Here is Abba Lerner (1943):
“The central idea is that government fiscal policy, its spending and taxing, its borrowing and repayment of loans, its issue of new money and its withdrawal of money, shall all be undertaken with an eye only to the results of these actions on the economy and not to any established traditional doctrine about what is sound or unsound."
Source: Abba Lerner (1943). “Functional Finance and the Federal Debt.” Social Research 10(1): 38–51.
So, carpet exporters are benefiting from depreciation of Nepali currency against the US dollar. Analysts have doubted if Nepal will ever benefit from weak rupee because almost 60 percent of trade gets pretty much unaffected by it, thanks to the pegged exchange rate. With respect to exports to EU, the economic mess there is lowering demand. But, the strong US dollar meant that it is relatively cheaper for them to purchase Nepali goods. Our exporters are expected to benefit from it. But, the irony is that in order to take advantage of falling rupee, we need to have sufficient inventory to supply as and when needed. Unfortunately, Nepal doesn’t have it. So, the inability to take benefit from falling rupee. However, carper exports seem to be rising even when volume of exports has declined.
Excerpts from a news story in Republica:
Despite the drop in volume of exports, Nepali hand-knotted carpet exporters enjoyed 40 percent rise in their income over the first ten months of 2011/12, thanks to strengthening of the US dollar.
Owing to almost 25 percent depreciation of Nepali rupee, Nepali exporters during the period received on average Rs 8,018 per square meter of hand-knotted carpet. They were receiving on average just Rs 5,103 per sq meter and Rs 5,669 per sq meter in the same period of 2009/10 and 2010/11 respectively.
"Thanks to the exchange rate gain, hand-knotted carpet fetched a total of Rs 4.84 billion over the first ten months of 2011/12, even though the export volume remained low at 603,631 sq meters," reads a report of Trade and Export Promotion Center (TEPC).
During the same period last year, Nepal had exported 698,517 square meters of carpet that fetched foreign currency worth Rs 3.96 billion only. In the same period of 2009/10, Nepal had exported 652,517 sq meters of woolen carpets earning Rs 3.33 billion.
TEPC data shows that Nepali exporters mainly received a blow from European markets as demand there shrank in the wake of Euro zone crisis. But exporters found new markets in the US, which for the first time emerged as the biggest single importing country of Nepali carpets.
Now, calculating the export value in US dollar terms will give us a rough figure of the contribution depreciation to boosting earnings in Nepali rupee.
Here is a combo of interesting figures that shows the evolution of merchandise export sophistication (or production sophistication) of Nepal since 1970. Overall, it shows that there has been little enhancement in the sophistication of Nepali exports or production. It is clearly seen in the product spaces, which are the network showing global similarities in production knowhow required by products. The nodes represent products, which are colored according to the color legend of the product communities they are in. The node size is proportional to global trade in that product and the links connect products that tend to be exported by the same countries.
The black square dots indicates that those products are exported with comparative advantage (RCA>1). Nepal’s export is concentrated in low value products, mainly textiles and garments. The USA’s export is concentrated in high value products, which require more advanced capabilities, such as machinery, chemical, health and electronic products. Though India’s export is slowly moving and diversifying to the core of the product space, i.e. high value products, it is also producing textiles and garments and other low value products with comparative advantage (also more competitively than Nepal).
It is argued that the assets and capabilities needed to produce a good are imperfect substitutes for those needed to produce another good “but their degree of asset specificity will vary” (Hausmann & Klinger, 2007). The probability that a country makes a new product is strongly related to the proximity of the product with other products the country already makes. It means that a country’s capability to produce one good is somehow tied with the installed capability in the production of other similar goods, i.e. “nearby goods”. Bailey Klinger provides an interesting metaphor: “products are like trees and firms are like monkeys.” Structural transformation involves the movement of monkeys from the poor part to rich part of the forest. It is easier for monkeys (firms) to jump short distance (i.e. to change products that use similar pre-existing factors).
