Links of Interest (2012-09-18)

Promoting social mobility (Equity and efficiency can be achieved by focusing investments in the early years, while also following up with later investments.)

Lesson from Japan: Do low interest rates boost growth? (Supply alone won't do anything if there is no demand for it. Low rates hardly boost "private demand, private risk-taking or entrepreneurship" if the economy is largely dependent on revenue externally, i.e. from exports, where economic conditions have nosedived.)

Nepali private sector in interested in PPP in agriculture sector

The private sector body also said the existing policy does not address the risks inherent in engaging the private sector in the farm sector and as a result, the country has not been able to take advantage of the opportunities in the agriculture sector. NCC urged the government to bring a policy that facilitates both the private sector and farmers to market access, provide loans in nominal interest rates, set up organic and chemical fertiliser factories, among others.

IRs 100 = NRs 168 in informal market (Officially, NRs 1.60 is pegged at IRs 1. The main reasons are high demand for IRs arising from increasing imports and cross-border smuggling of IRs.)

Traders attributed this surge in IC value in the black market to increasing smuggling of goods that created shortage of the currency. They said smuggling of sugar, food items, readymade garment and shirting and suiting, among others, has surged ahead of the festivals. Smuggling of motor parts, hardware and electronics are also on the rise.

NEA to hold study on 10 storage-type projects

The Nepal Electricity Authority (NEA) has selected 10 storage-type hydropower projects with a collective capacity of 2,652MW to carry out a feasibility study. The 10 projects are among the 31 projects approved by the Japan International Cooperation Agency (JICA) for further study. NEA had conducted a pre-feasibility study on 65 projects last year under the funding JICA, of which 31 projects were approved, NEA officials said.

The 10 projects are Madi Khola (199 MW), Lower Jhimruk (142 MW), Nalsinghgadh (400 MW), Chehera-I (149 MW), Naumure (245 MW), Dudhkoshi (300 MW), Sunkoshi-III (536 MW), Khokhajor (111 MW), Adhikhola (180 MW) and Lower Badhigad (380 MW).

NEA so far has issued survey licences to independent power producers for projects with a collective capacity of 11,645MW electricity, but all the projects are ROR type.

NEA is also studying 14 projects with total capacity of about 4,000MW. Of them, 11 are storage-type projects.

Supply intervention:  MoCS giving PEs Rs 35.8m to ensure smooth supply of food commodities

The Ministry of Finance (MoF) has agreed to provide Rs 35.8 million to the Ministry of Commerce and Supplies (MoCS) for providing direct subsidy to state undertakings involved in the supply of food commodities, keeping in view the upcoming festivals. Breaking the tradition of cross subsidy system under which state-owned enterprises were given tax and other privileges to enable them recoup the loss while dealing with subsidized goods, the MoCS first time is providing direct subsidy to public enterprises (PEs). The MoCS adopted new subsidy system after PEs reported loss while trading commodities like rice, sugar, salt and goats, among others, during last year´s festive season.

Under the proposed subsidy, NFC, STC and NTL will have to sell rice, salt and sugar at rates lower by Rs 5, Rs 2 and Rs 5 per kg respectively compared to market price.

Govt fails to implement MRP: Consumer activists termed the move just a 'publicity propaganda'

The government failed to publish maximum retail price (MRP) in Nepal Gazette (Rajpatra) today, as it has promised. Ministry of Commerce and Supply Management has promised to publish it today in the Gazette that could ensure the implementation of the MRP from today.

“There has been not any preparation to publish it in the Nepal Gazette ,” said secretary of the Ministry of Law, Justice, Constituent Assembly and Parliamentary Affairs Bhesh Raj Sharma.

“No file has reached the ministry related to maximum retail price,” he added. According to the process, concerned ministry should forward the file to Ministry of Law, Justice, Constituent Assembly and Parliamentary Affairs to publish notice in the Gazette.

According to the Clause 1 of Essential Commodities Control (Authorisation) Act 1961, the government decision on maximum retail price becomes effective only after the publication in Nepal Gazette.

Trade facilitation matters!

Economists celebrate trade not only because they love watching ships cross the Pacific and cargo planes land at Paris Charles-de-Gaulle but also because increased trade demonstrably raises income and improves living standards. This column argues that a powerful way to boost trade is by focusing on trade facilitation, i.e. improving both hard infrastructure like ports and railways, and soft infrastructure such as shipping logistics.

