Collier calls for “Decade of the Bottom Billion”

Paul Collier calls for a vigorous pursuit of MDGs, increase in aid, and offering a sense of hope to help the bottom billion. In the wake of UN General Assembly starting today, he questions why the UN did not did not act to set international guidelines on taxation and investment in resource rich poor countries, why it did not intervene in Mauritania when a coup was staged recently, why it does not do anything on biofuel scam and the prospects of genetically modified seeds in Africa, etc. As always, Collier’s pieces are thought-provoking, lucid, and to the point.

…Hope makes a difference in people’s ability to tolerate poverty; parents are willing to sacrifice as long as their children have a future. Our top priority should be to provide credible hope where it has been lacking. The African countries in the bottom billion have missed out on the prolonged period of global growth that the rest of the world has experienced. The United Nations’ goal should not be to help the poor in fast-growing and middle-income countries; it should do its utmost to help the bottom billion to catch up. Anti-poverty efforts should be focused on the 60 or so countries — most of them in Africa — that are both poor and persistently slow-growing.

A further weakness with the Millennium Development Goals is that they are devoid of strategy; their only remedy is more aid. I am not hostile to aid. I think we should increase it, though given the looming recession in Europe and North America, I doubt we will. But other policies on governance, agriculture, security and trade could be used to potent effect.

…Why, also, did the United Nations not intervene militarily when the democratic government of Mauritania, another country in the bottom billion, was overthrown by a coup last month? Where is an alternative initiative to open international trade to poor countries now that the Doha round talks have collapsed? Above all, with a five-year-old commodities boom transferring wealth to some of the countries of the bottom billion, where are the international guidelines on taxation and investment that might help these countries convert earnings from exports of depleting minerals into productive assets like roads and schools?

…We need not just a “Year of the Bottom Billion,” but several decades. This session of the United Nations is an appropriate moment to get started.

New global poverty line: Ravallion replies to Reddy

The IPC has a one pager on Ravallion’s reply to Reddy objections to the methodology used in the calculation of the new global poverty line ($1.25 a day at 2005 PPP prices). This is a much condensed version of a long reply by Ravallion to various objections to the new paper, its methodology, and the new poverty line.

...As Reddy notes, $1.25 is lower than the value in the US of our old poverty line, which works out to be $1.45 in 2005 prices. This has nothing to do with Reddy’s claimed faults in our methods, but stems from the revisions to the PPPs in the light of the better price data from the 2005 ICP; naturally, with higher PPPs in poor countries, the $US value of their national poverty lines falls.

Reddy thinks $1.25 a day is “…far too low to cover the cost of purchasing basic necessities,” He asserts that: “A human being could not live in the US on $1.25 a day in 2005 (or $1.40 in 2008), nor therefore on an equivalent amount elsewhere, contrary to the Bank’s claims.” I have no idea how Reddy reconciles this view with the fact that one quarter of (say) India’s population manages to live below the country’s official poverty line, which is about $1.00 per day in 2005 prices—even lower than our international line.

The (misplaced) role of markets

Here is a piece from the NYT about how the head of the Treasury and the chairman of the Fed- both proponents of liberal, free market idea-, fearing further negative repercussion in the economy emanating from the sub-prime mortgage crisis, changed their the administration’s economic ideology!

…Just like that, Mr. Bernanke, the reserved former Ivy League professor, and Mr. Paulson, the hard-charging former Wall Street deal maker, launched what would be the government’s largest economic rescue operation in modern times, one that rivals the Iraq war in cost and at the same time may redefine Washington’s role in the marketplace for years.

The plan to buy $700 billion in troubled assets with taxpayer money was shaped by two men who did not know each other until two years ago and did not travel in the same circles, but now find themselves brought together by history. If Mr. Bernanke is the intellectual force and Mr. Paulson the action man of this unlikely tandem, they have managed to create a nearly seamless partnership as they rush to stop the financial upheaval and keep the economy afloat.

…Along the way, they have cast aside the administration’s long-held views about regulation and government involvement in private business, even reversing decisions over the space of 24 hours and justifying them as practical solutions to dire threats.

…For Mr. Bernanke, the current crisis is the culmination of a lifetime of figuring how the system works from a theoretical viewpoint…Mr. Bernanke’s research into Japan’s financial crisis in the 1990s reinforced his view that the government had to be aggressive in intervening during market crises.

Interesting discussion about the causes of this crisis here. Intellectuals’ discussion about the crisis here.

Comments on Nepal's budget for FY 2008/09

In my earlier blog post, I said I was partially happy with the way the budget has prioritized sectors like hydro power and tourism. And, I raised some concerns about the potential rise in price level, which is already close to double-digit number.

Now, that I have read the whole budget speech delivered by the Finance Minister, I have some issues with the earlier confidence about the quality of the budget.