The level of sophistication of exports determines the income level of a country and its growth rate. Importantly, the level of economic complexity indicates the nature of future economic growth and the ability to produce new goods and move from low-value added to high value-added goods. Sophistication comes from either increasing the quality of currently produced goods or from a move into new and more sophisticated products.
New capabilities to usher structural transformation are not acquired suddenly. It takes time and is more “easily accumulated if they are combined with that already exists”. Again, a country can diversify its production by moving from the products that it already produces to others that require a similar set of embedded knowledge. Think it of this way: it is easier to move production from undergarments to pants than from undergarments to engines. We can figure out how far products currently not exported with comparative advantage are from the ones that are exported with comparative advantage and are within nearby range of existing production capacities of an economy. It is easier to produce “nearby” products than a product that is “far away” because the capabilities to produce similar but slightly differentiated products already exists in the economy. Eventually, what a country exports matters in determining its future course of growth and pace of structural transformation.
So, the capability to produce higher value products is accumulated over time based on the existing capabilities. In Nepal’s case, export-oriented sectors have not added much new capabilities. Worse, even the existing capabilities are being lost due to a slew of internal (lack of innovation, R&D and survival based on margin of preference in export destinations) as well as external constraints (mainly supply side constraints, including lack of adequate power and infrastructure, labor problems, policy inconsistency and policy implementation paralysis). More on Nepal’s problems with exports here, here and here (for services sector sophistication, see here)
Now, 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”. Meanwhile, manufacturing competitiveness (in turn sophistication) is determined by
Interesting stats:
Here is a news story related to this in Karobar Economic Daily. Now compare this with total garment export—one of Nepal’s top export items— of Rs 4.08 billion in 2010/11. [Btw, I checked in official data sources for beverages, spirits and vinegar (HS Chapter 22) imports and it was Rs 2.024 billion in 2010/11. Exports was close to Rs 1.023 billion. Anyway, though the figures given by Nepal Alcohol Production Association and as reported in the media might be a bit inflated, the fact is that the market for alcohol is increasing.]
There is a huge market for alcohol and the demand is increasing each year due to rise in household income, thanks to high remittance inflows. There are instances where most of the remitted money in some districts is spent on imported, high premium liquor. To bridge growing demand-domestic production gap, imports are surging. Since this also increases custom duties, the MoF is disinclined to take any corrective measures on this front (like promoting domestic firms to produce premium liquor). In fact a major portion of revenue growth is coming from duties on imports, which is rising each year.
Why not let domestic producers produce liquor by importing raw materials from abroad if consumer demand for liquor is going to grow unabated? Morality aside (for which government needs to regulate the market strictly), this would add some value to production domestically and increase job opportunities. While the investors need more fiscal incentives, the government needs more revenues from the industry. How can we create an equilibrium between these two forces?
Anyway, are we thinking right when we talk about increasing domestic revenue? How long can the MoF rely on revenue growth on the back of rising imports? This is not a sustainable approach. In fact, it’s a destructive approach—you increase imports and consumption, add little to domestic productive capacities, drain remittances on imports that could be produced domestically if given the right policies and regulatory mechanism, foster lackluster behavior and complacency right from households to bureaucracy, add little to economic growth by promoting services and trading activities in place of industrial activities, …. Where is this loop leading us to?
Raballand, Refas, Beuran, and Isik argue it is not. The collusion among various stakeholders/agencies at ports is a major part of the problem.
The international community has been increasing investment in projects that promote trade facilitation and improve logistics in the developing world, including in ports. In Africa, a key motivation for such projects has been a presumption that poor infrastructure and inefficient border control agencies are the major causes of extended delays in sub-Saharan Africa (SSA) ports. Based on new data and analysis, this note argues that collusion between controlling agencies, port authorities, private terminal operators, logistics operators, and large shippers is an important part of the problem. Decreasing dwell times in ports requires governments to combat collusive practices between the private sector and public authorities and recognize that large-scale investments in infrastructure are not sufficient to reduce logistics delays.
Meanwhile, here is the latest Logistics Performance Index (LPI) published by the WB. 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.
Shanta Devarajan argues:
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?
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.
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.
| 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 | ||||||
Few caveats: