Employment guarantee scheme in Nepal

The Nepalese policymakers have drafted Employment Guarantee Act promising to provide a job to all the households living below the poverty line (BPL), reports Ashok Thapa in Republica daily.

• Guaranteed job as a critical part of socio-economic security and fundamental rights of citizens, and promises a job of at least 100 days per year to at least a member of poor families.
• At least one member of families living below the poverty line will enjoy a job, fetching income equivalent to minimum wage fixed by the government.
• Jobs will be provided in sectors like construction, infrastructure and other development projects.
• In case the state failed to provide jobs, the draft says the government will pay unemployment allowance to those families.
• Based on VDC-level data, the committee, which is drafting the Act, has suggested the government to issue cards to the beneficiary households.
• In order to ensure the effectiveness of the program, the draft Act asks the local bodies to hold public hearings every four months to dig out grievances and other anomalies.
• VDC, DDC and NPC to control possible leakage.

It seem the existing plan is almost fully in line with India’s Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), the largest employment guarantee public works program in the world.Its cost as a share of GDP, total expenditure and revenue receipts is decreasing and is expected to be 0.45 percent, 3.19 percent, and 5.08 percent respectively in fiscal year 2011-2012. This social welfare program guarantees one hundred days of employment per year at the prevailing minimum wage rate for unskilled labor. When NREGA was implemented in 2006, eleven states saw a rise in minimum wages. The new revised wages, to be adjusted with CPI, is set to increase wages in twenty states.

Similar programs (public works) have been launched in the US, Ethiopia, Sengeal, Ireland and Bangladesh among other countries. I have batted for this kind of program to solve unemployment problems in the rural areas and to boost infrastructure work. Few things to keep in mind before enacting such program:

• Without strong local level institutions (VDCs) and representatives manning the local offices leakages will be pretty high. Else, fudging of muster rolls and manipulation of accounts will occur.
• It should be demand-driven by nature.
• It is necessary to identify the households below poverty line and then provide employment to one adult members from each household for a maximum of three months (usually during lean agriculture season).
• Public works should be carried out to boost local level infrastructure that can increase agriculture productivity and promoting local markets.
• The fiscal cost is a major issues. In India it costs around 0.5 percent of GDP. Almost 53 million households were provided employment in 2009-10. Around 2826 million persondays of employment was created. Women and those from indigenous and backward groups secured most of the employment.

Below I have calculated a rough cost estimate of employment guarantee scheme in Nepal. Based on the latest NLSS III results and assuming population of 30 million, the number of BPL population in Nepal is 3.9 million. If an adult member (working age population of 15-59 years) of BPL household is given employment, then around 4.3 lakhs persons will demand employment at the minimum agriculture wage rate of NRs 170 per day. The wage cost of such scheme per day would be at least Rs 0.07 billion. If employment is provided only during lean agriculture season (which means three months), then wage cost per year would be at least Rs 6.60 billion. If we assume that administrative cost to carrying out such scheme to be 25 percent of total wage cost, then the total cost (wage plus administrative) would be around Rs 8.25 billion. Administrative cost is aimed at 20 percent of total cost in India. In Nepal, it should be higher as we lack many functioning local level institutions and representatives.

Preliminary cost estimate of employment guarantee scheme
Number of BPL population (million)	3.9
Minimum agri wage per day (NRs)	170
Average household size	4.9
Number of households BPL	795,918
Potential employment demand (15-59 years)	431,388
Wage cost per day, billion	0.07
Wage cost per year (3 months of employment), billion	6.60
Administrative cost (25 percent of wage cost), billion	1.65
Total cost (wage plus administrative), billion	8.25
Total cost (share of budget for FY 2011-12)	2.14
Total cost (share of real GDP in producers prices, 2010-11)	1.29

This would be around 2.14 percent of budget (considering FY 2011-12 budget) and 1.29 percent of GDP in producers prices of 2010-11. This cost is higher than in India, where the cost is below one percent of GDP. The program should cost lower if administrative cost is lowered. Considering budget deficit of about 3.8 percent of GDP in 2010-11, enacting employment guarantee scheme in Nepal would increase deficit to 4.83 percent of GDP.

