A review of the Nepali economy under the Maoist-led administration

In the last day of his role as prime minister, the Maoist premier Prachanda claimed that his administration gave “utmost importance to economic transformation” and made “major contribution to economic revolution”. Unlike his boss, former Finance Minister Dr. Baburam Bhattarai was a bit modest in laying claims about economic progress achieved under his leadership. In assessing the economic policies and progress under the Maoist administration, it is unclear how the dismal performance, especially in encouraging private sector and utilizing development expenditures, amounts to or leads to “economic revolution”.

The most successful and significant achievement of the previous administration was to ensure governance and accountability in revenue collection, which increased by 40 percent in the first ten months of the current fiscal year, for which credit goes to Dr. Bhattarai’s policies on taxation. Given the institutional intransience for good governance at customs and government agencies, many people, including myself, were skeptical about revenue targets of Dr. Bhattarai, who, with good leadership and ‘carrot and stick’ approach, was able to beat all pessimistic expectations. Under his leadership, the Inland Revenue Department was more vigilant than ever in curbing leakages, streamlined and cleaned up the mess in the department, and offered extra incentives to customs personnel for better performance.

The other commendable policies initiated by Dr. Bhattarai were loan waiver of heavily indebted farmers and the Youth Self-Employment Program (YSEP). These programs were well-intentioned but the execution was not all that clear. Overall, the huge demand for loans by youths and partial relief received by some of the poorest farmers was worth the policy experimentation.

Not all the program and policies of the previous administration were productive. The drive for more revenue generation and implementation of VDIS led to savings flight as nervous investors and savers searched for safer vaults abroad. While this policy was unpopular in the business community, the government, instead of trying to find a common path, wasted more than three months going head-on-head against the businessmen, whom it saw as “feudalist and bourgeois classes”. At a time when there was a desperate need for normalization of tension between the private sector and the government, this incident led to souring of relationship and fostered distrust between the two.

Fond of making bombastic, populist and unrealistic claims and a tendency to look backwards in the age of globalization, the Maoists government miserably failed in convincing the private sector, foreign investors, and development agencies that their Marxist/socialist model was worth trying. Filled with pompous slogans, socialist ideas and the aim to develop “national capitalism”, Dr. Bhattarai’s budget was not well received by the private sector. They, along with the development agencies, repeatedly asked him to be clear about government’s position on the role of private sector and in general the economic system. Trying to treat private sector and cooperatives in equal footing by bringing Investment Board and Cooperative Board under the Economic Council was probably the most dubious plan. Instead of streamlining of disaggregated economic activities, it led to more chaos and confusion in the industrial sector. Also, the plan to revive moribund, sick industries with the aim of increasing employment and channeling their production for government’s use was a blunder. The drumbeat of double-digit growth rate without assessing ground realities and workable economic policies perplexed people.

The most devastating and counterproductive policies were to let YCL make a mockery of contract enforcement, destabilize the already feeble industrial sector, and turn a deaf ear to dire call for industrial security. By implicitly supporting the activities of its militant cadres, the Maoist administration showed double standards in dealing with the private sector. Some of the Maoist ministers even endorsed and defended the extralegal occupation of industrial districts by YCL cadres, forced donation campaign, and threat to life and property of businessmen, whom they see as ‘feudalists’. The government engaged in multiple rounds of discussion with businessmen but did not budge on the call for disciplining YCL cadres and taming disruptive activities of trade unions. This led to closure of several garment firms, jute mills, and multinational companies, among others. The Maoists administration backtracked only after it was threatened of noncooperation by the opposition parties; it was not because it was responding to the concerns of the private sector.

Later on, the Maoist government was busy cleaning its own mess. Too focused on controlling and finding a way out for its disruptive cadres, it was helpless in supplying the most needed essential services in rural areas. For instance, it was powerless when more than one-third of the population was under the threat of starvation at the height of the global rise in price of food and commodities, and when major forests were on fire. Moreover, the government also did not do enough to manage safe return of IDPs.