Here is a quick glance at the budget:

• Total budget: Rs 236 billion 15.9 million
• Recurrent expenditure: Rs 128 billion 516.5 million ( up by 40.6%)
• Capital expenditure: Rs 91 billion 311 million (up by 64.5%)
• Repayment of loans: Rs 16 billion 189.3 million (down by 1%)
• General administration: Rs 111 billion 824.9 million
• Development programs: Rs 124 billion 199 million

Financing

• Current sources of revenue: Rs 129 billion 215 million
• Total foreign assistance: Rs 65 billion 793.8 million (Foreign grant Rs 47 billion 93.2 million, Foreign loan Rs 18 billion 700.6 million) Net budget deficit Rs 41billion 11.6 million

Projections

• GDP growth 7%
• Agricultural growth 4.5%
• Non-agricultural growth 8.3%
• Inflation 7.5%

Some good stuff: sectoral priorities, increase in taxes in tobacco and alcohol, subsidy on micro-credit and import of machinery and equipment used for milk processing, emphasis on agriculture, irrigation, poverty alleviation, employment generation, ICT, research, rehabilitation, bail out of poor farmers who own money to banks, etc...

Some bad stuff:

• Socialist slogans and very populist budget
  
• Extremely inflated budget...revenue target very unrealistic...
• Investment Board and Cooperative Board (to promote private and cooperative sectors) under the Economic Council (which coordinates the two boards' activities and align them with national priority)...this might be easier said than done...what if the interest of these two boards clash? What if the cooperative sector crowd out private investment? Less regard to individual and private sector incentive mechanism...
• Deficit financing sure to put upward pressure on price level
• Efficiency and productivity are compromised by plans to revive moribund, sick state-owned enterprises like Hetauda Textile Mills, Gorakhkali Rubber Industry, Agricultural Tools Factory of Birgunj, fresh injection of funds to Nepal Airlines Corporation to buy two large aircraft...the problem with these sick policies to revive sick firms is that it just looks at the supply side, completely forgetting demand aspect. It is said that the security forces would buy textiles from these Mills, and agricultural tools would be purchased in the domestic market. However, the demand from the security forces is limited, which means that growth prospect of these sick companies is being compromised. Also, why would people buy agricultural tools manufactured in Nepal at a high prices when they can get the same products at a cheaper price across the border? We might end up making stuff no one uses (recall the wasteful resource investment in the Soviet Union)
• Ambitious electric railway projects...at a time when there is more than 30 hours a week load shedding in... from where will the country get electricity to run electric rails?
• Lots of loopholes for corruption, especially in social security reforms and debt relief ...no scientific methodology revealed so far
• too many commissions without plans for solidifying and consolidating the existing ones
• As argued earlier, how can Nepal attain double-digit growth rate in just three years. It is very impractical given the institutional and financing constraints to the economy.
• No plans to tackle very rigid social, political, and economic political institutions that have been constraints to economic growth
  

In general, this budget might please the public but is not friendly to the private sector. In a way, this was expected as the very foundation of the budget is based on socialist ideas of ending feudalism and feudal means of production. Read a related Op-Ed here.

The biggest hurdle, however, would be in implementation of the projects and coordination among numerous new and old commissions. I would be modest and not be too optimistic and too pessimistic! I will try to write an Op-Ed in detail along these lines this week, provided that there won't be too much pressure from the classes I am taking this semester!

Read the full budget transcript in English here.

More reactions here, here (Bhattarai defends the quality and quantity of budget)

Listen the whole budget speech is here (sorry it is in Nepali):

The Economics of Information

Joseph Stiglitz talks about the economics of information

First budget of the Federal Democratic Republic of Nepal

Today Finance Minister of Nepal Baburam Bhattarai presented budget of around Rs 236 billion ($3.23 billion) to the parliament. As expected, this year’s budget is bigger than last year’s budget and is already being termed ‘populist’ and ‘inflated’. More here. Read the full budget speech here.

The nice thing about this budget is that it takes sectoral issues seriously this time. It has rightly prioritized hydropower, tourism, and agriculture sector as top industries and has emphasized on the industrialization of agricultural sector. This is exactly what I had argued for in last time’s Op-Ed. I had argued for prioritizing hydropower and tourism sector for now and then to work on creating a good investment climate along with establishment of SEZs so that the sluggish manufacturing industry could be a major player in GDP. The budget has also aimed increase investment in agriculture, which is a good news for a country where more than 70 percent of the population is dependent on agriculture. But bailing out the poor farmers through cash could be very difficult. This mimics the Indian policy of bailing out poor farmers in in last year’s budget.

Long story short, considering the constraints to the economy at present and basing policies on reality, I am partially happy with this budget, which has been more pragmatic and better than I had thought before.

Though agriculture, infrastructure, health and education will be major areas of public investment, the budget will rate hydropower and tourism high on its priority, he added.