India's economic slowdown reflects both structural and cyclical factors

Post MDGs development priorities and assistance

Dani Rodrik assesses the relevant of MDG indicators and the global development or assistance framework in the post-MDG era:

Contribution of MDGs:

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[…]Clearly, however, the MDGs were a public-relations triumph, which is not to belittle their contribution. Like all worthwhile PR efforts, the MDGs served to raise awareness, galvanize attention, and mobilize action – all for a good cause. They amplified the global conversation about development and defined its terms. And there is evidence that they got advanced countries to pay more attention to poor nations.

Indeed, the MDGs possibly had their clearest impact on aid flows from rich to poor countries. A study by Charles Kenny and Andy Sumner for the Center for Global Development in Washington, DC, suggests that the MDGs not only boosted aid flows, but also redirected them toward smaller, poorer countries, and toward targeted areas like education and public health. However, aid was not directly linked to performance and results, and it is much more difficult to know whether it had the desired impact overall.

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Recommendations for the post-MDG development framework:

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[…]First, a new global compact should focus more directly on rich countries’ responsibilities. Second, it should emphasize policies beyond aid and trade that have an equal, if not greater, impact on poor countries’ development prospects.

A short list of such policies would include: carbon taxes and other measures to ameliorate climate change; more work visas to allow larger temporary migration flows from poor countries; strict controls on arms sales to developing nations; reduced support for repressive regimes; and improved sharing of financial information to reduce money laundering and tax avoidance.

Notice that most of these measures are actually aimed at reducing damage – for example, climate change, military conflict, and financial crime – that otherwise results from rich countries’ conduct. “Do no harm” is as good a principle here as it is in medicine.

This kind of reorientation will not be easy. Advanced countries are certain to resist any new commitments. But most of these measures do not cost money, and, as the MDGs have shown, setting targets can be used to mobilize action from rich-country governments. If the international community is going to invest in a bold new public-relations initiative, it might as well focus on areas where the potential payoffs are the greatest.

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On the post-MDG era, here is a link to a presentation based on Nepal country study for the forthcoming European Report on Development 2012/13.

Shashi Tharoor argues that the next focus should be in Goal 8, which calls for a “global partnership for development” with four specific targets: “an open, rule-based, predictable, non-discriminatory trading and financial system”; special attention to the needs of least-developed countries; help for landlocked developing countries and small island states; and national and international measures to deal with developing countries’ debt problems.”

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[…]The time has come to reinforce Goal 8 in two fundamental ways. Developed countries must make commitments to increase both the quantity and effectiveness of aid to developing countries. Aid must help developing countries improve the welfare of their poorest populations according to their own development priorities. But donors all too often feel obliged to make their contributions “visible” to their constituencies and stakeholders, rather than prioritizing local perspectives and participation.

[…]We must change the way the world goes about the business of providing development aid. We need a genuine partnership, in which developing countries take the lead, determining what they most acutely need and how best to use it. Weak capacity to absorb aid on the part of recipient countries is no excuse for donor-driven and donor-directed assistance. The aim should be to help create that capacity. Indeed, building human-resource capacity is itself a useful way of fulfilling Goal 8.

Doing so would serve donors’ interest as well. Aligning their assistance with national development strategies and structures, or helping countries devise such strategies and structures, ensures that their aid is usefully spent and guarantees the sustainability of their efforts. Donors should support an education policy rather than build a photogenic school; aid a health campaign rather than construct a glittering clinic; or do both – but as part of a policy or a campaign, not as stand-alone projects.

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Inflationary pressures on Nepali economy

It was published in Nepali Times, ISSUE #622 (14 SEPT 2012 - 20 SEPT 2012).

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Sticky prices

Steep inflation and mounting food prices will leave a big dent in Nepalis' wallets this festive season

In its its latest annual macroeconomic update, the central bank estimated inflation to be at 8.3 per cent, higher than the seven per cent target set in the budget and monetary policy for 2011-12. Nepalis who are struggling to cope with rising prices, especially food prices, find this figure hard to digest. Inflation is eroding people's purchasing power, who spend around 65.1 per cent of their consumption expenditure on food, and is hitting low income earners
the most.

The central bank's figure is low because it gives 46.82 per cent weight to food prices and 53.18 per cent to non-food and services prices while determining inflation, which means that non-food prices have more influence on inflation. Such practice is inconsistent with a recent research that that shows hike in food prices contributes about three-fourths of overall inflation.

