MGNREGA: Self-targeting, food prices, poverty, local capacity and jobs

Summary of latest papers on MGNREGA’s self-targeting ability, impact of food prices on poverty vis-à-vis income effect, capacity of local authorities to create enough jobs and workers’ incentives to take up MGNREGA jobs.

Jha, Bhattacharyya, Gaiha, & Shankar (2009) find that overall the size of landholdings is a negative predictor of participation in MGNREGA. A one standard deviation increase in landholdings (4.5 hectares) reduces the odds of MGNREGA participation by 1.3 fold (p.6). Specifically, they find a positive relation between size of landholdings and participation in Andhra Pradesh, and but the case is opposite in Rajasthan. They argue that program capture might be prevalent in Andhra Pradesh because of land inequality, political interference, and geographical remoteness.

Jha, Gaiha, & Pandey (2010) argue that the ratio of NREGS wage to agriculture wage, marital status, age, gender, and education determines employment in the rural employment guarantee program. Their conclusion is based on household level survey data from three states: Rajasthan, Andhra Pradesh, and Maharashtra.

• While it is broadly true that the selection of workers for NREGS favors illiterate workers and those from deprived backgrounds, female workers appear to have a lower chance of being selected. In two of the three states, the ratio of NREGS wage to agricultural wage has significant effects. Marital status and age also affect the chances of getting employment in NREGS. Within each state, workers in some districts have higher chances of being employed in NREGS.
• Once employed in NREGS, the duration of such employment is affected by social background or educational status. Factors relevant for selection for NREGS are not necessarily so for the duration of employment.

Ghose (2011) finds that MGNREGS, despite problems in implementation, has succeeded in providing substantial additional wage employment to the rural poor at a wage no lower than what prevails. It has thereby increased money incomes for this group of workers quite significantly. Yet, the program has not made a significant contribution to reduction of rural poverty. The reason is food price inflation to which the program has ended up contributing. While the MGNREGS increased the demand for food, this was not met by an increase in the supply of food in the short run. Ghose finds that the increase in wage income of rural households attributable to MGNREGA was 22.2 percent in 2009-10, up from 7.4 percent in 2006-07 (p.5).

In a case study of Birghum district in West Bengal, Mukherjee & Ghosh (2009) find:

• High inter-block variations in terms of average person-days created and utilization of NREGA funds. The blocks which have performed better also show significant variation across the Gram Panchayats within the block. There seems to be no clear relation between utilization of available funds and average person-days created either at the GP level or at the block level.
• The weak correlation observed between number of households with job card and availability of NREGA funds at the GP level suggests that GPs are not able to come up with adequate number of NREGA schemes to absorb the laborers demanding employment.
• There is also no evidence of NREGA getting better implemented in blocks with higher share of agricultural laborers or higher percentage of BPL households, which one would expect. Rather, blocks with higher share of BPL households show lower average person-days created under NREGA.
• Lack of technical skills and human resource seem to be the major reasons why the GPs are not able to develop adequate number of schemes under NREGA.
• Though NREGA allows scope for creating various types of durable productive assets at the community level (such as roads, improving rural infrastructure, drought-proofing, watershed development, water conservation etc), focus has remained on types of works which are easy to design (such as road construction and pond excavation).
• The GPs lack the capacity to design adequate number of schemes under NREGA which can be meaningfully linked with the livelihood and infrastructural development of the local economy. Therefore, greater efforts should be given for the capacity building of the GPs, especially the backward GPs.

Dutta, Murgai, Ravallion, & van de Walle (2012) argue that poorer families tend to have more demand for work on the scheme, and that (despite the un-met demand) the self-targeting mechanism allows it to reach relatively poor families and backward castes.

