Per capita GDP and dependent population in 2050 in South Asia

In a new ADB report (Asia 2050—Realizing the Asian Century), Nepal’s per capita GDP (PPP) in 2050 is estimated to be US$3400 and 65 plus population is expected to be 10.6 percent of the total population in 2050. See the table below for corresponding figures of other South Asian countries.

South Asian per capita GDP and 65+ population in 2050
Country	per capita GDP (PPP, US$)	65+ population
Bhutan	48,600	15
India	41,700	13.7
Sri Lanka	34,700	21.4
Bangladesh	14,200	14.9
Pakistan	7,900	10
Nepal	3,400	10.6
Afghanistan	2,800	3.6

Nepal is one of the “Young Asia” that will have a large working age population compared to other nations in 2050, thus increasing potential for reaping demographic dividends. One of the lowest per capita income and one of the highest number of working age population would mean that it will have potentially cheaper factors of production. It indicates a good reason for investors to plan their investment strategy of investing in Nepal and other young South Asian nations accordingly. Additionally, Nepal’s geopolitical location (between China and India) will be attractive as well because as these nations become richer, wages will increase and markets will expand. Nepal will become the perfect location to manufacture and provide services to the Indian and Chinese population.

Land grabs in Africa

An interesting article about land grabs in The Economist:

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Land grabs have been strikingly popular. Preliminary research by the International Land Coalition, a non-governmental organisation, reckons almost 80m hectares have been subject to some sort of negotiation with a foreign investor, more than half in Africa (see chart). This estimate is far higher than a previous one, by the World Bank, which last year said that foreign investors had expressed interest in 57m hectares. It is higher still than one by the International Food Policy Research Institute (IFPRI) which put the figure in a 2009 study at 15m-20m hectares. It would be wrong to draw a line between these numbers so as to conclude that land deals have grown fourfold. Since most are secret, knowing what to count is difficult, and the figures refer to different periods.

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Note that when land deals are initially proposed four main benefit0s are offered to the host countries (apart from the benefits to the deal seeker): more jobs, new technology, better infrastructure and extra tax revenues. None of these promises seems to have been fulfilled according to the article.

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So why are land deals popular? That is surprisingly easy to answer: strong demand and willing suppliers. The big investors tend to be capital-exporting countries with large worries about feeding their own people. Their confidence in world markets has been shaken by two food-price spikes in four years. So they have sought to guarantee food supplies by buying farmland abroad. China is by far the largest investor, buying or leasing twice as much as anyone else.

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Here is info about conference related to land grabbing and related papers.

Growth bottlenecks: India vs. China

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Although it had a lower income level than India in 1980, China's 2006 per capita gross domestic product stands more than twice that of India's. This paper investigates the role of the business environment in explaining China's productivity advantage using recent firm-level survey data. The analysis finds that China has better infrastructure, more skilled workers, and more labor-hiring flexibility than India, but a worse access to finance and higher regulatory burden. Infrastructure appears to be a key constraint for India: it lags significantly behind China, yet it has important indirect effects for the effectiveness of labor flexibility. Labor flexibility is also likely a major constraint for India, as evident in the predominance of small firms, the importance of firm size in accounting for India's disadvantage in productivity, and the complementarity of proxies of labor flexibility with infrastructure and access to finance. Interestingly, regulatory uncertainty has adverse effects in India but not in China. The empirical analysis suggests that it is important to consider country-specific growth bottlenecks and the indirect effects of policy reforms.

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Full paper by Li, Mengistae and Xu (2011).

South-South aid to Nepal

The share of South-South aid (i.e. aid flow between developing countries) in total ODA committed to Nepal is increasing. Total ODA amounted to around US$1 billion in 2009.  Most of the ODA Nepal receives is from Northern donors. The five Southern donors are China, India, OPEC Fund, Saudi Development Fund, and Kuwait. India is by far the largest Southern donor (over 67 percent of total South-South aid commitment). Overall, it contributes about 10 percent of the total ODA received by Nepal. [India is allowed to directly spend up to NRs 50 million (around 0.7 million USD) in development/welfare activities without informing the Nepalese authorities.]

