The need for CCTs during the financial crisis

The credit crisis has hit almost all the countries in one way or the another. Now, it is just a matter of how severely are they hurt. Getting credit has not been more difficult, even in the developing countries. This increases vulnerability of the already vulnerable population and the need for social protection increases as the crisis digs deeper holes into the global economy. It seems this is the most opportune time to push for social protection programs such as Conditional Cash Transfers (CCTs) to help cushion household income and also to help achieve MDGs of education and healthcare.

CCTs, born out of Mexico’s Oportunidades, is already successfully implemented in Latin America and in small scale in some African and East Asian countries. CCTs have boosted the use of preventive health care services in Colombia, Honduras, Mexico, and Nicaragua by between 8 and 33 percentage points, according to the WB. See this report for a detailed discussion about the impact of CCTs on poverty, education, and healthcare.

As might be expected, the effect on poverty reduction is greatest when the size of the cash transfer is generous. In Mexico, the poverty gap—or shortfall from the poverty line—among CCT beneficiaries in rural areas was reduced by 19 percent. Household consumption patterns have changed among CCT beneficiary households, in part because cash transfers are made to women. The evidence shows that women spend more than men do on food, high-quality nutrition, and other things that benefit children. CCTs have been so successful against poverty because they largely target poor households. Also, they have not, as some feared, led to adults reducing their work outputs in response to the steady income supplement.

CCTs have clearly increased the use of education services in country after country. In Pakistan, for instance, a CCT program increased the school enrollment of 10-14 year-old girls by 11 percentage points. And in Mexico, the Oportunidades program decreased dropout rates between the 6th and 7th grade by 9 percentage points.

The report shows that CCTs can indeed help poor households weather shocks ranging from an economic crisis to unemployment, illness, or death of a breadwinner. CCTs can also help ensure that households don’t cut back on children’s basic health and schooling. That said, CCTs are really designed to help get rid of long-term structural poverty than deal with sudden, short-term, income shocks, which require a more flexible social insurance instrument.

The ideal transfer program to deal with transient poverty (i) does not involve a long-term commitment such as school enrollment, (ii) is self-targeted and doesn’t involve complex administrative decisions for exit or entry, and (iii) involves the participation of beneficiaries in activities (for example, job-related) that address the source of the shock. While workfare programs or unemployment insurance are better suited to deal with transient poverty, having a CCT program in place during a crisis is clearly much better than not having any large-scale social assistance program at all.

CCTs are considered innovative for several reasons: (i) their targeting mechanisms; (ii) beneficiaries receive cash rather than in-kind benefits; and (iii) the transfers are conditional. CCTs are designed to increase the human capital of beneficiaries by making transfers conditional on certain requirements, such as school attendance, visits to health clinics and renewals of immunization. Additionally, CCTs aim to alleviate poverty in the short-term.

It offers qualifying families cash in exchange for commitments such as taking babies to health clinics regularly or sending children to school. These programs, now found in over two dozen countries, can reduce poverty both in the short and long term, particularly when supported by better public services. CCT programs help to reduce poverty in participating households and to protect them from the worst effects of unemployment, illness, or other income shocks. Participating households also tend to spend more on food and improved nutrients than comparable households who don’t receive the transfer, according to the WB report.

Nepal’s tourism industry: High hopes amidst weak foundation

It seems like this spring break is getting productive(I still have to finish my thesis by the end of this break!). On the first day of the break, I wrote this opinion piece about Nepal’s tourism industry and the need to rethink promotion campaigns and policies amidst global recession. The need for price competitiveness without compromising on quality of service has not been higher. I argue that the government needs to formulate realistic policies and targets that are consistent with Nepal’s macroeconomic situation (especially exchange rate appreciation), regulatory structure, and infrastructure. I use the latest Travel and Tourism Competitiveness Report to back up my arguments.

