Chart of the week: Favored channels of ODA delivery in fragile and non-fragile nations

Below is an illustrative chart (sourced from OECD’s publication Fragile States: Resource Flows and Trends) that shows the amount of aid money entering a country through various channels.

In Nepal, a large portion of foreign aid goes "non reported" and those reported are channeled through public sector, followed by NGOs, multilateral agencies, and others. No aid flowing through PPP (understandably so considering the lack of viable PPP institutional and regulatory frameworks). The report notes that Nepal is chronically under-aided (p.88, Box: 3.1).

NEPAL: Interesting flights data in FY2012

Here are interesting stats that I picked up from Sangam’s article in The Kathmandu Post:

• Domestic passenger movement dropped 0.55 percent to 1.575 million in 2012 (attributed to high domestic prices due to high fuel charges, less bandhs and more luxury coaches, slow economic growth and real estate activities, and low capital spending).
• The Nepali skies saw 70,877 flights in the review period, a drop of 10.49 percent.
• An average 195 planes took off and landed at TIA daily (Thats about 16 take offs and landing per hour if the domestic terminal opens for 12 hours a day).
• High fuel surcharge:
• Flying from Kathmandu to Bhadrapur now costs Rs 6,550 (Rs 3,250 fare and Rs 3,300 fuel surcharge), compared to Rs 4,200 in 2010.
• The normal airfare to Pokhara has soared to Rs 4,035 from Rs 2,500 two years ago. Fuel accounts for more than 30-35 percent of their overall operating cost
• Oligopolistic market:
• Buddha Air secured 60 percent of the market share among the seven commercial domestic airlines. The carrier flew 881,611 travelers in 2012, up 27.59 percent. Yeti Airlines took 28.74 percent.
• Yeti flew 452,806 travellers in 2012, a slim growth of 0.74 percent compared to 2011.
• Apart from these two rivals, all five airlines saw a negative growth.
• Collapse and irregular operation of struggling airlines like Agni Air, Guna Airlines and Sita Air benefited Buddha and Yeti.

Value added trade and global value chains

The global trade landscape is changing along with the development of sophisticated global value chains (intra-firm or inter-firm, regional or global). The gross trade figures hide the real value addition that takes place while a good or service is produced in a country or across countries. The WTO already has a website that details value added trade. Here is an earlier blog post based on it. Also, here is more on why value added is a better measure of trade.

In its latest report on global value chains, the UNCTAD argues that 80% of global trade takes place in value chains linked to transnational companies. It states that as much as 28% of gross exports is actually double counted due to non adjustment of value addition during each production process scattered across many countries. It also shows that production and trade of goods and services are linked at some stage.

It recommends developing countries to “engaging” in GVCs, “upgrading” along GVCs, and “leapfrogging” and “competing” via GVCs. The ideal outcome for developing countries would be to an increase in global value chain participation with higher value added goods and services. GVCs participation could help developing countries build their productive capacities (through technology dissemination and skill enhancement).

Excerpts from the latest UNCTAD report:

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GVCs make extensive use of services. While the share of services in gross exports worldwide is only around 20 per cent, almost half (46 per cent) of value added in exports is contributed by services sector activities, as most manufacturing exports require services (such as engineering work, software development, and marketing) for their production. In fact, a significant part of the international production networks of TNCs is geared towards providing services inputs, with more than 60 per cent of global foreign direct investment (FDI) channelled to services activities. By comparison, 26 per cent of FDI goes to manufacturing and 7 per cent to the primary goods sector. The picture is similar for developed and developing economies.

The majority of developing countries, including the poorest, are increasingly participating in GVCs. The developing-country share in global value-added trade increased from 20 per cent in 1990 to 30 per cent in 2000, and is over 40 per cent today. Again, the role of TNCs is critical, as countries with a higher presence of FDI relative to the size of their economies tend to have a higher level of participation in GVCs and a greater relative share in global value-added trade compared to their share of global exports.

GVC links in developing countries can play an important role in economic growth. Domestic value-added – that is, an improved capacity of an economy to produce a broader variety of goods, and goods of greater complexity – resulting from GVC trade can be very significant relative to the size of local economies. In developing economies, value-added trade contributes some 28 per cent to countries’ GDPs on average, as compared to 18 per cent for developed economies. Furthermore, there appears to be a positive correlation between participation in GVCs and GDP per capita growth rates. The economies with the fastest-growing GVC participation have GDP per capita growth rates some 2 percentage points above average.