• Participation rates on the scheme are higher for poor people than others.
• Targeting performance varies across states. Some of those living above the official poverty line in better-off states will no doubt be relatively poor, and need help from the scheme. The overall participation rate seems to be an important factor in accounting for these inter-state differences in targeting performance, with the scheme being more pro-poor and reaching scheduled tribes and backward castes more effectively in states with higher overall participation rates.
• While the scheme is clearly popular with women—who have a participation rate that is double their participation rate in the casual labor market—the rationing process does not appear to be favoring them. We also find evidence of a strong effect of relative wages on women‘s participation—both wages on the scheme relative to the market wage and the male-female differential in market wages. As one would expect, poor families often choose whether it is the man or the woman who goes to the scheme according to relative wages.
• For India as a whole, we find that the scheme‘s average wage rate was roughly in line with the casual labor market in 2009/10. This might look like competitive labor market equilibrium, but that view is hard to reconcile with the extensive rationing we find. Interestingly, we do find a significant negative correlation between the extent of rationing and the wage rate in the casual labor market relative to the wage rate on the scheme. Although this is suggestive, on closer inspection we are more inclined to think that other economic factors are at work. Indeed, the correlation largely vanishes when we control for the level of poverty. Poorer states tend to see both more rationing of work on the scheme and lower casual wages—possibly due to a greater supply of labor given the extent of rural landlessness.

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References:

Dutta, P., Murgai, R., Ravallion, M., & van de Walle, D. (2012). Does India's Employment Guarantee Scheme Guarantee Employment? World Bank Policy Research Working Paper 6003, 1-34.

Ghose, A. K. (2011). Addressing the Employment Challenge: India's MGNREGA. ILO Employment Working Paper No. 105, 1-40.

Jha, R., Bhattacharyya, S., Gaiha, R., & Shankar, S. (2009). Capture of Anti-Poverty Programs: An Analysis of the National Rural Employment Guarantee Program in India. Journal of Asian Economics 20(4), 456-464.

Jha, R., Gaiha, R., & Pandey, M. K. (2010). Determinants of Employment in India’s National Rural Employment Guarantee Scheme. ASARC Working Paper 2010/17, 1-34.

Mukherjee, S., & Ghosh, S. (2009). What Determines the Success and Failure of 100 Days Work at the Panchayat Level? A Study of Birbhum District in West Bengal. IDSK Occasional Paper 16, 1-19.

Employment Guarantee Act in Nepal

[It was published in Republica, May 16, 2012, p.8.]

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Work on it

While a cycle of political deadlock, hope and uncertainty continue to plague political sphere, Prime Minister Dr.Baburam Bhattarai’s government quietly approved an Employment Guarantee Act (EGA) and sent it to the parliament for endorsement. The EGA, modeled along India’s Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), will guarantee jobs to households below poverty line (BPL). If endorsed by the parliament and implemented from next fiscal year, this demand-driven scheme —originally drafted by National Planning Commission (NPC)— will help in reducing unemployment and under-employment, which is estimated to be around 46 percent of population, reduce distress migration from rural to urban areas, boost agriculture productivity, and enhance livelihood opportunities. Unfortunately, this hugely consequential public works program is not adequately discussed and consulted with relevant stakeholders.

The EGA guarantees 100 days of employment per year to one adult member of BPL households. Apart from providing jobs, the scheme seeks to create infrastructure that would help in boosting productivity and livelihood opportunities. According to NPC officials jobs will be provided in work related to construction, infrastructure, industries and other development projects. If the government is unable to provide jobs within a stipulated deadline to those who are eligible and demand one, then it will have to pay unemployment allowance equivalent to around 50 to 60 percent of minimum wage. It will have grievance redressal mechanism set up at grassroots level. In an economy with 83 percent of the population still living in rural areas, time-tested and successful public works program like employment guarantee will be a vital policy tool for social protection. That being said, without proper planning, monitoring and executive agencies at grassroots level, there is also a danger that the scheme could be a huge fiscal burden and a major instrument for elite capture, i.e. wealthy and those in power capture funds and works meant for the needy and poor.

