An interesting compilation of the most interesting events and news of 2010 compiled by FT’s Tim Harford. Here is a rundown, by the FT team, of the major expected events in 2011.
Friday, December 31, 2010
Wednesday, December 29, 2010
Nepal’s industrial and export interests in the Doha Round
My last op-ed for this year! It is about Nepal’s industrial and export interests in the upcoming Doha Round of trade negotiations under the WTO. I outline what Nepal’s interests are, what it should do, and why it should align with the LDCs in trade negotiations.
Doha Round & Nepal
Amidst the euphoria and repeated interaction between ministry officials and businessmen regarding cash incentives on exports, there is a different storm brewing, albeit quietly, in the international trade regime. Trade analysts and representatives in other countries are gearing up to outline country agenda for the next Doha Round (DR) of trade negotiations under the WTO. While they are working on ensuring the reflection of their domestic industrial and export interests in the upcoming trade negotiations, and possibly a passage of the DR, Nepali bureaucrats, industrialists and exporters are running after cash incentives on exports. They seem to be oblivious and unbothered by declining exports competitiveness and our national agenda for the next round of trade negotiations.
In 2011, the DR will dominate trade talks globally. Unfortunately, our bureaucrats and business community are unprepared for this. They are oblivious of our industrial and export interests and how to include them in common agenda of Least Developed Countries (LDCs).Their unpreparedness and halfhearted engagement in trade talks should not be surprising. Precisely because of this, since Nepal joined the WTO on April 23, 2004, becoming the first LDC to join the trading bloc through full working party negotiation process, its exports performance has been very disappointing.
For starters, Doha Round, which started in November 2001, is the ongoing trade negotiation round that aims to lower trade barriers globally. Multiple rounds of negotiations failed because of disagreement over agricultural subsidies in the US and the EU, industrial tariffs and non tariff barriers, services and special trade measures. The latest negotiation broke down due to India’s insistence on the inclusion of special safeguard mechanism (SSM), a measure designed to protect poor farmers by allowing countries to impose tariff on certain agricultural goods in case of rapid price volatility. Though it is believed that the developing countries would benefit from the passage of the DR, various studies show only a handful of countries would reap the benefits.
Not only do we don’t know the developmental impact of the DR, we also have no clue how specifically it will aid Nepal’s industrial and export sectors. The most reasonable estimates show that Nepal would see meager gains. A World Bank study showed that total gains from the DR would be as low as $96 billion and only $16 billion would go to developing countries. Worse, half of all the benefits that would go to the developing countries would be reaped by just eight countries (Argentina, Brazil, China, India, Mexico, Thailand, Turkey and Vietnam). For South Asia, real income gains would be about US$2.5 billion. India alone is expected to gain US$ 1.7 billion. That leaves US$ 0.8 billion for the rest of South Asia. It shows that there is very little gains at store for Nepal. Worse, terms of trade, the relative prices of a country’s export to import, is expected to worsen, putting further strain on exports and hurting net food importer LDCs like Nepal. Additionally, another study by Carnegie Endowment shows that total gains from trade would be even lower (between US$ 32-55 billion) than the WB’s estimate, with rich nations getting $30 billion; middle income countries like China, Brazil and South Africa getting $20 billion; and poor countries getting $5 billion (about $2 per head).
Even if the gains are meager, Nepal should not ignore multilateral trade negotiations. We should not be a mute spectator during trade negotiations. It should actively support LDCs’ agenda. That way it can reap benefits offered to all LDCs plus lobby for special measures to ramp up our industrial and export sectors.
Nepal should be pushing for the inclusion of its industrial and trade interests in LDCs’ common agenda. Since a substantial portion of our trade happens with our neighbors, our bureaucrats and negotiators, while supporting LDCs’ agenda, should also push for special concessions such as greater transit rights and non tariff barriers to landlocked LDCs. Pushing for favorable trade measures to exploit regional markets is in our national interest. It will further help penetrate regional markets, where the transaction and transportation costs related to trade are lower than in the EU and the US. Mind you, the latter markets are also important, but all LDCs will have uniform privileges in these markets. Nepal needs those privileges plus greater preferences in the regional markets, where trade complementarities are pretty high.
