24.8% of population earn less than US$1.25 a day in Nepal (latest year 2010)

[This is an update to this blog post. I will put up comparable data for South Asian countries soon].

Here I will focus on the latest poverty and inequality figures published by the World Bank and compare it with the one published by CBS.

The WB’s estimate is updated with NLSS III (see this updated one as well) data. Check it out here. For Nepal, the poverty headcount at $1.25 a day (PPP) was 24.8% in 2010 [7.4 million people] and 53.1% in 2003 [13.9 million people]. It was 68% in 1995 [14.7 million people].

The table below shows a comparison of the level of poverty as shown by the WB and the NLSS III studies. The figure are pretty close. I don’t have too much of spare time to make charts, so here are is a table that shows the relevant info.

	CBS 2011				WB_Feb 2012
	Poverty (%)	Inequality	Income or consumption share by deciles (%)		Poverty (%)	Inequality	Income or consumption share by deciles (%)
	Below national poverty line	Gini index	Poorest	Richest	Below $1.25 a day, PPP 2005)	Gini index	Poorest	Richest
2010	25.2	32.94	9.09	26.82	24.82	32.82	3.63	26.52
2003	30.8	41.4	9.09	35.57	53.13	43.83	2.9	36.69
1995	41.8	32.2	9.10	27.09	67.97	35.23	3.41	29.1
1984					78.15	30.06	4.04	25
2008					33.9	Interpolated using two sets of survey data
2008					29.37	using survey data of 2010
2008					43.57	using survey data of 2003

Here, for CBS’s figure, the years are 2010/11, 2003/04, and 1995/96 (based on NLSS series). Note that the CBS’s poverty figure in 2010/11 cannot be compared with the previous years because of the change in consumption basket used to compute poverty level. Further, be careful with the total figures as total population is considered to be 30 million in 2010, but the Census 2011 says it is just 26.6 million. Also, for the World Bank, the default poverty line is $38.00 per month, which translates to $1.25 per day poverty line($38=$1.25*365/12). For CBS, based on current market prices, a person needs to earn at least Rs 19,261 (Rs 11,929 for food items and Rs 7,332 for non-food items) every year to buy basic food calories to stay above the national poverty line.

Anyway, the figures of CBS and WB are very close.  If we look at data for comparable year, then Nepal had the third highest headcount poverty (US$1.25 a day) in 2008.

Congratulations (major credit to remitters and very little credit to policymakers and governments) for such a remarkable feat in reducing poverty. Here is a country where you can have encouraging poverty reduction with a miserable growth rate of below 4 percent!

Total convertible foreign exchange income of Nepal

Here are interesting charts showing total convertible foreign exchange income of Nepal over the past six years. The total convertible foreign exchange income of Nepal in fiscal year 2010/11 was Rs 312 billion, up from Rs 157 billion in 2005/06 (a whooping 98 percent increase between the two periods). The share of convertible foreign exchange income from merchandise trade and services trade (consider exports earning in convertible currency only as some of the income from exports to India is in Indian rupee) is 12.34 percent and 87.66 percent respectively. The convertible foreign exchange income from services trade overshadows the one from merchandise trade.

Don’t confuse total convertible foreign exchange income with gross foreign exchange reserves, which is the one you have been hearing about in the media and reading in the central bank’s periodic statements. For comparison, total convertible foreign exchange income in 2010/11 was Rs 311.66 billion, and gross foreign exchange reserves was Rs 263.13 billion (the total fiscal budget was around Rs 384 billion). Similarly, don’t confuse with total convertible forex income from merchandise trade, service trade and remittances with total value of merchandise trade, service trade, and remittance inflows.

The biggest contributor to total convertible foreign exchange income is remittances, which comes under the services trade heading. In 2010/11, the share of remittances, tourism and investment in total convertible foreign exchange income of services trade was 85.27 percent, 11.35 percent, and 3.38 percent respectively. In numbers, these translate to Rs Rs 214 billion, Rs 29.39 billion, and Rs 5.42 billion respectively. The total convertible foreign exchange income of merchandise trade and services trade was Rs 38.45 billion and Rs 248.80 billion respectively. Now, these are different from the total value of total merchandise export and total services exports (Rs 64.33 billion and Rs 53.01 billion respectively—see the table).