[Note that if you assume at least one member of each household, regardless of working age population, would get guaranteed employment, then the cost would be approximately double of what is estimated above.]

Changing pattern of global trade

---

The past few decades have seen important shifts that have reshaped the global trade landscape. As a share of global output, trade is now at almost three times the level in the early 1950s, in large part driven by the integration of rapidly growing emerging market economies (EMEs). The expansion in trade is mostly accounted for by growth in noncommodity exports, especially of high-technology products such as computers and electronics. It is also characterized by a growing role of global supply chains and an ongoing shift of technology content toward EMEs. These developments in global trade have been associated with growing trade interconnectedness and carry important implications for trade patterns, in particular in response to relative price changes. The aim of this paper is to outline the factors underlying these changes and analyze their implications for the outlook for global trade patterns.

---

Here is the full paper. The paper states that the expansion of global and regional trade was driven by trade liberalization, followed by vertical specialization and income convergence. Lower trade barriers and technology-led declines in transportation and communication costs facilitated regional and global supply chains. Meanwhile, convergence in income levels and factor endowments across countries pushed up trade, especially that of intra-industry trade.

The expansion in global (merchandise) trade is characterized by three trends

• The rise of EMEs as systemically important trading partners
• The growing importance of regional trade
• The shift of higher technology exports toward dynamic EMEs

Note that there is a difference in export contents of advanced and emerging market economies: advanced economies have less foreign (import) content in their exports and contribute towards other countries’ exports content, but EMEs tend to have relatively large shares of imported content in their exports (especially of those that involve heavily in assembly and processing trade). This affects sensitivity of trade patterns to relative price changes. The paper states that Asian supply chain is more dispersed compared to those in North America or Europe, rendering it more vulnerable to disruptions in trade flows. Also, check out the argument for judging trade and competition based on value-added during each step of manufacturing process than total value of final products imported or exported from countries.

 

The figure below shows trade interconnectedness between Japan and China and other countries from where it imports contents for its exports. The emergence of China as a global trade hub (and its prominence over Japan in over a decade) is clearly visible.

Major findings of Nepal Living Standard Survey III

Key findings of Nepal Living Standard Surveys
	NLSS I	NLSS II	NLSS III
Survey year	1995/96	2003/04	2010
Absolute poverty (% of population)	41.8	30.8	25.2 13
Demography (%)
Population aged 0-14 years	42.4	39.6	36.7
Population aged 15-59 years	50.8	52.8	54.2
Population aged 60+ years	6.8	7.6	9.1
Sex ratio (male to every 100 female)	95.5	92.3	85.6
Female headed households	13.6	19.6	26.6
Housing and household facilities (% of household)
House owner	93.8	91.6	89.7
House renter	2.2	5.4	7.8
Access to power	14.1	37.2	69.9
Access to drinking water	70.4	81.2	83
LPG for cooking	1	8.2	17.7
Access to toilet	21.6	38.7	56
Education
Literacy (6 + years)	37.8	50.6	60.9
Attendance in private school/collage	7.5	16.7	26.8
Remittances
Percentage of househoold receiving remittances	23.4	31.9	55.8
Total amount received (Rs billion)	13	46	310
From within Nepal	6	11	120
From outside Nepal	7	35	208
Use of remittance (%)
Daily consumption	-	-	78.9
Household property	-	-	4.5
Repay loans	-	-	7.1
Education	-	-	3.5
Capital formation	-	-	2.4
Income
Nominal avg household income (Rs)	43,732	80,111	202,374
Nominal avg per capita income (Rs)	7,690	15,161	41,659
Share of farm income in household income (%)	61	47.8	27.7
Consumption
Nominal per capita consumption (Rs)
All Nepal	6,802	15,848	34,829
Poorest (first decile)	2,152	4,183	11,093
Average (fifth decile)	4,777	9,230	24,238
Richest (tenth decile)	20,263	62,037	102,772
Consumption expenditure (share of total)
Food	-	59	61.5
Housing	-	9.5	11
Education	-	2.8	5.3
Other non-food items	-	28.7	22.2
Wage employment
Share of agriculture sector in wage employment	53	37	35
Mean daily wage (Rs)
Agriculture	40	75	170
Non-agriculture	74	133	263
Loans (% of total household)
Borrowing loans	61.3	68.8	65
Having standing loans	58.4	66.7	62.6
Loans from banks	16.2	15.1	20
Loans from money lenders	39.7	26	15.1
Loans from relatives	40.8	54.5	51.1

This table is sourced from Republica (2011-08-06). My initial comments on the findings are here.

