Job guarantee vs. income support program in Argentina

Pavlina R. Tcherneva argues that job guarantee program and income support plan should be combined to bring out an employer-of-last-resort programs in Argentina. Tcherneva argues: “An examination of the Argentine experience based on survey evidence and fieldwork reveals that poor women overwhelmingly want paid work opportunities, and that a policy such as the JG or the ELR cannot only guarantees full employment and macroeconomic stabilization, but it can also serve as an institutional vehicle that begins to transform some of the structures and norms that produce and reproduce gender disparities.”

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Tcherneva evaluates the transformation of Argentina's Plan Jefes, a job guarantee program, to Plan Familias, an income support plan, and finds that it represents a step backward for women by removing a number of benefits and reinforcing gender stereotypes. Paid work matters to women, says Tcherneva, and public employment plays a special role in providing an opportunity to work outside the home, especially for the poorest and most vulnerable of this group.

Employer-of-last-resort (ELR) programs can enhance individual well-being, so the role of fiscal policy extends beyond the goals of full employment and economic stability. The best way to combine the goals of basic income and job guarantees is to design a universal program in the form of an ELR, supplemented by a universal child allowance and income support for the sick and the retired.

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Major constraints faced by firms operating in Nepal

Though based on data from 2009, here is a snapshot of the major constraints faced by firms operating in Nepal. These problems are still persistent. See all of the survey results here and the Enterprise Survey report here.

A majority of the firms identified political instability as the main constraint to sound business environment in Nepal. For firms in South Asia and low income countries, political instability is not that big of a constraint as it is to Nepalese firms. However, electricity is a bigger constraint to firms in South Asia than it is for Nepal (as perceived by firms). Interestingly, for other constraints the proportion of surveyed Nepalese firms think the constraints faced by them are not as pressing as those thought by firms in the region.

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Now, the surveyed firms think that power outages is eating up their strength and revenue. Manufacturing firms are losing 28.2 percent of annual sales due to power outages. For retail sector, it is 25.6 percent. A recent study by the central bank found that the average capacity utilization of industrial sector in the last fiscal year was 54 percent, thanks to persistent power outages and labor problems.

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Pure hogwash: Improved state of Nepalese economy and the present government’s role

This article is published in today’s Republica. It has generated strong (also interesting) response.

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Pure hogwash

Desperate to give a positive message to public that the government is doing the needful to spur growth and job creation, the concerned authorities are echoing a similar line these days: The economy is back on track and investment climate is getting better. The officials at the prime minister’s office, the central bank and the finance ministry argue that growth will be 5 percent this fiscal year and the economy will see a surge in investment. Furthermore, they are asserting that the improvement in select macroeconomic indicators will entice foreign investment and spur jobs creation.

Nonsense. The fact is that the economy is still stuck in the same quagmire of low growth, low job opportunities, fledging industrial sector, high prices, low savings, high imports and consumption, and remittances-fueled impact-less investment cycles. The said rosy outlook is due to favorable exogenous factors. There is hardly any real policy change to induce structural transformation required to put the economy on a high growth path. All we have got is hastily designed grand plans and hollow promises to implement them.

The main source for the claim of 5 percent economic growth, which is likely to be not achieved, comes from the estimation by Ministry of Agriculture and Cooperatives (MoAC) that there will be bumper agriculture production, especially record paddy harvest. Agriculture sector constitutes about 33 percent of GDP and engages 83 percent of the population. Paddy is a major part of daily food consumption and contributes 21 percent to agricultural GDP. The officials have estimated that a 13.7 percent increase in paddy production will be enough to satisfy domestic demand, export surplus, and push up economic growth to 5 percent. Now, looking at the cheerful faces of ministers and policymakers, one wonders about their contribution in all this. Well, it is not because of any substantial policy change that agriculture production has increased; it is due to timely monsoon. The Bhattarai-led government cannot claim credit for this. A blip in agriculture production this year like it happened in 2007/08—when agriculture sector grew by 5.8 percent, leading to GDP growth of 6.1 percent— and its impact on growth does not mean that our economy is set on a track of high growth.

Furthermore, the main source for the claim of a favorable macroeconomic situation is a recently released macroeconomic update of the first five months of this fiscal year, which was misconstrued by leaders who are eager to show that economic indicators are sound during their tenure. The central bank’s figures reveal a huge balance of payments (BoP) surplus—an accounting record of all monetary transaction made between Nepal and all other countries—which reached Rs 61.19 billion. Similarly, current account—which is the aggregate of balance of trade (exports minus imports of both merchandise goods and services), net factor income (such as interests and dividends), and net transfer payments (such as remittances, foreign aid and pensions) — registered a surplus of Rs 24.89 billion. Another noticeable improvement was in foreign exchange reserves, which reached US$ 4.31 billion and is enough to finance imports of up to 9.3 months.