There are a few LDCs’ agenda that Nepal should support. First, seeking duty-free, quota free (DFQF) trade commitment on all products is in both Nepal’s and LDCs’ interests. The developed countries should agree to this even before the DR negotiations begin next year. It will show seriousness of the developed countries in creating a more liberal trade regime than the existing one, and assure other countries that protectionist measures, especially after the global economic crisis, will not cloud over progress made so far in multilateral trade regime. Since DFQF on all products would erode marginal preference enjoyed by some developing countries, Nepal should also push for securing some sort of marginal preference, over and above DFQF applicable to all LDCs. This could come in the form of low non tariff barriers and relaxed rules of origin for market assess in key regional and nonregional destinations. These are needed to sustain our exports given its existing level of low product sophistication and diversification. Furthermore, convincing and winning India’s confidence in our trade structure and system is in our long term national interest regarding industrial, export and economic growth.
Second, Nepal should also confirm to LDCs’ agenda on “bio-piracy”, which is the use of genetic resources and associated traditional knowledge without benefit sharing and prior consent. Nepal should push for full disclosure on the use of bio products native to a certain indigenous group, community or country. Third, on issues of intellectual property rights (IPR), especially concerning patent on medicines secured by western multinational pharmaceutical companies, Nepal should back LDCs’ agenda that such patents should not compromise on public health needs of the developing countries.
Fourth, regarding Aid for Trade (AfT), it is in our interest to seek adequate, reliable, and predictable funding for not only developing human resources and technical aspects of trade, but also concrete aspects such as funds for the construction of infrastructures along major trading routes. For instance, allocating meager sum of money for building awareness and technical capacity regarding trademarks and packaging will do little to overcome supply side constraints such as lack of roads, electricity, communication and storage facilities. Ensuring the latter would directly aid trade, employment and growth. Note that sometimes for small and medium enterprises, which are the mainstay of our economy, the cost of protecting trademark at the global level is higher than the total revenue generated from sales of such products. Nepal should push for a special facility whereby funds are available to fight trademark breaches in the international market.
Nepal needs smart bureaucrats and negotiators to not only fully understand both domestic and multilateral trade agendas, but also the art of successfully pushing for the inclusion of purely domestic industrial and export interests in the common agenda of LDCs. Along with largely confirming with the position of LDCs for the upcoming DR negotiations, Nepal should also seek greater preference, concession and market access, especially in the regional markets, where it has relatively higher competitive advantage than in the nonregional markets.
[Published in Republica, December 26, 2010, p.6]
Tuesday, December 28, 2010
Small and targeted unconditional transfers in India
Dutta, Howes and Murgai argue that unconditional cash transfers for the elderly and widows (pension schemes) in Karnataka and Rajasthan worked due to small size and relatively low level of leakage. Regarding scaling-up of the project, the authors caution that the outcome would depend on the likely impact of increased coverage on both targeting and leakage. They argue that increased coverage would most likely worsen targeting. Currently, leakages are low because levels of discretion are low. As program expands, avenues for leakages (bribes, diversion of funds) will be higher.
If the program is to be expanded, then the authors suggest:
In the short term, the way forward would be to expand the coverage among widows and the elderly and to increase the size of the pension. This is a path the Government of India has already embarked upon. In the longer term, the policy question is whether it makes a sense to expand the categories to whom social pensions are given.
Ultimately, one can imagine a situation in which, say, cash pensions are made to every holder of a BPL card, instead of, or as well as, an entitlement to buy subsidised food and/or to a guarantee to a minimum number of days of public employment. With the National Right to Employment Guarantee Act, and the decision of the government to support a Right to Food Act such a scenario is far-fetched today. Moreover, as stressed above, little is known about how cash transfers would perform if scaled up. Nevertheless, it is reassuring to know that calls for a greater role in Indian social security policy for cash transfers are at least not contradicted by the performance of India’s existing cash transfers.