Notice that all the changes are remittance- and migration-driven. More remittance money is spent on consumption than in any other heading. Only 2.4 percent of remittance money is spent in capital formation.

Households that owned houses have decreased while those renting houses have increased. Access to power has substantially increased. So, are households with safe drinking water and toilet. (One can guess the supply thought-- prolonged power cuts and taps running dry!). Households with LPG for cooking has also increased (which explains why the NOC is loosing out the most money on LPG).

Working group population has increased. But, those dependent (60+) has also increased. Dependent population below 14 years has decreased.

Nominal average household income and nominal average per capita income have increased by 153 percent and 175 percent respectively between NLSSII and NLSS III. In the same time period, nominal per capita consumption of the poorest households (first income decile) has increase by 165 percent while that of richest households (tenth income decile) has increased by 66 percent. The nominal per capita consumption of median households (fifth decile) increased by 166 percent.

Consumption expenditure on food, housing and education has increased but on other non-food items it decreased.

The average daily wage in agriculture sector has increased by 127 percent between the two surveys, but that of non-agriculture sector increased by 98 percent only.

More households are now borrowing from banks and curtailing loans from money lenders.

Absolute poverty declined to 13 percent in Nepal in six years

This is incredible. Prem Khanal writes that a forthcoming study based on Nepal Living Standard Survey (NLSS) 2010 shows that absolute poverty declined to 13 percent, a 18 percentage point decline in absolute poverty in the six years between 2003/04 and 2009/10. That is like three percentage point decline each year. The NLSS II conducted in 2003/04 showed 31.5 percent of the population was under absolute poverty. The first NLSS in 1995/96 showed 42 percent of the population under absolute poverty. The latest survey is based on 7,200 samples of households selected randomly nationwide.

Findings of NLSS III:

• 13 percent Nepalis below the poverty line fixed at 2,200 calorie consumption per day per person and access to essential non-food items.
• Based on current market prices, a person needs an income of at least Rs 14,430 per year to manage food items equivalent to 2,200 calorie per day and other essential non-food items.
• Households receiving remittance increased to 55 pc from 31.9 percent reported in NLLS 2003/04 (24 percent households received remittance in FY95/96). Of this income, 79 percent is used for daily consumption while only 2.4 percent is invested for capital formation.
• Sex ratio decreased to 85.6 from 92.6 in 2003/04.
• Average household size decreased to 4.9 persons from an earlier 5.3 persons.
• The Gini-coefficient has fallen to 0.35 from 0.41 recorded in the second NLSS. The nominal average per capita income of the poorest 20 percent of the population has increased nearly fourfold to Rs 15,888 from Rs 4,003 registered in the second NLLS. However, such income of the richest 20 percent of the population merely doubled, to Rs 94,419 from Rs 40,486 over the period.
• Households headed by females has increased to 26.6 percent from 19.6 percent recorded in the second NLLS.
• The per capita consumption share of the poorest 10 percent, according to the survey, is Rs 11,093 whereas the share for the richest 10 percent is Rs 102,772.
• The nominal average household income has seen a 2.5-fold increment to Rs 202,374 from Rs 80,111 six years ago.
• Households using cooking gas has doubled to 17.7 percent.
• Households taking loans from banks have gone up to 20 percent from 15 percent whereas households taking loans from local money lenders has gone down to 15.1 percent from 26 percent six years ago.
• More than 62 percent of households have outstanding loans as against 66.7 in 2003/04.
• The expenditure on cereal food has declined by a whopping 16 percentage points to 52.3 percent whereas expenditures on meat and vegetables have increased considerably.
• Kathmandu Valley has the lowest poverty incidence of less than 5 percent while Taplejung, Khotang and Sankhuwasabha have the highest -- up to 23 percent.