This definitely sends a good message about the state of our macroeconomy to absorb external shocks and repayment ability. Again, it was achieved not because of any sudden miraculous change in policies, but because of external factors. The increase in BoP surplus has to do more with massive increase in remittance inflows and improved services sector earnings. Remittance inflows increased by 37.9 percent between the first five months of this and last fiscal years. Transfers increased by 29.5 percent, including substantial excise refund by India. Services sector earnings increased by 46.4 percent. Some of these transfers are cyclical and some are just flukes in the account sheet. Meanwhile, forex reserves have improved mainly because of the increase in remittance inflows and depreciation of Nepalese currency against the dollar by approximately 17 percent. During the same period, reserves in Nepalese rupee increased by 35.4 percent, but in dollar terms the increase was just by 12.4 percent.

Just by looking at these numbers it defies logic to argue that investment environment has improved and economy is back on track. In fact, quick estimate based on the level of merchandise exports and imports so far this year shows that the total annual figures will hover around Rs 65 billion and Rs 400 billion respectively. Trade deficit will increase more than last year because of massive rise in imports of petroleum products, but it will be countered by rising remittance inflows and transfers, resulting in positive current account.

The very problems that have been plaguing the economy for a decade now are continuing to eat away its strength. There is nothing noteworthy the Maoist-led governments have done to address them after 2006. The average growth rate in the last decade was just 4.1 percent, with agriculture and non-agriculture growth rate averaging 3.18 percent and 2.34 percent respectively. Imports have reached about 32 percent of GDP and exports are merely 9 percent of GDP. Gross domestic savings are just 7 percent of GDP, signaling the dearth of domestic investment needed to launch big infrastructure projects. It is still very much a consumption fuelled economy, where increasing domestic production deficit is comfortably filled in by imports, which is financed by remittances. Development budget is heavily dependent on foreign aid and domestic revenue is inadequate to finance even recurrent expenditure. Many farmers in Terai and Hilly regions are short of adequate fertilizers needed to increase agriculture production, progress in repairing old and completing new irrigation projects has been frustrating, and food insecurity in remote areas remains as problematic as it were before due to weak distribution mechanism.

Meantime, domestic industries are gradually perishing. The power woes are stubbornly persistent and the grand plan of reducing load-shedding by importing power from India and by operating diesel plants never fructified. Rationing of electricity and persistent labor problems have forced industries to operate at barely 45 percent capacity. Labor unions have again started to show indifference and irresponsible attitude towards industrial development by shutting down manufacturing plants owned by both domestic and foreign investors (the latest saga being the closure of Unilever Nepal, one of the few remaining MNCs after 1996). Firms are unable to secure enough fuel to run their generators. Restaurants are pulling their shutter down due to shortage of cooking gas. Following the moderation in prices for a few months, inflation has started to creep up due to rise in prices of petroleum fuel, persistent supply-side constraints, and rise in retail prices of daily consumable goods and services. The threat to private property and forceful land grabbing by Maoist party’s cadres are still there. Safe appropriation of returns to investment is getting increasingly tough. Interest rates are high despite liquidity surplus in the banking sector. Enthusiastic entrepreneurs are dejected due to the lack of appropriate physical and regulatory infrastructure along with a supportive bureaucracy. In such a situation, one wonders how PM Bhattarai is aiming to entice US$1 billion of foreign investment, let alone investment commitment, in six months time when the total FDI in 2010 was barely US$39 million.

The claim of economic revolution by this government is pure hogwash. The economy is stuck in the same mess as it was before. The government has done nothing substantial to put it on the path of high growth, let alone address the short term constraints. The recent good news about bumper agriculture production, improved reserves and BoP surplus has nothing to do with policy changes by this government. Importantly, improvement in these indicators alone does not indicate an improved macroeconomy set to welcome more investment and ready to brace growth rate of over 5 percent.

[Published in Republica, February 11, 2012, p.6]

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Paul Krugman vs. the World

Source: Bloomberg Businessweek

Impact investing in Nepal

Here is a piece by Shabda Gyawali, published in Republica, about the prospect of impact investing in Nepal.

