Why do public service delivery fail?

Shanta Devarajan argues:

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Teachers in Tanzania are absent 23 percent of the time; doctors in Senegal spend an average of 39 minutes a day seeing patients; in Chad, 99 percent of non-wage public spending in health disappears before reaching the clinics.

These and other service delivery failures have been widely documented since the 2004 World Development Report, Making Services Work for Poor People.

But why do these failures persist?  Because they represent a political equilibrium where politicians and service providers (teachers, doctors, bureaucrats) benefit from the status quo and will therefore resist attempts at improving services.  For instance, teachers are often the campaign managers for local politicians.  They work to get the politician elected, in return for which they get a job from which they can be absent. Powerful medical unions ensure that their members can work in the private sector and neglect their salaried government jobs.  The losers are the poor, whose children don't learn to read and write, or get sick and die because the public clinic is empty.

[…] How can we disrupt this equilibrium to improve services for poor people? One possibility is to provide them with information.  We saw that community monitoring (poor people obtaining the information directly) had an effect on teacher performance.  But more broadly, poor people do vote.  If, with information, they vote along service delivery lines--rather than for politicians from their own ethnic or religious group, or who promise them private goods such as a job building roads--then it would be more difficult for politicians to ignore service delivery failures. 

[…] Information may not be the only solution.  The underlying problem is that politicians are behaving "clientelistically"--more interested in handing out private goods to their "clients" rather than public goods that benefit society, especially the poor--and getting away with it (they get elected).  And if most politicians behave this way, it's in every politician's interest to follow suit.  How can we move from clientelism being the norm to one where it is the exception?

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This reasoning also perfectly fits the state of service delivery in Nepal. Eventually, there is continued supremacy of extractive political and economic institutions over inclusive ones.

NEPAL: Prime Ministers and the economy

Here is a snapshot of how the economy (related one here as well) fared during various prime ministers since 1990/91 in Nepal. The highest GDP growth rate was 7.9 percent in 1993/94. Fiscal deficit widened the most in 2008/09, which shows how much Nepal is unable to match rising expenditure with revenue. FDI committed by authorized firms at DoI was the highest in 2010/11 (annual FDI growth rate was the highest in 1992/93). Initially due to conflict and now due to lack of job opportunities (new investors are reluctant to come and existing ones are perishing due to labor problems, high cost of production resulting from inadequate supply of electricity and supply-side constraints), the number of migrants is increasing.

The soaring expenditure and the inability to match it up with revenue (see widening fiscal deficit) is resulting in a situation where the economy is increasingly reliant on foreign aid to fund most of its reform programs and development works. Inflation was the highest in 1991/92 (due to the turmoil in the Gulf then and its impact on oil prices, the shock the economy got following economic blockade by India in 1989, and sudden change in economic structure following liberalization in 1992).

Based on the figures seen here, make you own judgment regarding which leader/party delivered growth and prosperity to the Nepali people.

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Prime Ministers and Economy
		billion					%
Prime Ministers	Fiscal year	Fiscal balance	FDI-authorized firms	Remittance	Aid disbursement	BoT	Inflation
KPB	1990/91	-10.66	0.41	2.13	5.99	15.03	9.81
KPB/GPK	1991/92	-11.26	0.60	2.32	7.80	16.32	21.05
GPK	1992/93	-11.96	3.08	2.99	9.24	17.15	8.86
GPK	1993/94	-11.62	1.38	3.47	11.56	31.66	8.95
GPK/MMA	1994/05	-10.55	0.48	5.06	11.25	45.64	7.66
MMA/SBD	1995/96	-13.82	2.22	4.28	14.29	56.14	8.13
SBD/LBC	1996/97	-14.36	2.40	5.60	15.03	70.01	8.09
LBC/SBT/GPK	1997/98	-17.78	2.00	6.99	16.46	61.49	8.33
GPK/KPB	1998/99	-17.99	1.67	10.31	16.19	56.49	11.38
KPB/GPK	1999/00	-17.67	1.42	12.66	17.52	64.13	3.39
GPK	2000/01	-24.19	3.10	47.22	18.80	63.54	2.43
SBD	2001/02	-22.94	1.21	47.54	14.38	61.25	2.89
SBD/LBC	2002/03	-16.44	1.79	54.20	15.89	78.22	4.75
SBT/SBD	2003/04	-15.83	2.76	58.59	18.91	81.89	3.96
SBD/KG	2004/05	-18.05	1.64	65.54	23.66	89.85	4.54
KG	2005/06	-24.78	2.61	97.69	22.04	100.90	7.96
KG/GPK	2006/07	-30.09	3.23	100.14	25.85	138.60	6.4
GPK	2007/08	-33.41	9.81	142.68	29.30	178.56	7.7
PKD	2008/09	-49.80	6.26	209.70	36.35	222.40	13.2
PKD/MKN	2009/10	-41.20	9.10	231.73	49.77	314.66	10.5
MKN/JNK	2010/11R		10.05			332.97	9.60
JNK/BRB	2011/12P

