Food weight in overall CPI in Nepal

The weight of food in CPI is 42 percent in Nepal, which means higher food prices would affect food security and exert upward pressure on inflation. The NRB figures show that food and beverage has 46.82 percent weight in CPI in fiscal year 2010/11.The NLSS III shows that 61.5 percent of household budget is spent on food (up from 59 percent in 2003/04).  Controlling food prices and ensuring food security is good for overall CPI and development. Now, what is the government doing about it?

The table below shows comparable food weights in CPI figures.

Food Weights in CPI (%)
Afghanistan	61
Bangladesh	58.8
Bhutan	31.7
India	46.2
Maldives	33.3
Nepal	42
Pakistan	40.3
Sri Lanka	45.5

Bangladesh has the highest food weight in CPI (Bhutan has the lowest) in the region. Here is the source (see Table 8, p.19).

Changing narrative of poverty and globalization in Nepal

[It was published in Republica, March 18, 2012, p.6]

---

Changing narrative

There is a tendency among development agencies and analysts to repeat same arguments regarding the state of Nepal’s development and capitalize on them to secure funding for projects. The government also goes along with similar reasoning to keep alive the stream of aid, which amounts to about one-fourth of our fiscal budget. With the evolving political and economic landscapes, the narratives are changing gradually, especially of those related to the state of poverty and globalization. The concerned stakeholders will better serve the development needs of this nation if they reconsider how they are selling arguments and development narratives henceforth.

For a long time Nepal has been projected as a country with too many poor people. The widely used benchmark for comparative poverty analysis is World Bank’s US $1.25 a day poverty line. Previously, its estimate showed that almost 53 percent of the population lived below this poverty line. The development agencies and even the government used this number to amplify results to get more funds for poverty alleviation. In order to score their point, they conveniently forgot the lower poverty estimate (30.8 percent) computed by the Central Bureau of Statistics (CBS) based on our own national poverty line. This has to change now.

The latest national poverty estimate based on the National Living Standard Survey 2010/11 (NLSS III) shows that 25.2 percent of the population lived below the absolute poverty line. Similarly, the latest US$1.25 a day poverty estimate based on data from NLSS III reveals that about 24.82 percent of the population is living below the globally comparable absolute poverty line. Furthermore, the Gini index—a popular measure of inequality—has declined from 43.83 in 2003 to 32.82 in 2010, according to WB estimates. The CBS estimated Gini index at 41.4 and 32.94 in 2003/04 and 2010/2011 respectively. Meanwhile, income or consumption of those in the middle of income deciles (i.e. middle class) has also increased remarkably.

With the latest globally comparable poverty and inequality figures, Nepal can no more be projected as the nation with extremely high share of absolute poor and increasing inequality. In fact, if we look at comparable figures, Bangladesh and India have more proportion of people below US $1.25 a day poverty line than Nepal has. Similarly, Nepal has lower income inequality than some countries in South Asia.

So, what changed? Did increased funding and development interventions work their magic when growth rate was subdued to under 4 percent? Well, the remarkable feat in reducing poverty level has more to do with the bump in household income due to rising remittance inflows than government’s or donor’s development-related interventions. In fact, the remitters did in six years what the government and development agencies could not do for decades. Of course, development interventions such as construction of rural road, improvement in agriculture production, and other interventions related to the achievement of MDGs helped, but these were effectively dwarfed by the contribution of remittances in directly increasing household purchasing power, and reducing poverty and inequality.

Between 2003/04 and 2010/11, nominal average household income and nominal average per capita income increased by 153 percent and 175 percent respectively. Furthermore, nominal per capita consumption of the poorest households increased by 165 percent while that of richest households increased by 66 percent only. Also, average household income of the poorest and richest 20 percent households increased by 297 percent and 133 percent respectively. These large bumps would have been impossible without significant remittance inflows, especially after 2000. According to the WB’s and CBS’s estimate, remittance inflows increased by 327 percent and 547 percent respectively between 2004 and 2010. With the phenomenal progress seen in these numbers, next time someone tries to score points by projecting Nepal as one of the most miserable countries riddled with desperately poor people, it would not be wholly incorrect to be a skeptic. That said, in terms of income per capita, which is different from the share of people below the poverty line, Nepal is still the second poorest (at US $644) in South Asia.

