India’s bilateral trade talks

Since further multilateral trade liberalizations agenda at the WTO is not moving forward (its nearly a decade since the Doha Round started—the Uruguay Round took eight years to complete), India is moving on with “Plan B”, which includes bilateral and regional trade deals. More here

INDIA’S BILATERAL TRADE TALKS
Partner	Start of talks	Status
Thailand	2001	Under negotiation; likely to be signed in 2010
Singapore	2002	Signed in December 2007; to be reviewed
Sri Lanka	2003	Under negotiation
Mauritius	2003	Under negotiation
China	2003	Joint feasibility study underway
Asean	2003	Trade in goods pact signed in August  2009; agreement on services to be  signed soon
Malaysia	2004	Likely to be signed by December 2010
BIMSTEC	2004	Under negotiation
GCC	2004	Under negotiation
Japan	2005	To be signed in October 2010
SACU	2005	Under negotiation
Chile	2005	Signed in March 2006; to be reviewed
Israel	2006	Under negotiation
SAFTA	2006	In force
EU	2006	Under negotiation
EFTA	2008	Under negotiation
Australia	2008	Joint feasibility study underway
Nepal	2009	Treaty in force until 2016
South Korea	2009	Under negotiation
New Zealand	2009	Under negotiation
Indonesia	2009	Joint feasibility study underway
Turkey	2010	Joint feasibility study underway
Pakistan	_	No formal agreement; Most Favoured  Nation status accorded
Asean          =     Laos, Vietnam, Singapore, Thailand, Malaysia, Indonesia,                              Brunei, Cambodia, Myanmar, Philippines BIMSTEC      =    Bangladesh, India, Sri Lanka, Thailand, Myanmar GCC             =    Kuwait, Bahrain, Saudi Arabia, Qatar, UAE, Oman SACU           =    South Africa, Lesotho, Swaziland, Botswana, Namibia SAFTA         =    India, Pakistan, Sri Lanka, Bangladesh, Bhutan, Maldives,                            Nepal, Afghanistan EFTA           =    Switzerland, Iceland, Norway, Liechtenstein

India’s style of negotiating trade deals:

[..] India’s approach to trade talks has also evolved in the last seven years. For instance, the cloud of secrecy has given way to a consultative process, where industry associations and trade bodies are consulted and their concerns taken on board. FTAs are generally negotiated based on the feedback of the industry chambers and associations, which form the main basis of the negotiating text for the government. Even though the ministry of commerce and industry negotiates the deals, inputs and suggestions are also sought from other ministries and departments.

One reason for this is the improved political management of trade negotiations. Prime Minister Manmohan Singh created a new institutional framework for trade policy formulation within the government by creating the trade and economic relations committee (TERC), which includes the Cabinet ministers for external affairs, finance, commerce & industry, agriculture, deputy chairman of the Planning Commission and senior officials. TERC has played an important role in securing governmental green signals for FTAs. It has enabled the external affairs ministry to bring to bear considerations relating to foreign and strategic policy on FTAs. When the India-Asean FTA faced domestic political hurdles, for example, it was the external affairs ministry that gave the needed push by underlining the importance of closer strategic relations with Asean.

That apart, Indian industry’s attitude to FTAs has changed. “You cannot compare India of seven years ago with the India of today,” said a commerce ministry official. Over the last few years, Indian industry has also realised it can compete favourably in the global marketplace. “Besides, it has realised that we may have a scarcity of some product today, but five years from now, we might be world-beaters. We are factoring all this in when we go out to negotiate,” the official added.

Labor market flexibility and employment during crisis

The global employment level is set to remain stagnant for 2010 before recovering in 2011, so say the authors of this note. They argue that trade openness leads to faster rises in unemployment, but also faster recovery. Also, high severance pay reduces unemployment and high unemployment benefits actually increases it. Their analysis shows that reduction in unemployment growth is more pronounced under a domestic banking or debt crisis than in countries that are only exposed to the global demand shock. The impact of global downturn persisted longer on average while employment growth reverted faster after domestic crisis.

They evaluate the average response to a crisis for countries with low levels of trade [with a trade (imports + exports) to GDP ratio of 25%] and compare the response to countries with a high openness level [of 130%]. For labor market institutions, they use a measure of the severance pay associated with laying-off workers. They compare the responses to a crisis when severance pay is one standard deviation below and above the mean. Their conclusion is that higher openness to trade led to a stronger reduction in employment growth in the initial phase of the crisis, but also allowed for a faster recovery.

The initial negative impact of openness in the case of a debt and banking crisis is consistent with findings on the importance of access to finance for exporters (see Iacovone and Zavacka 2009 or Berman 2009). Unlike a global economic downturn, banking and debt crises have a direct impact on the availability of credit for firms. Since exporters are more sensitive to changes in external finance conditions given their high up-front costs, the higher the openness-to-GDP ratio the stronger is the importance of the financial constraint and the more pronounced the impact on employment.