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Few caveats:

• Depending on the nature of expenditure (especially capital expenditure) there is a lag of few months to years. So, expenditure in n^th year might only show its effect after n+k years, where k>=0. It means GDP growth figure during the tenure of a certain prime minister might not fully reflect the impact of his (no female PM yet!) expenditure programs or reforms.
• That said, over 50 percent (70 percent in 2010/11) of total expenditure is recurrent expenditure. Capital expenditure is well below 20 percent. It means the impact of most of the expenditure is more or less reflected in the figures.
• The increasing fiscal deficit shows the difference between expenditure and revenue. We are spending beyond our means!
• FDI is related to those committed by firms registered at Department of Industry. It doesn’t mean that the committed money is actually invested. Nevertheless, it reflects investors’ confidence on the economy.
• High remittance inflows could be viewed as a proxy for high number of migrants seeking jobs abroad. It then means the lack of employment opportunities in the economy. Note that it is also affected by the openness of government policies regarding foreign employment and the demand for Nepali workers abroad.
• The aid dependency is increasing as Nepal is unable to satisfy its expenditure with domestic revenue. The table shows aid disbursement, i.e. how much of the committed money actually came to Nepal. Note that the discrepancy between commitment and disbursement might also be because of low absorption capacity of our system.
• The balance of trade (merchandise goods only) shows the difference between value of imports and value of exports. The high figure means imports outpacing exports. It points to our inability to produce goods demanded in the market, the lack of export competitiveness, eroding strength of manufacturing sector, and high dependence on imported items (primarily financed by remittances).
• Inflation is the least understood beast in our economy! It is mainly affected by prices in India (due to pegged exchange rate), prices of petroleum products, domestic supply constraints and increase in demand due to rise in income arising from high wages and remittance inflows.

NEPAL: Fertilizer shortage during planting season

At the height of the planting season, there is acute fertilizer shortage in Nepal. The delay in monsoon has already affected production (maize) in some districts. Add to that the shortage of fertilizer for paddy cultivation, which contributes the most in agriculture GDP (around 21 percent) and also has substantial weight on overall GDP growth. The expected good GDP growth this fiscal year is largely attributed to favorable monsoon last year and high paddy production.

Two versions for the shortage of fertilizer in the market:

• Farmers allege that the shortage is due to black marketeering of chemical fertilizers and middlemen manipulating the market
• The government says that the uncertainty over procurement of fertilizers is affecting delivery and supply.

The Agriculture Inputs Company (AIC) is responsible for procuring fertilizers, which are distributed through cooperatives. Previously, Indian Potash Ltd (IPL) was barred from supplying fertilizers after farmers complained of underweight sacks (50 kg per sack) of chemical fertilizers. Of 630,000 sacks of fertilizer procured from IPL, about 430,000 sacks were underweight by between 2 kg and 10 kg.

The government subsidizes chemical fertilizers (about 20 percent of actual cost is subsidized). It allocated Rs 2.5 billion for subsidy for 2011-12 in order to supply 150,000 tons of subsidized fertilizers to farmers. Annual demand for fertilizers is around 700,000 tons while government supplies just about 150,000 tons at subsidized price.

The picture shows farmers queuing up to get hold of fertilizers in Taplejung. It is reported that farmers walked two days to reach the district headquarter to get fertilizer. While demand for fertilizer is around 1200 tons in the district, supply is just about 240 tons.  

Few things to note here:

• The longer the shortage of fertilizers, the more it will impact agriculture production, which in turn will affect both GDP growth rate and food security situation.
• The AIC’s negligence in monitoring weight and quality of procured fertilizers should be not treated lightly. The truth needs to come out.
• The proper utilization of subsidized fertilizers should be a matter of concern to all because these are primarily financed by domestic taxpayers. Even donor’s money might have gone to subsidizing fertilizers. Agriculture subsidy is given with an intent to increase production, boost farmer’s income and support their livelihood, reduce food insecurity, promote agriculture employment, reduce poverty and boost economic growth. While all kind of subsidies impact fiscal balance, fertilizer subsidy is a bit different than subsidy on petroleum fuel and LPG. Technically, it is targeted to poor farmers and leakage is lower than in fuel subsidy.
• However, there are cases where subsidized fertilizers are being sold not via government depots or cooperatives, but though retail shops. The government officials or agencies take money/commission and supply subsidized fertilizer to private players in district headquarters. Farmers are told that the government depots are running short of fertilizers and are recommended to seek supplies from private players, who charge high price. The collusion between private players and government agencies at the district level impacts supply and leads to mis-utilization of subsidy meant for a good purpose.
• The immediate priority of the government, also MoF and MoAD, should be to procure adequate fertilizer and supply it to the market.