Monday, December 27, 2010
How developed countries can boost LDCs’ exports
Adapted from Katriin Elborgh-Woytek and Robert Gergory’s piece in the latest edition of IMF’s Finance & Development magazine.
There are steps the poorest economies themselves could take to boost exports—such as reducing the often prevailing antitrade bias in their trade, tax, customs, and exchange rate regimes; issuing more transparent trade and customs regulations; and taking steps to improve such key service sectors as communications and transportation (see World Bank, 2010).
Although broad-based multilateral trade liberalization is the ultimate policy target, there are less-obvious intermediate avenues—such as the extension and improvement of duty-free and quota-free (DFQF) trade preferences both by advanced and emerging economies—that could add nearly $10 billion a year to the coffers of poorer economies. These preference systems are designed to offset for the poorest countries some of the high trade barriers in sectors such as light manufacturing and agriculture—areas in which LDCs are likely to export.
There are three main avenues for the more advanced and emerging economies to help integrate LDCs into the global economy:
- Remove all tariffs and quotas on products from LDCs.
- Make the rules that determine whether a product is deemed to originate from an LDC more flexible and consistent—including relaxing so-called cumulation rules, which govern the extent to which inputs from other countries affect compliance with rule-of-origin requirements for LDC exporters.
- Tilt preference benefits more specifically toward poorer economies.
If all exports from developing countries were exempt from tariffs and quotas, LDC exports to both advanced and emerging markets would grow significantly—on the order of $10 billion a year, or about 2 percent of their combined GDP (Laborde, 2008; and Bouët and others, 2010). Broadening the coverage of preferences by major advanced markets could generate increased exports from LDCs of about $2.2 billion a year, or about 6 percent of net official development assistance from industrial countries to LDCs. The potential increase is even larger for exports to emerging markets—about $7 billion a year in additional exports (Bouët and others, 2010). Although the positive impact on LDCs would be sizable, the negative effect on advanced and emerging economies would be tiny because of the low level of LDC exports.
Second, if better-off economies were to make rules of origin more flexible, LDCs would benefit too. Rules of origin determine whether a good “originates” in a country that benefits from a preference system. The rules specify the minimum amount of economic activity that must be undertaken in the country benefiting from the preference and whether inputs from other countries count toward this minimum. Rules of origin differ widely across countries’ preference programs. They are frequently based on the amount of value added in the preference-eligible country or on the transformation a good undergoes in that country (measured by a change in tariff classification). These rules strongly influence where an LDC buys its inputs, which affects the overall economic consequences of a preference program.
To qualify for a preference program, LDC exporters must often limit input sourcing to suppliers in their own country or those from the country granting the preference—even if it would be cheaper to buy inputs elsewhere. This can be difficult for less-diversified LDCs, which depend on intermediate goods, processes, or patents from other countries. Rules of origin can also be a source of distortion, if exporters turn to less-efficient, more costly input sources to qualify for preferences. Moreover, the administrative burden of meeting complex rules of origin can be substantial, costing as much as 3 percent of export value (Hoekman and Özden, 2005). As a result, perhaps a quarter to a third of eligible imports do not gain preference, and some trade that might have benefited from better-designed preferences is likely never undertaken.
More liberal rules of origin allow producers to source inputs flexibly. Such rules implicitly acknowledge LDCs’ low capital intensity and lack of horizontal or vertical integration. Under China’s preference program, for example, origin (and thus preference benefits) can be conferred on a product based either on a minimum local value-added threshold or a change in tariff classification—implicit acknowledgment that the product is different and the LDC has added value. India’s low 30 percent value-added threshold gives potential LDC exporters flexibility in sourcing their inputs.
Moreover, better-off countries could make it even easier to stimulate trade among LDCs if their rules of origin specifically allowed preference-eligible countries to buy inputs from other preference-eligible countries. If these so-called cumulation provisions allowed inputs from two or more countries to be counted together, it would make it easier for the preference-eligible country to meet the minimum requirements under the rules of origin. In contrast, narrow or restrictive cumulation provisions rules do not allow the use of inputs from other countries, often fragmenting established cross-border production relationships. Cumulation provisions therefore determine how easily preference beneficiaries can trade among themselves, using intermediate goods or processes that originate in other countries.
