Nepal’s budget 2010-11: Big budget, big incentives

My latest piece is about a review of Nepal’s fiscal budget 2010-2011 published yesterday’s edition of Republica daily. Due to space constraint, I have focused on export and production incentives, infrastructure, employment generation and economic growth. If time permits, I will write blog posts about the potential impact of the expansionary budget on the already high inflation rate, economic growth and development outcomes. For starters, here is a rundown on Nepal’s fiscal budget 2010-2011. Here is a review of FY 2009-2010 and FY 2008-2009 budgets.

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Big budget, big incentives

Unlike previous budgets filled with turgid slogans and riddled with pet projects, Finance Minister Surendra Pandey presented a simple one, which gives continuity to ongoing projects and adds a few new ones. Overall, the budget is progressive, private sector-friendly, and focused on infrastructure, employment and exports promotion. Pandey’s hands were tightly tied— thanks to the incessant, inconclusive, futile political marathon—to effectively allocate funds and prioritize projects. Against such a backdrop, the fact that he was able to present a budget itself is a success story.

Make no mistake, the budget’s size of Rs 337.9 billion, up by 30.4 percent from last year’s expenditure, is not warranted by the incapacity of existing bureaucracy and local administrations, and fluid political economy, to effectively execute proposed projects. The size of our budget is ever-increasing, irrespective of the country being in civil war or peace period.

The government is planning to spend Rs 190.32 billion and Rs 129.54 billion as recurrent and capital expenditures, respectively. It represents 56.3 percent and 38.3 percent of total expenditure, and 25.8 percent and 44.8 percent increase over last year’s expenditure, respectively. Principal repayment is estimated to be Rs 18.42 billion, which is 5.4 percent of total expenditure. One good aspect of this year’s budget is that expenditure allocation for development programs have been jacked up substantially to Rs 178.61 billion, which represents 52.9 percent of total budget. Development programs have been in the backburner for more than two years due to never-ending political wrangling and the parties’ inability to forge a consensus on key development agendas. The other 47.1 percent of the budget is allocated to cover general administration expenses.

A country needs to match up its expenditure with revenue and deficit financing. Accordingly, the government is planning to collect Rs 281.99 billion (83.45 percent of total expenditure) revenue. Specifically, it aims to collect 63.92 percent and 19.33 percent of total expenditure from tax and non-tax revenue, and foreign grants, respectively. This still leaves the government with Rs 55.91 billion (16.54 percent of total expenditure) short of meeting the total expenditure target. It plans to cover this by deficit financing, consisting of foreign loans of Rs 22.23 billion and domestic borrowing of Rs 33.68 billion, representing 6.58 percent and 9.97 percent, respectively, of total expenditure.

Budget for FY 2010-1011
	Rs, billion	Percent of total budget	Percent increase from last FY
Total expenditure	337.9	100	30.4
Recurrent	190.32	56.3	25.8
Capital	129.54	38.3	44.8
Principal repayment	18.42	5.4
Development programs	178.61	52.9
General administration	159.29	47.1
Projected total revenue	281.99
Revenue	216.64
Foreign grants	65.34
Deficit	55.91
Deficit financing	55.91
Foreign loans	22.23
Domestic borrowing	33.68
FY 2010-11 full annex

There are plenty of customary allocations and projects. The things that should matter the most are projects and policies that will aid economic growth, employment generation, and development. Overall, the budget focuses on three aspects that should, in principle, meet these objectives: Infrastructure, exports promotion and private sector development.

It has given priority to develop infrastructure such as road transport, hydropower, and irrigation, which are critically needed to spur growth in the sluggish economy. Apart from funds for construction of four six-lane highways along major trading routes, there are also funds for regular and periodic repair and maintenance of potholed and dilapidated roads. Along with additional bridges and irrigation projects in villages, including rural Karnali zone, four hydropower projects with a combined capacity of 134 MW are planned. Moreover, it aims to develop at least one large- and medium-sized reservoir hydro projects in each development region. The government aims to establish Infrastructure Development Bank by inviting private sector’s participation as well.

These projects and goals are in the right direction. But, since infrastructure is the most binding constraint to growth (see What’s holding back growth?, Republica, May 14, 2009), the funds allocated to this sector are insufficient to not only meet demand for adequate infrastructure, but also to effectively generate multiplier effects large enough to push growth rate higher than the existing one.

The government has been very generous in providing enough incentives to the private sector. It will only be realized if they stop whining for even more and start utilizing them by being innovative investors, and by exhibiting competitive entrepreneurship instead of adhering to old school business models that survive on government concessions.

The government has promised blacktopped roads reaching premises of manufacturing firms employing more than 100 Nepali workers; sub-health posts staffed with health workers and a police post to any firm or industry employing over 500 Nepali workers; and 3 percent and 4 percent tax incentive, along with 25 percent income tax exemption, if value addition in exported commodities exceed 50 percent and 80 percent respectively. These initiatives will reduce transportation as well as transaction costs. Furthermore, there is 50 percent tax rebate on earnings from exports of goods produced using local raw materials. This is one of the import substituting policies.