South-South aid commitment to Nepal (US$ million)
Fiscal year	2004/05	2005/06	2006/07	2007/08	2008/09	2009/10	2010/11
China	0.14	0.14	12.07	1.39	36.60	29.41	35.48
India	8.65	4.75	61.91	38.61	95.45	100.70	92.55
OPEC Fund	4.99	7.90	7.23	3.14	-	-	8.11
Saudi Development Fund	5.30	0.89	1.25	3.06	3.45	6.01	3.57
Kuwait	3.96	0.91	-	-	-	-	-
Total	19.08	13.68	82.46	43.37	135.49	136.12	139.71
Share of South-South aid in total aid commitments (%)	4.12	2.97	14.61	6.97	14.83	12.48	11.49

The above table is adapted from Chandra Ghimire’s forthcoming paper (New Age of South-South Development Cooperation: A Case Study of Nepal). He is a joint-secretary at Ministry of Commerce & Supplies (MoCS). Exchange rate used is USD 1= NRs 72. (Note: Read Ghimire’s paper when it is publicly available. It has valuable information about South-South donors and aid received by Nepal.)

Infrastructure sector receives the biggest share of South-South aid. It received 83 percent of total South-South aid commitment over FY 2006/07-2010/11. Trade and industry, and finance and agriculture received 7 percent each. Social sector received 3 percent.

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Here is excerpt from a previous blog post about foreign aid to Nepal:

Foreign Aid to Nepal (total, million, current US$)
BA & ODA	1960-2008	1992-1999	2000-2008
Net bilateral flows	7582	2002	3116
Net ODA and Official Aid received	11732	3205	4289
Net ODA per capita (current US$)	561	147	160
GDP	159823	34859	70847
Net bilateral flows (% of GDP)	4.74	5.74	4.4
Net ODA (% of GDP)	7.34	9.19	6.05

Top bilateral donors (1960-2008):

• Japan has been the largest bilateral donor so far (1960-2008): US$ 2.06 billion
• Followed by the UK (1960-2008): US$ 1.03 billion
• Followed by Germany and the US (1960-2008): US$ 974 million and US$ 940 million
• Other top donors are European nations; the Scandinavian countries are very generous
• In this decade (2000-2008), top donors have jacked up bilateral assistance.

Average annual bilateral flows have been increasing. On average (annual), it was US$ 346 million between 2000 and 2008. The average annual net ODA flows during the same period was US$ 477 million.

Net ODA per capita (current US$) has been US$ 561 between 1960 and 2008, and US$ 147 over 1992-1999, and US$ 160 over 2000-2008.

• Net bilateral flows between 1990 and 2008 have been 4.74 % of GDP.
• Net bilateral flows between 2000 and 2008 have been 4.40 % of GDP.
• Net ODA between 2000 and 2008 have been 6.05 % of GDP.

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Over the period 2007-08, humanitarian aid sector received the highest amount, followed by economic infrastructure & services, health and population and so on…. It looks like the Southern donors are more interested in investing in infrastructure and productive sectors.

(Note that total ODA figure depends on which database you are looking at. But, there isn’t much variation if you just look at the shares from various sources.)

Now, the effectiveness of aid received by Nepal is another question. Here is discussion (needs update now) on the issue.

Total factor productivity (TFP) in South Asia

The figure shows total factor productivity (TFP) in 2007 and TFP growth (annual percent change) over 1985-2007. Nepal (in red circle) has the lowest TFP in South Asia (and in Asia). TFP of other South Asian countries is indicated by brown circle in the chart. The countries with high TFP are the ones the frontier economies (with high and sustained growth rate and per capita income) where entrepreneurship and innovation occurred.

The South Asia countries in the fourth quadrant shows that there is little TFP growth and are not competitive (plus low growth rate, low per capita income, low innovation and lack adequate entrepreneurship). Bhutan’s TFP growth is the highest in South Asia. India’s TFP growth rate is also impressive in South Asia. First, India succeeded in catch-up entrepreneurship and subsequently added frontier entrepreneurship to its development toolkits. More explanation in this recently released ADB (draft) report (Asia 2050 — Realizing the Asian Century). Frontier entrepreneurship requires substantial government support and intervention (because of extraordinarily long gestation period). India did this in the education sector (with the establishment of IITs and IIMs) and in the pharmaceutical industry in the early 1970s.