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Female migrants and income thresholds

An interesting study based on household data in Sri Lanka by Sanjaya DeSilva. The author finds that while households with female migrants experience enhanced catching up in terms of income level, households with male migrants see their economic position strengthened. Also, remittances from female migrants are used for home improvements and farm and nonfarm assets accumulation. Excerpt from the study is below:

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Utilizing a nationally representative sample of households from Sri Lanka, this study examines gender differences in the long-term impact of temporary labor migration. We use a propensity score matching (PSM) framework to compare households with return migrants, households with current migrants, and equivalent nonmigrant households in terms of a variety of outcomes. Our results show that households that send women abroad are relatively poor and utilize migration to catch up with the average household, whereas sending a man abroad allows an already advantaged household to further strengthen their economic position. We also find that remittances from females emphasize investment in home improvements and acquisition of farm land and nonfarm assets, whereas remittances of men are channeled more toward housing assets and business ventures.

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Emerging cities: Future economic centers of the world

McKinsey Quarterly has an interesting analysis about the future economic centers of gravity in the world, i.e. cities. It also ranks emerging cities based on population, GDP, floor space, municipal water and containers.

It estimates that by 2025, emerging cities will create over 4 billion “consumer class” with a total demand potential of $25 trillion. Here is a link to an illustrative chart on emerging global cities. Unfortunately, none of the cities in Nepal feature in the list. But, the emerging cities with high-income consumers are mostly from China and India, the two countries that share borders with Nepal.

Excerpts from the report:

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Our research indicates that 440 emerging-market cities, very few of them “megacities,” will account for close to half of expected global GDP growth between 2010 and 2025 (Exhibit 1). Crafting and implementing strategies that emphasize such cities will require new attention from senior leaders, new organizational structures that take account of urban rather than just regional or national markets, and potentially difficult choices about which activities to scale back elsewhere to free up resources for new thrusts.

Companies that adopt such a strategic approach may gain early-mover benefits. For some, developing better insights into demographic and income trends—such as an understanding of the urban areas where the population of older, wealthier consumers is growing most rapidly—will be sufficient. Others may need to dig deeper, learning the market dynamics of specific products in target cities. To illustrate the different panoramas of opportunity that appear when companies use a city-specific lens, we looked at five business sectors, each with different demand profiles. We then ranked cities with the highest growth potential for each of the sectors. Among the takeaways:

• Companies marketing health care products to seniors would find Shanghai and Beijing topping the list of cities with growing populations of older consumers whose incomes are sufficiently high (above $20,000 on a purchasing-power-parity basis) to afford these products. Tokyo and Osaka are the only developed-world cities among the top ten—a sign that well-off, aging consumers no longer are found exclusively in developed markets.
• Baby food is at the other end of the age spectrum. Combining income and demographic data—in particular, the numbers of households with young children—we found that cities in Africa offer great potential. More than half of the top ten cities enjoying rapid growth in the number of children who live in households with incomes from $7,500 to $20,000 (on a purchasing-power-parity basis) are in Africa.
• São Paulo, Beijing, Rio de Janeiro, and Shanghai rank highest in a targeted analysis of market growth for laundry products. In fact, over the next decade, São Paulo will experience more growth in the sale of detergents and related cleaning products than the national markets of France or Malaysia will. That’s just a small shard in the global-consumption mosaic for emerging cities. We project that urban consumers in developing countries will spend an additional $14 trillion annually by 2025.
• By 2025, cities worldwide will need to spend at least $10 trillion more per year on physical capital—everything from office towers to new port facilities—than they do today. In building construction, the new floor space required will be equivalent to 85 percent of today’s entire residential and commercial building stock; 40 percent of that growth will be in Chinese cities.
• Urban water-related infrastructure, another pressing need, will require $480 billion in global investment by 2025, with 80 percent of that flowing to emerging-market cities. Mumbai and Delhi will be the leaders in that spending.

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Read more here.

New infrastructure and economic activities

Here is an interesting news story about the multiplier effect from increased road connectivity. Want to boost local economic activities and income? Connect villages and districts with new and better infrastructure (roads, bridges, telephone, irrigation, etc.). The news story states that income of orange farmers has gone up five folds after increased connectivity. There are positive externalities as well (e.g., new education institutions are established).