One good incentive but will basically remain ineffective is the 2 percent rebate, in Nepali rupees, to exporters if they submit bank document explaining receipt of convertible currencies earned from exports. It will remain largely ineffective because this provision will cover about 20 percent of the exporters only. There should be easier ways other than showing bank document of earned convertible currencies.

These are some of the sweet deals in the budget, which apparently does not have hooks on incentives and policies. This might render the whole initiative futile.

First, the allocated sum for infrastructure development is insufficient. Funds should have been allocated to projects that are shovel-ready and have high marginal returns to investment in the short term. Instead, money is being allocated to study construction of railway, metro cable cars and waterways. They are fine projects for the future. But, as of now, we are a resource-strapped economy and have to manage resources judiciously and efficiently. It would have been better to focus on building more roads, connecting more villages with markets, and linking villages with each other, rather than conducting feasibility study of projects that we are dead sure will take decades to complete. It would be better to have modest aims and invest in sectors that have the highest marginal rate of return on public investment.

Second, there should have been a catch in the plan to constructing road up to premises of firms employing over 100 Nepali workers. What if a firm employing 100 workers fires 50 percent of workforce after the government builds road up to its premises? If this happens immediately, then the cost of government incentive offered to firms will be higher than the return it would generate. Also, the incentives package should have been product-specific as the socioeconomic impact of production of different products is different. The ones that generate the highest positive socioeconomic impact should get the highest incentives.

Third, the incentives package and exports promotion strategies are not fully compatible with the recently updated Industrial Policy 2010, Trade Policy 2009, and Nepal Trade Integration Strategy (NTIS) 2010. The industrial policy has already specified tax holidays and income rebate to firms investing in underdeveloped, undeveloped, and less developed areas, and also outlined plans for promoting Special Economic Zones (SEZs). The incentives offered in the budget should have been compatible with these or have built on the already prevailing ones. Same goes for the incentives outlined in trade policy and promotion of 19 products identified in NTIS 2010. This policy incoherence will flare up confusion and bureaucratic hurdles. This is a mistake of the Ministry of Finance. It should rectify this, if it wants to see the industrial and export sectors rebound with positive impact on growth, employment, trade deficit, and balance of payments.

The budget is also not in line with Three Year Investment Plan 2010-2013 published by National Planning Commission (NPC) last April. With this kind of incoherent and loosely assorted projects, the aim to achieve 5-6 percent growth rate, lower absolute poverty to below 20 percent, generate 20,000 jobs, and encourage private sector to invest 64 percent of the needed investment will remain a distant dream.

That said, the fact that we have a budget is itself good news. Now, we can only hope that it will be implemented as promised.

[Published in Republica, November 23, 2010, p.7]

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Cash transfers and financial inclusion

Campos and Coricelli argue that cash transfers might not only be a crucial social safety net against poverty and vulnerabilities in developing countries, but it might also benefit financial development.  CCTs are transfers often pain in cash, have an explicit poverty reduction objective, have an explicit conditionality component, and have a strong ex-post evaluation. Rather than the conditional aspect of CCT, Campos and Coricelli focus on cash aspect and its impact on financial inclusion.

CCTs have also been widely implemented after the global economic crisis.There are over 30 countries implementing conditional cash transfer programs, up from just 3 in 1997.

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In recent research (Campos and Coricelli 2010), we attempt to address this neglect of financial development as a possible factor explaining the success of cash transfers. Indeed, we lament the generalised lack of attention and interest in its potential role. Our argument is that cash transfers, through the formal financial sector, may be an important channel to boost financial development and thus potentially reconcile equity and efficiency concerns.

Our thinking is in large part inspired by some of the most successful cash transfer programmes, such as the Brazilian Bolsa Família programme. One delivery instrument in Bolsa Família has been electronic benefit cards (there is an ongoing study on the possibility of using mobile phones for executing these payments). In this, as in other successful programmes around the world, the beneficiaries, mainly women, have their benefits paid periodically into bank accounts, which is controlled through a dedicated ATM system (Lindert et al. 2007). We argue that the way in which these benefits are executed (or paid) matters considerably, and deserves further attention from both academics and policymakers.

[…]The view we take is that there is a largely-unexplored virtuous cycle of conditional cash transfer programmes and financial development. Conditional cash transfers can improve access to financial services, which, in turn, can shore up financial deepening, which may lower transaction costs in the financial sector (for example, by lowering the ratio of banking fees to GDP per capita). Cheaper banking services are not only one way of improving access to finance and of fostering financial inclusion, but they may also help to support cash transfer programmes by making their delivery cheaper and more transparent. Clearly, there are important political economy issues permeating these decisions.