Convertible forex income in 2010/11 (Rs billion)
Total convertible forex income	311.66
Convertible forex income from merchandise trade	38.45
Convertible forex income from service trade	248.80
Convertible forex income from remittances	214.00
Convertible forex income from tourism	29.39
Convertible forex income from investment	5.42
Total value in 2010/11 (Rs billion)
Gross forex reserves (provisional)	263.13
Total merchandise export	64.33
Total services export (BOP)	53.01
Total remittance income (provisional)	253.55
Total budget for fiscal year	385.00

The total share of remittances, tourism and investment in total convertible forex income was 74.75 percent, 9.95 percent, and 2.97 percent respectively. The income from tourism was 2.1 percent of GDP in 2010// and that from remittances was 20 percent of GDP.

[The data source is MoF and NRB. Computation and charts are done by myself].

Crisis divides macroeconomic schools of thought

Here is Simon Wren-Lewis over at VoxEu:

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So why have schools of thought within mainstream macroeconomics returned? One simple story is that schools of thought are associated with macroeconomic crises, and macro synthesis follows periods of calm. Keynesian theory itself was born out of the Great Depression. The first Neoclassical Synthesis arose from the period of strong growth and low inflation in the postwar period. Monetarism gained strength from the rapid inflation of the 1970s. The more recent synthesis may be a child of the Great Moderation, and now we have the Great Recession, schools of thought have returned. Because these crises are macroeconomic, and there are no equivalent crises involving microeconomic behaviour or policy, then fragmentation of the mainstream into schools will be a macro, not micro, phenomenon.

However I think this is too simplistic a view of what is happening today. One interesting feature of the current divide is that the label ‘Keynesian’ appears to be used more by those opposed to certain policies – and in particular fiscal stimulus – than those on the other side. Typically Keynesians see themselves as putting forward synthesis analysis, without the need for branding. What has become clear is that the New Neoclassical Synthesis was in many ways a celebration of New Keynesian theory which was not shared by many freshwater departments in the US.

There may be good reasons why New Keynesian economists might have imagined that their analysis was now an uncontested part of the mainstream. In particular, it is used in nearly all central banks as their main tool in carrying out monetary policy. With monetary policy somewhat depoliticised through central bank independence, the successful implementation of New Keynesian theory during the Great Moderation allowed divisions among academic departments to remain dormant.

On the other side, there was a belief that New Classical economics had been revolutionary, ie a successful counter-revolution against Keynesian ideas.  Once again there were good reasons supporting this belief. On consumption, rational expectations, the Lucas critique and more, traditional Keynesians had unsuccessfully opposed New Classical ideas. Furthermore, many of the leaders of New Classical thought did not want to update Keynesian thinking; they wanted to destroy it. The label ‘Keynesian’ was associated with much more than a belief that prices were sticky and that therefore aggregate demand mattered. Instead it became associated with state intervention. Wikipedia, in its third paragraph on ‘Keynesian economics’, says: “Keynesian economics advocates a mixed economy – predominantly private sector, but with a significant role of government and public sector...”.

The New Classical counter-revolution failed in one respect. While Keynesian analysis may have suffered a near-death experience, it survived and subsequently prospered. New Classical critiques led to fundamental and largely progressive changes. Yet, for many reasons including ideological ones, the would-be counter-revolutionaries did not want to give up their counter-revolution. Partly as a result, the degree to which New Keynesian theory was taught to graduate students differed widely among academic departments, at least in the US.

So, perhaps unlike the first (postwar) neoclassical synthesis, the New Neoclassical Synthesis was partial in terms of its coverage among academics. This incompleteness was not apparent during the Great Moderation, because in central banks the synthesis was uncontested. The fault lines only became evident when monetary policy became relatively impotent at the zero bound after the Great Recession, and fiscal stimulus was used both in the US and UK. Once that happened, what might be called the Anti-Keynesian school re-emerged.

Using this account, it is perhaps possible to view the current emergence of schools of thought as a historical aberration. The microfoundation of macroeconomics would seem to imply that mainstream macro should be as free from fragmentation into schools as microeconomics. As it becomes clear that the New Classical counter-revolution was not successful, the New Neoclassical Synthesis may yet become complete. (For an argument along these lines, see Economist 2012) After all, New Keynesian models are essentially real business cycle models plus sticky prices, and the addition of price rigidity seems both empirically plausible and inoffensive in itself. Both sides could agree that for economies with a floating exchange-rate monetary policy is the stabilisation tool of choice, with fiscal policy only being used if monetary policy is constrained (Kirsanova et al 2009). When interest rates are stuck at the zero lower bound, synthesis models clearly show fiscal policy can be highly effective at stimulating output (Woodford 2011). What has been called ‘demand denial’ appears not to make academic sense, particularly at a zero lower bound (Wren-Lewis 2011).