With regards to macroeconomic management, the administration’s performance was very disappointing. The price level initially rose above 14 percent due to rise in food, fuel and commodity prices in the global market. However, as prices of these items declined globally, they were too sticky in the Nepali market, leading to inflation rate of above 10 percent. The government was unable to manage shortage of goods, which was created artificially by holding back inventories. The export sector continued to lose its grip in international market and trade deficit is rising. The supply of fuel was severely affected due to frequent closure of the main highway linking the Valley and Terai. The government had to bail out cash-strapped, debt-ridden NOC two times. Still, the nation lacks a plan to close big hole in NOC’s balance sheet. On top of that, there is no immediate plan to bridge the wedge (of 500 MW) between demand for and supply of electricity in the economy. Worse, domestic and foreign investors are not yet convinced of secure investment, rule of law, and respect for property rights in the infrastructure and hydropower sectors.

The Maoists also failed to mobilize development expenditure, leading to very few development programs being implemented—a point even Dr. Bhattarai has conceded. So far, only 27 percent of total capital expenditure has been spent. Meanwhile, achieving the targeted economic growth rate is now a fairy tale!

The economy is far from being transformed. There were some successes in revenue collection and welfare programs. However, there were even more problems-- industrial relations deteriorated, allocated development money remained unspent, investors and donors remained skeptical of Maoists policies, price level spiraled upwards, and there was a severe shortage of energy, which further crippled the industrial sector, among others.

Links of Interest (05/27/2009)

From manufacturing to services to land in developing countries now (to ensure smooth food supply to rich countries’ consumers!)

Dambisa Moyo and Easterly respond to Sachs’s ironies

Serving the poor through (subsidized) markets

New database on nutritional impact

US trade policy for development: further open up markets to exports from poor countries

Feeble domestic demand is a dragging down EU markets

Need to think about the upcoming debt crisis in 2015

In this One Page, Paul Ladd argues that it is time to think about restructuring debt that the developing countries will owe to the international financial institutions as they will be forced to borrow money, due to the global financial crisis, to meet domestic development expenditure. Putting an international mechanism in place for sovereign debt restructuring now will help avoid situations the culminated to multiple rounds of debt reliefs such as HIPC and MDRI in the past.

If developing-country debt problems come to a head once again—including because of how the international community is responding to the current economic crisis—we will need a new way of addressing the problem. A second round of debt relief schemes based on creditor largesse will lack credibility. The scene is set once again for an idea that almost reached fruition in 2003, albeit in an imperfect form. An international mechanism for sovereign debt restructuring, which includes provisions for temporary moratoria on debt servicing, could provide a better means of restructuring unpayable debts in a way that is fairer, more transparent and more efficient for the creditors, the indebted country, and its population.

To be effective and comprehensive, however, any such arbitration mechanism would need to cover the claims of the World Bank and IMF. These are not covered by the recent introduction of “collective action clauses” in sovereign bonds.

The time to put in place such a mechanism is before a new debt crisis emerges, not when the waters start to get choppier. Otherwise, 2015 may be remembered as the year that a new debt crisis emerged, rather than the year in which we celebrate achieving the MDGs.

The scourge of poverty

This news is very disturbing:

Jashuli Bista, 26, who was living an impoverished life in Sunkada VDC of the district on Friday, killed her daughters, four-year-old Ramkala and eight-month-old Ramita, before she hanged herself to death.

Bista had been raising her daughters all alone as her husband Min Bahadur Bishta had gone to India for work.

This story is also very troubling. A woman is stripped naked and beaten up by a group of stupid men in the middle of Kathmandu.

Sachs’ take on Moyo and Easterly

Sachs has finally responded to Dambisa Moyo’s new book Dead Aid, where she basically follows on Easterly’s line of argument that aid is hurting Africa more than it is helping them.

The debate about foreign aid has become farcical. The big opponents of aid today are Dambisa Moyo, an African-born economist who reportedly received scholarships so that she could go to Harvard and Oxford but sees nothing wrong with denying $10 in aid to an African child for an anti-malaria bed net. Her colleague in opposing aid, Bill Easterly, received large-scale government support from the National Science Foundation for his own graduate training.