Countries with higher unemployment benefits suffered on average a more severe reduction in employment growth. One potential reason for this finding is that unemployment benefits can cause downward real wage rigidity (Campolmi and Faia 2005, Zanetti 2007) – if unemployment benefits are high, workers are more likely to resist a downward adjustment of wages. Another possible explanation is the role of informal employment. In poor countries with no or very low unemployment benefits and small welfare systems, workers who lose a formal job are often forced to take up informal activities instead. Thus, they do not appear as unemployed in our data, but typically suffer a substantial deterioration in their incomes and working conditions. Robustness checks revealed that the results for unemployment benefits are strongly driven by countries which have unemployment benefits in the upper 20th percentile. Thus, moderate unemployment benefits that provide a safety net for workers do not appear to be detrimental to employment growth during times of crisis.

Export discoveries and imitation

The rate of export discoveries goes down when first movers expect fewer benefits from their inventions because of imitation threats posed by competitors, according to a new working paper by Bailey Klinger and Daniel Lederman. Indeed, if prices for exports are determined only by global demand, imitators can either drive down those prices or drive up production costs. That, the authors argue, can lower the chances of product diversification in the export market within a particular country or industry. But that market failure might be partly compensated when export discoveries in one industry lead to findings in another. Because export diversification and new export discoveries are linked to economic growth, the authors recommend that governments not use entry barriers to protect innovators from the threat of imitation. Instead, they should consider interventions that directly stimulate export discoveries.

Full paper by Klinger and Lederman here. Export diversification along the extensive margin is inextricable from the introduction of new export products. The authors test the hypothesis that the threat of imitation inhibits the introduction of new exports -- export discoveries -- under the assumption that the intensive and extensive margins of exports are correlated within broad country-industry groups. Econometric evidence from panel-data techniques that are appropriate for count data (the number of discoveries) suggests that discoveries within countries and industries rise with the growth of exports along the intensive margin (relative to the growth of non-export gross domestic product) but the magnitude of this partial correlation increases with domestic barriers to entry and with customs delays in exporting. However, the magnification effect of barriers to entry appears to be less significant as a determinant of total within-country export discoveries. This is consistent with inter-industry and within-country spillovers related to export discoveries, implying that barriers to entry enhance the effect of export growth on discoveries within country-industries but total discoveries might be unaffected by barriers to entry.

Maoist madness in the Himalayas

The Maoist party is probably the most contradictory and inconsistent party in Nepalese dirty political arena. It is perhaps the most disgustingly opportunistic party unwilling and unable to bring out policies to institute prerequisites for long term economic growth. Except for Dr Bhattarai, I have not heard of any other Maoist leader arguing logically about economic growth and the economic mess we are in right now.

The one thing that you should not interfere when everything is in a mess is the sector that is posing as the binding constraint to economic activities. Low appropriability of returns arising from micro-risks such as political instability and corruption along with low social returns due to a lack of infrastructure are the two strongest constraints on the economy at present. Failure to address these constraints, thanks to politicization and obstruction by the leaders, is costing the economy dearly.

Micro-risks are always there in the economy. So, there is now way we will get away with them so soon. But, we can address the lack of infrastructure constraint with appropriate long term goals and vision. When the Maoist party was in power, they approved several hydropower projects in order to fulfill their dream of generating 10,000 MW hydroelectricity in 10 years.

Alas, their own dream is shattered by their own actions. The natural resources department of the UCPN (Maoist) has demanded that contracts and agreements on the West Seti, Upper Karnali, Arun-III, Chainpur Seti, Upper Karnali ST-1, Lower Arun, Upper Marsyangdi-II, Budhigandaki, Tamakoshi III A, Dudhkoshi, Dudhkoshi-4, Likhu, Phulkot and Namlan, among other hydropower projects, be presented for deliberations in the Legislature- Parliament´s Committee on Natural Resources. They also asked the government to stop all ongoing activities at those projects until the agreements are presented before the parliamentary committee. It is pure madness that will only exacerbate the economic mess. Electricity sourced from running water is almost the only source of power in this country. Furthermore, the country desperately needs a sizeable bout of investment now. They only sectors that are feasible are tourism and hydroelectricity. This could have bridged to some extent the investment gap, provide jobs, and potentially export revenue if we were able to export them after domestic use. This could have partially solved the perpetual balance of trade deficit. Alas, we are no so lucky. The economy is being held hostage by one single party which is raising voices on the back of “proletariat ” agenda. It is only concerned with usurping power by selling the failed Marxist agenda.

