Stiglitz on global stimulus

Stiglitz argues for a global stimulus package with grants made available to the poor countries, else as much as 200 million people will go down the poverty line, plus rethinking on having a new global reserve system.

if we are to avoid winding up in another debt crisis, some, perhaps much, of the money will have to be given in grants. And, in the past, assistance has been accompanied by extensive "conditions," some of which enforced contractionary monetary and fiscal policies – just the opposite of what is needed now – and imposed financial deregulation, which was among the root causes of the crisis.

One of the more important medium-term initiatives urged by the UN commission is the creation of a global economic coordinating council, which would not only coordinate economic policy, but would also assess impending problems and institutional gaps. As the downturn deepens, several countries may, for example, face bankruptcy. But we still do not have an adequate framework for dealing with such problems.

And the US dollar reserve-currency system – the backbone of the current global financial system – is fraying. China has expressed concerns, and the head of its central bank has joined the UN commission in calling for a new global reserve system. The UN commission argues that addressing this old issue – raised more than 75 years ago by Keynes – is essential if we are to have a robust and stable recovery.

Nepal floats very unrealistic development strategy paper

I wonder when the policymakers in Nepal will realize that high investment will guarantee high economic growth only when there are complementary factors in place to ensure that the investment is properly utilized, i.e. creating an ‘equilibrium’ of demand for and supply of goods and services being produced.

I say this because the Maoists government has released National Development Strategy Paper (NDSP), which it will present as the main strategy paper in the upcoming Nepal Development Forum (NDF) scheduled to take place in May. The NDF is a forum for donors to review NDSP and determine if the donor community wants to invest in some of the projects outlined by the government of Nepal. What’s in NDSP? The main theme of the paper is INVESTMENT. The government will tell donors to pour in money, cough up some of its own, and make (unrealistic) promises that it will deliver growth! How many times have this kind of forums been successful in delivering the outcomes? Has anyone tracked the efficiency of donors- say, output and investment ratio in the sectors they are investing in? (The drama of donor community in Nepal, its activities, outcomes, and efficiency deserves an extended analysis in another blog post!).

The NDSP, which also forms the second part of the Three-Year Interim Plan, has set a target to achieve an average economic growth rate of 7.6 percent and lower the national poverty level to 21.5 percent over a period of the next three years starting from mid-July 2009. According to the strategy paper, the government plans to invest Rs 1151.6 billion (US$ 14.5772 billion) from domestic resources for formation of fixed assets (in 3 years time). Of this, private sector is expected to invest Rs 324 billion (US$ 4.10127 billion) while remaining Rs 827.7 billion (US$ 10.4772 billion) is anticipated to come from government´s sources. Note that planned total investment is double the size of GDP of Nepal. If this is not overly ambitious and unrealistic, then I need to relearn the difference between reality and dream! Also, I doubt if the private sector would invest US$ 4.1 billion at a time when the very existence of their survival is in question.

Among the sources of funding, the strategy paper aims to mobilize Rs 532.2 billion (US$ 6.69362 billion) worth of revenue, Rs 233.3 billion (US$ 2.93422 billion) of foreign aid and Rs 70.8 billion (US$ 0.890453 billion) worth of internal loans. I doubt on the calculation of these numbers. What are the assumptions and facilitation process?

What else? The strategy paper also aims to achieve agriculture growth of 5.2 percent and non-agricultural growth of 8.8 percent during the period. At a time when the whole industrial sector is going bust and there is a decline in agriculture production, I am surprised how the guys at the National Planning Commission (NPC) came up with these numbers. Again, this projection does not reflect reality. The Maoists government has a tendency to talk highly but deliver poorly. See this and this.

It is very unlikely if the government will be able to garner the proposed amount of investment. Additionally, we simply do not have the complimentary factors that are needed to realize the fruits of this investment. The biggest hurdles are poor institutional setting and bad infrastructure, corruption and appropriability concerns. Moreover, the industrial sector has never been this uncompetitive (blame labor disputes, increasing competition, power cuts, defunct supply chains, …). Mend these, and the fallout will be favorable!

The WB has rightly criticized NDSP as being ambitious. They also should say it is unrealistic and seek a complete revision of the objectives, revise long-term projects and include more short-term projects heavily focused on infrastructure, governance aspects, and, most importantly, make the government clearly identify how it is going to boost private sector confidence and not let its militant cadres disrupt their business activities.

Regarding the proposed investment, Goldmark, country director of Nepal’s largest lender, said that it would be challenging to mobilize the planned investment as long as investors do not feel considerable improvements in the environment for doing business. The strategy paper should pay due attention to checking erosion of business confidence and this can be done by improving the law and order situation, she said.

Apart from a long-term energy development program, Goldmark also urged the government to bring in short-term projects to develop hydropower and added that the NDSP needs to have different case scenarios to address future global and domestic economic conditions, which are difficult to predict.

She also said the NDSP is silent on public finance management and public procurements and stressed the need to focus on issues and to improve government accountability towards the people. “Promise less and improve deliveries,” she advised the government.

I will write more on this issues in the next op-ed. The bottom line: the whole paper should be revised and the goals should be made realistic. All the procedures and steps should be clearly identified so that tracking the progress of projects and investment flow is rational and accountable.