Another aspect where the prevailing narrative has to change is the one concerning the state of Nepal’s globalization. Generally, trade as a share of GDP is widely used to get a sense of the extent of globalization of a country. Using this barometer, Nepal has been projected as the most open and globalized country in South Asia (with trade to GDP ratio of about 53). However, globalization is not only about the degree of trade flows in and out of a country. It also incorporates a host of other social and political dimensions. The latest KOF Index of Globalization, which is published by KOF Swiss Economic Institute, comes handy while analyzing the economic, social and political dimensions of globalization.

The economic dimension (which has 36 percent weight on the overall KOF index) measures actual trade and investment volume as well as trade restrictions imposed by countries. Furthermore, the social dimension (38 percent weight on overall index) shows the extent of the dissemination of information via various modes, and the political dimension (26 percent weight on overall index) shows the degree of political cooperation computed by considering factors such as the number of embassies, membership in international organizations, participation in UN Security Council Missions and international treaties.

Contrary to popular belief that Nepal is one of the most open (or globalized) economies in South Asia, the KOF index of the latest year available shows that Nepal is actually the third least globalized country, followed by Afghanistan and Bhutan, in the region. Sri Lanka, followed by Pakistan, India, Maldives and Bangladesh, has the highest index value in South Asia. While Belgium and Austria are the two most globalized countries in the world, Nepal ranked 163rd out of 186 countries. Looking further into the three broad measures that are used to compute the overall KOF index, it appears that, in South Asia, Nepal has the least value in economic globalization, third least value in social globalization, and fourth least value in political globalization. The message coming out of this updated measure of globalization, which goes beyond the usual measure of openness based on trade as a share of GDP, is that Nepal cannot be portrayed simply as the most open economy in the region.

A study based on the globalization index shows that the actual economic flows and restrictions in developed countries are most strongly related to economic growth. In the meantime, while information flows are slightly less strongly related to growth, political integration has no effect. What does this mean for Nepal? Well, we have to work more on greater integration in order to have a sizable globalization-induced growth. Specifically, we have to boost actual trade and investment flows and address the factors that are hindering supply capacities, especially those related to infrastructure, strikes, labor disputes, and research and development.

With changing economic and political landscapes, the long held views about the extent of poverty and globalization in Nepal should also change. While Nepal is no more a country with the highest share of poor people below the poverty line, it still has one of the lowest per capita incomes in the region. Meanwhile, it is not the most open economy in South Asia and the potential to reap benefits from increasing degree of globalization is limited by supply-side constraints.

[Published in Republica, March 18, 2012, p.6. In the article I have mentioned income inequality (Gini index). It should have been Gini coefficient based on expenditure. Thanks to Purna Man for pointing that out.]

---

Roads and apples in Mustang

Here is how road connectivity spurs local economy and production in rural areas. We have comparative advantage in the production of apples from Mustang. In fact, we have monopoly on it and producers could rake in supernormal profits as the willingness of consumers to pay relatively high prices for apples produced in Mustang is high.

---

Although Mustang´s apple had carved a niche for itself in the domestic and international markets a long ago, unavailability of road network meant many farmers saw their produce go wasted unable to find market. As a result many farmers simply lost interest.

But after construction of the road in the district couple of years ago more and more farmers have started adopting apple farming as a profession once again and more land in the northwestern district is being converted into apple farms. This year alone farmers grew apple in 255 hectares of land. These farmers can earn up to Rs 1.5 million per year by selling their produce. “Traders arrive at our doorstep to collect the produce and we have no problem marketing them,” said Indra Bahadur Tulachan, a farmer from Tukuche.

According to the Mustang Agriculture Office, people who stopped apples farming because of difficulties in transportation have once again started growing apples. As more people returned to apple farming, the district faced a shortage of apple sapling this year. The demand for saplings hovers at around 20,000 units per year. However, the demand went up by around four folds this year. “To fulfill the demand we had to get the saplings from Jumla,” Meghnath Timilsina, senior official of the Mustang Agriculture Office, said.

As income from the apple business tops hundreds of thousands of rupees each year, farmers have now started running group apple farms in the district. To attract more people toward apple farming, the district agriculture office has also started providing subsidy on apple saplings, packaging and transport of apples. The office also conducts free training sessions to acquaint farmers with various technical aspects of apple farming.