Dr Bhattarai indicated that the new government might not continue the past ones' privatization policy. "We will activate public enterprises, then issue their shares to people and employees, and run them under the public-private partnership modality," he said.

He reaffirmed the past governments' actions to deal with loan defaulters stringently. But at the same time, he tagged banks as 'parasites'. "Banks have completely ignored the real sector and focused only on serving able groups. This situation must be corrected," he stated.

However, the aim of achieving a double digit growth within five years (specifically, after two years) is very ambitious and I would need very convincing progress and policies to believe that this will be a reality. Bhattarai wants to take two years to prepare the country to get ready to set off in a double digit growth trajectory. However, given the threats to private property (even the Maoist’s party land reform minister grabbed land by force), bottlenecks in supply side, and sluggish manufacturing sector, I would be very hesitant to aim for a double digit growth rate. In a realistic basis, I would first aim for sustaining present growth rate of 5% for the next two years, then scaling it up by 2% for the next two years, then based on the investment climate and the level of structural changes in the economy, I would aim for a double digit growth rate.

The other issue that is sidelined in this context is monetary policy. Right now, inflation rate (7.7%)is more than the GDP growth rate and is expected to remain higher next year (about 7-8%). The injection of more money in the economy (especially by increasing wages to the tune of Rs 12 billion and bailing out poor debt ridden farmers, increasing expenditure by almost 60%) would put pressure on price level. With shortages of different goods and the advent of big festivals, expenditure is expected to shoot up. Moreover, the full effect of global rise in commodity and fuel prices is yet to be seen in the economy. This central bank would not let inflation rate get out of control (imagine how the IMF would bark at the central bank if this happens!). This means rise in interest rate and dampening of banking credit to firms and individual borrowers. It is unclear how monetary policy would be harmonized with the expansionary fiscal policy.

I don’t think inflation would be a major issue unless it crosses 10% limit. The ‘double digit’ number (inflation, not growth rate) would discourage investors. So, as along as it is under this limit (like in India and China), a slightly inflationary GDP growth rate would be tolerable for two or three years. But, this should not be let built on increasing expectations, which would lead to flight of capital and cash from the country.

Sources of finance:

Out of the estimated sources of financing for the current year, Rs 129 billion 215 million would be borne from the current source of revenue. Out of the total foreign assistance of Rs 65 billion 793.8 million, Rs 47 billion 93.2 million would be borne by foreign grant, and Rs 18 billion 700.6 million by foreign loan. However, there would be a deficit of Rs 41 billion 11.6 million even by mobilising both the sources.

With the same institutions still reigning bureaucracy and the same problems plaguing the economy, I wonder how the current administration is aiming to implement the ambitious budget.

Update: there is an increase in budget for the hydropower and transportation sector (113% and 77.14% respectively). This is a good news on fiscal side (concerns, on monetary policy remains high, as mentioned above.

Rs. 13 billion 910 million proposed for the road transport sector, which is an increase of 77.14 per cent in comparison to the revised expenditure of the last fiscal year.

Rs. 12 billion 690 million proposed for the power sector, which is an increase of 113 per cent in comparison to the revised expenditure of the last fiscal year.

A high-level power sector development committee under the chairmanship of the Prime Minister to be established to materialise the objectives of producing and utilizing 10,000 MW hydro powers in the next 10 years.

I will go over the budget speech in detail after my monetary theory class this afternoon. I will write more about the quantity and quality of stuff on the budget tomorrow.

Economic crisis: Call Keynes!

Jayati Ghosh opines that the current economic slowdown, triggered by the crisis in the Wall Sts starting last year, would affect the poor people in the developing countries. So, what can we do to prop up demand? Well, get back to the Keynesian policies to stimulate aggregate demand, mainly through fiscal policy. Would the impact of current crisis in economies around the globe resurrect the Keynesian ideas, which were like hot potatoes after the Great Depression until when the crisis in the 1970s gave rise to Friedman’s camp?

…fiscal policy and public expenditure must be brought back to centre stage. Across the world, we need significantly increased public expenditure to revive demand in flagging economies, to manage the effects of climate change and bring in widespread use of green technologies, to fulfill the promise of achieving minimally acceptable standards of living for everyone in the developing world.

And, some words on reducing inequality:

Reducing inequalities is not going to be easy. It will require the north to reduce its consumption of scarce resources and carbon emissions, which means some reduction of average consumption generally. It will require the global elite, spread across both developed and developing worlds, to curb extravagant lifestyles. It will require wage shares of national income to rise from their current very low proportions, with corresponding declines in the shares of profits and interest. And it will require governments in the powerful developed countries to recognise that they can no longer call the shots in all important international decision

I don’t exactly understand how curbing “extravagant lifestyles” by global elites would reduce inequality. Is this voluntary or involuntary? I guess income redistribution through progressive taxes and employment opportunities for the poor would be more effective than hoping for the global elite to give up their lifestyles!