Government intervention is sought in areas of “human capital development through quality education at all levels; a commitment to science, technology and R&D; the rule of law with an effective regime for intellectual property rights as well as for exit/bankruptcy; the availability of financing for entry and the subsequent phases of entrepreneurial activity; and an overall policy framework that is based on competition and rewards innovation.”

Meanwhile, the draft report argues that the global economy’s center of gravity is shifting toward Asia, and the region could account for about half of global output in 2050, up from the current 27%, as well as half of global trade and investment. It the potential outcomes for Asia under two competing scenarios: the Asian Century and the Middle Income Trap.

In the more optimistic Asian Century scenario, the region’s gross domestic product (GDP) would soar to $148 trillion and account for 51% of global output in 2050. On a purchasing power parity basis, GDP per capita in Asia would rise to $38,600, compared with the projected 2050 global average of $36,600. The alternative scenario assumes that Asia’s fast-growing economies—the PRC, India, Indonesia, and Viet Nam—will fall into the middle income trap of slowing growth rates and stagnating income levels over the next 5 to 10 years. Furthermore, none of Asia’s slow-growing economies would manage to accelerate its growth rate under this scenario. If these events occur, Asia would account for only 32%, or $61 trillion, of global GDP in 2050. On a purchasing power parity basis, GDP per capita would rise to only $20,300, or just over half of that under the Asian Century scenario.

The report identifies six key drivers of transformation in the region:

1. technical progress
2. capital accumulation
3. demographics and the labor force
4. the emerging middle class
5. climate change mitigation and the competition for resources
6. the communications revolution.

The challenges of Asia include modernization of its governance systems and retooling of its institutions to ensure transparency, accountability, and the enforceability of rules and regulations. It advises Asian leaders to devise bold and innovative national policies while pursuing regional and global cooperation to successfully manage regional public goods, energy security, infrastructure connectivity, food supplies and water resources, and to maintain long-term peace and stability.

[TFP is is a variable which accounts for effects in total output not caused by inputs. If all inputs are accounted for, then total factor productivity (TFP) can be taken as a measure of an economy’s long-term technological change or technological dynamism.TFP can not be measured directly. Instead it is a residual, often called the Solow residual, which accounts for effects in total output not caused by inputs.]

The perilous state of Nepal’s state-owned enterprises

A majority of the state-owned enterprises (SOEs) are running budget deficits for long time on top of mounting loan and debt. Only one or two SOEs are making profits mainly due to monopoly powers. As competition intensifies, these SOEs’ account might also go into the red. The top three politicized, corrupt, and perennially loss making SOEs are Nepal Electricity Authority (NEA), Nepal Oil Corporation (NOC), and Nepal Airlines Corporation (NAC). Keeping them alive with the existing management structure and operation system has meant choking development funding and widening fiscal deficit. All these SOEs had sizable profits before they became infested with corruption and a recruiting tool/job bank for political parties.

The solution is simple: adjust market prices according to international prices, and domestic demand and supply (for NEA and NOC); and for NAC it is just cleaning the entire enterprise with better management and less politicization.  To do this in a sustainable fashion, privatization is one potentially viable option. The other option is to break up monopoly  and monopsony powers of NEA and NOC and operate them under a PPP model with complete management and financial independence.

Below I detail the state of NEA, NOC and NAC. I will have further comments on this issue in later posts.

For electricity, per unit investment is NRs 8.97, but is sold at NRs 6.57 per unit (a loss of NRs 2.40 per unit). The NEA’s total income is NRs 1.5 billion but its yearly operating expense is NRs 1.65 billion. Its total loss is about NRs 19.47 billion, several times more than its total assets. It still needs to pay around NRs 500 million each to India and power contractors. More details here. It was running in profit until FY2058/59.

