Maoists’ hydro madness in Nepal

My latest piece is about UCPN(M)’s decree to stop all hydropower projects funded by foreigners and that are export-oriented. I think it is wrong. Period. Why does not this party do something that will boost morale and incentives of investors so that we have badly-needed infrastructure and industrial investment in the economy. It is one of the quickest ways to create jobs and stimulate the stagnant economy. If they think all electricity will be exported, then let the terms and conditions be revised in such a way that electricity produced in our country will first have to fulfill domestic demand and then be allowed to export the surplus. I just do not see the logic in restricting foreign investment, for whatever investment and consumption purposes it may be, in Nepal. I don’t think they will invade our resources and snatch our sovereignty. It is maniac thinking in this century! Additional discussion in my previous blog post.

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Maoists’ hydro madness

The demand of Unified Communist Party of Nepal (Maoist)’s water resources and energy department to cease all projects with foreign investment in hydropower sector and let them be reviewed by the parliament’s committee on natural resources was a bombshell. It shook the confidence of domestic as well as foreign investors. They have explicitly argued that the party will oppose any investment in hydropower that is export-oriented and funded by foreign investors.

This wrongheaded and senseless decision, if implemented, will cost the nation dearly in terms of investment, employment, economic growth and, above all, macroeconomic health of our fragile economy. Furthermore, it will exacerbate the existing power crunch.

This decree from the UCPN (M) shows that the party does not have a viable and coherent agenda to steer the economy toward a long-term sustainable growth path. Their failed Marxist ideology reeks of opportunism and hypocrisy. Recall that it was the Maoist government that announced a plan to generate 10,000 MW of electricity in 10 years time beginning 2008. Since the investors were not convinced that their investment deals will be honored by UCPN (M) party cadres and youth wings, they had lack of confidence in the Maoist government and hesitated investing. The then Finance Minister Baburam Bhattarai had to implore with investors, both domestic and foreign, to invest in the country as their dream of leapfrogging to double-digit growth rate in three years’ time had no chance of being realized. Out of power and unable to win confidence of other parties to officially run the state machinery again, they are doing exactly opposite of what they promised to the public and investors.

The average economic growth rate in the past five years has been below 4 percent. Unemployment in the formal sector is stagnating. The industrial sector growth rate declined for three consecutive years since the Maoists joined mainstream politics. It is recuperating after hitting a negative growth rate last year. Similarly, foreign direct investment has tanked. The incessant interference in the industrial sector by militant youth wings and politically-indoctrinated, belligerent trade unions has compelled both domestic and multinational firms to shut down operations, reduce production, and severely affected competitiveness of Nepal’s industrial sector. The result has been devastating: Job market has stagnated, exports have decreased while imports skyrocketed, shortage and carteling have led to unusually high prices of goods and services, and economic growth rate suppressed below 4 percent.

Amidst this unfortunate situation deliberately inflicted by misguided and naive approaches of UCPN (M), the only hopes of reviving the economy rests on two sectors Nepal is naturally endowed with: Tourism and hydropower. There is pretty much a consensus among political parties, including the Maoists, that they will let Nepal Tourism Year 2011 run smoothly. Excellent. Unfortunately, we do not have similar agreement for hydropower sector. It might be because this sector offers a fertile ground for hefty commission for an extended period of time. The UCPN (M) might also be planning to use this issue as a bargaining chip with India as most of the hydropower projects are to be constructed by Indian companies or joint ventures involving Indian companies. Whatever the political motive behind this move, one this is certain: With the Maoists basically against all foreign-invested hydro projects, the prospect of fulfilling domestic power demand and exports of surplus electricity look dim. It will severely affect our ability to create jobs, spur infrastructure investment-led growth, and narrow down negative balance of trade.

Writing a column in one of the leading dailies, a Maoist-affiliated member of parliament and analyst accused those opposing this new stance of his party saying that they are ignoring domestic power crunch and industrial development, and are hell-bent on exporting hydropower to narrow down trade deficit with India. He alleges that critics are not thinking of using electricity domestically to produce goods, which then can be exported at a high value instead of cheaply and directly exporting electricity. He argues that electricity is a ‘raw material’.

This stance reflects his party’s wrongheaded, naive and contradictory analysis about the use of our natural resources. First, no investor will export electricity if domestic demand is very high, which means the price domestic consumers are willing to pay is also very high.

Second, since this is an oligopolistic market – where there are few sellers and many buyers – low supply, high demand, and high price means that there is abnormal profit. No sensible investor would want to ignore profits in the domestic market. Even if they ignore, terms and conditions for purchase of electricity can be revised so that power is not exported until domestic demand is satisfied. With so many big hydropower projects on the anvil, exporting surplus electricity makes a perfect business sense, whose positive externalities, among others, would be a potential reduction of trade deficit and high economic growth rate. Bhutan is doing exactly this.