This outcome may, however, represent wishful thinking by New Keynesians. An alternative reading is that the Keynesian/Anti-Keynesian division is always going to be with us, because it reflects an ideological divide about state intervention. That divide occurs all the time in microeconomics, but because it involves arguing about many different externalities or imperfections it does not lend itself to fragmentation into schools. In macro, however, there is one critical externality to do with price rigidity, and so disagreements about policy can easily be mapped into differences about theory. Demand denial is attractive because it gives a non-ideological justification for what is essentially an ideological position about economic policy. Unfortunately, there is a danger that dividing mainstream analysis this way makes macroeconomics look more like a belief system than a science.

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What drives sophistication of production and exports?

Anand, Mishra and Spatafora argue that “an educated workforce, external liberalization, and good information flows are important prerequisites for developing sophisticated goods and services”. The sad part is that the low income countries have been unable to enhance sophistication of manufactured and service exports, which would act as a “catalyst for broad-based economic growth”. The authors not only look at production and export of goods, but also services.

The whole concept of computing export sophistication comes from the idea that what a country produces and exports matters for growth and as countries become richer, they move to producing and exporting more sophisticated goods. The impact (knowledge spillovers, backward and forward linkages, and those that offer easier transition from production of one product to another) of production and exports of some products is greater than others. Sophistication comes from either increasing the quality of currently produced goods or from a move into new and more sophisticated products. It induces structural transformation. [Sophistication is measured based on whether the products exported by any given country are those typically exported by high-income or low-income economies.]

Three main points to take home from the paper:

• LICs and SSAs export basket consist of high share of natural resources and relatively low share of manufactures. They have moved production and exports into very few new products. Also, though services have become an important part of trade, they have failed to capitalize on the growth as other countries have done.
• Sophisticated exports (of both manufacturing and services) bring broad based growth if the economy is liberalized, the exchange is not over-valued, and there are goods information flows.
• An educated workforce, external liberalization, and good information flows are vital for development of sophisticated exports of goods and services. Interestingly, for sophistication of goods, the impact of tertiary education was not statistically significant. For sophistication of services, all measures of schooling were significant. If developing economies raised total years of schooling or external liberalization to the level observed in advanced economies, the gap in the sophistication of goods exports between advanced and developing economies would shrink by, respectively, 15 percent and 8 percent. Furthermore, if developing economies raised tertiary schooling or information flows to the level observed in advanced economies, the gap in the sophistication of service exports between advanced and developing economies would shrink by, respectively, 42 and 53 percent.

The composition of Indian service export basket, and its sophistication, was similar to other countries at its income level in the early 1990s. But, it began changing after 2000 and the share of computer information services grew from 0 to 51 percent of total export basket by 2009. India is seeing a shift from traditional to modern activities (business and computer services) in its composition of service exports.

The study finds that a one standard deviation increase in the sophistication of goods or services is associated with a, respectively, 0.6 or 0.4 percentage points increase in the average annual growth rate. Or, if developing countries were to increase the sophistication of their goods or services to the levels observed in advanced economies, their per capita growth rate would increase by, respectively, 1.1 or 0.5 percentage points. The initial export sophistication of both goods and services is associated with subsequent output growth, even after controlling for financial development, human capital, and external liberalization.

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In the figures above, see Nepal’s and India’s position. On services sophistication, Nepal’s existing state is miserable. Meanwhile, India has top-notch services sophistication. In goods sophistication as well, Nepal has a low value.

1.29 billion people below US$1.25 a day in 2008

The latest update by the WB shows that an estimated 1.29 billion people in 2008 lived below $1.25 a day (2005 PPP), equivalent to 22 percent of the population of the developing world. In 1981, 1.94 billion people were living in extreme poverty.

But, at the current rate of progress there will still be around 1 billion people living below $1.25 per day in 2015. Additionally, the number of people living between $1.25 and $2 has almost doubled from 648 million to 1.18 billion between 1981 and 2008.

The $1.25 poverty line is the average for the world’s poorest 10 to 20 countries. A higher line of $2 a day (the median poverty line for developing countries) reveals that there was only a modest drop in the number of people living below $2 per day between 1981 and 2008, from 2.59 billion to 2.47 billion, though falling more sharply since 1999.