Travel and tourism (T&T) industry has been playing a vital role in sustaining GDP growth rate, which has been stagnating at 3.8 percent in the past decade. At a time when the industrial sector is going bust due to power cuts, labor disputes, and declining price competitiveness, a prosperous tourism industry is of supreme importance. The travel and tourism industry has been one of the largest employers (more than 548,000 in 2008) and fastest entry-vehicle into the workforce for youths.

To lure more tourists, the government announced Visit Nepal 2011 in January with the aim of attracting one million international visitors. The targeted number seems pretty ambitious because during a similar campaign in 1998, Nepal hosted only 464,000 tourists, earning US$ 24.8 million in revenue.

Does Nepal have the appropriate supporting regulatory structure, flexible policy framework and basic infrastructure that would increase price competitiveness without compromising on quality of service? According to the latest Travel & Tourism Competitiveness Report, published annually by the World Economic Forum, the answer to this question does not look that encouraging. Out of 133 countries, Nepal ranks 118 in travel and tourism competitiveness. It was ranked 116 in 2008’s report, which means competitiveness of this industry has actually declined.

Tourists are highly sensitive to price competitiveness and value added services provided by this industry. Generally, three factors – macroeconomic risks, regulatory structure, and tourism infrastructure – are essential to improve price competitiveness and to induce more per capita visitor spending in the Nepali tourism industry.

Read the full opinion piece here

Links of Interest (03/08/2009)

The poverty trap facing low-income countries

The need for a new paradigm in economics to explain current global crisis

Remaking the WB in a time of crisis

The state of maternal mortality in Nepal

Visa-restriction index 2008

Two pics sourced from Nepal: A Himalayan Kingdom in Transition by Karan and Ishii (reminds me of my village and work on the field!)

RCTs in education

Esther Duflo has an article in NBER’s quarterly newsletter Reporter about how randomized controlled trials (RCTs) were used to find out what works and what does not work in education sector reform in the developing countries. She discusses the RCTs done in India and Kenya to find out what requires (what does not) for high quality learning (good in heterogeneous student setting), lower teacher absentee, and re-empowering parents (not much effect) in the education reform process. She argues that a likely case would be that the government could be better in getting the schools work better for the poor (rather than giving ownership to local communities or parents). Strange finding given the fact that huge amount of resources are spent by multilateral donors in handing over responsibility of managing schools to local communities in countries like Nepal and India.

Does better access to inputs (textbooks, teachers) affect school outcomes (attendance, test scores) — and if so, by how much? The motivating theoretical framework was very simple, but the results were surprising. For example: Glewwe, Kremer, and Moulin found that lowering the student-textbook ratio from 4 to 2 had no effect on average test scores. Banerjee, Jacob, and Kremer found that halving the student-teacher ratio also had no effect on test scores.

These negative results prompted new reflection on the barriers to education in poor countries: If simply providing inputs does not increase the quality of education in poor countries, then it must be necessary to change the organization of teaching in schools, both the pedagogy and the incentives faced by students and teachers. This led to a new round of field experiments motivated by the general question: Can changing the organization of teaching in schools affect education outcomes? For the most part, these more recent projects have varied more than one factor at a time in different experimental groups, making randomization a powerful tool for examining the role of incentives, spillovers, and other key questions in the economics of education.

Together, a series of randomized evaluations of education programs in developing countries have taught us something about how education in developing countries can be improved: focus teaching on skills students need to progress further; find ways to motivate teachers. Neither of these is necessarily an easy, ready-to-implement prescription. Much more work is needed to develop programs that can achieve these two objectives on a large enough scale, especially given the political economy of education in developing countries. While neither suggests plug-and-play prescriptions, they do give us ample direction about where to search.

What’s more, these experiments have also taught us something about how to search, how we can learn about learning. Each experiment answers some questions and asks new ones; the next study builds on the previous one, progressively suggesting a model of education which is ready to be enriched over time.

The relationship between load shedding and pregnancy

This news is interesting. Following rapid fall in hydro electricity generation, the government of Nepal cut power supply for almost 16 hours a day (this means, only 6 hours of power in 24 hours!). This has restricted most people in their houses (and increased the time invested with family members).