Third, running rivers are our raw materials. Harnessing latent energy out of this and transacting it within and outside of our border comes under services sector. Fourth, at present neither the government nor the domestic investors have financial resources and expertise to fund big hydropower projects. Hate it or love it, we will need foreigners to invest in the hydropower sector. There is no alternative to it. Small hydropower projects could be funded by domestic investors, but not big ones, which is the need of the hour for high and sustained growth. The country has already wasted way too many scarce resources in funding small hydropower projects that cannot fulfill increasing electricity demand in the domestic economy. We need to look for economies of scale to remain competitive.

The seemingly opportunistic, wrongheaded and senseless stance of the largest party in the parliament should be shelved for good. Else, investors will shy away from investing in Nepal, job market will not grow, and economic growth will continue to stagnate at a low level. If investments are made in line with the laws and regulations of the hydropower sector, then there is no logical justification to disallowing foreign investment in hydropower sector, be it for domestic use or exports.

[Published in Republica, September 30, 2010, pp.7]

Can India’s growth rate take over China’s?

Latest edition of The Economist says it might because of two factors: demography and democracy.

Its economy is expected to expand by 8.5% this year. It has a long way to go before it is as rich as China—the Chinese economy is four times bigger—but its growth rate could overtake China’s by 2013, if not before (see article). Some economists think India will grow faster than any other large country over the next 25 years. Rapid growth in a country of 1.2 billion people is exciting, to put it mildly.

There are two reasons why India will soon start to outpace China. One is demography. China’s workforce will shortly start ageing; in a few years’ time, it will start shrinking. That’s because of its one-child policy—an oppressive measure that no Indian government would get away with. Indira Gandhi tried something similar in the 1970s, when she called a state of emergency and introduced a forced-sterilisation programme. There was an uproar of protest. Democracy was restored and coercive population policies were abandoned. India is now blessed with a young and growing workforce. Its dependency ratio—the proportion of children and old people to working-age adults—is one of the best in the world and will remain so for a generation. India’s economy will benefit from this “demographic dividend”, which has powered many of Asia’s economic miracles.

The second reason for optimism is India’s much-derided democracy. The notion that democracy retards development in poor countries has gained currency in recent years. Certainly, it has its disadvantages. Elected governments bow to the demands of selfish factions and interest groups. Even the most urgent decisions are endlessly debated and delayed.

India’s state may be weak, but its private companies are strong. Indian capitalism is driven by millions of entrepreneurs all furiously doing their own thing. Since the early 1990s, when India dismantled the “licence raj” and opened up to foreign trade, Indian business has boomed. The country now boasts legions of thriving small businesses and a fair number of world-class ones whose English-speaking bosses network confidently with the global elite. They are less dependent on state patronage than Chinese firms, and often more innovative: they have pioneered the $2,000 car, the ultra-cheap heart operation and some novel ways to make management more responsive to customers. Ideas flow easily around India, since it lacks China’s culture of secrecy and censorship. That, plus China’s rampant piracy, is why knowledge-based industries such as software love India but shun the Middle Kingdom.

Understanding basic statistics for policymaking

Compilation of several brief tutorials in a single file. Original source here. Refreshing and very useful! View it on full screen for clarity.

Reading Statistics 101

Democratizing development economics

The World Bank Group’s President Robert Zoellick argues that development economics as of now is not “democratic” enough and it must broaden scope of the questions it asks to make it more relevant to the challenges of the present world and policymaking. His suggestions: Focus on empirical evidence but don’t always go after data as it does not capture everything; try to encompass the experiences of successful emerging economies; and do not follow blueprints.

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But it is appropriate to ask: Where has development economics brought us? Is it serving us well?

Even before the crisis there was a questioning of prevailing paradigms and a sense that development economics needed rethinking. The crisis has only made that more compelling.

A great deal of progress has been made over the last several decades: in health, education, and poverty. The share of people living in extreme poverty in developing countries has more than halved in the quarter century since 1980; global child mortality rates have almost halved.

But success has been uneven; countries are frustrated by the lack of progress on overcoming poverty and achieving the Millennium Development Goals, a useful yard¬stick to measure progress.

Most of the fall in poverty has occurred in East and South Asia and Latin America. While the world will meet the MDG target of halving the number of people living in extreme poverty by 2015, progress in Sub-Saharan Africa, despite some notable recent gains, still lags. Progress at the country level is even more uneven: Only 45 of 87 countries with data have already achieved or are on track to achieve the poverty target.

[…]The success of China and others has raised questions on the role of the state. What are the effective and proper roles of government ---- Enabler? Referee of fair and clear rules? Empowerer? Investor? Owner? Or anointer of winners?