It argues that though food, fuel and financial crises over the past four years slowed the rate of poverty reduction in some countries, global poverty kept falling. According to the WB, preliminary survey-based estimates for 2010—based on a smaller sample size than in the global update—indicate that the $1.25 a day poverty rate had fallen to under half of its 1990 value by 2010. It means that the first Millennium Development Goal of halving extreme poverty from its 1990 level has been achieved before the 2015 deadline. However, only three regions have reached MDG1 using $1.25 a day line, namely East Asia, Eastern Europe and Central Asia, and the Middle East and North Africa.

In South Asia, the $1.25 a day poverty rate fell from 61 percent to 39 percent between 1981 and 2005 and fell a further 3 percentage points between 2005 and 2008. The proportion of the population living in extreme poverty is now the lowest since 1981. In 2008, there were 571 million people below the $1.25 a day (2005 PPP) poverty line in South Asia. For Nepal, the estimate is based on NLSS II (2003/04). We will have to wait for estimate based on NLSS III (2010/11).

South Asia	$1.25 a day (2005 PPP)		$2 a day (2005 PPP)
Year	% of population	Number (million)	% of population	Number (million)
1981	61.1	568.4	87.2	810.6
1984	57.4	573.8	85.6	854.8
1987	55.3	593	84.5	905.9
1990	53.8	617.3	83.6	958.8
1993	51.7	631.9	82.7	1010.4
1996	48.6	630.8	80.7	1047.3
1999	45.1	619.5	77.8	1068.8
2002	44.3	640.5	77.4	1119.7
2005	39.4	598.3	73.4	1113.1
2008	36	570.9	70.9	1124.6

Looking back to the early 1980s, East Asia was the region with the highest incidence of poverty in the world, with 77% living below $1.25 a day in 1981. By 2008 this had fallen to 14%. In China alone, 662 million fewer people living in poverty by the $1.25 standard, though progress in China has been uneven over time. In 2008, 13% (173 million people) of
China’s population still lived below $1.25 a day.

In the developing world outside China, the $1.25 poverty rate has fallen from 41% to 25% over 1981-2008, though not enough to bring down the total number of poor, which was around 1.1 billion in both 1981 and 2008, although rising in the 1980s and ‘90s, then falling since 1999.

The report notes that the number of poor declined between 2005 and 2008. But, let us also note that there was a net increase in poverty to the tune of 44 million people, who fell below the extreme poverty line due to the impact of food price changes between June and December 2010 in twenty-eight low and middle income countries.

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UPDATE (2012-03-09): Looks like the country level data with latest survey year is also available. For Nepal, its NLSS III (see this updated one as well). Check it out here.For Nepal, the poverty headcount at $1.25 a day (PPP) was 24.8% in 2010 [7.4 million people] and 53.1% in 2003 [13.9 million people]. It was 68% in 1995 [14.7 million people]. See this blog post.

Where is the danger of political polarization and extremism greater?

It is greatest in countries with:

• relatively recent histories of democracy,
• existing right-wing extremist parties, and
• electoral systems that create low hurdles to parliamentary representation of new parties.

But, the greatest threat is when depressed economic conditions are allowed to persist. Read more here.

Creeping prices: What determines food and nonfood prices in Nepal?

[It is published in today’s Republica, p.6].

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Creeping prices

In the mid-term review of monetary policy, the central bank argued that inflation, which is a measure of the increase in general prices of goods and services over a period of time, target of 7 percent for this fiscal year won’t be met. Instead, it stated that inflation will be around 8 percent. Unsurprisingly, it is not the first time inflation target has been revised upward. The dynamics of the causes of price fluctuations in the economy has discombobulated Nepalese experts and policymakers for a long time. Given the unique yet evolving market integration between Nepal and India, the ineffectiveness of monetary tools to tame rising prices, and the increasing influence of oil prices on general price level, tackling inflation in Nepal would require both policy tools as well as earnest political commitment to correct market distortions.

