Fig: Log of GDP per capita 2006 (constant 2000 US$) vs. log of exports per capita (current US$), Nepal
I was looking into the evolution of exports and output in Nepal and was trying to figure to how much drag does exports have on GDP. It seems that beginning 1991, increase in exports has definitely dragged GDP per capita in its direction. This stopped between 1995-1996, continued between 1998-2001, stopped between 2001-2003, and then…. Since 2001 even though exports per capita has declined, GDP per capita is increasing. Before 1991, exports did not have too strong effect on GDP. This shows that fluctuations in exports in Nepal does not substantially affect GDP per capita.
Does it mean that Nepal has no future in the exports sector? Well, it is difficult to grow at a rate of more than 5% just on the back of agricultural sector. Nepal has to find a way out to make a transition to export-based economy and home grown demand that is hinged on industrial production. This is the only way out to attain double-digit growth rate and some periods of growth acceleration.
This pushes one to think: so why is the export sector and the domestic demand for industrial output not increasing? Well, the main strongest constraints lie in poor infrastructure and increasing microeconomic risks (corruption, taxes, instability, property rights). More on these constraints on later posts.
There is just possibly a silver lining for developing nations in the present crisis, and it is that they may well emerge collectively with a much bigger say in the institutions that govern economic globalisation. Once the dust settles, China, India, Brazil, South Korea, and a handful of other “emerging” nations will be able to exercise greater influence in the way that multilateral economic institutions are run. And they will be in a better position to push for reforms that reflect their interests.
In trade, the present round of global trade negotiations has already demonstrated that if rich nations want developing nations to play ball, they will need to let them shape the rules of the game.
He also talks about Tobin tax on global foreign currency transactions so that revenue generated from this source could be used in the promotion of global public goods (development assistance, vaccines for tropical diseases, and in green technologies). Great idea! But, wouldn’t it reduce G8’s and IFI’s clout on the developing world? Is it politically feasible?
The idea about giving ‘policy space’ to developing countries in WTO agreements is essential if Doha Round is to pass in the coming days. It was precisely because of this shortcoming that the last WTO negotiation failed after India and other developing countries demanded SSMs facility amidst global food crisis.
I think donors and IFIs should also focus on harmonizing foreign aid allocation and assistance to developing countries so that competing donor interests do not collide and doubling of projects is avoided.
Here is Subramanina on ‘policy space’ for developing countries:
Dani’s view is that these openness levels can be maintained by a bargain around “policy space.” Developing countries would then use this space to figure out the best development policies. In return, industrial countries would be allowed to use this space to push for some kind of global harmonization of tax and regulatory policies that would help buy off middle class anxieties about globalization that might otherwise lead to outright protectionism.
Nancy Birdsall’s take on the issue:
Dani’s agenda – a global trade regime allowing for “policy space”, a climate change agreement that is just as well as enforceable, credible deployment of the proceeds of a Tobin tax, an IMF with the resources to respond to crises – none of these has any legs if the developing countries have minimal influence at the international financial institutions. And one thing is clear to me: Those institutions will not only enjoy fundamental governance reforms until and unless the developing countries collectively assert themselves to get it done.
Policy space is a two-way street. [President Obama's] chief economic advisor Larry Summers has also been vocal of late on globalisation’s adverse impact on workers. It will not do much for good for developing countries to raise the spectre of protectionism each time such concerns are voiced. They should say no to trade protectionism straight and simple. But they should be willing to negotiate with advanced nations on avoiding regulatory races to the bottom in such areas as labour standards or tax competition.’
The World Trade Organization's Doha Round mistakenly attempted to fix global food challenges by liberalizing agricultural markets. Poorer producers have been left without government support and developing countries have grown increasingly dependent on imported food. Even given the enormity of the financial crisis, the U.S. government continues to perpetuate failed solutions for Africa. More must be done to protect the poor. Fair, not free trade must be adapted immediately as a part of creating a new global economic system.
The food crisis is largely overshadowed by the financial crisis and ensuing global recession. At times, development policy becomes one dimensional!
Meanwhile, the Kerala model (state-sponsored land reform, education, infrastructure, and social services initiatives), which is largely insulated from the current financial crisis.
The southern state of Kerala boasts nearly universal literacy — 91% as opposed to the Indian national average of 65%. It's also one of the fastest growing states in India, second only to the tourism-rich state of Goa…In addition to its tremendous literacy rate, Kerala boasts one of the nation's finest healthcare systems, even for those who can't afford to pay user fees and therefore depend on government hospitals. Kerala's infant mortality rate is about 16 deaths per 1,000 births, or half the national average of 32 deaths per 1,000 births.
