Economic discourse & accountability in Nepal

My latest op-ed/column is about the need for economic discourse and accountability in Nepal. There is a severe lack of discussion about economic issues. The way the economy is heading right now will define the way of life of the Nepalese people. The better the economy performs, the better will be the lives of the citizens.

The (uncertain, baffling, and ever-prolonging) political deliberations going on right now will mean nothing if the economy comes to a grinding halt or becomes dysfunctional. Since the people do not discuss economic issues as widely as it should have been, there is hardly any accountability. Furthermore, the talking heads and commentators rarely discuss these issues. They either do not understand what is going on or they can’t find experts to plainly explain what is going on in the economy. Hence, people do not judge political parties (including elected representatives) and their policies based on their pre-election commitment versus post-election delivery. More and more people need to discuss economic issues as they do with political issues.

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Economic Discourse & Accountability

The macroeconomic health of our economy is in a terrible shape. This dire warning is repeatedly trumpeted in the media and public sphere by politicians, economists, and commentators. Sadly, a majority of the population is unable to make much sense of it. Nevertheless, this issue will continue to pop up until we find a way to fix the Rs 22 billion hole in the country’s balance of payments (BoP), which basically is an accounting record of all the monetary transactions between Nepal and the rest of the world. Rather than incessantly drumbeat possible causes of the BoP crisis, let me discuss one issue rarely highlighted by talking heads and commentators: Economic accountability and its relation to our economic woes.

The gloomy economic conditions we are in right now are self-inflicted. It is a product of deficient as well as defective economic policies abetted by a political culture that is infected by corruption and a lack of accountability. With so much analysis and reporting going on about the BoP deficit, double-digit inflation rate and wobbly monetary situation, hardly any analyst has clearly explained how these economic conditions relate to a citizen’s consumption and living habits. How does it affect the lives and livelihoods of people residing in, say, Darchula, Rukum, Syangja, Sarlahi, and Solukhumbu? The failure to effectively convey this message has discouraged the public from actively discussing the very economic issues that will affect their lives and livelihoods in all possible ways. This is fostering a lack of accountability and scot-free pillaging of taxpayers’ rupees by the politicians.

Economic accountability is effective when citizens consciously demand one from their elected representatives. One way to induce this is through the dissemination of actionable analysis and interpretation of policies that can be easily comprehended by the public. The public demand for accountability is strong when they are aware of the way their tax rupees are spent by their leaders.

The people need to know how a particular economy policy to counter the BoP deficit would affect their disposable income, consumption, and livelihoods. If this is explained in plain language, then the people from all walks of lives will start discussing why the BoP crisis emerged in the first place. Then they will potentially start demanding explanations from their elected officials. The media, economic analysts and commentators could play a catalytic role in facilitating this process.

Unfortunately, the virtual absence of conversation about economic issues and the lack of demand for accountability by the public is a testament to the fact the media, analysts and commentators have not done an effective job in interpreting economic policies and conveying its impact on the citizens. For instance, there needs to be a wider discussion about the impact of land reform policy proposed by UCPN (Maoist), who wants to get away with private ownership of land and institute cooperative-style ownership. The people need to know how it will impact production, productivity, employment and economic growth.

Likewise, they also need to know if reverting back to import substituting policies, as recently suggested by Finance Minister Surendra Pandey, will help narrow the BoP deficit, or exacerbate it. Likewise, the public has to be furnished with answers to why they have to live under 54 hours of power cuts every week despite millions of rupees ‘invested’ in developing hydropower and in maintaining the bloated, inefficient bureaucracy of Nepal Electricity Authority. They also need to know why aid dollars and domestic tax rupees are wasted without any result in sight from the Melamchi Water Supply Project. The people need to know the impact of busting the real estate bubble in their lives and livelihoods. Moreover, they should be made aware of the costs of bandas, and its affect on their income and productivity.

The citizens should be explained the position of each political party on key economic issues. So far, no political party has clearly identified their core economic principles and policies, their intended policy prescriptions to the most pressing economic issues, and their strategy in kick-starting the jammed growth engine. If the public knows the position of each party on all major economic issues, then they will automatically judge the performance of their elected representatives on the basis of post-election achievement versus pre-election promises. There will be citizen-led pressure on the leaders to deliver results, not just empty promises.

The civil society and think tanks in Kathmandu have to do a better job in analyzing and explaining how a specific economic policy affects particular regions, industrial clusters, and livelihoods. The think tanks should play a vital role in stimulating discussion about the pros and cons of any economic policy before they are voted in the parliament. Meanwhile, the government needs to promote an open battle of ideas and ideals so that the final policy prescription is well analyzed by analysts and acceptable to a majority of the citizens.

The more discussion there is about economic policies at the policy level, in the media, and in the public sphere, the finer would be the eventual policy agendas. This would contribute a whole lot in terms of making our leaders accountable to the people. A failure to do so is already reflected in the inconsistent, incongruent, and impractical policies in the recently introduced Industrial Policy 2010.

To ensure economic accountability, there has to be an extensive discussion of economic issues in the public sphere. The media, analysts and commentators have to effectively break down the multidimensional impact of economic policies in the simplest form. This will help people associate economic policies with their lives, leading to exchange of ideas and ideals at individual, society, community and national levels. There is no better path to accountability than the one where citizens actively demand such from their elected representatives.

[Published in Republica,June 16, 2010, pp.7]

Keynesian perspectives last week

Krugman explains "That 30's Feeling": “Many economists, myself included, regard this turn to austerity as a huge mistake. It raises memories of 1937, when F.D.R.’s premature attempt to balance the budget helped plunge a recovering economy back into severe recession.”

Robert Skidelsky is not happy with the British government’s decision to slash spending and asks "Who governs?" : financial markets or government. “ These propositions are a re-run of the famous “Treasury view” of 1929. By contrast, Keynes argued that demand can fall short of supply, and that when this happened, government vice turned into virtue. In a slump, governments should increase, not reduce, their deficits to make up for the deficit in private spending. Any attempt by government to increase its saving (in other words, to balance its budget) would only worsen the slump. This was his “paradox of thrift”. The current stampede to thrift shows that the re-conversion to Keynes in the wake of the financial collapse of 2008 was only skin-deep: the first story remains deeply lodged in the minds of economists and politicians.”

Krugman wonders why Greenspan is regretting that deficits have not yet increased interest rates. Krugman explains: “deficits in the face of a liquidity trap don’t drive up interest rates and don’t cause inflation — lends credence to the Keynesian view.”

Export-led growth and volatility

How does export-led growth affect volatility? Here is an interesting discussion on this issue. There are four main mechanisms at play in the relationship between outward oriented growth strategy and volatility.

• Terms-of-trade volatility and output: TOT can directly affect output and growth. Decline in exports and export prices would severely affect balance of trade and revenues.
• Domestic market volatility and output: As export sector operates in tune with overseas market, domestic demand and supply shocks are less strongly correlated with output.
• Diversification and volatility: As countries diversify export items in tandem with more reach in overseas market, growth volatility decreases. More on this here.
• Specialization and volatility: Specialization in exports reduces growth volatility if the specializing and exporting nation is a high income one. The demand for their product is pretty much inelastic.

Policy lessons:

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“The stabilization effects of export product diversification are noticeably more consistent than that for export market diversification. This finding suggests that developing-country policymakers should emphasize measures that help broaden their countries’ manufacturing base, and expand the range of exportable products.

There are also a number of steps that governments can take domestically to help the private sector diversify its export base. Rather than protecting domestic producers with “infant-industry” tariffs—a classic inward-oriented strategy—policymakers can remove barriers to domestic market entry, and thereby encourage innovation and development of new markets by companies at home.

There is also strong evidence that better trade facilitation (that is, the reduction of fixed and variable costs associated with moving goods across borders) can be highly effective in promoting export diversification. Practical steps—such as the removal of red tape affecting exports and imports, and developing trade-related infrastructure and services—can make a major contribution to export diversification and help manage outward orientation.”

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Women in parliament and GDP per capita

It shows the ratio of female to male members in parliament with respect to GDP per capita. See Nepal (NPL) there, close to 50 percent despite low GDP per capita!

Source: Michael Clemens' presentation at ABCDE 2010 conference

Asia in 2030

At a time when the developed countries are bearing the burnt of economic crisis and an increasing market uncertainty due to mounting debt and deficit,  the Asian economies (save the very low income ones) are on a different track. They are helping in global growth recovery. Also, they have strong domestic demand and pretty resilient exports sector. If this trend continues, then Asia will be the largest economic region by 2030, according to Anoop Singh's piece in the latest Finance & Development magazine.

For this to happen, Singh argues, Asia needs to continue good policy reform and watch out for few issues thorny issues:

• Surge in capital flows need to be managed to prevent overheating and to decrease vulnerability
• Shocks in the developed countries might transmit to the Asian economies (exports decline and credit tightening)
• Needs to keep on building domestic demand to make it a main source of growth
• Strengthen social safety nets
• Development of national and regional infrastructure to reduce transportation costs and foster regional integration

The role of inventory adjustment in the Great Trade Collapse of 2008-09

This paper examines the role of inventories in the decline of production, trade, and expenditures in the US in the economic crisis of late 2008 and 2009. Empirically, we show that international trade declined more drastically than trade-weighted production or absorption and there was a sizeable inventory adjustment. This is most clearly evident for autos, the industry with the largest drop in trade. However, relative to the magnitude of the US downturn, these movements in trade are quite typical. We develop a two-country general equilibrium model with endogenous inventory holdings in response to frictions in domestic and foreign transactions costs. With more severe frictions on international transactions, in a downturn, the calibrated model shows a larger decline in output and an even larger decline in international trade, relative to a more standard model without inventories. The magnitudes of production, trade, and inventory responses are quantitatively similar to those observed in the current and previous US recessions.

For more see this paper.

The transformation of development thinking

David Lindauer and Lant Pritchett discuss the transformation of development thinking, development policy making, and the next big idea for growth. Though this is an old paper, it is quite interesting. May be they should update it considering the ideological shift economics fraternity has seen after the global economic crisis starting 2008.

How has the thinking on economic development changed after 2002 (and before 2008)? It might take different forms depending on several factors that affect the global and local markets. But one thing is certain: “The road to development is extremely complex, and the ultimate guide to that path must therefore be more complex than an arrow pointing confidently in one direction.”

Growth experience between 1980 and 2002:

• The enormous slowdown in growth that has occurred throughout the developing world: the so-called lost decade(s) in Latin America has its counterpart on other continents. The median growth rate in low- and middle-income economies fell from 2.5 percent in 1960–79 to 0.0 percent (zero!) in 1980–98.
• The long-awaited transition from stagnating Marxist central planning to a capitalist economy has gone horrifically worse than anyone would have dared predict. While the consensus was that the economies would experience a dip in income as they restructured and as resources were reallocated from old to new activities, no one predicted in 1992 that income in many newly capitalist countries in 2002 would be less than half the level under the Communists.
• The financial crises—or perhaps the single rolling financial crisis—of the 1990s: Mexico in 1994; Thailand, Korea, and Indonesia in 1997; Russia and Brazil in 1998; Ecuador in 1999; Turkey in 2000; and Argentina today. In each case, something caused a near or actual debt default or a large depreciation (or both).
• The collapse of sub-Saharan Africa, which has by now become so complete as to force itself into world consciousness. Nearly all of sub-Saharan Africa has been transformed from the heady optimism and enormous promise of early independence to almost unspeakable suffering. The only relatively consistent success cases—Botswana and Mauritius—do not give much hope for an entire continent. The AIDS crisis is so severe that the only historical analogue is the Black Death.
• The world’s two most populous countries, India and China, have grown rapidly. This is somewhat puzzling because in many ways these countries are slow, cautious reformers that remain among the more closed and restricted economies in the world. Both India and China accelerated by more than 2 percentage points, while the rest of the world decelerated by more than 2 percentage points.

This gives a mixed signal to what and what kind of political and economic system propel growth. So, what should be the agenda for post-Washington Consensus economic growth?

Lindauer and Pritchett argue that a new agenda should “acknowledge the complex, state-dependent, contingent relations between policies and growth.” While doing that there is also a need to recognized that growth regressions have failed to give a clear picture of the different growth experiences of similar and dissimilar countries.

The basic flaw in growth regressions is that they confuse partial correlations with (stable) parameters and confuse empirical variables(that might be associated with policies) with feasible actions to promote growth.

By now, there are thousands of papers that put economic growth on the left-hand side and other stuff on the right-hand side. This research produces empirical findings that are translated, more or less crudely, into policy recommendations: a partial correlation of lagged enrollment rates and subsequent growth is interpreted as proof that education is good for growth, which is then used as the basis for recommending more public spending on education; a partial correlation of trade and growth outcomes indicates that openness is good, which becomes a recommendation to reduce tariffs; a partial correlation of inflation and growth shows that low inflation is good, which leads to the adage that fiscal austerity will promote growth. Sadly, many of these recommendations have not worked in practice, in part because nearly all of the growth regression research is essentially irrelevant to policymaking and policy implementation. The findings do not constitute a credible basis for meaningful development advice, since they are not empirically stable and they are not about policy.

It is not surprising that growth regressions are unstable across countries and over time, because any model in which growth is linearly (or log-linearly) related to any given variable across countries, time periods, levels of development, and circumstances is almost certainly misspecified.

Even growth regressions with right handside variables under direct policy control—say, the budget deficit or tariffs— are still describing a relationship between policy actions and outcomes, not policies and outcomes. A policy is a mapping from states of the world to policy actions.

What is next after the terrible performance and use of growth regressions? They list some better ideas to study growth.

• A number of intriguing leads suggest future directions for research. One branch of such literature is episodic analysis, in which researchers examine episodes of more or less discrete changes in policy or intermediate outcome variables.
• A second approach is to examine economic growth directly, either to
  attempt a close reading of the factors that initiated a growth boom or bust or to undertake cross-sectional work explaining changes in growth rates.
• Although growth regressions are inherently hopeless, a few authors work from the growth partial correlations to plausible microeconomic mechanisms that explain the growth correlation, and then to the actual policy variables that could alter outcomes.

(They argue that economics profession does not need any new great idea in economic growth. It just needs to, as Rodrik says, “figure out how to turn sound economic thinking into useful, context-contingent policy recommendations.”)

For policy advice they propose a diagnostic tree of policy options. They branches they propose are (i) current level of income, (ii) current status of growth, (iii) linkages with the world economy, (iv) government strength, and (v) government capacity.