These qualifiers above are useful as they highlight the important policy areas. Conditional cash transfer programmes can improve financial inclusion if and when the payment of the benefits is done through the formal banking system (as opposed to a surprisingly still common way of paying beneficiaries in cash and in person). Financial inclusion can shore up financial deepening if, for instance, bank regulations are able to relax branching restrictions and allow (or lower the costs) for the operation of mobile phone-based banking systems. Financial deepening can lower banking costs, but policymakers have to focus on the ways in which these cost reductions are actually passed on to low-income consumers (by, for example, subsidising basic banking accounts, if that is required). Lower costs of formal financial services can clearly improve access. They are also likely to reduce the implementation costs of conditional cash transfer programmes, thereby enhancing their potential effectiveness.

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There are plenty of studies about the impact of CCTs on poverty, inequality, women empowerment, education, health and inclusive development, among others. For instance, this study finds that cash transfers in Brazil (Bosla Familia) contributed to reductions in inequality of another 0.2 Gini points per year. 

CCTs, born out of Mexico’s Oportunidades, is already successfully implemented in Latin America and in small scale in some African and East Asian countries. CCTs have boosted the use of preventive health care services in Colombia, Honduras, Mexico, and Nicaragua by between 8 and 33 percentage points, according to the WB. See this report for a detailed discussion about the impact of CCTs on poverty, education, and healthcare.

In Pakistan, for instance, a CCT program increased the school enrollment of 10-14 year-old girls by 11 percentage points. And in Mexico, the Oportunidades program decreased dropout rates between the 6th and 7th grade by 9 percentage points.

Book Review -- The Maoist Insurgency in Nepal: Revolution in the Twenty-First Century

A book review of The Maoist Insurgency in Nepal: Revolution in the Twenty-First Century published in Journal of South Asian Development, October 2010 5:300-303.

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[Mahendra Lawoti and Anup Kumar Pahari (eds). 2009. The Maoist Insurgency in Nepal: Revolution in the Twenty-First Century. New York: Routledge. 354 pp. $150. ISBN 978-0-415-77717-9 (HB). DOI: 10.1177/097317411000500208]

The book aims to explain the dynamics and growth of the violent decade-long insurgency, led by the Communist Party of Nepal (Maoist), which started in 1996 from rural districts in Nepal. Various aspects of the rebellion are explored in an attempt to provide a diverse picture of the nature of the insurgency, its modus operandi, and success in recruiting and keeping intact a sizeable support base.

There are 15 chapters, with contributions ranging from the Maoists’ tactics in recruiting cadres by mobilising a plethora of means such as cultural programs, indoctrination, and political education, the governance of a growing parallel bureaucracy, the role of ethnicity in inciting conflict to the comparison between the PLA and the security forces in flaring up the violent movement. The role and consequences of external actor’s engagement and the quest for identification of causes behind the growth of insurgency are also explored. The two editors of the book, Lawoti and Pahari, delve into what is at stake for the nation and the CPN-M in the post-insurgency era, that is, after the successful revolution in 2006 that culminated in the end of the two-century long monarchy and signing of the Comprehensive Peace Agreement (CPA) with democratic parties. Given the breadth of issues explored by the authors, from various perspectives, the book is not only useful to researchers interested in the nature, causes and consequences of a home-grown insurgency but also to a general audience having interest in conflict studies and conflict resolution professionals interested in understanding and solving ideology-based insurgencies.

Despite presenting rich information, the contributors of Part II, which deals with the extensive use of indoctrination and political education, cultural programmes, the use of student unions and the mobilisation of landless rural poor against elites to generate popular support for the insurgency, fall short of making their point convincingly. There is little analytical rigour in their analysis as all of them are informational and interpretive in nature. Readers would have benefited tremendously had there been analytical examination of the Maoists’ tactics and the level of success in methods used to recruit insurgents and enhance the support base.

While attempting to explain why the Maoists were successful in recruiting rebels through indoctrination of Maoists ideology, Eck just explains the modes of indoctrination while failing to convincingly explain why indoctrination was successful and to what extent it contributed to the growth of Maoist support bases in rural areas. Eck’s claim that the focus on ‘local knowledge and the understanding of local grievances’ (p. 45) was the main reason for enticing recruits is partially refuted by Acharya, who shows that grievances, caste and ethnic divisions and ideology are insignificant variables (pp. 264–84). In fact, using econometric analysis, Acharya shows that the main cause of longevity of the insurgency and its mass appeal are incentives, that is, the opportunity cost of joining the rebellion is low due to limited employment opportunities, difficult physical geography and personal security amidst the absence of state. Meanwhile, Tiwari asserts that initially development inequalities and poverty increases the likelihood of conflict, but once conflict kicks in, the intensity is guided more by social variables, that is grievances are not primary causes (pp. 243–57).