The unintended consequence: more number of pregnancies reported at hospitals. Could increasing hours of load shedding lead to higher population growth rate? I hope not, especially for a poor country like Nepal, which already has one of the highest population growth rates in the world! This could potentially further lower per capita at a time when real income is already expected to decrease due to high inflation rate hovering at around 14%.

According to media reports, the number of women with bulging bellies visiting Prasuti Griha (a top maternity hospital in Kathmandu) has risen sharply, and this has been attributed to the almost round-the-clock cut in power, leaving Nepalis with no other means of entertainment except copulation. There is no reason why the G-8 nations cannot bring about a baby boom if they follow in Nepal’s footsteps.

NEA, however, should be prepared to face the government’s ire once the census figures are out in 2011 and it realizes that all its efforts to bring down population growth to replacement level has gone for a toss.

Meanwhile, I have been told that young couples venturing out for candlelight dinners has taken a nosedive, much to the chagrin of restaurant owners. “Why go out and waste money, when you can enjoy romantic evenings everyday in the confines and comforts of your own apartment,” they say.

With load-shedding excepted to continue for at least another four to five years, I recommend restaurant owners to shut down their business and use that space instead to open maternity clinics. Makes perfect sense, right?

Forever Globalization!

Globalization is such a diverse, broad-based, and potent force that not even today’s massive economic crash will dramatically slow it down or permanently reverse it. Love it or hate it, globalization is here to stay.

The bottom line: Nationalism never disappeared. Globalization did not lessen national identities; it just rendered them more complex. Even in a Bill Gates era, today’s Otto von Bismarcks still wield great power. Globalization and geopolitics coexist, and neither is going anywhere.

More here.

Product space, comparative advantage and Nepal’s export sector

Does coordination failures bind the Nepali economy from moving to more favorable “nearby” products (or new productive activities) that could contribute to higher GDP growth rate?

A “product space” is used to analyze if coordination externalities pose as a binding constraint on growth[1]. It is argued that the assets and capabilities needed to produce a good are imperfect substitutes for those needed to produce another good “but their degree of asset specificity will vary” (Hausmann & Klinger, 2007). This means that a country’s capability to produce one good is somehow tied with the installed capability in the production of other similar goods, i.e. nearby goods.

For instance, either labor or capital or both used by company A to produce good X might be used by company B to produce good Y. Though good X and good Y are different and have different market prices, the factors used to produce one good can be used to produce (or at least initiate production of) other goods at a lower cost. In order to produce good Y, company B can benefit from the trained human resource or existing capital stock of company A. Similarly, company B can use infrastructure already installed for A’s use and make good Y. This means that the existence of already installed capability can be easily used to produce other “nearby goods” that uses similar capability. This would mean that future structural transformation would depend on what is ‘close’ to existing production, creating strong path dependence for the emergence of new exportable products (Klinger, 2007). The overall connectedness of an economy’s export basket affects the rate of export upgrading and the length of growth collapses after a shock to primary export items (in Nepal’s case carpets and garments industries).

As seen in the product spaces below, Nepal has some nearby products which command high price in the international market. Moreover, the existence of “nearby” products is pretty much consistent with the level found in countries with similar income level. However, it should be noted that despite the existence of multiple “nearby” products, the rate of successful upgrading of the production capacity might be affected due to infrastructure constraints. Moreover, the evolution of new nearby products would also depend on the increment in the existing stock of facilitators/infrastructures such as road transport, electricity, and communication.

Nepal’s product space 1985[2]:

Figure 1

 

The comparatively advantageous products in the export market (denoted by black squares) are scattered and the ones where the potential to upgrade to new productive activities lied in the labor intensive sectors (denoted by green dots towards the left of Figure 1), particularly garment and textiles. This is the only region on the product space above where the nodes are connected by red lines (which means proximity greater than 0.6). Moreover, the remaining links in that region are dark blue, which means a proximity index between 0.55 and 0.65. It indicates that this sector has the installed capacity to move to more productive activities that could generate comparative advantage on exports. We also see some red links connecting nodes at the bottom of right hand corner of the figure. These nodes correspond to machinery, especially electronics.