In India, MGNREGA came into force on February 2, 2006 with an aim to directly touch the lives of the poor and promote inclusive growth. This flagship rural employment scheme of the Congress government is credited for partly helping the party get an astounding electoral victory in 2005. MGNREGA is an extension of Employment Guarantee Scheme (EGS) implemented in Maharashtra in 1979 in response to debilitating impact of famine and drought on poor households. The scheme guarantees employment within 15 days if a qualified person submits employment application at a local administrative authority. The wage rate is equal to the unskilled agriculture labor wage, which is now adjusted for inflation as well. Currently, the MGNREGA wage is highest in Haryana (IRs 191 per day) and lowest in Bihar and Jharkhand (IRs 122 per day). The average wage across all states and union territories is IRs 145 per day for seven hours of manual unskilled work. The work has to be provided within 5 km radius of the village a person is residing or else extra wage of 10 percent is payable. Moreover, working and living facilities (safe drinking water, shade for children and periods of rest for workers, first-aid box for emergency treatment and minor injuries, and safety equipment and measures for health hazards connected with work) have to be provided. At least one-third of the work is reserved for women and the while designing work by the Gram Panchayats 60:40 wage to material ratio has to be maintained. The permissible work is related to water management, land management and rural connectivity in and around the areas where the workers reside.

The program is running into its sixth year of operation and its assessment thus far has largely been positive. In its first year, the program was implemented in the 200 most backward districts. The next year it covered an additional 130 districts and now it covers all districts of India. In 2010/11, it provided employment to 55 million households and of the 2.6 billion persons-days of work provided, 47.7 percent was taken up by women and 51 percent by Scheduled Castes (SCs) and Scheduled Tribes (STs). Latest estimate shows that the cost of MGNREGA is about 0.45 percent of GDP, 3.19 percent of expenditure and 5.08 percent of revenue.

 

Preliminary cost estimate of employment guarantee scheme
Number of BPL population (million)	6.71
Minimum agri wage per day (NRs)	195
Average household size	4.90
Number of households BPL	1369028.57
Potential employment demand (15-59 years)	742013.49
Wage cost per day, billion	0.14
Wage cost per year (100 days of employment), billion	14.47
Administrative cost (25 percent of wage cost), billion	3.62
Total cost (wage plus administrative), billion	18.09
Total cost (share of budget for FY 2011-12)	4.70
Total cost (share of GDP in constant prices, 2011-12)	2.69

Source: Own estimate based on Census 2011 and NLSS III data

A quick estimate of the potential cost of the proposed EGA reveals that to cover all adults of BPL households (as per NLSS III) it would cost at most 2.69 percent and 4.7 percent of 2011/12 GDP and budget respectively. It includes wage and administrative costs of providing employment to around 0.74 million adults from 1.37 million BPL households. However, implementing the program is not as easy as it sounds because of the need to generate additional revenue to fund the program, the need to finalize central-state power division to execute and share cost burden, and the inherent administrative hassles and shortcomings.

First, implementing EGA without additional sources of funding or without cutting unproductive and untargeted subsidies would be a challenge in the face of rising budget deficit, which is expected to reach about 3.8 percent of GDP this year. Finding an additional Rs 18 billion for EGA when the MoF is struggling to secure enough funds for retired PLA combatants along with additional expenses required for Nepal Army in the post-integration era is a big headache for MoF officials. The problem compounds when revenue growth fails to keep pace with expenditure growth.

Second, NPC’s hurry in getting it implemented from next fiscal year would invite operational trouble because EGA typically mandates federal states to cover some portion of the cost as seen in the case of MGNREGA in India. EGA designed now without taking into account this political aspect is going to run into serious trouble. Furthermore, all other employment schemes need to be either scrapped or incorporated in EGA to ensure smooth operation, plug leakages, and avert duplicates. The required homework on this front is dismal.

Third, without strong local level institutions (VDCs) and representatives manning local offices, leakages will be extremely high. Implementing the scheme with weak grassroots institutions would result in fudging of muster rolls, manipulation of account by contractors and elite capture of the employment slots meant for BPL households. This is precisely one of the reasons why Karnali Employment Guarantee Program failed to yield satisfactory result. The EGA should be allowed to be used as yet another tool for political parties and their supporters to legally plunder state coffers without adding any value to productive capacity of the nation.

Fourth, the work under EGA should be strictly related to rural sector, including land management, water management and rural road connectivity—all of which will help boost agriculture production and productivity. The program is meant for BPL households and public works should be carried out in places where most of them reside, i.e. rural areas. Also, the assets created should be fairly long lasting so that they not only help agriculture sector, but also link this with the industrial sector.