Generally, inflation is determined by money supply in long term. In short term, it is determined by demand and supply pressures, which are in turn affected by the relative elasticity of wages, prices and interest rates. In Nepal’s case, monetary tools such as increase in interest rates and decrease in money supply have not been used specifically to control inflation because there is hardly any correlation between M2—a broad measure of money supply and a key indicator used to forecast inflation—and prices of goods and services. Instead, our prices have historically been following the prices in the Indian economy, thanks to the pegged exchange rate and free flow of goods and services across the open border. Furthermore, policy interventions (mostly fiscal tools such as taxes and expenditure) have been more or less consistent with changes in the Indian economy. Interestingly, this link has been weakening following the global food, commodities and fuel prices hike after 2007 for two main reasons: increasing imports of petroleum products and domestic market distortions. Policy makers preparing firepower to tame rising prices should take note of these evolving changes.

A recent study by the IMF economists showed that almost a third of the variability in domestic inflation can be attributed to the prices in India and movements of international oil prices. While food price increases contributed to about three-fourths of overall rise in price level, monetary factors mattered more for nonfood price inflation than for food price inflation. It indicates rampant domestic food market distortions and rise in domestic financing for imported durables. Overall, food prices have been more volatile than nonfood prices in the economy. The study found that the responsiveness of food price inflation was significant and quick to spillovers from India’s food prices and the global oil price fluctuations before 2007. However, after 2007 the impact of fluctuating oil prices is more persistent than the spillovers of food prices prevalent in the Indian economy. Even though petroleum prices do not change readily in our economy as they do in the international market, the price fluctuations are seen directly and indirectly in the cost of imported inputs (and final products) used by agricultural, industrial and service sectors.

These findings are not in line with an earlier held belief and research finding (including a 2007 study of similar nature by Edimon Ginting of the IMF) that inflation in India and inflation in Nepal tend to converge and the pass through of inflation from India to Nepal takes about seven months. With the changing composition of imports from India and the large share of petroleum products in import basket, this has been changing since 2007, thanks to increasing demand for fuel to power machines, generators and vehicles. Currently, the pass through time of food and nonfood prices from India to Nepal has shortened and international oil prices have greater impact than what it was thought to have before.

It is not that the prices are entirely determined by external factors. Domestic supply-side factors also matter, particularly market distortions. Note that when global food prices spiked in 2007 and 2010, being a net food importing country, domestic food prices also went up. But, when global food prices moderated, domestic prices did not normalize accordingly. Why did prices remain stubbornly sticky at high level? Well, it is because of supply-side factors such as strikes, hoarding, black marketeering, deliberate withholding of supplies and inventory, distortion of agriculture prices by middlemen, and agricultural trade hurdles imposed by our neighbors, among other factors. These have increased uncertainty and expectation of future rise in input cost. The inflationary expectation arising from the uncertainty over supply of fuel and cooking gas, its rising prices at global level, and supply-side constraints have primarily contributed to the series of food and nonfood price hikes in recent months. That said, prices are also pushed up by demand factors, especially consumption demand fuelled by high remittance inflows. However, consumption has been high (around 92 percent of GDP) for a long time, so it does not justify the stubbornly high and sticky prices.

The changing pattern of the impact of oil prices, inflation in India and the uncertainty over supply conditions have important policy implications. First, the policymakers need to factor in the volatile oil prices when they estimate targets for inflation rate as domestic prices are deviating from the prices in the Indian market. Second, monetary tools have little traction on inflation and inflationary expectation in the short term. Fiscal tools such as lowering levies on petroleum products and subsidizing inputs might help to moderate prices. However, these too have drawbacks as they tend to widen budget deficit, and confound policymakers in managing the tradeoff between taming high prices and maintaining fiscal space. Third, resolving supply-side constraints seems to be the most promising, yet most difficult, intervention to lower rising prices. Promising because it will correct markets and link production with demand, but difficult because it requires more political than policy action. Fourth, prices will continue to remain volatile and high unless the government reduces load-shedding hours and matches power generation with power demand. Else, people will continue to demand more fuel each year, which means more shortages as the government cannot procure enough of it because of its inability to supply adequate funds to NOC without a substantial increase in revenue generation and reduction in allotted expenditure for other sectors. Note that the import of petroleum products increased by around 50 percent last year and the total earning from merchandise export was Rs 10 billion short of the total value of petroleum import.

The evolving factors that are pushing food and nonfood prices up have to be well comprehended to better design macro policies aimed at reducing high inflation, which is eroding real purchasing power of people. Along with the prices in the Indian economy, international oil prices, and domestic supply-side constraints (including market distortions) are having strong bearing on inflation in Nepal. To bring down inflation back to the desired level, effective monetary and fiscal policies have to be formulated and enacted by considering these factors.

[Published in Republica, February 28, 2012, p.6]

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