Aside from the social development indicators, Kerala's growth rate is nothing to sneeze at. In the last few years it averaged between 6-10%, not only keeping pace with the national average but at times ranking among the fastest growing states in the country. The sectors that are doing well are largely those that are thriving across India — IT, services, and tourism — but agricultural production and small-scale manufacturing are also succeeding.
the state had a matrilineal and even a matriarchal society, with a line of forward-looking queens that still ruled much of Kerala in the early days of the British Empire…A single party, the Communist Party of India (Marxist) or CPI(M), has ruled Kerala for much of the past 50 years. The CPI(M) successfully pushed for three major reforms in the 1960s and 1970s. The first and most important was land reform.
the CPI(M) deliberately and methodically invested in education, setting goals so popular with the electorate that even when the Communists lost power, new governments did not dare modify education policies.
Kerala invested heavily in government-financed healthcare. The state now boasts 160 patient beds per 100,000 people, the highest rate in the country.
…With the end of this ideology, Kerala represents a real alternative. Investing in people — whether through breaking the oligarchy of big landlords (or perhaps investment bankers) or providing social services including universal education — will ultimately lead to the development of a meaningful middle class.
Bedeviled by rising losses and slacking competitiveness on export sector and hence its direct negative impact on the growth rate, the government had been mulling over establishing SEZs for the past several years. This is supposed to enclave the export-oriented industries from labor disputes, complex tax issues, and other exogenous problems related to supply of energy and labor.
Finally, the government has ratified establishment and implementation of SEZs act in the country. Under the WTO, low income country like Nepal are allowed to take initiatives to prop up their flagging export sector, which basically supports the manufacturing sector and high wage jobs apart from the agricultural sector. I argued for more incentives for export-based industries in past opinion pieces here and here.
Nepal has been doing very bad in the export sector recently (see the figure below), thus affecting the growth rate. The end of MAF in early 2005 has proved to be detrimental to the Nepali textile and garment industry, the main component of export portfolio. Read this opinion piece for more stuff.
Fig1: Exports as a % of GDP. Notice steep decline in exports after 1997, a shock probably emanating from the declining competitiveness of garment and textile industries and a series of phase out of quotas under the MFA.
The Act allows workers to unite and practice collective bargaining, but prohibits them from undertaking activities that affect production and normal operations of industries…
Terms of recruitment, facilities and lay off will be governed by the agreement the worker and management will sign while accepting the job. Initially, the draft had incorporated the ´hire and fire´ provision as demanded by entrepreneurs…SEZ Authority and the SEZ regulations will determine the extent of workers pay scale, medical and insurance facilities, among others…
In order to lure investors in SEZ, the Act has provided them with facilities such as duty-free import of raw materials, exemption of value added tax (VAT) and free them from excise duty and other local taxes. The industries in SEZ have been provided with income tax holiday for five years…After five years also, they will continue to enjoy 50 percent discount on income tax…In order to ensure investors, the Act says industries already into operation would continue to enjoy all the facilities, even if later amendments changed the structure and extent of facilities.
Going by the Act, only export-oriented industries can be set up in SEZ. Nevertheless, the government has allowed them to make domestic sales not exceeding 15 percent of their transactions. Interested investors now can acquire land in the zone in lease for 30 years from the SEZ Authority, which will be led by an independent expert. Also, they will receive 50 percent, 40 percent and 25 percent discounts respectively on the lease rent for the first three years of investment. After 30 years, lease agreement can be renewed in every 5 years.
Way to go before the crippling export-based sector revives its previous position as the driving force of growth!
Education quality and economic growth: rather than just increase in school attainment and enrolment, higher cognitive skills matter for economic growth.
Professors Farrant and McPhail analyze Hayek’s ‘inevitability’ thesis (“each step away from the market system and towards social reform of the welfare state is inevitably a journey that must end in a totalitarian state”) and argue that the confusion surrounding this thesis is attributable to Hayek himself, despite Hayek’s strong disagreement with the way Samuelson explained this topic in his textbook Economics (11th edition).
...Much of the apparent confusion over the inevitability thesis, we suggest, is largely attributable to Hayek himself (with the water muddied further by the secondary literature on the Hayek–Samuelson exchange), with Samuelson having ready cause to read Hayek as making an ‘inevitability’ claim about the situational logic supposedly inherent to the mixed economy since Hayek often suggested that the logic of the mixed economy and redistributive welfare state ultimately and inevitably resulted in a totalitarian polity.
...Hayek repeatedly appears to consider the mixed economy and welfare state practices to have their own inherent logic, which, once set into play by government policy to redistribute income and attain social justice, apparently necessitates ever-further government intervention, the government perhaps ultimately finding itself inexorably “driven to establish an essentially totalitarian system” (Hayek, 1978, p. 301). Again, the above illustrates the immense importance Hayek placed on his oft-repeated statement that “if you don’t mend your principles you will go to the devil”’(1978, p. 105).
...we note that Hayek repeatedly suggests that attempts to achieve social justice ultimately tend towards full-blown command planning and a totalitarian polity....Samuelson correctly understands Hayek to oppose any welfare state practices that involve income redistribution because they apparently lead, in Hayek’s view, to political serfdom...Many are called as prophets. . . few are chosen as seers by the scorekeeping historian. . . [f]orty years after Friedrich Hayek wrote down his nightmare of the welfare state leading remorselessly to the totalitarian murder of freedom, Scandinavians enjoy freedom second to none that the world has ever seen (Samuelson, 1983b, p. 59).
The journal also has an essay by Samuelson, who argues that he stands by his initial assessment of The Road to Serfdom and the ‘inevitability’ thesis. Samuelson tries to formally settle the unresolved intellectual bicker he and Hayek had back in the 70s and 80s.
...Hayek over-praised the optimality of individualistic spontaneity. Charles Darwin’s genius long earlier had eclectically enumerated both the pluses and minuses of individualistic natural selection...Having spent a lifetime near libertarians, I can confirm that they are an individualistic idiosyncratic bunch. For example, my conservative mentor Gottfried Haberler was defined by Mises to be “communist.” The number of Mt. Pelerin resignations never quite reached the number of its new members.)..Anthropological experts in “content analysis,” focusing their microscopes on the Hayek text (1944),might score its impact to be traceable to both (1) its version of history and (2) its projection of the future.
…If Hayek believes that the spending of newly printed currency on employment and consumption will worsen our current terrible depression, then Hayek is a nut. Alas, one fatal error eclipses a few elementary true truths á la Mises and Hayek: Easy money now often does entail tighter money later which will come as a surprise to uncompleted projects and new contingent contemplated investment projects.
...Two-thirds of a century after the book got written, hindsight confirms how inaccurate its innuendo about the future turned out to be. Consider only Sweden’s fig-leaf middle way. As I write in 2007, Sweden and other Scandivanian places have somewhat lowered the fraction of GDP they use to devote through government. But still they are the most “socialistic” by Hayek’s crude definition. Where are their horror camps? Have the vilest elements risen there to absolute power? When reports are compiled on “measurable unhappiness,” do places like Sweden, Denmark, Finland and Norway best epitomize serfdoms?
...No good deeds go unpunished! Never then, or before, or later did I have reason to think or to say: Yes, I have misunderstood you. Yes, I have incorrectly quoted from you. Mea culpa. Exactly what I have written above evaluating The Road to Serfdom is precisely what I believed about it in the 1940s and continued to believe about it up to the present 2007.
Consider this by Hayek (Foreword to the 1956 American paperback edition of The Road to Serfdom, pp44 in the definitive edition of The Road to Serfdom):
The hodgepodge of ill-assembled and often inconsistent ideals which under the name of the Welfare State has largely replaced socialism as the goal of the reformers needs very careful sorting out of its results are not to be very similar to those of full-fledged socialism. This is not to say that some of its aims are not both practicable and laudable. But there are many ways in which we can work toward the same goal, and in the present state of opinion there is some danger that our impatience for quick results may lead us to choose instruments which, though perhaps more efficient for achieving the particular ends, are not compatible with the preservation of a free society. The increasing tendency to rely on administrative coercion and discrimination where a modification of the general rules of law might, perhaps more slowly, achieve the same object, and to resort to direct state controls or to the creation of monopolistic institutions where judicious use of financial inducements might evoke spontaneous efforts, is still a powerful legacy of the socialist period which is likely to influence policy for a long time to come.
Apparently, Hayek overstretched his warnings and considered that economic planning and reforms would lead to (ultimately result in) a totalitarian state. For the sake of justifying freedom, he blinded himself to the possibility of having a managed mixed-economy. See the success of the Nordic countries. Also, it is hard to believe that the US (and other Western countries) would end up being totalitarian states, especially after the financial crisis (with all those bail-out interventions and activist government policies).
I remember having these discussions in Professor McPhail’s senior seminar class (History of Economic Thought) in Fall 2007. The original scanned letters between Hayek and Samuelson were pretty interesting! Btw, the first economics book I purchased (while I was doing A levels economics) was written by Samuelson and Nordhaus. Their book is probably the best introductory textbook in economics. Also, every time I read Hayek’s pieces (apart from The Use of Knowledge in Society), I find it hard to believe him (realistically speaking) despite the persuasive arguments he presents.
Here is a popular video about the road to serfdom.
