Nepal, India & China – growth and trade compared

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China’s GDP growth rate has always been higher than that of Nepal’s. Since 2002 Indian growth rate started rising higher, but Nepal’s declined and then stayed below 5%. (Source: WDI)

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GDP per capita of China and India is rising very fast. But, Nepal’s is pretty much stagnant (or rising at a very slow pace). (Source: WDI)

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Since 1997 exports of goods and services (share of GDP) started to decline in the case of Nepal. Both China’s and India’s exports had been ever-increasing up until 2007, when the global financial crisis started and then followed by global economic crisis. China’s drop in exports was more pronounced than that of India’s after the economic crisis. Latest data show that exports of both the countries are picking up. (Source: WDI)

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India is the most important exports destination for Nepalese exporters. Almost 64 percent of total merchandise goods are exported to India. Exports to both India and World declined after 2008. Exports to China is very low as of now. (Source: DOTS, IMF)

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Imports from India accounts for almost 57 percent of total merchandise goods imports. Imports from China is picking up, thanks to cheap and competitive products. (Source: DOTS, IMF)

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Trade deficit is ever-increasing. Trade deficit with India was around US$1.08 billion in 2009 and with the world (excluding India) US$1.04 billion. Trade deficit with China is increasing but below US$500 million. (Source: DOTS, IMF)

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Nepal’s share of trade deficit (with respect to total trade deficit) is the highest with India, accounting for over 50 percent of total trade deficit. With China, it is around 15 percent of total trade deficit. (Source: DOTS, IMF)

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Trade in services and human development

Shepherd and Pasadilla (2011) find that less restrictive services trade policies are associated with better human development outcomes across a range of sectors. They argue: “Appropriate services trade liberalization can therefore promote human development directly through improved outcomes, in addition to indirectly effects through the income channel.”

Usually, the impact of services liberalization impacts income, which in turn is assumed to promote human development. But, the authors isolate the direct connection between service sector restrictiveness and development and find: (i) the tension between service sector openness and human development outcomes are overstated; (ii) there is no systematic association between greater policy restrictiveness and better outcomes; and (iii)  open and efficient services sectors can help promote human development.

Aid at a glance, Nepal (2006-2008)

Over the period 2007-08, humanitarian aid sector received the highest amount, followed by economic infrastructure & services, health and population and so on…. Here is an earlier post about the foreign aid in Nepal.

Tragedy in Japan

Donate for a noble cause and do you part in helping Japanese people overcome the misery brought by the earthquake and tsunami. Donate to The Nippon Foundation, an NGO working in a wide range of domestic and international activities, including health and welfare projects, educational and social issues, maritime development, and protection of the marine environment.

[FYI: My friend Shota Nakayasu is working in The Nippon Foundation.]

Political system and economic liberalization

Giuliano, Mishra and Spilimberg argue that economic reforms may scare politicians, but democracy and economic liberalization generally go hand in hand. Political liberalization and domestic financial, capital account, product markets (electricity and telecommunications), agriculture, and current account transactions tend to move together. But, look at political liberalization and trade. Trade seems to have increased, irrespective of political liberalization. Up until 1990, decrease in political liberalization actually boosted trade. Then political liberalization increased but trade performance continued increasing.

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The bottom line is that democracy is good for structural reforms, but the reverse is not true—economic liberalization introduced by autocracies does not cause a move to democracy. Moreover, there is no foundation for politicians’ fear that voters will punish policymakers who implement financial sector reforms or reduce fiscal deficits.

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The record of the Washington Consensus

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For 30 years, Washington has been shopping a trade-not-aid based economic diplomacy across Latin America and beyond. According to what is generally known as the “Washington consensus”, the US has provided Latin America loans conditional on privatisation, deregulation and other forms of structural adjustment. More recently, what has been on offer are trade deals such as the US-Colombia Free Trade Agreement: access to the US market in exchange for similar conditions.

The 30-year record of the Washington consensus was abysmal for Latin America, which grew less than 1% per year in per capita terms during the period, in contrast with 2.6% during the period 1960-81. East Asia, on the other hand, which is known for its state-managed globalisation (most recently epitomised by China), has grown 6.7% per annum in per capita terms since 1981, actually up from 3.5% in that same period.

The signature trade treaty, of course, was the North American Free Trade Agreement (Nafta). Despite the fact that exports to the US increased sevenfold, per capita growth and employment have been lacklustre at best. Mexico probably gained about 600,000 jobs in the manufacturing sector since Nafta took effect, but the country lost at least 2m in agriculture, as cheap imports of corn and other commodities flooded the newly liberalised market.

This dismal economic record prompted citizens across the Americas to vote out supporters of this model in the 2000s. Growth has since picked up, largely from domestic demand, and exports to China and elsewhere in Asia.

Interestingly, the only significant card-carrying members of the Washington consensus left in Latin America are Mexico and Colombia.

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More by Kevin Gallagher here.

Going beyond Keynesianism to avoid another global crisis

High income countries are facing a “new normal” (a combination of low growth, high unemployment and low returns on investment). Some of the European countries are facing sovereign debt crisis and may require restructuring. Middle-income countries are experiencing short-term capital inflows, putting appreciation pressure on currency and equity and real estate markets prices. Surge of food, fuel and commodity prices is hurting the poor. With these economic problems what can be done to avoid another global crisis?

Justin Lin argues that “a global push for investment along the line of Keynesian stimulus is the key for a sustained global recovery; however, the stimulus needs to go beyond the traditional Keynesian investment.” But the problem lies in avoiding the Ricardian trap—a situation where the government spending fails to boost aggregate demand as people expect increases in taxes in the future (and save now) to pay for existing deficit that funds government spending. Lin suggest:

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To avoid the Ricardian trap, it is important to go beyond conventional Keynesian stimulus of “digging a hole and paving a hole” by investing in projects which increase future productivity. So the investment will increase jobs and demands for capital goods now and increase the growth and government’s revenue in the future. The increase in revenue can pay back the cost of investment without increasing household’s future tax liability.

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Krugman argues that this still misses the point:

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It’s one thing to have an argument about whether consumers are perfectly rational and have perfect access to the capital markets; it’s another to have the big advocates of all that perfection not understand the implications of their own model.

So let me try this one more time.

Here’s what we agree on: if consumers have perfect foresight, live forever, have perfect access to capital markets, etc., then they will take into account the expected future burden of taxes to pay for government spending. If the government introduces a new program that will spend $100 billion a year forever, then taxes must ultimately go up by the present-value equivalent of $100 billion forever. Assume that consumers want to reduce consumption by the same amount every year to offset this tax burden; then consumer spending will fall by $100 billion per year to compensate, wiping out any expansionary effect of the government spending.

But suppose that the increase in government spending is temporary, not permanent — that it will increase spending by $100 billion per year for only 1 or 2 years, not forever. This clearly implies a lower future tax burden than $100 billion a year forever, and therefore implies a fall in consumer spending of less than $100 billion per year. So the spending program IS expansionary in this case, EVEN IF you have full Ricardian equivalence.

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