Permitting wider cumulation would assuredly mean that LDCs could meet the rules of origin more easily and at lower cost and would also encourage south-south trade. Allowing the poorest countries to source inputs from all LDCs and other developing countries while remaining eligible for preferences would provide the added flexibility needed for effective use of preference programs.
Sunday, December 26, 2010
The Doha Round and services trade
Negotiating the liberalisation of services is complicated. Adequate national regulation and international regulatory cooperation will often be necessary. A concerted effort is needed to help countries strengthen and improve service sector regulation and implementing institutions, as well as to cooperate with each other where there are significant regulatory externalities.
Much of what remains to be done to remove developing nation barriers to trade in services will be conditional on such regulatory improvements. An important element of any Doha package on services should therefore be agreement to create mechanisms to promote pro-competitive domestic regulatory reform and thus support liberalisation in the future.
Although comprehensive liberalisation of service markets in all 153 members in the Doha round is neither possible nor at this point in time desirable, the largest services economies (a “G25”) can and should go further.
But the larger players may also need to pursue domestic regulatory reforms before opening up some services sectors to foreign competition, and will need to strengthen regulatory cooperation to facilitate trade in some services.A pre-commitment approach will allow such conditions to be put in place and ensure that there is an agreed timetable to open markets to greater competition. Explicitly recognising that services liberalisation cannot – and should not be – divorced from services regulation will do much to help harness the potential that trade agreements have to expand services trade and investment.
More on services trade and the Doha Round by Bernard Hoekman and Aaditya Matto here
The path to prosperity: How countries become rich?
Becoming a rich country requires the ability to produce and export commodities that embody certain characteristics. We classify 779 exported commodities according to two dimensions: (1) sophistication (measured by the income content of the products exported); and (2) connectivity to other products (a well-connected export basket is one that allows an easy jump to other potential exports). We identify 352 “good” products and 427 “bad” products. Based on this, we categorize 154 countries into four groups according to these two characteristics. There are 34 countries whose export basket contains a significant share of good products. We find 28 countries in a “middle product” trap. These are countries whose export baskets contain a significant share of products that are in the middle of the sophistication and connectivity spectra. We also find 17 countries that are in a “middle-low” product trap, and 75 countries that are in a difficult and precarious “low product” trap. These are countries whose export baskets contain a significant share of unsophisticated products that are poorly connected to other products. To escape this situation, these countries need to implement policies that would help them accumulate the capabilities needed to manufacture and export more sophisticated and better connected products.
Here is a paper by Felipe, Kumar and Abdon. Their analysis is based on Hidalgo et al. (2007) and Hausmann et al. (2007)’s concept of product space, which is an application of network theory that yields a graphical representation of all products exported in the world. Products are linked through lines that represent their proximity, defined as the conditional probability of exporting one products given that they also export the other one. Countries change their export mix by jumping to products that are nearby, in the sense that these other products use similar capabilities to those used by the products in which they excel (those products in which they have revealed comparative advantage [RCA]). A country’s position within the product space signals its capacity to expand to more sophisticated products, thereby laying the groundwork for future growth. Countries that export products that have few linkages with other products or countries that have not accumulated sufficient capabilities to jump to other products cannot generate sustained long-term growth.
The focus is on manufacture and export of sophisticated and better connected products (PRODY) so that structural transformation-- whereby the economy moves from traditional, low wage sector to sophisticated, high wage sector—takes place in the developing countries. Here is more on their ranking of countries based on an “index of opportunities”. Here is a blog about Nepal’s export sophistication. The basic idea behind the whole analysis is that what countries products and export determines who they are in the world. Countries with a more sophisticated export basket growth faster.