Currently, around 2,000 farmers are involved in apple farming in the district.

---

Nepal doesn’t have the highest proportion of poor people in South Asia

So says the latest poverty estimates released by the World Bank. For the  curious minds, here is a previous post that compares US$1.25 a day of the WB and national poverty line of CBS.

The chart below shows comparable data of South Asian countries in 2008. In South Asia, Bangladesh had the highest proportion (46.62%) of people living below US$1.25 a day, followed by India (37.37% in aggregate) and Nepal (33.9%). The Maldives has the lowest figure.

Now, if you look at the latest available data, then the figures are:

• Bangladesh: 38% in 2010
• Bhutan: 10.22% in 2007
• Rural India: 34.28% in 2010
• Urban India: 28.93% 2010
• Maldives: 1.48% in 2004
• Nepal: 24.82% in 2010
• Pakistan: 21.04% in 2007
• Sri Lanka: 7.04% in 2006

The chart below compares the CBS’s and WB’s data. In poverty estimate for the latest year, there isn’t much difference in the two estimates.

Extractive political and economic institutions are the reasons why Nepal is poor

So say Daron Acemoglu and James Robinson. The interesting question now is that if extractive political institutions are breeding extractive economic institutions, which is slowing down the country’s march on the path to prosperity, then how does this justify the recent rise in purchasing power of the poor and the decline in equality? How could this happen with such a subdued growth rate? Is growth a sufficient condition for poverty alleviation? Where do remittances fit in all these extractive processes?

Anyway, the thesis that extractive political institutions are hindering growth holds much water because it is precisely due to the lack of political will and the myopic, selfish vision of political leaders that the country is in this miserable state. They extracted the resources to the last bit and tried to create institutions to institutionalize the extraction processes. See this in the hiring and transfers of civil servants, bureaucracy, real estate and housing, agriculture and industrial sectors, education and health sectors, sports, the relationship between politicians, businessmen and goons, and so forth. Despite the talk of inclusive political and economic institutions, they are not implemented in reality. You have reservation quotas and promotion policies in the name of inclusiveness, but all these are snatched by the cronies of political parties and the elites. In Nepal, you have extractive institutions hiding behind the veil of inclusive institutions, which are institutionalizing extractive processes for the benefit of a few and at the cost of many.

Anyway, below is the entire blog post copied from their blog:

---

Caste and Coercion

DARON ACEMOGLU AND JAMES ROBINSON

Slavery in Nepal was abolished only in 1921. Corvée, forced labor, was made illegal in 1952, but survived. It was only in 2000 that various sorts of coerced and bonded labor finally disappeared.

As late as the early 1990s in the Western parts of Terai, the lowland forest area of Nepal which borders India, many rural people were forced to work 30 to 35 days a year in unpaid labor services. The most important institution in this region was that of Kamaiya labor. Kamaiya was a particular type of servile labor relation where superficially workers and landlords freely entered into contractual relations during the festival of Maghesakranti (first day of the Magha month of the Nepali calendar), which starts on January 14. In practice, the majority of the workers were in debt to various masters, and debts are passed between generations with landlords buying and selling Kamaiya, a situation akin to chattel slavery. In 1992 a government report estimated that there were still about 20,000 Kamaiya households, possibly 116,000 adults and children. The report found that on the average, a Kamaiya worked about 13 hours a day and a male adult worker might receive a daily income of only around 11 Rupees, about 14 US cents. Using the legal minimum wage of 60 rupees for eight-hour work per day, such a worker ought to be getting 102 Rupees for the 13-hour work, about US$1.29, not exactly a fortune but better than 14 cents. Other research by the International Labour Organization using data from Banke district suggests much longer work hours, with a working day for men of as much as 17 hours a day during the heyday of the Kamaiya system.

Figure: Time Use for Bonded Male Laborer

Source: Bhadra, Chandra (2006) “Gender Dynamics in Bonded Labour in Nepal,” International Labour Organization.