The price movements, especially of food items, in the huge informal economy and the current debatable weight given to food and non-food items mean that official inflation figures underestimate the actual prices people pay in the market every day. The central bank's figures which show a decline in food and beverage inflation from 14.7 per cent in 2010-11 to 7.7 per cent in 2011-12 do not reflect reality.

Prices in Nepal have historically moved in tandem with prices in India, thanks to our pegged exchange rate and huge volume of imports. About one-third of price variability here is determined by prices in India. After 2007-08, when the global economy was struck by food, fuel, and financial crises, prices in Nepal started to remain stubbornly sticky at high level. It showed one directional changes only in response to food production and availability domestically, ie when supplies went down, prices went up. But when supplies moderated, prices remained sticky at high level. What happened?

As monetary policies (money supply and interest rate) have little traction on inflation in Nepal, supply side constraints and oil prices are weighing heavily on food and non-food prices. Since aggregate consumption has always been high (about 90 per cent of GDP) for a long time, there is very little extra pressure coming from demand side. Major pressure is exerted by supply side factors along with unjustified price speculation and rigging of product and factor markets by middlemen.

First, some wholesalers have deliberately withheld stocks to bump up prices in order to earn abnormal profits on the eve of Dasain and Tihar when the demand for essential food and non-food items is pretty much price inelastic (demand hardly changes with respect to changes in prices).

Second, though recurrent bandas temporarily disrupted distribution of essential items, wholesalers and retailers capitalised on the strikes to stick to higher prices even after the normalisation of supplies. Third, middlemen are distorting prices and calculatingly keeping them high. For instance, transportation cost and some leakages do not fully justify more than 50 per cent increase in prices of fruits and vegetables after they reach Kalimati from Dharke of Dhading. Powerful politically affiliated middlemen and associations act both as monopsonists (only they purchase food from farmers), and monopolists (only they sell food to wholesalers), in effect depriving farmers of the true price by stifling competition and also burdening consumers with artificially inflated prices.

Fourth, each time supply disruption occurs and oil prices are raised, there is inflationary expectations in the market, especially among retailers who preemptively up prices and keep it higher than the norm of taking 10 to 20 per cent profit only.

Fifth, the frequent hike in fuel prices and load-shedding hours have increased cost of production, which are ultimately reflected in the retail prices. Such fluctuations affect costs at production site, distribution chains, and retail stores. Furthermore, the continually rising imports of goods, especially those from outside of India, and the depreciation of the Nepali rupee have further pushed up prices.

Now, what can the government do about this?

For imported goods, there is little it can do to influence prices because they are determined externally. For those goods produced and sold domestically, especially food items, there is no other option but to strictly supervise distortionary activities by the movers and shakers of the market. It means clamping down on middlemen, setting up fruit and vegetable wholesale markets in strategic shopping locations, monitoring retail prices, and booking those who deliberately withhold supplies against the existing supply policies. Furthermore, the government could also lower import tariffs on food items, raw materials, and intermediate goods.

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Impending rise in food prices in South Asia

With late and low monsoon in South Asia and droughts in major food producing and exporting countries, there are worrying sings that food prices might escalate in the coming months. The FAO Food Price Index averaged 213 points in July 2012, up 12 points from June. Though this is still less than the peak of 238 points reached in February 2011, the point is that overall food prices have started to increase again due to upward price pressures coming from grain, sugar and oil/fats prices. This has come amidst disappointing news about monsoon rains, and floods and droughts in major grain producing nations. South Asia will get particularly affected by this as festival season, when demand for daily consumed food items is higher than normal times, is just around the corner in India, Nepal and other countries in the region.

In its August food price update, the FAO stated that the adverse maize and corn production prospects in the US due to droughts and setback in wheat production in Russia, Kazakhstan, and the Ukraine (which accounts for nearly a quarter of global wheat export) amidst projected sharp rise in demand from livestock sector are driving prices upward. Furthermore, untimely rains in Brazil, the largest sugar exporter in the world, have raised concerns about sugarcane production and its prices in the coming months.

In South Asia, India, which is also the largest producer and exporter of food items, had 21 percent less rainfall than average. The Indian government is considering releasing grains stored in government warehouses around the country. In Nepal, agriculture production is projected to be lower than last year’s due to late and low monsoon and the shortage of fertilizers during peak planting season. Other countries in the region also are one way or the other affected by late monsoon, floods and droughts this year. Consequently, the prospects of high food prices are real and will impact food security situation in the region.