Mottin’s contribution on the use of cultural programmes such as dance, theatre and songs that circulate through tapes, CDs and videos to keep cadres intact and tempt more people to join the rebellion is largely based on observations and anecdotes from fieldtrips in the Maoists’ strongholds. Mottin, however, falls short in explaining how the Maoists’ songs and dance were any different, if they really were, from that of the United Marxist-Leninist (UML), which were once very popular among the rural impoverished masses. In Chapter Four, despite providing valuable insights into the evolution and contribution of the Maoist student’s union in raising awareness about its parent party’s rebellion, Snellinger struggles to justify how the All Nepal National Independent Student Union-Revolutionary (ANNISU-R) is a ‘scientific organization’. By blindly following the CPN-N’s ideology, restricting the upward mobility of competent members in the management body of ANNISU-R and using violence to put forward their demands contradicts the author’s claim that the student body is a scientific organisation.

In the next chapter, Joshi looks at the tussle between poor landless people and rural elites, and the effect of liberalisation on rural households. Joshi’s claims that the insurgency is mostly related to the grievances of rural landless poor and the apathy of the political establishment in reforming the feudal economic system that only benefited the ‘landed elites’ are not fully backed by convincing evidence. Nepal has been feudal since its inception as a sovereign state. Why the revolution after two centuries of the existence of feudalism? Plus, it is quite wrong to attribute the continuation of feudal land holdings as a trigger. Unequal distribution of land cannot be solely attributed for the disgruntlement among the poor during and after the insurgency in Nepal. Nepali people are fiercely individualistic in nature, which is evident from their dissatisfaction with collective production units and communes in the Maoist’s model village, which were considered as breeding grounds of the Maoist insurgency. Not even in the Maoist’s model village—Deurali—were residents satisfied with collective production units and communes, as is shown by Lecomte-Tilouine (pp. 116–32). They were forced to follow the Maoist’s utopian model of governance that consisted of Marxist education in schools, communes and kangaroo courts.

Examining the trajectory of insurgency with the participation of indigenous groups and the role of the Madhesi community during and after the insurgency, Lawoti and Kantha do an excellent job to fill the void on the ethnic dimension of the insurgency. The Maoists raised issues such as language equality, secular state and self-determination rights, and incorporated proportionally high indigenous representation in their organisational structure, leading to an increase in support from the indigenous people. In fact, the insurgency began from the land of one of the indigenous groups, the Kham Magars. By comparing Maoist movement in Nepal with that of Peru and India, Lawoti shows that the latter countries’ inclusive policies helped blunt the growth of insurgencies. One important implication of this finding is that alienating and excluding ethnic groups is a recipe for disaster. This is further confirmed by Kantha, who argues that due to the Maoist’s hostile attitude towards the Madhesis’ interests, especially on instituting a single Madhes state with a right to declare autonomy and their pro-India stance, they could not garner popular support in the Terai region. Kantha, however, fails to explain whether the leaders of Madhes, most of whom once belonged to mainstream political parties that ignored ethnic minorities’ rights, are genuinely interested in securing the rights for Madhesi people or are they simply seizing the political opportunity and creating a niche for ethnic politics? The higher echelons of the newly formed Madhesi parties are virtually void of lower caste people, which indicate more of a repackaging rather than a genuine push for empowerment of marginalised Madhesis by the upper caste Madhesi elites.

On the military dimension, comprehending the inability of a large, well-trained and equipped state army to contain effectively an insurgency is always intriguing and surprising. Mehta and Lawoti fault the fickle political situation; the coup in

2005 leading to withdrawal of support to the security forces by India, the United Kingdom and the United States; and the inability of the army to win the support of the public for the weakness of the state army. The Maoists emerged triumphant due to their ‘political foresight and strategies and not through military victory’ (p. 191). They, however, do not talk about the moral and material support pro- vided by India to the Maoist insurgents. They also do not talk about the political will, which was at best halfhearted, to fight the Maoist insurgency. Pahari compares the Maoist movement in India and Nepal and argues that the Maoists gained an upper hand because of the extreme centralisation of political, administrative and governance powers in Kathmandu. Upreti looks at another important dimension of the conflict—the role of external actors, who showed ‘inconsistency and duplicity’ while dealing with the government and security forces. The international actors severely criticised the state for violating human rights during the insurgency. Meanwhile, they also supported the security forces by supplying arms, logistics and training before the royal takeover and imposition of state of emergency.

Most analysts were surprised when the Maoists gained the largest number of seats in the 2006 CA election. In a forward-looking chapter, Lawoti unravels the causes of this surprising election victory—projecting themselves as the only agent for change; creating an environment where other parties could not freely and fairly seek votes; and the undemocratic intra-party culture among the democratic parties (pp. 287–303). This strategy worked once, however, if the Maoists employ the same strategy again in future elections, then ‘democracy, freedom, and the Nepali people will be victims’ (p. 301).