---

COMMENTS:

The survey showed everything positive happening at the household level right now. This has come about when the major macroeconomic variables are deteriorating and political uncertainty increasing. Something other than the economic variables are at play. The only exogenous factor I can think of are remittance and migration. It looks like it is a remittance- and migration-led decline in absolute poverty.

More households received more remittance money, increasing their income and consumption. The first two deciles household on the income scale got a bump in their income due to remittance money, decreasing income inequality. This also means that the marginal increase in growth of remittance received by poorest households is higher than the marginal increase in growth of income of richest households. I am surprised by this. Also, it means an increase in female headed households as men leave to sweat outside the country.

Sex ratio, the ratio of male to female, has decreased. It is like Nepal is having more females than males (just opposite in India—where the latest census showed 940 girls for every 1000 males)? Or am I reading the number incorrect?

About the astounding decrease in poverty, the impact is not only due to remittances. NLSS III shows that absolute poverty declined to 13 percent. If we account for the impact of remittances, the poverty incidence has declined to 21 percent. What accounts for the eight percentage point decline in absolute poverty? Increase in real wage in agriculture sector? Increase in the number of population moving from low productivity to high productivity sectors?? Decrease in fertility??

A three percentage point decline in poverty each year for six years is quite incredible. More incredible would be to know the reasons behind this. Also, compare this one with Multidimensional Poverty Index, which showed that the percentage of people who are MPI poor (headcount) is 84.7 percent. The World Bank estimated that 55.10 percent (15.59 million) of the population living below income poverty line of $1.25 a day (2005 PPP US$). Again, the 13 percent national poverty figure is very surprising. The National Planning Commission must have a good answer to this. Isn’t 2,200 calorie per day (Rs 14430 per year including food and access to basic non-food items) per person too low to sustain given high inflation?

The increase in remittances has led to a consumption binge. Since most the consumed goods are not produced in Nepal (for various reasons related to labor dispute, political instability, policy inconsistency, loss of competitiveness both in domestic as well as foreign markets), they are imported, leading to huge trade deficit. Interestingly, the increase in household income has led to consumption of more dietary goods like meat and vegetables.

The increase in average household income and remittance inflows has led to decline households in debt as well. But, loans from banks are increasing and from nonbank lenders decreasing. Is creditworthiness of Nepali households increasing?

At the policy level, it seems like without any substantive policy reform absolute poverty has declined in Nepal. We have dangerously outsourced the reform need of our economy to remittances. How long can it last? What’s up, Ministry of Finance and National Planning Commission? It comes amidst stagnation in manufacturing sector and even growth rate.

The all-positive results of NLSS III should not blind the MoF and NPC from enacting reforms. I would be reluctant to applaud the outcome shown by this survey unless the NPC comes up with good and convincing explanation. There are way too positive results amidst too many inconsistencies. Basking on the good results of NLSS III survey and doing nothing substantive to revive the economy like in previous years is going to be dangerous. For now, the remitters (not the policymakers and political leaders) should be applauded for brining about this change.

I am eagerly waiting for the full report (and possibly the raw data so that I can play with it and look for other stuff).

U-shaped GDP of Asia between 1700-2050

The estimates in a new book (Asia in 2050) by the ADB shows that if Asia continues on its recent trajectory it would double its share of global GDP to 52% by 2050 and regain its dominant economic position it held in the 1700s. The rise, fall and rise of Asia is depicted in figure 1 by the U-shaped GDP (share of global GDP). Specifically, it is like the shape of a marginal cost curve.

But, it warns that “Asia’s continued rise is plausible, but by no means pre-ordained”. China, India, Viet Nam, and Indonesia could fall victim to the “middle-income trap”—as countries grow rapidly they are unable to compete with low-income, low-wage economies in manufactured exports and advanced economies in high-skill innovations. It basically means that countries fail to make a timely transition from resource-drive growth, with low-cost labor and capital, to productivity-drive growth. South Korea avoided this trap, but Brazil and South Africa could not, says the report.