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Small is beautiful

by Shabda Gyawali

Foreign Direct Investment (FDI) can bring great advantage to the host country. It fuels economic growth, helps reduce poverty, creates employment opportunities and assists building of physical infrastructures. With the same intention, the government has decided to observe 2012-2013 as Nepal Investment Year and setup Nepal Investment Board (NIB) to spur and facilitate foreign investments in the country.

To attract foreign investment, NIB is launching promotional events like road shows in countries like India, UK and the US. NIB is targeting foreign firms that have the resources to invest in mega projects in sectors like energy, tourism, infrastructure development and commercial agriculture. Dr. Baburam Bhattarai-led cabinet has also passed Investment Board Act, which facilitates investments above Rs. 25 billion through single window policy. A population of 28 million, rising per capita income (mainly due to remittance), demographic dividend, underexplored natural resource, and Non Residential Nepalis’ global network provides enormous market size and opportunities for investors in Nepal.
Having said that, the government and other enthusiasts needs to recognize that simply declaring 2012-2013 as Investment year won’t be enough to attract foreign investment. Capital inflow in a particular country depends on domestic and international macroeconomic situation and investment climate. For a traditional foreign investor the risk in Nepal is very high. According to the World Bank established international sovereign rating standard, Nepal is rated CCC+. With this rating, Nepal is boxed under “High Default risk” category.

Additionally, due to perpetual “in-house” hurdles like militant labor, extortion, local opposition, arbitrary government policies, red tape, corruption, and bandas, Nepal’s foreign private capital attracting capability is also undeveloped and fragile. In 2010, Nepal attracted the least amount of private commercial capital in the South Asian region. According to the World Investment Report 2011, Nepal was ranked 134 out of 141 countries in the Inward FDI Performance Index. Despite the potential market opportunity in Nepal, traditional large scale investors will continue to be reluctant to invest until issues like high investment risk and cost of capital are addressed.

While the government should continue scouting for large scale investors through Nepal Investment Board, it should also create appropriate environment to lure in a small but a growing breed of financers called Impact Investors. These investors are willing to take investment risk in developing countries like Nepal and understand the market dynamics of low income countries to reduce the cost of capital through innovative financial products. The capital they deploy intends to create (beyond financial returns) positive social and environmental impact.

These investors believe in building entrepreneurial culture and invest in small businesses that use market-based approaches to provide scalable solutions to socio-economic problems. Investments are generally made in sectors that serve the people at the base of the economic pyramid (those earning less than US $3,000 per annum). Impact investors target sectors like affordable education, healthcare, renewable energy, access to finance and sustainable agriculture. While government or charity solutions will sometimes provide these products or services, impact investment can complement government and philanthropic capital to reach more people.

In recent year a board range of organisations has shown interest in adopting impact investing model in developing countries. The list includes but is not limited to investment banks, sovereign wealth funds, and endowments, philanthropic foundations and international development organizations. Traditionally, inflow of foreign capital (not including remittance) in developing countries like Nepal has taken place in the form of investment designed to maximize financial returns, with no consideration of its social impacts.

Likewise, foreign aid is structured to maximize social returns, with no expectation of monetary returns. Impact investing provides a platform to blend capital from both foreign aid and foreign investments to support entrepreneurship culture in developing world. The impact investor operates in the missing middle and fills the capital gap above micro-financing and below institutional financing. They structure their investment vehicles (like venture capital/private equity fund and investments in businesses) in the form of equity, quasi-equity and debt. Some of the investors are also willing to accept below-market financial returns in order to maximize social and environmental returns.

To the best of my knowledge, there are no impact investing funds currently operating exclusively in Nepal. However, there are few initiatives in the pipeline. One of them is Ventures Nepal, one of the funds in the International Financial Corporation’s (IFC) SME Ventures program, which will provide risk capital financing and complementary advisory services to small businesses in Nepal. With the fund size of US $10 million, Venture Nepal aims to make risk capital investments of up to US $500,000 in small and medium enterprises (SMEs).

Another is Dolma Development Fund (DDF), structured as a non-profit domiciled in United Kingdom, which is currently raising US $10 million for investment in SMEs in Nepal. DDF plans to deploy the money over a period of 3-5 years with a focus on target sectors like rural connectivity (internet/mobile), healthcare, affordable private education, clean drinking water, eco-tourism and off-grid renewable.

Small businesses are the backbone of any developing economy. Not only do small businesses/startups help job creation and poverty reduction they also bring wealth of replicable innovations to market. Attracting more impact investors in the Nepal means more startups will have access to capital. The scope of impact investing extends beyond meeting capital shortage though; it also includes establishing infrastructure and overlaying networks of intermediaries, institutions and investors.