So how does structural transformation occur? Basically, the major determinant of a country’s comparative advantage, and its trade pattern, is the relative factor endowment. Changing comparative advantage based on factor accumulation dictates a country’s export basket. If prices are right for the various factors of production so that firms select the most appropriate techniques for production, then factor accumulation leads to factor price changes, leading to changes in the techniques of production. Countries growth by accumulating physical or human capital or by improving the way various factors of production are mixed (TFP). This brings about a change in the composition of export basket. So, structural transformation is the results of changes in underlying fundamentals such as education, financial resources, and overall productivity. That said, export diversification is not easy.
Those firms that engage in “self discovery” face cost of discovery, leading to a situation where there might be high social returns but high private costs. If new products discovery fails, then the firm incurs the cost. But, if it succeeds, then other enter the market following the discovery. This is where government intervention might be required to offset private costs if there is high social return from any venture. Similarly, export diversification requires large initial investments (high fixed costs), which the government should own up. The government could facilitate information and coordination externalities.
Here are few recommendations (adapted from the same paper) for countries with low product sophistication to escape “low-product trap” :
- Many of the products exported by these countries are nature-made and subject to decreasing returns. Only industrialization can create an effective agricultural sector. None of these countries will ever get rich without an industrial and an advanced service sector.
- In the traditional trap literature (à la Nelson and Myrdal) there were two ways to escape from the low-level equilibrium trap. First, per capita income must be raised, in one go, to the point where the trap would not force income per capita down again to the subsistence level. Second, the growth rate of population must decline (e.g., reduction in the birth rate or emigration), and/or that of national income increase (e.g., through technical progress or capital from abroad).Industrialization greatly increases a country’s ability to sustain a large population.
- To a certain extent and under this view, some of these countries may need a “big push,” that is, a planned large-scale expansion of a wide range of economic activities and achieve a “critical minimum effort” (investment requirements to raise per capita income to the level beyond which the further growth of per capita income will not be associated with income-depressing forces exceeding income raising forces).
- The above will not be enough: simply “pumping money” will not help unless a critical mass in an increasing returns sector is created. These countries will need their governments to take “strategic bets” by getting directly involved in the development of new sectors (big leaps). This, however, will be difficult for many countries in this group, as, by definition, they lack the required capabilities. These capabilities are: (i) human and physical capital, the legal system, institutions, etc. that are needed to produce a product (hence, they are product-specific, not just a set of amorphous factor inputs); (ii) at the firm level, they are the “know-how” and working practices held collectively by the group of individuals comprising the firm; and (iii) the organizational abilities that provide the capacity to form, manage, and operate activities that involve large numbers of people.
- For this reason, it is imperative that these countries focus their efforts on accumulating new capabilities. This will require: (i) human capital to acquire skills, technology, and knowledge (in many cases, basic management, accounting, and record keeping); (ii) a higher drive to diversify and to increase sophistication by embracing a realistic industrial vision; and (iii) improvement in organizational abilities (e.g., firm-level organization).
Saturday, December 25, 2010
Openness and growth: Mexico versus China
Following its opening to trade and foreign investment in the mid-1980s, Mexico’s economic growth has been modest at best, particularly in comparison with that of China. Comparing these countries and reviewing the literature, we conclude that the relation between openness and growth is not a simple one. Using standard trade theory, we find that Mexico has gained from trade, and by some measures, more so than China. We sketch out a theory in which developing countries can grow faster than the United States by reforming. As a country becomes richer, this sort of catch-up becomes more difficult. Absent continuing reforms, Chinese growth is likely to slow down sharply, perhaps leaving China at a level less than Mexico’s real GDP per working-age person.
Full paper by Kehoe and Ruhl here.
Here is an earlier post about why Mexico isn’t rich? Hanson argues that “Mexico’s underperformance is overdetermined”. Though faulty provision of credit, persistence of informality, control of key input markets by elites, continued ineffectiveness of public education, and vulnerability to adverse external shocks each may have a role in explaining Mexico’s development trajectory, we don’t yet know the relative importance of these factors for the country’s growth record, he asserts.
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