---

---

Two scenarios:

• Asian Century scenario: Asia’s GDP (at market exchange rates) increases from $17 trillion in 2010 to $174 trillion in 2050, or half of global GDP. Seven countries—China, India, Indonesia, Japan, South Korea, Thailand, and Malaysia—would lead the Asian march to prosperity. They will account for 73 percent of global population and 90 percent of Asia’s population. They will account for 45 percent of global GDP. Asia would have a per capita GDP of $40,800 in 2050, equal to the Europe’s level today. Interestingly, Asia would have no poor countries (those with average per capita GDP of less than $1000), compared with eight today.
• Middle Income Trap scenario: Assumes that fast-growing converging economies fall into the trap in the next 5-10 years, without any of the slow- or modest-growth aspiring economies improving their record. Asia’s GDP in 2050 would be $65 trillion only and GDP per capita $20,600. A combination of bad macro policies, finance sector exuberance with lax supervision, conflict, climate change, natural disasters, changing demography and weak governance could lead to this scenario.

---

---

Growth challenges faced by Asia’s leaders:

• Increasing inequality within countries, which could undermine social cohesion and stability.
• For some countries, the risk of getting caught in the “Middle Income Trap”, for a host of domestic economic, social, and political reasons.
• Intense competition for finite natural resources, as newly affluent Asians aspire to higher standards of living.
• Rising income disparities across countries, which could destabilize the region.
• Global warming and climate change, which could threaten agricultural production, coastal populations, and major urban areas.
• Poor governance and weak institutional capacity, faced by almost all countries.

---

In May 2011, the ADB came out with an earlier version of the same report/book. Then, it argued that Asia’s GDP under Asian Century scenario and Middle Income Trade scenario would be $148 trillion and $61 trillion in 2050. Have to find out what led to the discrepancy in estimates in two months period.  Below is how the report identified per capita GDP in South Asia.

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

Reviving Nepalese exports with Special Economic Zones (SEZs)

[This was published in Republica, July 31, 2011, p.7]

---

Reviving exports with SEZs

Nepal’s exports are decreasing due to loss of competitiveness engendered among others by power shortage, labor dispute, lack of investment, inadequate supply of infrastructure, policy unpredictability, and other supply-side constraints. The declining exports revenue and ballooning imports is leading to an ever-widening trade deficit, which is not only draining out foreign exchange reserves but also impacting balance of payments. The situation has gotten so worse that our exports revenue, which is around 15 percent of GDP, is barely enough to finance petroleum imports. Worse, foreign direct investment (FDI) inflow has been stagnant at US$ 39 million for two years now and FDI commitment has declined by almost 40 percent.

Right now, with the assistance of donors, both bilateral and multilateral, a number of initiatives are implemented with an objective to boost exports in line with the recommendations of Nepal Trade Integration Strategy (NTIS). Since these initiatives are run amidst the existing constraints mentioned above, the ultimate impact on exports will be minimal, if any, in the short term. To increase export competitiveness, export revenue, and FDI, an immediate enactment of Special Economic Zone (SEZ) Act is a must. This is even more necessary to revitalize the ailing manufacturing sector. Unfortunately, despite a well-prepared SEZ bill ready to be presented to the parliament for discussion and enactment, no political leaders have shown genuine interest in pushing it through for the benefit of the struggling exports sector.

The exports success in China, East Asia, Latin America, and our regional partners such as India, Pakistan, and Bangladesh are partly attributed to the enactment of SEZs—where industrial and labor laws are more liberal than in the whole economy; infrastructure requirements such as road, power and communication are adequately supplied; security is guaranteed; and firms are given income and tax incentives to locate plants inside the zone. The primary objectives of a SEZ is to enhance industry competitiveness, attract FDI, boost exports and diversify exports basket while maintaining protective barriers to create jobs and stimulate economic activities. 

