Some Keynesian stuff

Keynesianism works in Australia

Australia went early and hard with a substantial cash handout to households in December 2008, followed by another round of cash stimulus delivered a month or two ago, and then a large-scale infrastructure program. The national accounts for the March quarter (which should include the effects of the first round of stimulus) have just come out, and show growth of 0.4 per cent, compared to a 0.6 per cent contraction in the December 2008 quarter

 

IMF loves to apply Keynesian principles in Africa

The main focus of fiscal stimulus should be on the expenditure side, particularly infrastructure and social spending given pressing needs, as reducing tax rates may be inequitable and the scope for doing so is limited given low revenue ratios. Other countries will have to adjust, in a way that will not affect critical spending. Additional donor support would reduce the need for adjustment. In all cases, countries should give priority to expanding social safety nets as needed to cushion the impact of the crisis on the poor.

And, this is very interesting-- The Phillips machine: Using water to predict the economy

Industrial policy in the US

Any doubts that the ongoing series of bail outs of financial institutions and key industries in the West is not an industrial policy. Well, it is definitely an industrial policy (under different trade regimes) of a different form that somewhat resembles the policies of South Korea, Japan, Taiwan and China, writes Gallagher. This is not necessarily protectionism. And yes, the government can fill up the gap where the private sector cannot. The best way to do it: go for PPP but with more accountability.

Many will cry that industrial policy – government fostering of specific sectors, industries or firms – is protectionism. It certainly can be. These policies are justifiable only to the extent they correct for market failures in the economy. Of course we all know that the free market is failing to supply credit to firms in the real economy. There is also an underproduction of green technologies, because firms are not compensated for the environmental benefits they bring. This is accentuated because dirty producers don't have to pay for their environmental sins.

If US policy rectifies market failures, these policies should be seen as correctionism rather than protectionism. Asian countries such as Japan, South Korea, Taiwan and China have all successfully experimented with industrial policy. Conventional economic theories would have told these nations to produce rice, fish and perhaps some clothing for the world economy. However, over time governments enabled firms like Toyota, Kia, Hyundai, Acer and Lenovo to become household names across the world.

When countries succeed at industrial policy they usually form public-private partnerships, put conditions on favoured recipients and have systems for government accountability. Public-private partnerships help alleviate the problem of governments picking winners by creating mechanisms whereby governments get important input from the private sector. Enforceable conditions are also important, such as performance requirements to export a certain percentage of output before receiving additional support. Government accountability needs to be ensured as well.

New op-ed about the Nepali economy under the Maoist-led government

This op-ed is the same as the blog post published earlier.

 

 

 

In the last day of his role as prime minister, the Maoist premier Pushpa Kamal Dahal 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 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.

Unfortunately and mistakenly, I emailed the same article to two (rival) dailies in Nepal. I have no desire to publish the same op-ed in two dailies (Republica and The Kathmandu Post) on the same day. I bear responsibility for the confusion (and tension) it created there! This should not have happened.

Green on Moyo and the effectiveness of aid

Duncan Green is not satisfied with Moyo’s analysis and the alternatives she proposes:

But it is Dead Aid’s purported alternatives to aid that seem particularly feeble: African governments should issue lots of bonds (not too many takers at the moment - bad luck on the timing there); trust in China (and thus get stuck in commodity dependence, let alone the human rights issues); rich countries should remove barriers to trade (fine, but it won’t make much difference except in a few particular products like cotton) and invest in infrastructure (does anyone disagree with that?) and access to microfinance needs to be increased (sure, but it’s not even close to a magic bullet).

What is most noticeable is what’s missing – the book claims to be about finding better ways to finance development, but she barely mentions taxation or redistribution. Maybe it’s that Goldman Sachs/Zambian elite thing coming through again.