Washington Consensus and Latin America

The historic backlash against the Washington consensus is not without justification. According to a soon-to-be-released study by the Inter-American Development Bank, trade and investment liberalisation in Latin America has had only a small impact on economic growth and has accentuated inequality in the region. Indeed, only one country has had a faster growth rate since nations in the region began experimenting with Washington's prescriptions in the early 1980s. That country is Chile, which has strayed from the Washington consensus in significant ways.

A recent report by our Working Group on Development and Environment in the Americas found that investment liberalisation is partly to blame for the slow economic growth in the region. According to our statistical analyses, foreign investment in Latin America increased significantly over the past 20 years but wiped out many local firms and contributed to an overall decrease in total investment. Despite a tripling of foreign investment in the region since the 1970, total investment as a percent of GDP has declined from 24% in the 1970s to 19% today – far below the 25% recommended by the recent Spence Commission for sustained economic growth in developing countries. Rather than locating in Latin America and spurring new economic activity, foreign firms largely operate as enclaves with limited connections to the domestic economy.

That’s Gallagher and Wise in this opinion piece

Poverty, geography and armed conflict in Nepal

My latest opinion piece is based on a paper by Iyer and Do. They show that poverty determines the onset of conflict and geography determines the variation of conflict intensity within a country. According to their working paper, a 10 percentage point increase in poverty is associated with 25-27 additional conflict-related deaths and geographic condition such as elevation and the presence of mountains and forests explain a quarter of the cross-district variation in conflict intensity. I discuss some policy implications and tie it up with the Maoists’ ideology.

Most of the researches on poverty and conflict are based on cross country analysis. Iyer and Do, however, do a within country study by comparing data on conflict related deaths from different districts in Nepal. Their results corroborate the view that lower economic development is associated with more conflict. More on poverty and conflict here and here and here

The increase in the number of PLA recruits and its sympathizers might have little to do with political culture and bourgeois-proletariat drumbeat started by the Maoists. The truth is that conflict is significantly higher in places with greater poverty and lower levels of economic development. The study shows that at any given time, poor areas are significantly more likely to experience the onset of conflict, contingent on the fact that they did not experience the onset in previous period.

The Maoists recruited more militants from districts where the opportunity cost – the cost of next best alternative forgone – of recruiting new members was the lowest. People residing in districts that were socially and economically backward (irrespective of geographic landscape) were drawn into insurgency easily and earlier than residents from other districts because the opportunity costs of joining the armed rebellion was low for them and the economic and political gains for the Maoists was high.

The study also shows that ethnic and caste polarization, land inequality, linguistic diversity and political participation are not significantly associated with violence. This finding raises questions over the real motive of the Maoists’ push for land redistribution reforms. Is it just a populist move to entice more voters or are they genuinely considering scientific land reform that would help accelerate productive activities? Furthermore, in light of this research, it is hard to believe if the Maoists’ rhetoric on the existence of the tussle between bourgeois and proletarians and the need to dismantle the former holds any ground. The Maoists are yet to clearly identify how big of a problem the bourgeois productive structure, if any, pose to economic activity.

This has an important policy implication—policies aimed at increasing the opportunity cost of joining armed outfits should be of paramount importance in order to stop the onset of armed conflict. It can be done by investing in formal, informal and vocational education. This would potentially ensure that the returns to labor (wages) earned by engaging in formal economic activity is higher than the returns from joining armed outfits. Additionally, increasing employment opportunities and livelihood generation activities would also help to serve this purpose. This would potentially give rise to a tendency to deter – even by poorer communities –the emergence and spread of disruptive activities.

Akerlof and Shiller on animal spirits

The housing market touched on all aspects of the animal spirits identified by Keynes — confidence, fairness, corruption, storytelling, and money illusion. It's clear, in this market and many others, that those animal spirits help drive the economy and that, to steer it safely, economists and policy makers will have to study such behaviors further and take careful account of them in devising new incentives and reforms.

From The Chronical Review, Vol.55, Issues 32, ppB6

Where's the water source?

A kid in search of water for his mother who manually grinds stones in Ratnapur, Bara. Stone grinding is one of the main occupations for poor families, especially women. A long shortage of rainfall has created severe shortfall of water in this region. Source: www.myrepublica.com

Being a Searcher = Successful aid

Bill Easterly writes:

One approach to a successful aid project just is to immerse yourself in the local community, put local people in charge who are themselves highly motivated, be adaptive and flexible to respond to whatever the local people think about how they can help themselves, so that you customize the “standard project designs” to fit local circumstances. Most aid projects fail because there is nobody in the field making all these necessary adaptations and fixing unanticipated problems as they arise. The moral of the story is: be a Searcher and not a Planner.

He also writes that the secret to successful aid “is that there is no secret.” He does not believe in RCT methodology applied to aid effectiveness.

This kind of aid project is based on a lot of personal, face to face interaction, developing trust and a shared vision, so it is small scale, it has to let things proceed at their own pace, it can’t meet rigid pre-set output targets, it could never be judged by a rigorous “randomized controlled trial” methodology. In short, it involves the kind of tacit knowledge and individual adaptation that could never be converted into a routinized project implemented by the official aid bureaucracies. It breaks all the rules, and it works.