How can the Maoists justify this business unfriendly and contradictory act? This is not in the interest of the Nepali people. One ideologically dogmatic party should not and cannot not dictate and constrict the realization of aspirations of 28 million people. Who are the Maoists to argue that these projects are against national interest? Mind you, they only received 40 percent votes in the past election, if you assume that the election was fair in all 75 districts. Technically, they received 40 percent agreement on their proposed policies from among the eligible voters. This does not mean that they received a majority to dictate long term economic growth matters with myopic political vision to usurp power and push the country decades backward. Almost 60 percent of the eligible voters dissented with the Maoist party’s agenda. Additionally, how can a party, whose cadres are being fed by taxpayers like us, act as if there is no government and the rule of law. It is ludicrous and beyond sensible reasoning.

Their main target is India. They probably want to target Indian joint ventures in hydropower sector, restrict their activities, and use this as a bargaining chip during negotiations with India to fulfill their own vested interest of getting top posts in the government.  Four of the projects targeted by the Maoists are being developed by Indian investors, either solely or through joint ventures. It affects at least 3300 MW of hydro projects: Upper Karnali (900 MW), Tamakoshi 3 ´A´ (880MW), Upper Marshyngdi (600 MW), Arun III (402 MW), Lower Arun (400 MW), Balefi (50 MW) and Likhu (34 MW). Here is a very sensible piece from Dr. Ram Sharan Mahat.

At a time when investment is going down and the country is reeling under severe power crunch, this act does not do a bit in terms of protecting our economic interests. Investors will leave the country as they did during the bloody insurgency. Any surplus electricity can be exported, which the Maoists say should not be allowed. Why? How can they bridge the huge balance of trade deficit with India? The only viable way to do it is through electricity exports, exactly like what Bhutan is doing.

The Maoists are largely responsible for the economic mess we are in right now. Since they launched the bloody insurgency, which by the way is the bloodiest one in the world if we consider the level of fatalities and development level, in 1996, investment is tumbling down, exports are decreasing, employment is shrinking, imports are exploding due to limited avenues for investment of remittance money, and balance of trade is widening.

Most of the bidding in public works (construction of public infrastructure) is taken by the Maoist-affiliated wings, fostering massive inefficiency. Daily consumable goods are being procured and restricted supply in the product market to artificially jack up prices. Industrial districts are turned into youth wing camps. They have made a mockery of private property by willfully confiscating property. Investors are pulling out money and running away. Way too many evil acts are committed by the UCPN (M). They have pushed Nepal’s development at least a decade backward.

Again, they are mostly targeting Indian JVs and commercial interests. It is nothing but a political move. Nepali investors simply cannot and do not have the financial and technical capability to invest in large projects the country desperately needs. We need foreign investment. Period. Apart from using this issue as a political bargaining tool, they are probably after commission (like they are doing in the construction sector). The Maoist party is (may be even more) as corrupt as the other political parties. Its top echelon is the most hypocrite (as well as incoherent and inconsistent) I have noticed since the time I understood Nepali politics, however incomplete it may be. This recent senseless stunt is just a distraction from its latest corruption scandal. Lets sort out the scandal first!

The economy is being made a scapegoat to achieve vested interest of one very unpopular party that wants to run the show using fist instead of logic and sensible acts. We all know how Dr Bhattarai, the Finance Ministry during the Maoist government, had to implore with domestic and foreign investors to invest in Nepal when they shunned investment due to militant youth wings’ and unions’ activities. He even assuaged investment in hydropower sector to realizes its wild dream of producing 10000 MW in ten years. Now, it is totally opposite simply because they are not (and cannot after several unsuccessful rounds of voting for the prime minister position) in power.

The UCPN(M) should be stopped from doing taking law in its hand. It is costing our nation dearly. Their failed ideology is against the business sector, our economic interests and long term growth path. The party has comprehended neither geo-politics nor geo-economics. They look like pure opportunists, playing illogical and incoherent dirty games with both friends and foes. So far I have not heard of any group or organization supporting this wrong headed move. Stop this madness!

Conflict and development in South Asia

Ghani and Iyer have a good note on the relationship between conflict and development in South Asia. This blog post is just jutting down of major points from their note.

Countries that have low per capita income have a higher conflict rate. However, high income does not guarantee peace and stability also. In Nepal, Sri Lanka and Pakistan, for their given level of development, the conflict rates are much higher. The figure does not show causality, i.e. conflict may be contributing to low per capita income, or low income may be contributing to conflict. In Nepal, all the regions had high conflict intensity during the decade-long Maoist insurgency. Poor countries are at a greater risk of being plunged into conflict.