Despite populist talks, the Maoists have not formulated policies for economic transformation. The economic policies they formulated when they were in government backfired because the economy saw a negative growth in manufacturing sector. Meanwhile, domestic and foreign investment nosedived. Several factories closed down due to threats from the Maoist-affiliated militant youth wing and trade unions. Looking at the Maoists’ method of operation even after their emergence as the largest party in the parliament, there is very little evidence that the Maoists will reform and do things differently. From the Maoists’ perspective, it however makes little sense to do things differently, when their current modus operandi is paying hefty political dividends. The book does not include studies on crucial issues such as the economic cost, the stagnation of income growth and the effect of Maoists ideology on private sector investment and growth during the insurgency.

[Reviewed by Hari Bansha Dulal, The World Bank, Washington DC, USA, and Chandan Sapkota, Carnegie Endowment for International Peace, Washington DC, USA.]

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Nepal’s fiscal budget 2010-2011

Here is the skeleton of Nepal’s fiscal budget 2010-2011 presented by Finance Minister Surendra Pandey today after yesterday’s Maoist party’s inexplicable drama.

Budget for FY 2010-1011
	Rs, billion	Percent of total budget	Percent increase from last FY
Total expenditure	337.9	100	30.4
Recurrent	190.32	56.3	25.8
Capital	129.54	38.3	44.8
Principal repayment	18.42	5.4
Development programs	178.61	52.9
General administration	159.29	47.1
Projected total revenue	281.99
Revenue	216.64
Foreign grants	65.34
Deficit	55.91
Deficit financing	55.91
Foreign loans	22.23
Domestic borrowing	33.68
FY 2010-11 full annex

Even though Mr. Pandey claims that this budget is in line with the Three Year Plan (2010-2013), which I think is not, politically, thanks to the Maoist party, he is restricted to bring a budget that will more or less be in line with the plan.  He is constrained by other parties’ reluctance to add new development programs. So, pretty much everything looks like a continuation of the ongoing programs.

Specifics:

• Infrastructure: construction and reconstruction of roads, bridges, highways, Tamakoshi Hydropower Project, irrigation projects in Karnali

• Transport: Rs 2.52 billion for regular and periodic repair and maintenance of roads (my take: the sum is too little to tackle the binding constraint to economic growth); construction of railway, metro, cable cars and water ways (my take: forget these and divert money to constructing roads and building hydropower; link up villages and markets first, where there is the highest marginal rate of return on public investment); upgrading and construction of bridges over roads and those linking highways; 4 six lane highways
• Hydropower: budget for completion of Trishuli III “A” (60 MW), Kulekhani III (14 MW), Chameliya (30 MW), and Rahughat (30 MW); at least one large and medium sized reservoir projects in each development region-- Budhi Gankadi (66 MW), Naushyalgad (400 MW), 300 Tamor (300 MW) and Aandhikhola (175 MW) projects to be brought into operation; micro hydropower production to be encouraged; national grid expansion and construction of inter-country transmission line of high capacity (my take: Good one. But, let us also ensure that they happen on time. It would have been better to put a time horizon for completion of these projects and institute a proper governance body to ensure that they are completed on time)
• Tourism: NTY 2011 promotion to bring in one million tourists; Rs 5 lakhs for any organizer bringing in more than 100 foreign passport holders via air; Lumbini, Pokhara, Janakpur to be promoted; airport infrastructure to be upgraded (my take: the cash incentive could divert some of the regional conferences to Kathmandu; good for the economy!)
• Private sector development: black topped roads reaching premises of manufacturing units employing more than 100 people; tax payment days reduced by 12 working days; sub health post staffed with health workers to any productive industry employing more than 500 Nepali workers; a police post of 5 police personnel near any manufacturing firm employing more than 500 Nepali workers; direct purchase of diesel from NOC at dealer’s price for manufacturing industries and hotels; along with 25% tax exemption, 2% of incentive in NRs to exporters on submission of bank document that they have received convertible currencies earned from exports; 3% and 4% tax tax incentive, along with 25% income tax exemption, if value addition in exported commodities exceeds 50% and 80% respectively; safeguard economic protection of industrial workers who have contributed to Social Security Fund; high priority to completion of road construction and electricity transmission lines to encourage cement industries in Udayapur, Makawanpur, Dhading, Rolpa, and Dang; grants for registration of collective trademarks for tea and coffee in the international market; price carteling and syndication to be illegal; Youth Self-employment Program (my take: Good incentives, but unsure how much of it will be picked up by the private sector, for whom any amount of incentive by this resource-strapped nation is insufficient; I like the idea of constructing roads up to premises of manufacturing units if they employ more than 100 people. It would better if this is used in as carrot-and-stick style, i.e. if firms employ more than 100 just to get roads to their premises, and fire 50 percent employees after getting the roads built for free, then they should be held liable for the costs incurred in constructing the roads. There should be hooks to this incentive. Also, let us start with breaking up the syndicate in transport sector. Consumer surplus is being deliberately squeezed by unfair pricing by syndicates and cartels. Also, export promotion measures are laudable. We’ll have to see how much risk abatement there will be with these tax incentives.)
• Financial and capital markets: capita restructuring of NBL and RBB; Infrastructure Development Bank; NRNs allowed to invest in capital market (my take: Why not totally reform and privatize NBL and RBB? What is the point in resuscitating them time and again? Let us make infrastructure development bank a reality. First, increase funding for it. Also, how about selling infrastructure bonds with relatively attractive high long-term interest rates?)

