Friday endorsed the working procedure of Local Infrastructure Development Partnership Programme, which not only increased the number of projects, but also allowed lawmakers to have their say in project selection. Government officials said the working procedure has effectively ended the efforts to make the programme less distributive, as it has allowed federal lawmakers to execute as many as 20 projects in a single constituency.

The programme is modified version of controversial Constituency Infrastructure Special Programme (CISP) and the Constituency Development Programme (CDP) implemented through lawmakers. According to officials at the Federal Affairs Ministry, the option of selecting as many as 20 projects goes against the current fiscal year budget that states maximum of five projects related to road, drinking water, irrigation and river control could be carried out in one constituency. While drafting the working procedure, the ministry had proposed for selecting maximum 10 projects within five areas. However, after a strong pressure from the lawmakers, the number was doubled to 20.

After a strong lobby from lawmakers, it has given sole authority to select the projects to a committee headed by directly elected lawmaker and represented by parliamentarians from proportional representation and the lawmaker in the National Assembly. This goes against the provision of the current budget which had envisioned forming a committee co-ordinated by directly elected representative from particular constituency and represented by members of federal parliament, provincial parliaments and heads of the local governments.

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Cabinet approves splitting of CAAN

From The Himalayan Times: The Cabinet meeting on Friday gave permission to the Ministry of Culture, Tourism and Civil Aviation (MoCTCA) to split the Civil Aviation Authority of Nepal (CAAN) into two different entities — regulatory body and air navigation services provider.

“Since the Cabinet has given permission to split CAAN into two entities, MoCTCA and CAAN will frame a new act to implement the decision,” said Sanjeev Gautam, director general at CAAN. He further mentioned that after the formulation of the new act, MoCTCA will first forward it to the Parliament for approval. “After it is endorsed by the Parliament it will come into implementation.” In 2012, the government had formally announced that CAAN would be divided into two separate autonomous bodies. The government had said it would create two entities by dividing CAAN so as to improve the regulatory mechanism and also to develop civil aviation infrastructure.

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