I certainly don't begrudge any of them the help that they got. Far from it. I believe in this kind of help. And I'd find Moyo's views cruel and mistaken even she did not get the scholarships that have been reported (Easterly mentioned his receipt of NSF support in the same book in which he denounces aid). I begrudge them trying to pull up the ladder for those still left behind. Before peddling their simplistic concoction of free markets and self-help, they and we should think about the realities of life, in which all of us need help at some time or other and in countless ways, and even more importantly we should think about the life-and-death consequences for impoverished people who are denied that help.

Recently Paul Kagame, President of Rwanda, wrote an op-ed for the Financial Times praising Moyo's fresh thinking. This is extraordinary. His government has depended on aid for more than a decade. Nearly half the budget revenues currently come from aid. Rwanda currently imports around $800 million of merchandise each year, but only earns $250 million or so in exports. So how does it do it? Aid, of course, helped to pay for around $450 million of the imports. Without foreign aid, Rwanda's pathbreaking public health successes and strong current economic growth would collapse. Kagame's op-ed did not help FT readers to understand this.

At some level, the works of Sachs and Easterly (and Moyo) are more ideological than practical (I think Sachs is little bit more practical!). Easterly is in an all out war with economists who favor some form of government intervention and industrial policy (such as Sachs, Rodrik, and Collier). Easterly’s work is more in line with Hayek’s and free-market views and Sachs’ is more interventionist. These two are reviving the 1940’s back-and-forth argument between Hayek and Keynes (and later followed by Hayek and Samuelson) and applying them in the development field. And now we know who was right in the epic ideological battle between the centrists and the rightists.

Interesting number

The number of births in a year in India = the total population of Nepal = 27 million

This is probably the most pessimistic (but realistic) description of India:

INDIA is a land of bright promise. It is also extremely poor. About 27m Indians will be born this year. Unless things improve, almost 2m of them will die before the next general election. Of the children who survive, more than 40% will be physically stunted by malnutrition. Most will enroll in a school, but they cannot count on their teachers showing up. After five years of classes, less than 60% will be able to read a short story and more than 60% will still be stumped by simple arithmetic.

Is it time for the death of Chinese growth model?

Michael Pettis argues that the fiscal stimulus enacted in the Asian economies, particularly China which is providing a “steroid-fuelled” growth, will potentially boost growth in the short term but their growth model is not sustainable.

One of the consequences of the Asian development model has been that production outgrew consumption for decades. When a country produces more than it consumes, it must run a trade surplus to export its excess capacity. The Asian model consequently required high and rising trade surpluses that allowed Asian producers to produce far in excess of what Asian consumers could afford to absorb.

But there cannot be trade surpluses without trade deficits elsewhere. A fundamental requirement for the Asian model was that foreigners were able to run the requisite trade deficits. In practice, only the US economy and financial system were large and flexible enough to play this role. The Asian model, in other words, implicitly involved a massive bet on the willingness and ability of the US to continue to run large and rising trade deficits.

The assumption that implicitly underlay the Asian development model – that US households had an infinite ability to borrow and spend – has been shown to be false. This spells the end of this model as an engine of growth. The sooner Asian policymakers accept this and force through the necessary economic and political changes, the less painful the transition will be. Unfortunately this does not seem to be happening.

Many Asian nations are using fiscal stimulus to prop up export-based sectors. Is exports-based growth model still the answer to higher GDP per capita in developing and emerging nations? As the main buyers (US and the EU) are cutting back consumption expenditure and the governments ‘required’ to maintain fiscal balance down the road (deficits can’t go forever), will the exports-based growth obsessed nations find customers to buy their goods and services? Also, will domestic demand in the developing countries be strong enough to prop up GDP growth rate? Is the exports-based growth model still relevant for the low income countries? And, is the model nearing death for emerging nations? Interesting questions that need answers!

Here is Szirmai arguing that the manufacturing sector still matters for growth and catch up in the developing countries.