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UPDATE (2012-06-22): Recommended readings on the same issue:

• Dr. Prakash Chandra Lohani: Political economy of fertilizer shortage
• Akhilesh Upadhaya (Editor-in-Chief of The Kathmandu Post): Farmers’ enemies
• Sangam Prasain: Nepal at risk of sliding back to food deficit status

Rio+20: Climate Change and Nepal

The figure below compares CO₂ emissions, projected annual temperature change and projected change in hot days/warm nights (2045-2065).

As expected, emission levels are very low in Nepal. But, annual temperature change between 2045-2065 (relative to the control period 1961-2000) is projected to be higher than in even Bangladesh, China, India and the USA. Hot days and warm nights are expected to increase by 2.5 days and 8 days respectively between 2045-2065 (relative to the control period 1961-2000).

Data source is here. The definition of CO2 emissions per unit of GDP, CO2 emissions per capita, and the projected temperature and annual hot days/warm nights is as follows:

• Carbon dioxide (CO₂) emissions per units of GDP are carbon dioxide emissions in kilograms per $1,000 of GDP in 2005 purchasing power parity (PPP) terms. PPP GDP is gross domestic product converted to international dollars using PPP rates. An international dollar has the same purchasing power over GDP that a U.S. dollar has in the United States.
• Carbon dioxide (CO₂) emissions per capita are carbon dioxide emissions divided by midyear population.
• Projected annual temperature change is the projected change in annual temperature in the years 2045-2065, relative to the control period 1961-2000.  The range reflects the 10th and 90th percentiles of results from nine general circulation models (GCMs) at a standardized 2-degree grid, employing the A2 storyline and scenario family. Values are aggregated at the country level.
• Projected change in annual hot days/warm nights are the projected changes in the annual incidence of "hot days" and "warm nights" in the years 2045-2065, relative to the control period 1961-2000.  Hot days and warm nights are those that exceed the 90th percentile of maximum temperatures and those that exceeded the 90th percentile in minimum temperatures, respectively, in the control period. These indicators are useful to understand potentially critical thresholds related to heat stress in different sectors such as agriculture and energy.  The range reflects the 10th and 90th percentiles of results from nine general circulation models (GCMs), employing the A2 storyline and scenario family. Values are then calculated at the country level from 2-degree gridded data.

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Rio+20 and Nepal

High-in come countries, with one sixth of the world’s population, are responsible for nearly two thirds of the greenhouse gases in the atmosphere. Methane and nitrous oxide produced by the agricultural sector account for about 10 percent of anthropogenic warming. Most of it comes from the guts of cattle and sheep. Globally, agriculture and land-use change and forestry contribute 14 percent and 17 percent of CO₂ emissions, respectively. Read more here.

Though Nepal’s emission levels are very low, irrespective of the unit of measurement, it is disproportionately affected by the vagaries of climate change/weather. The low contribution of enablers of climate change and its high impact on economy and livelihoods call for a balanced approach to meet growth and development needs while keeping low its impact on environment. As of now, there is a tradeoff between these two and the challenge for policy makers is to find a suitable point (say country-specific Pareto optimal point for sustainable development) based on a slew of factors such as endowment, institutional capabilities, livelihood options, infrastructure necessities (including roads, ICT, irrigation, energy) and others. The impact of climate change will alter comparative advantage on agriculture trade (and also of the industrial sector that depends on agriculture sector for raw materials), reduce livelihood options, increase or decrease the average number of warm or cold days and nights, endanger communities living in mountain and low-lying areas and impact their livelihood options, engender distress migration and may induce conflict, among others. Against this backdrop, the Rio+20 (United Nations Conference on Sustainable Development) is a crucial platform for countries like Nepal to voice their concern and seek options to balance growth (jobs enriching) and environment necessities.