Fifth, since large-scale social protection schemes like EGA create temporary distortions in the agriculture labor market, the government should be able to adequately deal with such byproducts. For instance, the MGNREGA wage rate put upward pressure on overall wage rate in India and created a shortage of labor in major agriculture states like Punjab and Haryana, where workers from poor states like Bihar and Uttar Pradesh migrated during lean agriculture season. This will also happen in our economy and temporarily affect both agriculture and industrial sectors.

Overall, while it is commendable that the NPC is pushing for the implementation of EGA, the government should realize that the scheme would be a waste of resources if it is implemented without adequate institutional set up and clear cost sharing mechanism between central and state governments. Importantly, it should be ensured that the scheme is demand-driven rather than supply-driven and adequate initiatives are instituted beforehand to plug loopholes and inefficiency.

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Logistics Performance Index: Nepal ranked 151 out of 155 countries in 2012

The latest LPI ranking shows that Nepal has the fifth worst logistics efficiency in the world. With a score of 2.04, it ranked 151 out of 155 countries in 2012. Chad, Haiti, Djibouti and Burundi have worse logistic performance than Nepal’s.

Compared to previous rankings, Nepal’s performance is sliding downward. In 2007 the ranking was 130 (out of 150 countries) with a score of 2.14 and in 2010 its ranking was 147 (out of 155 countries) with a score of 2.2.

[The three areas where there is improvement in score (but ranking is still low) are customs, infrastructure and logistics competence. Customs clearance time has improved by half a day, and clearance and delivery of exports are to traders’ satisfaction. While the quality of airports, roads, rail and warehousing infrastructure is pathetic, telecommunication/IT has improved with less traders and freight forwarders (29%) indicating it as an issue. The satisfaction with competence and quality of services is average though this is an improvement. That being said, performance on all other indicators is pathetic.]

The ranking in timeliness of shipments in reaching destination within the scheduled or expected delivery is 153 out of 155 countries. The ranking in the ease of arranging competitively priced shipments is 151. The ranking in infrastructure and tracking & tracing is 149.

LPI 2012 Nepal
LPI	Rank	151
	Score	2.04
Customs	Rank	125
	Score	2.2
Infrastructure	Rank	149
	Score	1.87
International shipments	Rank	151
	Score	1.86
Logistics competence	Rank	146
	Score	2.12
Tracking & tracing	Rank	149
	Score	1.95
Timeliness	Rank	153
	Score	2.21

Nepal has the worst logistics performance ranking in South Asia. Between LPI 2010 and LPI 2012, all countries in South Asia have improved logistics performance ranking except Nepal. India is ranked 46 out of 155 countries, followed by Pakistan at 71, Sri Lanka at 81, Maldives at 104, Bhutan at 107 and Afghanistan at 135.

Logistics Performance Index ranking (out of 155 countries)
Country	LPI Rank	LPI Score	LPI Rank	LPI Score
	2012		2010
India	46	3.08	47	3.12
Pakistan	71	2.83	110	2.53
Sri Lanka	81	2.75	137	2.29
Maldives	104	2.55	125	2.4
Bhutan	107	2.52	128	2.38
Afghanistan	135	2.3	143	2.24
Nepal	151	2.04	147	2.2

In South Asia, Nepal has the highest lead time (days) for export via port or airport and land (6 days and 7 days respectively). Lead time is the amount of time between the placing of an order and the receipt of the goods ordered. Similar is the case with import lead time. The number of agencies for export and import (5 each) is the highest in South Asia. Furthermore, the documents required for both exports and imports (6 and 5 respectively) is also the highest in South Asia. Export cost via airport and land supply chains (US$1831 and US$1651) is also the highest in South Asia. Similarly, import cost via airport and land supply chains (US$1957 and US$2322 respectively) is also the highest in South Asia.

Better logistics mean better economic competitiveness and trade performance. It also helps in lowering food prices as “transport and logistics directly affect the price and local availability of food through the performance and resilience of food chains.” The study shows that in developing countries, particularly in landlocked and poor ones, transport and logistics account for 20-60 percent of delivered food prices. The efficiency of a country’s supply chain depends on logistics performance.