Though there are no comparatively advantageous products at present in this sector, it could potentially be a promising one due to the existence of high proximity between other products. The product space also shows other products that are exported with comparative advantage (scattered black boxes in the figure). These products do not have high proximity and there is no scope of shifting to productive activities around them, i.e. their installed capability does not benefit the production of nearby products that use similar capability because there is none! These are just noises in the product space (such as lead and lead alloy products, which are high valued but have low demand in the international market).

The products that were exported with comparative advantage in 1985 were: trousers, breeches of textile fabrics (8423)[3]; skirts of textile fabric for women (8434); undergarments of textile fabrics for women (8443); textile men shirts (8441); other textile outer garments (8439); sacks and bags of textile materials (6581); twine, cordage, ropes & cables (6575), women dresses of textile fabrics (8433). In the garments and textile sectors, the two most promising products, based on the global market size and the proximity of products in domestic production activities, were undergarments knitted of cotton (8462) and footwear (8510). The other products that seem promising are in the machinery industry (toward the lower right hand in Figure 1). Products that have relatively large share on international market and some degree of proximity in domestic production structure are electronics microcircuits (7638); radio broadcast receivers for vehicles (7621); and photographic cameras, parts & accessories (8810).

The export of some agricultural products was also comparatively advantageous in 1985. However, the production of such products occurred in isolation with very low proximity, if any (see upper right hand in Figure 1). This underscores the earlier argument that high and sustained growth rate is not possible from the export of agricultural products, which are of low value in the global market. The agricultural products that were export with comparative advantage were: leather of other bovine cattle & equine leather (6114); leather or other hides or skins (6116); shellac, seed lac, stick lac, resins, gun resins, etc (9); art, collector species & antiques (8960); fresh or dried grapes (575); fixed vegetable oil (440); beans, peas, lentil & other legume vegetables (542), and other cereal meals & flours (7). Notice that production of all these products are peripheral and are pretty much independent of the installed capacity used in the production of other products. This shows that in 1985 most of the products that were exported with comparative advantage came from the garment and textile industries.

Nepal’s product space 2000:

Figure 2

 

In 2000, the number of products exported with comparative advantage was higher than in 1985 (see the number of black squares in Figure 2). Products which could be manufactured using the installed capacity needed for the production of the goods exported with comparative advantage in 1985 were produced in 2000 and exported with comparative advantage. Some of these products were undergarments excluding shirts of textile fabrics (8442); other outer garments & clothing knittes (8459); other made up articles of textile materials (6589); blouses of textile fabrics (8435); suites & customs made of textiles for women (8431); knitted jerseys, pullovers twinsets (8451); and knitted synthetic undergarments (8463), among others.

Almost all the products that were nearby the products that were exported with comparative advantage in 1985 were produced and exported successfully in 2000. This means that coordination failures, at least in this sector, are out of question. The failure of this sector in the global market after 2005 has to do with other factors such as poor infrastructure and high corruption, which increased transportation costs and transaction costs, leading to lack of price competitiveness at a time when other big players entered the market with similar products but at a very low price. Due to the absence of nearby products and favorable proximity, the agricultural sector did not see new products added to the list of products that were exported with comparative advantage. Similar is the case with the machinery industry, which showed some potential of generating new competitive products in 1985. The slackness in these two sectors has to do with poor quality of infrastructure and corruption as explained earlier.

Figure 3

Figure 4

 

As seen above, Nepal’s production is highly peripheral and sparse, which is not that different from similar income countries (see Figure 1, 2 and 4). Exports related productive structure is concentrated in agricultural (labor intensive) and manufacturing sectors, especially high-valued ones in the garments and textiles industries. There are also relatively more nearby products and proximity in the textile and garment industries. However, despite this why did the garment and textile industry went bust after 2005, the year MFA expired. The answer points towards other factors that hindered the shift in productive activities in the economy, mainly infrastructure and corruption.