Thus, one of the top priorities of NIB should be to put in place regulatory incentives and safeguards to attract impact investors. This will help build entrepreneurial culture and provide capital for sustainable growth and job creation. In the short run, it is the small-size foreign investments that will build appropriate FDI friendly environment in Nepal before the country can attract large scale commercial capital.

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Development-led globalization vs. finance-led globalization

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“The term finance-driven globalization characterizes the dominant pattern of international economic relations during the past three decades,” the report says. “This is intended to convey the idea that financial deregulation, concerted moves to open up the capital account and rapidly rising international capital flows have been the main forces shaping global economic integration. . . . Financial markets and institutions have become the masters rather than the servants of the real economy, distorting trade and investment, heightening levels of inequality, and posing a systemic threat to economic stability.”

“Financial and other resources should be channelled towards the right kinds of productive activities. Industrial development remains a priority for many developing countries…but a wider sectoral approach, including a focus on the primary sector in many least developed countries, is needed to ensure that measures to diversify economic activity are consistent with job creation, the security of food and energy supplies, and effective responses to the climate challenge”.

“rebalancing will need a global new deal that can ‘lift all boats’ in developed and developing countries alike. It is a basic truth that people everywhere want the same thing: a decent job, a secure home, a safe environment, a better future for their children and a government that listens to and responds to their concerns.

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Here is more from the latest UNTCAD report titled Development-led globalization: Towards sustainable and inclusive development paths.

Time to set Sustainable Development Goals

With the possibility of recession in the EU and slowdown in major economies, policymakers the world over are looking for pragmatic policy initiatives to avert further hardships brought about by a series of crises—food, fuel, financial, economic, environment and sovereign debt. Given this backdrop and the increasing anxiety over the long term resilience of people and the planet, it is high time the world chose to integrate economic, social and environmental dimensions of development and move on the path of sustainable development, which has been defined as "development that meets the needs of the present without compromising the ability of future generations to meet their own needs".

To this end, recently, the High-level Panel on Global Sustainability urged in its report presented to the UN Secretary-General Ban Ki-moon that in order to achieve sustainable development, the people should be placed at the center of any development strategy. By urging for the integration of social and environmental costs while determining world prices and measuring economic activities, it calls for a set of sustainable development indicators that go beyond the traditional approach of Gross Domestic Product, and recommends that governments develop and apply a set of Sustainable Development Goals that can mobilize global action and help monitor progress.

The 22-member panel, established by the Secretary-General in August 2010 to formulate a new blueprint for sustainable development and low-carbon prosperity, was co-chaired by Finnish President Tarja Halonen and South African President Jacob Zuma. The Panel’s final report, “Resilient People, Resilient Planet: A Future Worth Choosing,” contains 56 recommendations to put sustainable development into practice and to mainstream it into economic policy. If fully implemented, these measures will have profound implications for societies, governments, and businesses.

The report argues that the eradication of poverty and improving equity must remain priorities for the world community and that empowering women and ensuring a greater role for them in the economy is critical for sustainable development. Furthermore, it calls for improving health and education; ending of subsidies on fossil fuels, which is around US$400 billion each year, and agricultural subsidies, which is also around US$400 billion in the OECD countries alone; changing financial market regulation to promote long-term, stable and sustainable investment; improving access clean water, sanitation and food; meeting the Millennium Development Goals (MDGs) and going beyond them; ensuring universal access to affordable sustainable energy by 2030; and having universal telecommunications and broadband access by 2025.

The Panel’s report underscores the importance of science as an essential guide for decision-making on sustainability issues. It calls on the Secretary-General to lead efforts to produce a regular Global Sustainable Development Outlook report that integrates knowledge across sectors and institutions, and to consider creating a Science Advisory Board or Scientific Advisor.

The report provides a timely contribution to preparations for the UN Conference on Sustainable Development (Rio+20) in Brazil in June 2012. A recently leaked draft agenda document for the Rio+20 asks countries to sign up for 10 new sustainable development goals for the planet and promise to build green economies at the first earth summit in 20 years. Importantly, the recommendation of the panel, if implemented, will put the world in a path of sustainable development that will not only propel prosperity, but also ensure measures to sustainably utilize natural resources and environment to meet that end.

As global population reaches 9 billion by 2040 and middle-class consumer increases by 3 billion over the next 20 years, the world will need at least 50 percent more food, 45 percent more energy and 30 percent more water. These cannot be addressed with the existing development paradigm. The world needs to adopt a new approach to the political economy of sustainable development to address the sustainable development challenges in a new and operational way. It is time to work for a sustainable planet, a just society and a growing economy.