• Social security: social security allowances (distribution to be initiated through banking system), child protection grant for poor-Dalit families in Karnali, human development of backward and marginalized groups, one percent income tax as social security tax
• Women empowerment: 17.9% of total budget allocated for women empowerment, including campaign against gender based violence, legal expenses of small girls and teens rape cases to be covered by the state treasury
• Sports: incentives for medal winners at international events, development of sports infrastructure, construction of regional sports complexes, construction of cricket grounds of international standard at Mulpani, Kathmandu and Bhairawa, Rupendehi (my take: We badly need it. Let us boost our athletes’ morale)
• Targeted poverty alleviation: social mobilization, income generation, self-employment, small community infrastructure development, skill enhancement and creative programs through PAF; target groups are Dalit, Madhesi, ethnic groups and backward groups BPL; Karnali Employment Program
• Reconstruction, Rehabilitation … : monthly allowances and livelihoods for combatants (my take: if they are really in a combative mood and support their parent party in any moves, then why pay them with taxpayer’s money? I hate to think of giving hard earned tax rupees to idly sitting, potentially destructive and politically indoctrinated militants!)
• Agriculture: livestock development by concessional loans to be self sufficiency and to promote exports of meat (my take: its fine to aim for self sufficiency, which I doubt, but don’t aim for exports as of yet because we hardly meet international sanitation standards; it is a useless chatter to show that something is going to happen); Karnali Zone Special Agriculture Development Program, which is an extension to last year’s program, with provision of transportation of fertilizers, seeds, small scale irrigation, training… all aimed at reducing food scarcity; Rs 2.75 billion subsidy to farmers on chemical and organic fertilizer; 50% capital subsidy to cooperative of small farmers to purchase machinery and equipment for processing of cardamom, ginger, tea, coffee and honey; R&D; incentives for cooperative farming; 50% subsidy to insurers on the premium they pay for agriculture and livestock insurance (my take: I like these calibrated incentives, but think that they are not enough to bring about a substantial change; though it is tiny amount, it is better than nothing) 
• Irrigation: Rs 9.01 billion allocated for irrigation facility in additional 81,475 hectares of land in this fiscal year; construction of irrigation projects in Bara and Bardiya; continuation of People’s Embankment Program
• Land-use: Land to be classified into six categories -- agricultural, industrial, forestry, commercial, residential and public community
• Education: Rs 57.65 billion (17.1% of total budget) allocated,an increase of 24.5% over last year’s education budget; teacher-student ratio mapping; internet facilities in every community school; 5400 schools to be handed over to communities during this fiscal year; girls’ toilet mandatory in each community school; a total of Rs 1 billion for teaching grant for schools facing scarcity of teachers
• Health: Rs 24.51 billion allocated; expansion of free of cost maternity service; free basic health services; promotion of infant and maternal health
• High-Level Public Enterprises Management Board proposed to reform overall management of public enterprises (my take: why another bureaucratic board? We know the problem. We know the solution. Let us privatize some, offer public shares of some, and have PPP models for some. No point perennially pumping in money in the loss making public institutions.) 
• Rs 150 million for periodic review of both physical and financial performances of projects outlined by the budget; Finance Minister to chair the high level committee (my take: I really would like to read the final assessment report of not only the projects, but also how this committee spends the proposed sum)

Tax policy and incentives:

• Permanent Account Number for all employees
• Compulsory VAT registration for educational consultancy, discotheque, health club, catering, party palace business, mechanically operated dry cleaning service and restaurant with bar operating in municipality areas and other areas specified by IRD
• 40% tax exemption in income accruing from investment in construction and operation infrastructure development sectors like roads, bridges, airports and tunnels
• 25% rebate tax for people earning money out of exports of goods produced by using local raw materials
• 50 tax exemption for software development, data processing, cyber-café and digital mapping industries located within technology, biotech, and IT parks
• Tax incentives to facilitate merger of banks, finance and insurance companies
• 50% exemption on land registration tax for purchase of land by firms giving direct employment to 300 or more Nepali workers
• 30% exemption on land registration tax on land transferring ownership to women in rural areas
• An advance lump sum payment of land and house taxes for 5 years at existing rates

For this fiscal year, on July 12, 2010, Mr. Pandey was allowed to present a budget that was equivalent to one-third of last fiscal year’s actual expenditure. This barely sustained expenditures for the first four months of this fiscal year. During this period, revenue growth decelerated primarily due to low economic activities caused by budgetary uncertainty. Rural economy suffered. Government had to borrow from budget allocated for principal repayment as fiscal crunch got severe.