Overall, I was intrigued by Moyo’s politics/ideology. She manages to combine an entirely understandable resentment to the patronizing ways of aid donors and their crass portrayal of her continent (in Tony Blair’s awful soundbite) as ‘a scar on the conscience of the world’, an uncritical celebration of the rise of Chinese and Indian influence in Africa, and a highly conventional international financier’s assumption that free capital markets will solve every problem. A kind of third worldist neoliberalism, or right wing version of the old ‘aid as imperialism’ line.

Earlier discussion on the same issue here

Ram Saran Mahat talks sense!

Former finance minster of Nepal Ram Saran Mahat zeros down on growth and Maoist led government’s progress (I largely agree with his assessment):

Their focus was on distribution, not on production. We believe in production. Without creating production and employment opportunities you cannot raise the economic status of the people. They believed that distributing government resources would take care of everything. […] They believe in government intervention even in production and trading. They believe in re-nationalisation.

[…] distribution of wealth takes time, it cannot happen overnight. We could have done better, but even with the type of development we saw in the private sector, the living conditions at the bottom have improved a lot. Look at the real wages in the rural areas. Now it is difficult to get labour for agriculture, the wage rate is very high. Real wages have gone up. If you look at the National Living Standard Survey (NLSS), it shows that the consumption level of people across regions, across ecological bases, of all income groups have increased significantly. Employment opportunities have increased, there is demand for more labour, more employment. So while it is true that market forces increase disparity, it increases the income level of the poor also. To raise the economic status of lower income groups, of course, you need a separate package of economic reforms. More consideration needs to be given to the social sector -- health, education, rural development, agriculture.

Even in the early days our development programme, our budget distribution and expenditure pattern, the focus was on creating infrastructure in rural areas. We strongly believed that without basic infrastructure in place -- like access roads, electricity, education, basic health services -- no matter how much you spend for the downtrodden, it will have no meaning. And infrastructure is not created overnight, it takes time. Now you have started seeing results. Karnali is accessible, you have road links to Kalikot, Jumla. Districts that were not touched by road networks 10-15 years ago now have road access not just in their headquarters but practically in all VDCs. Electricity has reached to far corners of the country. That has helped a lot in improving the status of the common man. Because of improved infrastructure in rural areas, people are now producing for the market. Even from the far corners of Nepal, you see agricultural production coming into the market. So our emphasis was different.

The Maoist-led government failed because they allocated budgeted programmes, ill-conceived, half-baked programmes, without much study. They didn't allocate funds in well-studied, well-prepared programmes. They allocated huge sums of money without any preparation. But how can you spend money? Of course, there are financial rules and regulations that need to be followed. This is why they couldn't deliver.

The Maoists also failed miserably on the price front. The irony is that at the international level prices have been declining. Prices decline during a recession. Indian inflation is almost at 0 now. Fuel prices have gone down. But Nepal's inflation rate is going up. This is because of government mismanagement. There is more purchasing power in the hands of the people without production. Production should go side by side with income. The emphasis on distributive policies leads to easy money in the hands of the people, which leads to inflation. Bandas, hartals, disruptions in the supply chain are also responsible for this.

The irony of private sector involvement in infrastructure sector in SSA

Kate Bayliss finds that by encouraging private sector involvement (by reducing their risk exposure) in utility provision in Sub-Saharan Africa, risks are simply transferred to governments, taxpayers, and end-users. Private sector is supposed to bet on risks, make smart investment and profit from it. However, it seems that the private sector engagement in utility provision in the developing countries is leading to a situation where benefits are reaped by them while risks are being heaped upon consumers and taxpayers.

a plethora of donor initiatives have emerged with the aim of bringing private investment into the region, and these too focus on reducing risk for the private sector. As a result, on offer to the private sector are the least challenging and most lucrative aspects of delivery, which are tightly ring-fenced and bound by guarantees. In industrialised economies, discussions of the merits of PSP highlight the importance of transferring risk to the private sector in order to generate efficiency gains. In contrast, as regards attracting PSP into utilities in SSA, the focus is on reducing the risk to which the private sector is exposed. But this risk is not reduced, it is transferred. As a result, African governments, taxpayers and end-users bear high levels of risk in order to accommodate the priorities of investors.

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.