All these bonded laborers had something else in common, they were all either Dalits (‘untouchables’) or Janajatis which is a collective term for people speaking Tibetan-Burmese languages such as Magars, Gurungs, Tamangs and Sherpas.  Right up to the present day Nepal has been dominated by high caste elites, known as the Parbatiyas, made up of the Brahmin and Chettri castes. Brahmins and Chettris comprise only 28% of the population according to the 2001 census, but they are massively overrepresented in politics (e.g., as ministers, members of parliament and leaders of political parties), the legal profession, the civil service, and professional fields. Dalits and Janajatis, though they make up 45% of the population, have historically had more or less no representation in any of the areas. The caste system is a rigid form of occupational segregation, handed down from parents to children and severely blocks the opportunities and life chances of those at the bottom of the hierarchy. A society with a caste system wastes a vast amount of its economic potential.Right up to the present day much of the economy of Nepal has been based on labor coercion, repression and exclusion – that is, on highly extractive economic institutions.

And you guessed it: Nepal is a very very poor country, with per capita income only about 40th of the US.

---

India’s GDP growth rate in 2011-12 estimated at 6.9% (7.6% in 2012-13 & 8.6% in 2013-14)

The latest Economic Survey 2011/12 released by India’s Ministry of Finance states that GDP growth rate for 2011/12 is estimated at 6.9% (factor cost at 2004-05 prices). The Indian economy is expected to growth at 7.6% in 2012-13 and 8.6% in 2013-14. The main reason for a gradual recovery in the next two years is due to the expected decline in overall investment rate. These projections are based on assumptions regarding factors like normal monsoons, reasonably stable international prices, particularly oil prices, and global growth somewhere between where it now stands and 0.5% higher.

The major highlights of state of Indian economy in fiscal year 2011/12 are as follows:

• Gross capital formation during the third quarter of 2011-12 as a ratio of GDP was at 30%, down from 32% a year ago.
• Agriculture and allied sectors are estimated to achieve a growth rate of 2.5% in 2011-12 with food grains production likely to cross 250.42 million tonnes owing to increase in the production of rice in some States.
• The industrial sector has performed poorly, retreating to a 27% share of the GDP.
• The services sector continues to be a star performer as its share in GDP has climbed from 58% in 2010-11 to 59% in 2011-12 with a growth rate of 9.4%.
• Industrial growth pegged at 4-5 percent, expected to improve as economic recovery resumes.
• Inflation on WPI was high but showed clear slow down by the year-end.
• WPI food inflation dropped from 20.2% in February 2010 to 1.6% in January 2012. Calibrated steps initiated to rein-in inflation on top priority.
• India remains among the fastest growing economies of the world. Country’s sovereign credit rating rose by a substantial 2.98 percent in 2007-12.
• Fiscal consolidation on track - savings & capital formation expected to rise.
• During the first half of 2011-12, India’s export growth was at 40.5%, but it has been decelerating since. Imports have growth rapidly, by 30.4% during 2011-12 (April-December).
• The current account deficit (CAD) has widened to $32.8 billion in the first half of 2011-12, compared to $29.6 billion during the corresponding period of 2010-11.
• The foreign exchange reserves increased from US$279 billion at end March 2010 to US$305 billion at end March 2011. Reserves varied from an all-time peak of US$322.2 billion at end August, 2011 and a low of US$292.8 billion at end-January, 2012. It covered nearly the entire external debt stock.
• In 2010-11, the CAD of US$ 45.9 billion was financed by the capital account surplus of US$ 62.0 billion and it resulted in accretion to foreign exchange reserves to the tune of US$ 13.1 billion (US$ 13.4 billion in 2009-10).
• Central spending on social services goes up to 18.5% this fiscal from 13.4% in 2006-07.
• MNREGA coverage increases to 5.49 crore households in 2010-11.
• Sustainable development and climate change concerns on high priority.

Countries offering Preferential Trade Arrangements (PTA) to Nepal

Here is a chart that shows twelve countries and one economic bloc offering PTAs to Nepal. They are Australia, Canada, EU, Iceland, Japan, New Zealand, Norway, Switzerland, Turkey and the US (offering GSP facility); and China, Chinese Taipei and Republic of Korea (offering LDC-specific PTA facilities).

Don’t confuse PTAs with RTAs. Nepal is signatory to three RTAs (India-Nepal, SAFTA, SAPTA; BIMSTEC is yet to come into force). Here is a brief trade profile of Nepal.