A 2008 World Bank study estimated that there are 2301 SEZs in 119 developing and transition economies (clustered mainly in Asia and the Pacific and Latin America), accounting for about 69 million direct jobs and over US$ 200 billion in gross exports per annum. In Bangladesh, Pakistan and Sri Lanka, over 75 percent, 50 percent and 67 percent respectively of manufacture exports originate from SEZs. The success of Bangladeshi garment industry at a time when the corresponding Nepali industry is dying is attributed to the enactment of SEZs. The Chittagong Export Processing Zone is considered to be third most competitive SEZ in the world. At present, there are over 133 and 8 operational SEZs (with several more planned) in India and Bangladesh respectively. While our neighbors and competitors in the international market are actively pursuing every means available to incentivize industries to locate inside SEZs, entice FDI, and boost exports, our political leaders are not even showing interest in debating in the parliament the already prepared SEZ bill.

Typically most of the industries in SEZs are labor intensive and assembly-oriented activities, including light manufacture goods such as textiles, apparel, leather, and light electrical and electronic goods. Sector specific zones such as Agriculture and Herbs Processing Zone, Export Processing Zone, and Garment Processing Zone inside SEZs are established to boost exports of and investment in particular sectors.

There are numerous advantages of having SEZs in a least developed country like ours which is losing competitiveness and manufacturing base. First, infrastructure facilities, tax incentives and subsidies provided to industries that locate inside the zones will help boost their competitiveness, which in turn will aid our struggling exports sector, generate revenue and diversify exports. Second, due to policy certainty and economic incentives, multinational companies will come and bring in investment and technology with them. This will help to not only spur economic activities but also increase employment. Third, in most of the manufacture -oriented zones, a large chunk of employment is secured by women, accounting for almost 60-70 percent of total employed workforce in such zones worldwide. Empowering women via gainful employment will be much more effective than the shallow talk on women empowerment and inclusiveness at the political level.

Fourth, ancillary firms and local suppliers of raw materials, which are needed for industries in such zones, will emerge when entrepreneurs see a stable market inside the country. It will not only help in stimulating local economies but also accelerate backward supply linkages and dissemination of technology, leading to increase in productivity. Fifth, there will be economies of scale, which means decrease in average cost of production as output increases, when similar or near-similar industries operate in the same place, resulting in cost competitiveness of our products. Sixth, most of the firms in Nepal are operating below their capacity, leading to low production and productivity. With the supply of infrastructure guaranteed inside SEZs, these firms will be able to operate at full capacity. They will not only export items to contribute foreign exchange reserves, but also sell items in the domestic market, which is flooded with imported goods, by paying appropriate local taxes.

None of these benefits are in any way against our national interest, at least when viewed in terms of stimulating growth, employment and poverty reduction. There is no reason why our political leaders should not do the necessary for the enactment of SEZ Act. Specifically, the Minister for Commerce and Supplies and the Minister for Industry should personally push for the enactment of this Act by amending few provisions in the existing SEZ bill. These include, among others, lowering mandatory export requirement of 75 percent of total production for companies inside SEZs and a more flexible and industry-friendly labor law regime, which as of now includes fixing wages and welfare based on ‘agreement between industry and employee’.

The enactment of SEZ bill will help to realize the objectives of Trade Policy 2009 and Industrial Policy 2010, and in the effective implementation of NTIS, which identified 19 products having export potentials. Currently the government has proposed establishing SEZs in Bhairawa, Panchkhaal, Simara, Dhangadhi Jhapa, Kapilvastu, Jumla and Biratnagar. The International Finance Corporation (IFC) recommended SEZs in Simara and Biratnagar as being the most feasible ones. The construction of SEZ in Bhairawa is expected to be completed by the end of this fiscal year. The delay in enacting SEZ Act will negatively impact investment plans by companies considering locating plants inside the zone.

For a long time now, finance ministers, including FM Bharat Mohan Adhikari, have been regularly mentioning about SEZs in their budget speeches, but without concrete effort later on to push for the enactment of the Act. For the sake of the struggling exports and manufacturing sectors and for national interest, the political parties should at least leave aside partisan differences over political issues and collectively endorse SEZ Act, and also create enabling environment for operation of such zones. This is the surest and best way to revive our exports and manufacturing sectors for now.

---