Nepal’s economic policy should focus on narrowing down trade deficit, achieving high economic growth, enhancing efficiency of public institutions, reducing poverty, lunching efficient public workfare programs for the rural poor, curbing corruption, reducing inflation, and maintaining fiscal stability. This year’s budget aims to lead the country to “industrialization by developing sustainable, self-sufficient and self-reliant economy through optimum mobilization of domestic resources”. Good luck!

Animal spirits of the Maoist party in Nepal

No, it is not consumer confidence that brings forth investment and prosperity-- referred by JM Keynes as “animal spirits”. I am talking about the real animal destructive spirits of the Maoist party in Nepal. Even after stepping into the political mainstream, they (not only the brainwashed, duped and indoctrinated cadres, but also the political brass) are as unruly as they were during those decade-long days in jungle. Definitely, some habits are hard to go by! The Maoist movement sustains through deception and constant bashing (and intimidation) of the population--“elite and feudal”. The Nepali Maoist party is an epitome of that outdated strategy.

Now, Keynes wondered the mystery of sudden entrepreneurial instincts (animal spirits) that drives innovation and all the goodies (and sometimes bad consequences) that come with it: "the thought of ultimate loss which often overtakes pioneers, as experience undoubtedly tells us and them, is put aside as a healthy man puts aside the expectation of death". No amount of political cajoling will revive animal spirits in entrepreneurs. It just happens when entrepreneurs feel that it is the right time. Alas, thanks to the Maoist party’s hostile attitude and policies toward businesses, Nepali people have not seen that time lately.

Robert Shiller explains:

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The term "animal spirits," popularized by John Maynard Keynes in his 1936 book "The General Theory of Employment, Interest and Money," is related to consumer or business confidence, but it means more than that. It refers also to the sense of trust we have in each other, our sense of fairness in economic dealings, and our sense of the extent of corruption and bad faith. When animal spirits are on ebb, consumers do not want to spend and businesses do not want to make capital expenditures or hire people.

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Well, that is the economic side of animal spirits, which is usually good. We can only hope that Nepali people will experience those spirits very soon.

What the Maoist politicians did yesterday night was the result of the unleashing of real animal/jungle spirits. By preventing (and publicly fighting) the finance minister to announce the budget, they exhibited something that is very uncommon in Nepal’s parliamentary history. (btw, something like that happened in Ukraine’s parliament in April 2010, and in Taiwan as well; but they weren’t related to budget speech).

The Maoist party has been constantly changing positions and commitments despite multiple rounds of meetings and agreements with other parties. After all, what could be the best strategy to politically survive (with deception) than to be fickle to the extreme—divide and rule!  They change their political commitments and positions at the eleventh hour, holding hostage the economic future of the whole nation.

The country would have been a different place in a matter of just few years if the Maoist party had encouraged Keynes’s animal spirits. Alas, that won’t come true because if it did, then the Maoist would run out of reasons to dupe and brainwash the public to sway political tide their way. Instead, what we are getting is the real animal/jungle spirits time and again unleashed by the entire echelon of the Maoist political structure, jeopardizing economy, development, livelihoods, and future of millions of Nepali people who do not conform to the outdated ideology of the Maoist party. Political wrath aside, let me give a taste of how the delayed budget and the Maoist party’s hostility toward any progressive economic activity will hamper our economy:

• Few economic activities and no new development works. It is already being put in the back burner for a year now. Think of no new roads linking rural villages, no public healthcare, no salary for teachers in public schools, no subsidies and cash transfers to needy ones, dysfunctional local administration (VDCs), and above all pay freeze of government employees.
• Slowdown in private sector activities. A substantial portion of demand in the private sector comes from government contracts. With delayed budget and no development related activities included in it, private sector will lose demand. This has many consequences. First, many jobs are hinged on the government demand for services from the private sector. They will perish. Second, private sector takes loans to purchase raw materials and other accessories need to meet government demand. Usually, payment occurs after delivery of services demanded by the government. So, with no payment from government due to budget complexities, private sector will not be paid on time. They will in turn likely default on bank loans, dragging down and squeezing the very conduit that funnel money from one sector to another. It will bring the economic activity engine of the nation to a grinding halt.
• The negative multiplier will potentially be very high. This means that Rs 1 investment will yield less than Rs 1 outcome. It will lead to an inefficient allocation and reallocation of resources.
• The destructive activities of the Maoist party will create a strike-unemployment cycle. The impact of obstruction and destruction created right now will not end when the “jungle spirits” end. It drags on for quite some time as investors take time to rebuild confidence. Read this blog post to see how much the country bleeds if economy activities are  halted for a day. The jungle spirits of the Maoist party will potentially make Nepali people even more poorer in real terms, encourage brain drain, promote increasing migration to the Gulf countries for labor, erode business confidence, mock rule of law, create shortages… (you put the rest!)
• There will be dire macroeconomic consequences. Already, our macroeconomic situation is going real bad. Balance of payments is in deficit. Industrial activity is down, exports are declining and imports are surging up. FDI has tanked. Private investment in critical infrastructure is hindered. Investments to relax binding constraints to growth are being blocked. Growth rate has stagnated below four percent. Inflation rate is double-digit. Daily consumable goods are getting expensive day by day. Major construction and rebuilding projects are being taken by political party affiliated organizations. Land price has shot up the ceiling. Donation campaigns are terrorizing business community. Businesses flourish only if they have blessing of the most militant youth wings, trade unions and politicians.
• I can go on and on. The bottom line: the Maoist party’s activities have pushed development backward, contributed to making macroeconomic situation worse, stymied investment, halted employment opportunities, deadlocked political and economic future of the nation, deprived over 28 million citizens of some of their basic constitutionally and universally guaranteed rights, and basically made our lives worse.
• When will we see the Maoist party’s “animal/jungle spirits” transform into JM Keynes’s “animal spirits”?