High income economies dominate the top logistics rankings, while the economies with the worst performance are least developed countries that are also often landlocked, small islands, or post-conflict states.

So, what is so special about logistics in the top performers? Well, all top performers have developed and maintained a strong public-private partnership and dialogue; good cooperation between policymakers, practitioners, administrators and academics; and a comprehensive approach in the development of transport services, infrastructure and efficient logistics.

The Logistics Performance Index is based on a worldwide survey of operators on the ground (global freight forwarders and express carriers), providing feedback on the logistics “friendliness” of the countries in which they operate and those with which they trade. The ratings are based on 6,000 individual country assessments by nearly 1,000 international freight forwarders, who rated the eight foreign countries their company serves most frequently. It is the weighted average of the country scores on the six key dimensions:

• Efficiency of the clearance process (i.e., speed, simplicity and predictability of formalities) by border control agencies, including customs
• Quality of trade and transport related infrastructure (e.g., ports, railroads, roads, information technology)
• Ease of arranging competitively priced shipments
• Competence and quality of logistics services (e.g., transport operators, customs brokers)
• Ability to track and trace consignments
• Timeliness of shipments in reaching destination within the scheduled or expected delivery time.

Sri Lanka: The upcoming South Asian miracle

Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management, explains the promises of an upcoming South Asian miracle, i.e. Sri Lanka. The article below is adapted from Sharma’s article published in The Economic Times. It is based on his new book Breakout Nations: In Pursuit of the Next Economic Miracle.

After decisive end of a bloody civil war, Sri Lanka is on a path of robust growth with investment in infrastructure, readily available human capital, better investment climate, and building up of the prerequisites for high growth rate. The Sri Lankans will definitely enjoy a peace dividend that will be of envy to its regional partners like Nepal.

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Why Sri Lanka can be a breakout nation

Ruchir Sharma

I first visited Sri Lanka in 1997, shortly after a rebel bombing of the central bank headquarters had thrown the financial system into chaos. Military checkpoints made travelling around Colombo rather punishing, but the overwhelming impression was of a charming island and talented people trapped inside a seemingly endless civil war.

When I returned in 2011, the civil war had ended with surprising finality, and I took an extra day to see the country, including the huge territory that had been behind the lines of the Tamil rebels.

This should have been easy enough: the Tamil capital at Trincomalee is just 160 miles from Colombo - but the new highways were still being built, and the helicopter on offer was a single-engine job of the kind that routinely crashes in India. My accommodating hosts arranged for the air force to take me up in a twin-engined helicopter.

I've taken helicopters in many emerging markets when the road network is inefficient, normally a bad sign for the economy. But the aerial views of the multiple expressways under construction, the lush green plantations of the interior, and the new resorts facing the turquoise waters that drape the island helped convince me that Sri Lanka is no longer a land in waiting.

In the 1960s, Sri Lanka was billed as the next Asian growth miracle, only to be stymied by a tryst with socialism that played a direct role in igniting the civil war. During the war, Sri Lanka grew half as fast as South Korea and Taiwan and became another country in the long line of emerging-market disappointments.

Today, it seems that Sri Lanka's time has come. The civil war is over, the process of healing is under way, and there is every chance that Sri Lanka will become a breakout nation. Despite slowing sharply during the war years, the economy continued to grow at an average pace of nearly 5% even though it was running on one engine: the prosperous Western province where Colombo is located, and where the well-educated young population was producing strong growth in industries and services.

The North and East Provinces, which account for 30% of Sri Lanka's land and 15% of its population, were largely war zones. With the nation whole again, achieving 7% growth over the next decade should be well within reach.

Since taking office in 2005, President Mahinda Rajapaksa has been consolidating power in ways that critics see as the start of a family dynasty. For now, however, he is deploying his growing powers to ends that suggest he understands the fundamentals of growth, if not of democracy.

Rajapaksa's regime is working to trim the fat left over from the socialist experiments of the 1970s, including high taxes and government debts that still equal 80% of GDP. It is also bringing the vast swaths of formerly rebel-held territory back into play; the government has established vocational training centres and low-interest loan programmes, distributed boats and livestock, and begun building roads and bridges in the former war zone.