This further substantiates the argument that the economy could not upgrade to new productive activities after the end of MFA as there were very few nearby products remaining with high proximity in the textile sector. The backward and forward linkages are also very weak in almost all the industries. Several small sized firms and their production are not linked by medium and large scale firms. For instance, there are around 30 small firms producing medicinal plants. But, there are no medium and large sized firms that could utilize small firms’ production. The production either is processed locally or is exported to India for processing. There seems to be a clear coordination problem here.

However, note that this problem is caused by a stronger constraint, namely a lack of infrastructure (and poor quality of existing ones). It is precisely because of the lack of infrastructure (electricity and road transport) that investors are not willing to invest on medium and large sized processing plants. More than 14 hours of power cuts daily is a major factor in the emergence of such backward and forward linkages. In addition, the delivery time and transportation costs are high in the absence of adequate means of transportation. Hence, the coordination problem itself is dwarfed by much stronger constraints— lack of infrastructure.

The hypothesis that coordination failures/externalities are the binding constraints on growth is not consistent with the analysis presented above.

This is a part of growth diagnostics of Nepali economy I am currently doing as a part of my research. Previous blog post about why taxes do not qualify to be the most binding constraint on growth here. Here is a blog post about the evolution of exports in Nepal. Here is my bet on why infrastructure is the most binding constraint on growth. I will post more updated analysis about the infrastructure constraint in later posts.

Apologies for the unclear equation below (I did not bother to rewrite the equation again just for this blog post)!!

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Footnotes:

[1] Klinger (2007) provides an interesting metaphor: “products are like trees and firms are like monkeys.” Structural transformation involves the movement of monkeys from the poor part to rich part of the forest. It is easier for monkeys (firms) to jump short distance (i.e. to change products that use similar pre-existing factors).

[2] Each node is a product and its share of world trade determines its size. Node sizes are proportional to PRODY, which is a measure of revealed sophistication of each product. Rather than the distance between products, what matters in this figures is the color-coding of the linkages between pairs of products (also known as proximity): light blue link = proximity under 0.4; beige link = proximity between 0.4 and 0.55; dark-blue= proximity between 0.55 and 0.65; red link=proximity greater than 0.6; black square indicates product exported with comparative advantage; if a country is producing goods in a dense part of the product space, then the process of structural transformation is much easier because the set of installed capabilities can be easily redeployed to other nearby products. If a country specializes in peripheral products, then structural transformation is not that easy. The proximity between two productsand is the minimum of the pairwise conditional probabilities of a country exporting a good given that it exports another:

and RCA stands for revealed comparative advantage and is calculated as , where exports is denoted by, good by , and country by.[3] The number in brackets refers to Standard International Trade Code (SITC) of the products.

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References:

Picture sources: Hidalgo CA. Klinger B, Barabasi A-L, Hausmann.R, Science 317, 482-487 (2007)

Klinger, Bailey. "Development and the Topology of Product Space." UNTCAD Speakers Event October 2007. United Nations Committee on Trade and Development: http://r0.unctad.org/ditc/tab/events/emstrade/Speakers/klinger.pdf, 2007.

Hausmann, R., & Klinger, B. (2007). Growth Diagnostic: Paraguay. Cambridge: Center for International Development, Harvard University.

Hausmann, R., Rodrik, D., & Valesco, A. (2004). Growth Diagnostics. Cambridge: Center for International Development, Harvard University.

Hausmann, R., Hwang, J., & Rodrik, D. (2006). What Your Export Matters. NBER Working Paper#11905 .

Hidalgo, C., Hausmann, R., Klinger, B., & Barabasi, A.-L. (2007). The Product Space Conditions Development of Nations. Science 317 , 482-487.