Keeping in mind the impending rise in food prices during and after the festival season, South Asian nations need to be prepared to take actions both at national as well regional level. First, emergency release from stock should be the priority to stabilize prices. Second, market imperfections arising from rigging of prices by middlemen or cartels should be monitored. Third, building crucial agriculture infrastructure such as irrigation and roads for market access also helps as only about one-fifth to two-fifth of farmers are “significant participants” in agriculture markets. Fourth, targeted food subsidies and social protection programs should be designed and implemented well in advance. Fifth, large grain producing and exporting nations like India should refrain from export bans as the other countries in the region are net food importers.

Additionally, realizing the destabilizing impact of droughts on global grain production and contribution to keeping prices high since 2007, in a recent report the FAO highlighted the “need for to transform the way water is used- and wasted- throughout the entire food chain”. Conserving water by using it more “sustainably and intelligently”—such as modernization of irrigation, better storage of rainwater at farm level, recycling and re-using, pollution control, and substitution and reduction of food waste— will not only help boost food production and stocks, but also is an important climate change adaptation strategy. As 75 percent of South Asia’s poor people live in rural areas and depend on rain-fed agriculture, changing the way water is used in agriculture is crucial for supporting livelihoods, sustainably boosting production and controlling food prices. Globally, one-third of food for human consumption is either lost or wasted.

South Asian governments need to closely monitor the prospects for rapidly spiraling food prices and implement appropriate remedial measures as and when required. Else, it will once again push thousands of people below the poverty line, increase vulnerability and heighten food insecurity.

Also, see Trade & Development Monitor, August 2012.

Nepali labor unions demand medal weighing 1kg for 20 years of service

Nepal has seen a lot of labor union activism especially after 2006. The labor unions, who are dictated by political party bosses, have time and again faulted badly despite their claims that their strikes (sometimes destructive!) are aimed at exercising their rights and fair pay. Fair enough as long as it is limited to that.

But, it ain’t given their past record. Read here and here (the demand for rise in wages and perks is not matched by rise in labor productivity!). Remember this time when the unions stroke a deal with the industrialists to not go for strikes for four years? Keeping true to commitments/promises is a tall order for them. Recently, KFC and Pizza Hut were closed down (partly due to labor dispute). Difficult industrial relation/restrictive labor regulation is one of the most problematic factors for doing business in Nepal.

These aside, the mother of all demands by labor unions (affiliated to UCP (Maoist) and CPN-UML)  is this: According to a news report published in Nagarik daily, workers shut down Hotel Greenwich Village demanding, among others, gold medals weighing 1kg for 20 years of service.

Demands include the following (there are 22 points in total):

• Gold medal weighing 1.01 kg for those working for 20 years and 0.550 kg for those working for 15 years in the hotel
• Hike in wages
• Health insurance of up to Rs 50,000 for family
• New clothes and shoes every six months
• Annual salary equal to 16 months of pay

No comments!

Competitiveness of Nepali economy unchanged

The latest Global Competitiveness Report 2012-2013 shows that Nepal’s ranking in competitiveness has remained unchanged at 125 out of 144 countries. Last year, Nepal’s ranking was also 125 out of 142 countries. Nepal’s ranking is the lowest in South Asia, where the most competitive economy is India (last year it was Sri Lanka).

	GCI 2012-2013		GCI 2011-2012	GCI 2010-2011
Country	Rank (out of 144 countries)	Score	Rank (out of 142 countries)	Rank (out of 139 countries)
India	59	4.32	56	51
Sri Lanka	68	4.19	52	62
Bangladesh	118	3.65	108	107
Pakistan	124	3.52	118	123
Nepal	125	3.49	125	130

Competitiveness is defined as “the set of institutions, policies, and factors that determine the level of productivity of a country”.The ranking is based on global competitiveness index, which comprises of 12 categories – the pillars of competitiveness – which together gives a picture of a country’s competitiveness landscape. The pillars are: institutions, infrastructure, macroeconomic environment, health and primary education, higher education and training, goods market efficiency, labor market efficiency, financial market development, technological readiness, market size, business sophistication and innovation.

Switzerland tops the overall ranking for four consecutive year. It is followed by Singapore, Finland, Sweden and Netherland in the top five competitive nations. The least competitive nations are Burundi, Sierra Leone, Haiti, Guinea and Yemen. The report notes that troubled economies in the Euro zone areas—Portugal (49th), Spain (36th), Italy (42nd) and Greece (96th)— “continue to suffer from competitiveness weaknesses in terms of macroeconomic imbalances, poor access to financing, rigid labour markets and an innovation deficit”.