During fiscal year 2009/10 the annual peak demand reached 885.28 MW, a 8.96 percent growth over the peak demand in previous fiscal year. Annual energy demand recorded 4367.13 GWh out of which 3076.69 GWh was met by domestic power generation, 612.58 GWh was imported, and 667.860 GWh was managed through load-shedding (Nepal Electricity Authority 2010). Currently, power outages have reached up to 14 hours a day. Since supply of electricity is trailing behind demand for electricity by over 50 percent (on an average the demand is 900 MW, but supply is around 450 MW), especially during dry season, it has affected pretty much everyone in the country. Due to acute power crunch cost of production of industries is going up, cost competitiveness of Nepalese products is decreasing, industries are closing down, production is being winded down, a shortfall in domestic production is leading to an increase in imports of even the most basic goods and services (contributing to widening trade deficit), and future growth potential is being severely crippled. It will take years to make up for the lost growth potential due to the ongoing energy crisis even if the power outages are solved in five years time.

For fuel, NOC is running a deficit of NRs 15 billion. Right now, it is incurring a loss of NRs 8.1 in a liter of petrol, NRs 23.42 in a liter of diesel, NRs 13.61 in a liter of kerosene, and NRs 322.6 in a cylinder of LPG gas. It has been maintaining a profit of NRs 7.6 in aviation fuel.It means that the monthly loss is about NRs Rs 1.96 billion. Why so? Because NOC is beset with corruption, political infringement in management, poor governance, and poor accountability. The financial health of NOC is so worse that the no financial institution is willing to lend money to it against any guarantee. Recently, the government had to implore Employment Provident Fund (EPF) to lend NRs 2 billion and ask India to give NRs 3 billion line of credit to resolve fuel shortage for two months. It is just a very short term band aid to a recurrent problem, which needs structural adjustment (it may be painful).

NOC is probably the most politicized SOE in Nepal. Due to long running structural issues, mainly disinclination to adjust domestic fuel prices with international prices, NOC is running huge deficit. As I alluded to before, tt is a recurrent problem. It happened before, is happening now, and will happen in the future if the structural constraints underlying the poor performance of NOC, and market and labor rigidities are not addressed in time. Apart from stopping leakages and ensuring efficiency in the whole process, there is no option but to make domestic petroleum prices consistent with international prices.

The country cannot repeatedly bail out NOC by slashing development expenditure.  Unless we find an alternative to petroleum products, there is no simple fix. The demand for petroleum products is pretty much inelastic, so even if prices change, quantity demanded will not decrease. It means the contribution of imports of petroleum products on balance of trade deficit will continue unabated. Worse, long power outage is forcing firms to use petrol or diesel to run generators. This has further hiked demand, leading to higher imports. So, unless we address this situation, reduce dependence on petroleum products, and find alternative sources of energy, the problem will persist more rigidly that it had persisted in the past. The long term solution is to generate hydroelectricity by injecting large amount of investment sourced from both domestic and foreign sources. There is no easy fix unless we fundamentally change the way we have been producing and consuming energy in this country.

For airline, NAC has been embroiled in repeated scandals related to purchase of aircrafts, appointment of staffs, loans and so forth. It has been a recruiting tool for the major political parties. Its losses are mounting (over NRs 2 billion; its total asset is worth NRs 16.80 billion). It has just two big aircrafts (one was just repaired after months of grounding the plane at TIA) and three small aircrafts for domestic flights.  And it is running a budget deficit. At one time NAC was the pride of the nation. It had 21 aircrafts, including eight Twin Otters, two Boeing 727s and two 757s. It was also one of the biggest foreign currency earners. Unfortunately, at a time when domestic and international airlines are making profits by operating flights in Nepal, it is sad to see that Nepal Airlines is running a deficit again and again.

Nepalis prefer South Korea to the Gulf for employment

Proof: Just see the number of people lined up to submit application for Korean language test. Nepali workers get better facilities and salary in South Korea than in the Gulf. South Korea is taking 7100 Nepalis this year under its EPS program, which takes in workers from about 15 countries. Remittances have been the backbone of the Nepali economy. It amounts to almost 23 percent of GDP.