Nepal will propose focusing on the following key areas of sustainable development:

• Food security and sustainable agriculture
• Water and sanitation
• Energy
• Sustainable cities
• Natural disaster
• Green job and social inclusion
• Mountain ecosystem

Nepal expects Rio+20 to:

• Renew commitment of Member States for preserving the Rio principles
• Foster implementable consensus for fulfilling the implementation gaps in the Rio declaration and other associated commitments
• Address new and emerging challenges in a fair and equitable manner based on the principle of common but differentiated responsibilities (CBDR)

Specifically, it wants developed countries to fulfill ODA commitment, ease transfer of technology, waive debt, ease trade barriers, and enhance capacity of LDCs. It expects an agreement on the Mountain Agenda adopted in 1992. It expects focus on green economy, especially support for harnessing its hydro-generation potential. It expects the Rio+20 Conference to “fully integrate the IPoA into its outcome document and underline renewed and scaled-up global commitment to achieve sustainable development in the LDCs.”

Read an earlier piece on Rio+20 Summit here.

District-wise household size, population growth rate, migrant population and remittance inflows

Here is an interesting infographic that shows district-wise household size, population growth rate, absentee (migrant) population and remittance inflows. The relationship between absentee population and remittance inflows is pretty clear. Also, notice that the poorest regions have larger household size and relatively high population growth rate.

Readings related to this infographic:

• Latest population estimate of Nepal (26.6 million)

A total of 23 districts in hilly region saw negative population growth rate while Kathmandu saw 60 percent growth in population. The urban population constitutes about 17 percent of the total population. Kathmandu district has the largest population followed by Morang. Manang constitutes the lowest population. Population density of Nepal is estimated 181 per sq.kms. Kathmandu district has the highest density (4408) and Manang (3) has the least. Kathmandu has recorded the highest decadal population growth (60.93 %) compared to all Nepal (14.99 %) and lowest in Manang (-31.92 %). Sex ratio is estimated to be 94.41 (male per hundred female) in the current census as compared to 99.80 in the previous census 2001.

• Costs and benefits of remittances in Nepal

- About 48% of migrants originate from Terai, 45% from the Hills, and 7% from the Mountain.
- Over 30 percent of household income in the Western region is accounted by remittances. In Syangja, Kaski, and Tanahu, it is 25.5%, 28.2% and 34% respectively. About 43.4 percent of household income in Argakhashi came from remittances. It was 7% in Jumla.
- Jhapa (16.8), Morang (13.2), Chitawan (10), Nawalparasi (11.8), Solukhumbu (10.7) got remittances over NRs 10 billion. Agarkhachi and Jumla got 7.5 and 0.4 billion respectively.

- Migrant destinations differ by their place of origin. A large number of migrants from Far-Western and Mid-Western (and Western) regions go to India; those from Western and and Eastern regions go to the Gulf; and those from Western and Eastern regions go to Malaysia.
- Ethnically, the probability of migration, in descending order, is above average for Muslims/others (mainly to the Gulf), Hill Dalits (mainly to India), Hill Janajatis (mainly to the Gulf), and Brahman/Chhetri (to India, the Gulf and Malaysia).
- Western Hills and Eastern Terai receive more remittance. The Western Hills send the largest number of migrants (20%). For Eastern Terai the number is 17%.

- Per capita receipt of remittances generally increases with recipients’ household wealth (skilled and educated migrants send more).

- In 2008, most of the returnees were from India, followed by the Gulf and Malaysia.
- About 37% of the returnees would “very likely” go back abroad soon. About 34% would “very unlikely” go back soon.
- Most returnees would return to either agriculture (48%) or stay inactive (20%--employment wise) or daily wage workers (10%). These are the ones who are “very likely” to migrate again.

For more on these, read here: http://goo.gl/tQSNO and http://goo.gl/qYisW

FDI, approved industries and employment in Nepal, 1989/90-2010/11

Here is a chart that shows total FDI inflows to Nepal, number of industries/firms and employment generation. Also, it shows the share of investment and employment of top ten FDI origin countries, and India’s agriculture investment share in total Indian FDI inflows.

Total FDI inflows from approved industries in 2010/11 was Rs 10.05 billion and approved industries/firms were 209 (total employment target was 10,887). Of this India’s share in foreign investment was 69.72 percent and share in total employment was 30.07 percent. Meanwhile, China’s share in foreign investment was 11.81 percent and share in total employment was 28.16 percent.

The total FDI approved in agriculture was Rs 367.12 million with employment target of 1337. The highest FDI approved was in manufacturing at Rs 6.134 billion, followed by tourism at Rs 1.184 billion. Of total Indian investment, share in agriculture was 1.55 percent in 2010/11, 81.73 percent in 2008/09 and 21.49 percent in 2007/08.