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The construction of the Surkhet-Jumla stretch of the Karnali Highway has brought about tangible changes in the lives of locals of Pili and surrounding villages in Kalikot district. The Pili village has now become a business hub for the eastern belt of the district, where people from over two dozen VDCs run hotels, stationery shops and groceries.

As local produce now reaches the market with ease, locals have started adopting agriculture and animal husbandry and have bought plots of land in towns such as the district headquarters of Manma and Surkhet with the income. The price of land in Pili has also gone up, thanks to the road access.

Local farmer Jaya Bahadur Shahi said locals are  now finding it easier to ferry their produce to Jumla and elsewhere after a suspension bridge was built at Talasera, linking Pili with Gela VDC.

Farmer Padam Malla said that earlier they sold an orange for Rs 1, but now the same orange goes for Rs 5.

The Kalika Secondary School (KSS) has been established in the village itself, giving the local children easy access to education. Earlier, the children had to walk four hours to the nearest lower and secondary level schools. Local teacher Purna Bahadur Shahi said the road has helped people “become independent.”

Hamsha Bahadur Shahi, headmaster of the KSS, said the new road has kept local people in the villages as now they don’t have to look for job opportunities elsewhere.

Local resident Raj Bahadur Malla echoed Shahi and recalled how he had to set out for India in search of jobs in the past. “I am now earning Rs 15,000 to Rs 20,000 a month here,” said Raj Bahadur, who runs a hotel and a grocery store in his 12-room house in Pili.

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Now, with the new infrastructure in place, there also should be enough funds for operation and maintenance of such infrastructure. It will help ensure sustainability of such productive investments.

Mid-year review of FY2013 budget scales back GDP growth to 4.1%

The Ministry of Finance has released a mid-year review of budget for FY2013. At the outset note that this year Nepal is not having a full budget so far due to lack of political consensus as the opposition parties contend that the caretaker government prior to election is not authorized to launch full budget with new programs and policies. Consequently, Nepal had a one-third budget in July 2012 and followed by two-third budget in November 2012.

It means the economy still doesn’t have a full budget. Now, readers might be wondering what is the big deal if things are going fine. Well, a full budget comes with around six associated bills, including those on revenue policies and internal borrowing. Revenue policies are guided by Finance Act 2012 and internal borrowing is not allowed right now. Furthermore, the present budget is pretty much the same size as of last year’s actual expenditure. Considering inflation of above 10%, we are actually seeing a real contraction of spending allocation, let alone the capacity to spend given the political difficulties.

Anyway, here are some of the relevant stuff from the mid-year review:

• GDP growth rate for FY2013 revised to 4.1% from 5.1% considering the impact of unfavorable monsoon and low capital expenditure.
  • Projected agriculture sector growth: 0.7%
  • Projected non-agriculture sector growth: 5.4%
• Total expenditure stood at 29.59% of total allocation. Capital expenditure was around 15% (Rs 7.66 billion) of the allocated amount for FY2013 (Rs 51.3 billion). All expenditures (recurrent and capital) are lower than what was achieved in the first half of FY2012 (overall down by 6.3%). Recurrent expenditure is down by 3.05% and capital expenditure by 19.90%.
• Revenue mobilization was Rs 134.56 billion, 2.04% higher than the target.
• Average inflation was 10.7%.
• Exports increased by 9.3% and imports by 25.2%. Balance of payments surplus dropped to Rs 6.7 billion.
• A number of important projects—especially those tagged as national pride projects— have seen some progress.
• Private sector added 30 MW electricity to the national grid. More power imports from India and 38 MW electricity generation from thermal and diesel plants helped contain power cuts to around 12 hours a day.
• Deposits of BFIs increased by 4.8%, but loans increased by 5.3%. Liquidity declined by 15.1% (down by Rs 30.30 billion) as the government could not spend enough and banks could not attract deposits with relatively low interest rates.

The revised GDP growth figure still looks quite optimistic given the continued slowdown in construction sector and slowing down of growth of remittance inflows, which will then hit services sector growth. Earlier, the IMF, ADB, and the WB estimated GDP growth at 3.8%. The IMF recently indicated that it expects growth to fall below 3.8% estimate.

Also, though the capital spending is low, we might see pick up in spending in the last three months of FY2013 as in the previous years. But, overall spending level might fall short of the already low level reached in FY2012 (dropped to 3.3% of GDP from 7.9% of GDP in FY2011).