Banks are returning, big retail chains are setting up shop, and domestic airlines are flying to Jaffna and Trincomalee again. The flood of state spending drove growth in North and East provinces up to 14% in 2009 and 2010, and they are expected to grow at above 13% for several more years, making them the fastest-growing areas of the country.

The effects reverberate nationwide. On my helicopter trip, I visited some of the newly-renovated resorts, from the retro-chic Chaaya Blu in Trincomalee to the Cinnamon Lodge in Habarana, which lies in the 'cultural triangle' formed by Sri Lanka's three ancient cities.
It wasn't hard to imagine tourists, seduced by the country's raw appeal, coming in droves. While prices are not as dirt cheap as they were at the height of the war, they are still very low - $150 for a high-end hotel room - which means the Sri Lankan currency is still very competitive and attractive to foreign investors.

War-zone insurance rates that had made it too expensive to dock in Sri Lanka have disappeared, leading to a large increase in cargo traffic at the main port in Colombo. The government is pouring money into new terminals there, as well as new ports and harbours in formerly rebel-held regions.

The reintegration of the marginalised Tamils - with their high levels of educational achievement and English fluency - could provide a huge boost to a nation that multiple consulting firms already rank highly as a potential destination for multinationals looking to outsource customer service, IT and other back-office operations.

It would be a mistake to sugarcoat the post-war mood. The final stages of the war were highly controversial: charges of human-rights violations still fly against both sides.
There is evidence that Tamils, embittered by the bloody endgame of the war and suspicious of Rajapaksa, continue to leave the country. But many of those who remain seem determined to put the war memories behind them. I was surprised to see Tamils in Trincomalee working to attract Indian tourists to the 'Ravana trail'.

While to Indians Ravana was the devil incarnate, in Sri Lankan legend, he was one of the most powerful and inspired of ancient kings. The difference of interpretation is of no small magnitude in Sri Lanka, which has long feared domination by its much-larger neighbour.

But in Trincomalee locals say that as long as the 'Ravana trail' is drawing tourists, subjective spins on the myth don't matter.

It's only natural for nations to trade most heavily with their neighbours and, indeed, the success of east Asia has been driven in no small measure by the willingness of China, Japan, Taiwan and South Korea to leave old wars in the past, at least when they are cutting business deals.

In contrast, there is no region in the world with weaker trade among immediate neighbours than south Asia where trade within the region has stagnated at 5% of total trade with the world.

Sri Lanka could be the country to move the region toward a new trade regime. The government is proposing a grand deal that could unlock trade with India and provide a huge boost to the economy. The opposition comes from Sri Lankan businessmen fearful of Indian competition. But India welcomes the deal, in part as an opportunity to balance China's growing interest in Sri Lanka as a linchpin on its supply routes through the Indian Ocean.

Sri Lanka is only too happy to exploit its felicitous location in return for even a small share of China's gargantuan outbound investment; China is investing heavily in the Sri Lankan port at Hambantota, the home base of the Rajapaksa family.

There is some risk that the peace dividend could prove fleeting: a 2009 study by the US Agency for International Development found that 40% of nations that end a civil war will revert to violence within a decade. However, Sri Lanka's peace could well hold because of the decisive end to the war.

There is also a fundamental national consensus that the future should be decided based on what works, not on the ideological debates that retarded Sri Lanka's development for so long. By the late 1990s, even the main left-leaning party, the SLFP, was moving toward a more modern development model built on an open economy and trade liberalisation.

Over the course of its war, Sri Lanka grew its economy slowly but positively, by a total of 206%. The country now has economic and administrative momentum. The government can build prosperity without interruption by suicide bombers.

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What explains the decline in poverty in Asia and Nepal?

According to a recent report by the ADB:

• Increase in expenditure contributed to lower number of poor people below US$1.25 a day, i.e. income effect
• But, it was dampened to some extent by rising food and non-food prices
• The net effect seems to show that the increase in expenditure contributed more to offset the negative impact of rising food and non-food prices.