Dietary energy consumption in South Asia

Consumption of 9 major vegetal foods (2003-2005)
FAO Stat 2009	DIETARY ENERGY CONSUMPTION (kcal/person/day)
COUNTRIES	Rice	Wheat	Maize	Pulses	Sugar    raw eq.	Potatoes	Soybean oil	Palm oil	Rape & mustard oil
Bangladesh	1,580	172	30	41	51	42	39	78	16
India	699	498	39	108	172	28	45	67	40
Nepal	831	349	382	77	41	88	27	80	47
Pakistan	160	876	90	62	253	19	13	149	24
Sri Lanka	925	343	53	66	287	13	1		0

Apparently, Bangladeshis get the highest amount of calorie per day from rice. It is also true in India, Nepal and Sri Lanka. However, Pakistanis get the highest calorie per day from wheat. Rice is relative more popular in Bangladesh, wheat in Pakistan, maize in Nepal, pulses in India, sugar in Sri Lanka, potatoes in Nepal, soybean oil in India, palm oil in Pakistan, and rape & mustard oil in Nepal. The people in the Indian subcontinent have different tastes. (Source: FAO Statistical Year Book 2009)

Links of Interest (2010-11-17)

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Climate Change, Agriculture and Poverty

Although much has been written about climate change and poverty as distinct and complex problems, the link between them has received little attention. Understanding this link is vital for the formulation of effective policy responses to climate change. This paper focuses on agriculture as a primary means by which the impacts of climate change are transmitted to the poor, and as a sector at the forefront of climate change mitigation efforts in developing countries. In so doing, the paper offers some important insights that may help shape future policies as well as ongoing research in this area.

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How do governments respond to food price spikes? Lessons from the past

Food prices in international markets spiked upward in 2008, doubling or more in a matter of months. Evidence is still being compiled on policy responses over the following two years, but lessons can be learned from the price spike in 1973, the magnitude and speed of which were similar to those experienced around the 2008 spike. In developing countries, policy responses to the earlier spike lowered the (negative) nominal assistance coefficient for agriculture by one-third between 1972 and 1974 before it was returned to the same level by 1976. That was twice the extent of the fall and recovery of the (positive) nominal assistance coefficient for high-income countries. However, the trade and welfare effects of those changes were much less for developing than high-income countries, suggesting the dispersion of distortion rates among farm industries decreased in developing countries. The adjustments were virtually all due to suspension and then reinstatement of import restrictions, with changes in export taxation by developing countries playing an additional (but minor) role during 1972-74. This beggar-thy-neighbor dimension of each government’'s food policies is worrying because it reduces the role that trade between nations can play in bringing stability to the world’'s food markets. More effort appears to be needed before a multilateral agreement to desist can be reached.

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The Economic Consequences of “Brain Drain” of the Best and Brightest

Brain drain has long been a common concern for migrant-sending countries, particularly for small countries where high-skilled emigration rates are highest. However, while economic theory suggests a number of possible benefits, in addition to costs, from skilled emigration, the evidence base on many of these is very limited. Moreover, the lessons from case studies of benefits to China and India from skilled emigration may not be relevant to much smaller countries. This paper presents the results of innovative surveys which tracked academic high-achievers from five countries to wherever they moved in the world in order to directly measure at the micro level the channels through which high-skilled emigration affects the sending country. The results show that there are very high levels of emigration and of return migration among the very highly skilled; the income gains to the best and brightest from migrating are very large, and an order of magnitude or more greater than any other effect; there are large benefits from migration in terms of postgraduate education; most high-skilled migrants from poorer countries send remittances; but that involvement in trade and foreign direct investment is a rare occurrence. There is considerable knowledge flow from both current and return migrants about job and study opportunities abroad, but little net knowledge sharing from current migrants to home country governments or businesses. Finally, the fiscal costs vary considerably across countries, and depend on the extent to which governments rely on progressive income taxation.

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