In the figure above, you can clearly see the surge in FDI immediately after liberalization of the economy in the early 1990s. It declined for the next two years and then increased for two years. The onset of Maoist insurgency and its gradual intensification led to decline in FDI up until 200/01, which it increased and then the total FDI inflows have been erratic up until 2004/05. Both FDI and employment generation are in upward trend since then. That said, the dent in 2008/09 might be because of the impact of global financial and economic crises.

If you are wondering about how Nepal stands wrt FDI inflows to regional nations, then the figures look disappointing. FDI inflows to Nepal in 2010 was just $38.99 million. In contrast, India’s was $24.64 billion. The latest (2011/12) FDI inflows to India  was a record FDI of $46.8 billion.

So, what are the main constraints to FDI inflows to Nepal? Some of them are:

• Political instability/strikes
• Lack of appropriability of returns to investment
• Militant trade unions
• Inadequate supply of infrastructure (power and road network)
• Policy inconsistency
• Increasing cost of doing business

For solutions, read this. (The hope is that the newly formed Nepal Investment Board will encourage investors to come to Nepal. Btw, does anyone have any idea about NIB’s website?)

• Political stability (if it can be achieved!)
• Taming labor militancy and smoothening industrial relations
• Policy consistency on key issues related to investment regime and sectoral support
• End of syndicates, which foster uncompetitive practices and charge high fares
• Credit at low interest rate to key sectors where we enjoy comparative advantage consistent with our land, labor and capital resource endowment
• Emergency measures to supply power for at least two shifts in manufacturing plants
• Fast track endorsement of investment plans and lowering cost of doing business in Nepal
• Enactment of SEZ bill
• Industrial security

[Update 2012-07-06: FDI from approved industries has been updated.]

Will flat cash incentives for exports work in Nepal?

The FNCCI, following a strong lobby by GAN, has asked the government to extend at least two percent cash incentives to all exports, irrespective of value addition and destination. Currently, the government offers two percent of total export revenue as cash incentive if there is 30-50 percent value addition, three percent for 50-80 percent value addition and four percent for over 80 percent value addition.

The main purpose of cash incentives scheme is to increase exports and reduce trade deficit. Just by giving cash incentives won’t achieve this because the cash incentives received by exporters will hardly be reflected on the price of final exported items. Cash incentives are given after goods are exported and they do not necessarily boost price competitiveness. As of now it is a misplaced export incentive with too much bureaucratic hassles to claim cash (plus incongruous with other policies’ emphasis on domestic value addition together with employment generation).

Quick comments:

• Cash incentives won’t be directly reflected on the price of final exported items. Hence, it won’t directly boost price competitiveness. It might just compensate the lost revenue due to high cost of production arising from exogenous factors to the firm/sector in question (e.g. load-shedding and cost of diesel, strikes, bandha).
• Conditioning cash incentives on value addition is one hook for not letting the scheme be inefficient. It should be further linked to employment generation as well, i.e. offer such incentives to those strategic sectors that have both high value addition and high employment generation. See this presentation for more on this.
• Cash incentives or other export promotion measures should be designed keeping in mind the factors/determinants that boost competitiveness of manufacturing sector: government forces (education policies, energy policies, economic, trade, labor, financial and tax policies, science and technology policies, manufacturing and infrastructure policies); capabilities (innovation, technology, process, infrastructure); market forces (demographic, macroeconoimc environment); and resources (human, materials, energy, financial).
• Fundamentally, export incentive packages that increase productive capacity and address binding constraints to exports growth work more often than simply doling out cash based on certain value addition criterion. The same amount of money can be used to construct roads up to manufacturing plants or to provide credit and concessional loans to emerging entrepreneurs or to subsidize insurance premium during transportation of goods to the nearest port in India or to construct the much needed special economic zones. These measures will help enhance our exports and add to productive capacities more than the cash incentives.
• Cash incentives as of now is unlikely to alter Nepal’s export destinations and composition of export basket.
• Competitiveness of Nepali export items is going down. The main reasons are: lack of adequate supply of infrastructure, political instability/strikes, labor problems, lack of innovation by private sector, and government’s inability to implement key reforms enshrined in major policy documents. The state of trade facilitation in Nepal is pathetic, ranking 124 out of 132 countries. Nepal has the fifth worst logistics efficiency in the world. Supply-side constrains have eroded competitiveness to a great extent. Cash incentives for exports won’t directly address these problems. If these issues are resolved (by both government and private sector), then you won’t need cash incentives to boost competitiveness  (if it can!) and exports and to reduce trade deficit.