The annual reductions in the poverty headcount ratio have been impressive in Armenia (22.61%), Azerbaijan (13.31%), Bhutan (15.26%), urban areas of the PRC (15.98%), Fiji (13.31%), Kazakhstan (24.81%), Sri Lanka (11.01%), and Thailand (21.12%). In Nepal, the annual reduction in poverty was to the tune of 7.61% between 2003 and 2010.

In further decomposition of the contributing factors to poverty reduction, the researchers also consider the effect of population growth along with the income effect, food prices and non-food prices. The results show that 30.40 million people escaped poverty in developing Asia every year during the survey periods. The income effect was the most significant.

• If prices and populations had stayed the same, the increase in mean household income during the period would have helped 244.10 million poor escape poverty every year.
• In Nepal, if prices and populations had stayed the same, the increase in mean household income between 2003-2010 would have helped 2.80 million poor escape poverty every year. Keeping other factors constant, increase in population, food prices, non-food prices and income would have increased the number of poor by 0.1354 million, 0.8544 million, 0.8843 million and –2.80 million every year. The net effect on poverty would have been a decrease in poverty by 0.20 million every year between 2003 and 2010. Hail the migrants and remittance inflows!
• In Nepal, food prices and non-food prices contributed to increase in poverty by 5.15 percent and 1.09 percent respectively. But, the income effect decreased poverty by 14.86 percent, leading to a net effect of decline in poverty by 7.61 percent annually between 2003 and 2010.
• The recent food price increases have slowed poverty reduction.
• The income effect in rural India is the biggest.

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Explaining the change in the number of poor people (million)
Country	Change in number of poor due to				Net effect on poverty
	Population	Food price	Non-food price	Income
Bangladesh	0.70	5.51	5.89	-13.43	-1.33
Bhutan	0.00	0.01	0.01	-0.04	-0.02
India–Rural	3.31	40.37	45.38	-99.69	-10.63
India–Urban	2.55	13.22	13.42	-30.85	-1.65
Nepal	0.14	0.85	0.88	-2.80	-0.92
Pakistan	0.60	9.40	8.78	-18.99	-0.20
Sri Lanka	0.01	0.42	0.62	-1.33	-0.28

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For more on the decline in poverty, see here, here and here.

UNESCAP projects GDP growth rate to be 4.5% in FY 2011/12 in Nepal

Here are latest projections by UNESCAP in its Economic and Social Survey of Asia and the Pacific 2012:

• GDP growth is projected to be about 4.5% in 2012, thanks to political instability, frequent strikes in the country, persistent labor problems and severe electricity shortages. It argues that economic revival largely hinges on improved law and order, as poor security and political instability are limiting the government's capacity to spend money and boost rural income.
• Inflation remained close to being a double digit, 9.6% in 2011 and in 2010. Weak supply of food items kept inflation high while at the same time, the cost of production of both agricultural and industrial products rose due to severe electricity shortages and rising labor wages stemming from the Overseas migration of Nepalese workers.
• Budget deficit is estimated to be 3.8% of GDP.
• The growth rate of the economies of the Asia and the Pacific region is forecast to decline to 6.5 percent in 2012 with a slackening demand for the region’s exports in advanced economies and as a  result of higher costs of capital.
• Managing growth and inflation balance seems to be a challenge in the region. Coping high and volatile commodity prices, addressing high unemployment and coping with volatile capital flows are also challenges faced by policymakers.

Considering the large remittance inflows to the region and large out migration, the UNESCAP is batting for establishment of South Asian Migration Commission:

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Remittances from overseas workers are quite substantial and play a major role in the South Asian economies. Governments should consider some special and innovative institutional arrangements to protect migrants and provide social protection coverage. In this regard, a commission should be created to put forward a uniform stance of countries in South Asia to oversee migration and enhance its positive aspects. Once established, the South Asian Migration Commission could formulate the framework for a coherent and comprehensive response to the issues surrounding migration generally applicable to all the countries in South Asia . By looking into best practices regionally and internationally, the Commission could help in designing policies that harness the benefits of migration in the best possible way for all stakeholders and minimize their negative effects.