The benefits of globalization and reform have yet to reach many of the poor. Many see the economic policy prescriptions of the Washington Consensus as incomplete -- lacking attention to institutional, environmental or social issues, or simply lacking as a guiding philosophy.

Others herald “orthodox” policies as helping developing countries navigate the crisis, pointing out that some developed countries strayed from orthodox lessons of finance and budgeting to their peril.

[…]Emerging economies are now key variables in the global growth equation. The developing world is becoming a driver of the global economy. Much of the recovery in world trade has been due to strong demand for imports among developing countries. Led by the emerging markets, developing countries now account for half of global growth and are leading the recovery in world trade.

We see a similar trend in the global development landscape, with developing countries assuming important roles alongside traditional development partners. These new partners are contributing not only aid, but more importantly are becoming major trading partners and sources of investment and knowledge. Their experiences matter.

Yet for too long prescriptions have flowed one way. A new multi-polar economy requires multi-polar knowledge.

With the end of the outdated concept of a Third World, the First World must open itself to competition in ideas and experience.

The flow of knowledge is no longer North to South, West to East, rich to poor.

[…]Yes, there are some basic principles we can follow: a belief in property rights; contract rights; the use of markets; getting incentives right; the benefits of competition within and across economies; the importance of education; macro-economic stability -- but we might learn these more from economic history than from economic models.

As the World Bank’s “Doing Business” reports have highlighted, small and medium- sized enterprises can flourish given an enabling environment that encourages – rather than blocks or constrains – the entrepreneurial spirit.

Beyond the basic principles, experience would suggest that we may need to consider differentiated policy approaches.

The right policies may differ across phases of development -- for example reliance on export-led growth versus domestic demand, or on different types of innovation, depending on the closeness of companies to technology frontiers.

The right policies may differ now from the 1970s given the changes brought about by the internet and the growing importance of supply chains in international transactions.

The right policies on financial regulation may differ across phases of development -- what may safeguard in one context may strangle in another.

[…]We need a deeper understanding of the process of how an economy’s structure evolves. This is not just about the shift from agriculture to industry and services over time.

Within agriculture, services, or industry, we need to know much more about the process of moving into higher quality goods and services, about what determines a country’s economic dynamism, and what contributes to the flexible adjustments in the structure of an economy.

I would maintain that a competitive market should be the economy’s fundamental mechanism for allocating resources. But there are market failures. There are also government failures -- including an inability to correct market failures. There is an important role for good governance, anti-corruption, and the rule of law, and governance will go beyond considerations of simple economic efficiency.

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Here is a paper that provides an overview of the history of development research at the WB.

Six main messages emerge. First, research and data have long been essential elements of the Bank's country programs and its contributions to global public goods, and this will remain the case. Second, development thinking is in a state of flux and uncertainty; it is time to reconsider both the Bank's research priorities and how it does research. Third, a more open and strategic approach to research is needed -- an approach that is firmly grounded in the key knowledge gaps for development policy emerging from the experiences of developing countries, including the questions that policy makers in those countries ask. Fourth, four major sets of problems merit high priority for our future research: (i) securing economic transformation; (ii) broadening opportunities to participate in the benefits of, and contribute to, such transformation; (iii) dealing with emerging risks at all levels; and (iv) assessing the results of development efforts, including external assistance. Fifth, a new multi-polar world requires a new multi-polar approach to knowledge; the Bank must learn from, and collaborate with, developing-country researchers and institutes. Sixth, greater emphasis must be given to producing the data and analytic tools for others to do the research themselves and providing open access to those tools. And open data initiative needs to be extended to open knowledge. This will better inform development policy debates and allow for deeper engagement with the direct stakeholders in the outcomes of those debates.

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Reaction from some economists here:

Nobel Prize-winning economist Michael Spence, who led a commission on economic growth, said Mr. Zoellick’s comments are “generally not only in the right direction, but very useful.” Harvard economist Dani Rodrik…. also praised the World Bank president. “The speech hits all the right notes: the need for economists to demonstrate humility, eschew blueprints…and focus on evaluation but not at the expense of the big questions,” Mr. Rodrik said.

But the reaction wasn’t unanimous. New York University economist William Easterly…called Mr. Zoellick’s comments “amazingly presumptuous.” He says the current system of economic research, where ideas are picked apart by other economists, works well. If anything, he says World Bank economists are often the exception because their bosses pressure them “to reach the ‘right’ conclusions,” Mr. Easterly said—meaning that World Bank loans are useful and foreign aid is productive.

The World Bank’s chief of research, Martin Ravallion, responded, “I have never been told what conclusions I should reach, and I doubt very much that anyone told Bill Easterly what conclusions he should reach in his many years working for the Bank’s research department.”

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.