In the emerging markets (BRICS), China is ranked at 29th position, Brazil 48th, South Africa 52nd, India 59th, and Russia 67th.

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Nepal’s case:

Given the political stalemate and lack of introduction of new reform to boost competitiveness along with implementation of existing ones, it is no surprise that there is no improvement in ranking. In 2011-2012, ranking jumped by five positions to 125 compared to 2010-2011 rankings. In 2009-10, Nepal’s ranking was 125 out of 133 countries and in 2010-11, the ranking was 130 out of 139 countries.

Nepal is still a factor-driven economy but its macroeconomic environment is better than that of other factor-driven economies. Its labor market efficiency is below the standard of other factor-driven economies. Nepal still has a long way to go to become an efficiency-driven and then innovation-driven economy.

In basic requirements (institutions, infrastructure, macroeconomic environment, and health and primary education), Nepal’s ranking is 121 (same as last year) out of 144 economies. In efficiency enhancers (higher education and training, goods market efficiency, labor market efficiency, financial market development, technological readiness, and market size), Nepal’s ranking is 126 (an improvement by one position). In innovation and sophistication factors (business sophistication and innovation), Nepal’s ranking is 133 (down by one position). In overall competitiveness index, basic requirements, efficiency enhancers, and innovation and sophistication factors have 60 percent, 35 percent and 5 percent weight respectively.

The best ranking is in macroeconomic environment at 56 out of 144 counties (last year it was 50, which means a bit deterioration this year). Ranking in gross national savings (% of GDP) is 18 and government budget balance (% of GDP) 48. Ranking in women in labor force (ratio to men) is 13.The worst ranking is in infrastructure at 143 out of 144 countries (in quality supply of electricity as well it is 143).

The rankings in the 12 pillars of competitiveness are (last year’s in bracket) : institutions 123 (124), infrastructure 143 (141), macroeconomic environment 56 (50), health and primary education 109 (115); higher education and training 128 (129), goods market efficiency 121 (125), labor market efficiency 125 (128), financial market development 91 (100), technological readiness 129 (130), market size 95 (98); business sophistication 127 (125) and innovation 133 (134).

The report also includes results from perception survey (of business community) on the most problematic factors for doing business. The chart below shows the results. Government instability, corruption, inefficient government bureaucracy, policy instability and restrictive labor regulations are perceived as the top five problematic factors for doing business in Nepal.

Impact of temperature increase on economic growth

By analyzing the historical fluctuation in temperature in 125 countries between 1950 and 2003, Dell, Jones and Olken (ungated version here) found that it does not have significant economic impacts in rich countries, but in poor countries one standard deviation increase in mean annual temperature reduces economic growth by 0.69 percentage points.

A one degree rise in temperature is associated with a 2.66 percentage points reduction in growth of agricultural outputs. in poor countries (for rich countries it is 0.22 percentage points). Also, their results show that an additional 100mm of annual rainfall is associated with 0.18 percentage points higher growth in agricultural output in poor countries and 0.16 percentage points higher growth in agricultural output in richer countries.

Furthermore, high temperature negatively impacts industrial value-added and political stability. They find that a one degree higher temperature in poor countries is associated with 2.04 percentage points lower growth in industrial output.

Overall, higher temperature is associated with political instability in poor countries. Specifically, an additional one degree change in temperature in poor countries is associated with a 2.7 percentage points increase in the probability of any change in POLITY (i.e. Policy IV index which rates political system in each country annually from –10 as fully autocratic and +10 as fully democratic). Political instability impacts factor accumulation and productivity growth. Using another dataset of leadership change, they show that a one degree rise of temperature raises the probability of leader transitions by 3.1 percentage points in poor countries.

Below is the abstract from their paper:

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This paper uses historical fluctuations in temperature within countries to identify its effects on aggregate economic outcomes. We find three primary results. First, higher temperatures substantially reduce economic growth in poor countries. Second, higher temperatures may reduce growth rates, not just the level of output. Third, higher temperatures have wide-ranging effects, reducing agricultural output, industrial output, and political stability. These findings inform debates over climate's role in economic development and suggest the possibility of substantial negative impacts of higher temperatures on poor countries.

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Source: Dell, Jones and Olken (2012); Panels A and B plot the change in average annual growth against the change in average annual temperature between the periods 1970-1985 and 1986-2000, for rich and poor countries respectively.