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It is a good idea to have a commission to look after migrants’ rights and working condition, and channeling remittances to productive sectors instead of in consumption of imported goods. However, I think a commission at the regional level is a bit out of sync with the need for it by other countries. Nepal needs it for sure, but others might not feel so strongly about the idea. In the top ten recipients of remittances as a share of GDP, Nepal (20% of GDP in 2010) is the only one from South Asia. In terms of total amount of remittance inflows, India, Pakistan and Bangladesh (US$58 billion, US$12 billion, US$12 billion respectively) come in the top ten list. Having such commission at the national level in countries like Nepal is a good idea if the goal is to see quick policy execution and coordination. At the regional level, it will take a long time and might not work as expected. For now, I think the recommendation should have been to set up such a commission at the national level for countries where remittances constitute more than 10 percent of GDP (or say more than domestic revenue as a share of GDP). In terms of share of GDP, remittances in Bangladesh, India, Pakistan, and Sri Lanka are 10.9 percent, 3.1 percent, 5.6 percent, and 8.3 percent respectively.

That being said, it would be wonderful if a regional commission is set up (again, politically it might not happen soon) because a significant share (53 percent) of South Asia’s remittances come from the six GCC countries. About 18 percent comes from the US, 12 percent from Western Europe, 11 percent from other high income countries, and 6 percent from developing countries. The figures related to those of 2010. A unified voice is wonderful idea, but not a realistic one in terms of the time needed to set it up and to make it functional. This idea deserves further exploration and vetting.

Back to growth rate, the Nepali government expects GDP growth rate to be 5 percent this fiscal year. In Global Economic Prospects (GEP) 2012, the World Bank estimated GDP growth rate to be 3.6 percent. It blamed law and order problems, and persistent and extensive infrastructure bottlenecks (electrical shortages are reflected in widespread load-shedding and unreliable delivery). It expected exports to be hit due to the sovereign debt crisis in the EU and slow growth prospects. Exports to Europe (in particular textiles and clothing) are more sensitive to a decrease in consumer demand. If you are curious about the current state of Nepali economy, see this presentation.

Load-shedding versus demand for alternative energy sources and equipment

So, how much alterative energy sources and equipment Nepal is importing due to load-shedding? According to FNCCI’s estimate it is Rs 35 billion last year and might reach Rs 100 billion this year. Now, it is an entirely wild guess. I will have to check out the figures out when I am free. But, the overall message is true: Load-shedding is increasing demand for diesel generators (which has doubled the demand for diesel, in turn incurring huge losses to NOC thanks to state subsidies), solar panels, batteries, invertors, and the equipment used in them.

Increasing imports of alternative energy sources and equipment means widening trade deficit, which is already at unsustainable level (about 22 percent of GDP). It will further drain forex reserves and increase deficit.  First, Nepal will have to cough up more forex reserves to finance imports (which in turn means spending the remittance income). Though reserves are at record level right now, it might surprisingly come down if growth of remittance inflows slowdown and imports rise unabated. It might put the balance of payments in the red again (happened in 2009/10 and 2010/11). Second, the increase in load-shedding hours means high demand for fuel to run generators. Since diesel and LPG are subsidized to such an extent that the NOC, which is helplessly left to shoulder the burden, is incurring loss of over Rs 1 billion each month. NOC officials estimate that at present diesel generated electricity is to the tune of 500 MW. Ultimately, the Ministry of Finance (MoF) will have to take care of the balance sheet mess of NOC. It will get reflected in the country’s expenditure-revenue sheet—meaning pressure to widen fiscal deficit (at 3.8% of GDP now).

Now, why would this trend persist despite such ominous situation? Because, households are barely feeling the pinch as a result of increasing remittance income (at 20% of GDP now—around US$4 billion).

Until I compute the actual figures, let me list the FNCCI’s guess of imports of goods that are imperfect substitutes of hydroelectricity.

• Generator: Rs 5 billion (imported from India, China, Taiwan, Vietnam, among others)
• Solar panel, electricity import from India and coal: Rs 4 billion
• Battery: Rs 5 billion

Solution to multiple macroeconomic problems: generate enough hydroelectricity!