In general, conflict rates are seen to be higher between (in low per capita income ones) and within (in lagging regions) countries. In South Asia, conflict is concentrated in lagging regions, which have lower income per capita than national average. It is easier to recruit rebels in lagging regions because the opportunity cost of conflict is relatively low. Meanwhile, geographic conditions such as forest cover is related to incidence and intensity of conflict. States in India that have higher forest cover have higher conflict intensity. Conflicts can be triggered by low economic growth, unequal distribution in gains from development, political marginalization, shocks from natural disasters, and commodity price shocks.

Reducing conflict is a prerequisite to political stability, which, in turn, is the prerequisite for implementing pro-growth policies. One of the policy options to reduce conflict in South Asia is the deployment of police force, which the authors argue, are underequipped and understaffed. In addition to the police force, armed forces are also deployed depending on the incidence and intensity of conflicts. Another policy option is to conduct negotiations and sign peace pacts with insurgents. An economic solution to conflicts is to expand welfare programs and reduce poverty in conflict-affected areas. Many of the policies launched with this intention have failed due to poor economic policy selection and poor implementation. A right combination of these approaches could be a fruitful policy approach to amicably solve conflicts.

>>More on poverty and conflicts, here are Djankov and Reynal-Querol arguing that poverty does not necessarily cause civil war. Their point is that poverty and civil war could be driven by the same determinants (like colonial history), some of which are missed by in the typical econometric specifications that bat for poverty as a cause of conflict. Meanwhile, Fisman and Miguel argue that in Africa an income drop of 5% increases the risk of civil conflict in the following year to nearly 30%. Short term shocks to income do trigger violent conflicts.

According to a working paper by Iyer and Do, 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.

Similarly, Antonio Ciccone argues that a 5% income shock (say by drought) raises the likelihood of civil conflict by 15 percentage points.

Sachs vs. Easterly over MDGs, again!

Jeffrey Sachs bats for “multi-donor pooled funding that has clear timelines, objectives and accountability”.

We need a major change of funding toward pooled donor funding. Bilateral aid would remain, but mainly to promote demonstration efforts and innovations. The core of assistance would use pooled mechanisms to scale up what has been proven to work, avoiding fragmentation and poor accountability. Indeed, there are moves in this direction: a new maternal and child health initiative to be agreed this week saw African leaders specifically request that the support should come through the Global Fund. Similarly, infrastructure funding could be scaled up through new public-private financing pools for roads, rail and power, via the World Bank and African Development Bank.

William Easterly mocks Sachs and argues that only trade-fuelled growth can help the world’s poor. He thinks that private sector is the one that will help in reducing poverty, not aid.

This is all the more misguided because trade-fuelled growth not only decreases poverty, but also indirectly helps all the other MDGs. Yet in the US alone, the violations of the trade goal are legion. US consumers have long paid about twice the world price for sugar because of import quotas protecting about 9,000 domestic sugar producers. The European Union is similarly guilty.

Equally egregious subsidies are handed out to US cotton producers, which flood the world market, depressing export prices. These hit the lowest-cost cotton producers in the global economy, which also happen to be some of the poorest nations on earth: Mali, Burkina Faso and Chad.

According to an Oxfam study, eliminating US cotton subsidies would “improve the welfare of over one million West African households – 10 million people – by increasing their incomes from cotton by 8 to 20 per cent”.

To be fair, the US government has occasionally tried to promote trade with poor countries, such as under the African Growth and Opportunity Act, a bipartisan effort over the last three presidents to admit African exports duty free. Sadly, however, even this demonstrates the indifference of US trade policy towards the poor.

The biggest success story was textile exports from Madagascar to the US – but the US kicked Madagascar out of the AGOA at Christmas 2009. The excuse for this tragic debacle was that Madagascar was failing to make progress on democracy; an odd excuse given the continued AGOA eligibility of Cameroon, where the dictator Paul Biya has been in power for 28 violent years. Angola, Chad and even the Democratic Republic of the Congo are also still in. The Madagascan textile industry, meanwhile, has collapsed.

It is already clear that the goals will not be met by their target date of 2015. One can already predict that the ruckus accompanying this failure will be loud about aid, but mostly silent about trade. It will also be loud about the failure of state actions to promote development, but mostly silent about the lost opportunities to allow poor countries’ efficient private businesspeople to lift themselves out of poverty.

This kind of ideological battle will be fought for a long time to come. Similar form of battle was fought in the past, is being fought right now, and will be continued in the future. In a way, both are right, and both are wrong. Sometimes ideology blinds sensible reasoning. It is seen vividly in economics (incessant right and left tussle) than in any other subject. Perhaps, this is what adds spices to economics!

The human cost of Maoist insurgency in Nepal

Preliminary estimates (number):
Killed - 16,791
Disappeared - 1,327
Internally displaced - 78,708
Widowed - 9,000
Disabled - 4,305
Property lost - 11,775


It would be interesting to see the economic costs as well. Is there any that I missed?