Challenges to growth

Michael Spence lays out the steps to overcome the challenges to growth (mostly in developed countries):

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• First, expectations are or have been out of line with reality. It takes time for the full impact of deleveraging, structural rebalancing, and restoring shortfalls in tangible and intangible assets via investment to manifest itself. In the meantime, those who are bearing the brunt of the transition costs – the unemployed and the young – need support, and those of us who are more fortunate should bear the costs. Otherwise, the stated intention of restoring inclusive growth patterns will lack credibility, undercutting the ability to make difficult but important choices.

• Second, achieving full potential growth requires that the widespread pattern of public-sector underinvestment be reversed. A shift from consumption-led to investment-led growth is crucial, and it has to start with the public sector. The best way to use the advanced countries’ remaining fiscal capacity is to restore public investment in the context of a credible multi-year stabilization plan. This is a much better path than one that relies on leverage, low interest rates, and elevated asset prices to stimulate domestic demand beyond its natural recovery level. Not all demand is created equal. We need to get the level up and the composition right.

• Third, in flexible economies like that of the US, an important structural shift toward external demand is already underway. Exports are growing rapidly (outpacing import growth), owing to lower energy costs, new technologies that favor re-localization, and a declining real effective exchange rate (nominal dollar deprecation combined with muted domestic wage and income growth and higher inflation in major developing-country trading partners). Eventually, these structural shifts will offset a lower (and more sustainable) level of consumption relative to income, unless inappropriate increases in domestic demand short-circuit the process.

• Fourth, economies with structural rigidities need to take steps to remove them. All economies must be adaptable to structural change in order to support growth, and flexibility becomes more important in altering defective growth patterns, because it affects the speed of recovery.

• Finally, leadership is required to build a consensus around a new growth model and the burden-sharing needed to implement it successfully. Many developing countries spend a lot of time in a stable, no-growth equilibrium, and then shift to a more positive one. There is nothing automatic about that. In all of the cases with which I am familiar, effective leadership was the catalyst.

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Inflation in Nepal: Recent development & outlook

Here is a brief presentation on the recent inflationary development and outlook.

Inflation in Nepal: Recent Development and Outlook

Current state of Nepali economy (2014 edition)

Here are the presentation slides from a recent talk on the current state of Nepali economy. Similar presentation done in 2012 here.

Current State of Nepali Economy 2014

Remittances and tax mobilization in Nepal

Consumption tax and customs duty make up about 72% of Nepal's tax revenue mobilization. Too reliant on remittances-backed imports and consumption for tax revenue.

Agglomeration or business environment: Which is more important for job creation?

Abstract of a working paper by Clarke et al (2013):

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Based on a comprehensive worldwide firm survey, this paper looks at how the business environment and economic agglomeration affect job creation, holding constant conventional determinants of firm growth, such as firm ownership, size, and age. The analysis finds that economic agglomeration is most important, especially modern telecommunications, access to export markets, concentration of economic activity in large cities, and capacity agglomeration (the concentration of large firms in a city). Although the business environment affects job growth less than agglomeration does, some elements of the business environment matter, such as labor flexibility, unionization, and local skill levels. There is strong heterogeneity in job creation across firm size and age.

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Nepal's and Africa's structural transformation

Africa's ongoing structural transformation is strikingly similar to Nepal's slow structural transformation. It is characterized by the shift of workers and economic activities from agriculture sector to low productive, low-value added services sector activities, resulting in a slowdown in transformation. Eventually, there aren't enough jobs for the youth and the economy is stuck in a low growth trap.

Most of the GDP growth is coming from non-tradable sectors such as construction, retail and wholesale trade and real estate and housing. The demand for these services sector activities are in turn driven by public expenditure, and remittances. Tradable sectors such as manufacturing and high-value agriculture activities are not prominent. Worse, more and more workers are shifting to informal activities in services sector until they find jobs overseas. Addressing this will be one of the major economic challenges for the Constituent Assembly II, if the country wants to realize its goal of graduating from LDC status by 2022. 

Dani Rodrik writes about Africa's structural transformation:

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As researchers at the African Center for Economic Transformation in Accra, Ghana, put it, the continent is “growing rapidly, transforming slowly.”

In principle, the region’s potential for labor-intensive industrialization is great. A Chinese shoe manufacturer, for example, pays its Ethiopian workers one-tenth what it pays its workers back home. It can raise Ethiopian workers’ productivity to half or more of Chinese levels through in-house training. The savings in labor costs more than offset other incremental costs of doing business in an African environment, such as poor infrastructure and bureaucratic red tape.

But the aggregate numbers tell a worrying story. Fewer than 10% of African workers find jobs in manufacturing, and among those only a tiny fraction – as low as one-tenth – are employed in modern, formal firms with adequate technology. Distressingly, there has been very little improvement in this regard, despite high growth rates. In fact, Sub-Saharan Africa is less industrialized today than it was in the 1980’s. Private investment in modern industries, especially non-resource tradables, has not increased, and remains too low to sustain structural transformation.

As in all developing countries, farmers in Africa are flocking to the cities. And yet, as a recent study from the Groningen Growth and Development Center shows, rural migrants do not end up in modern manufacturing industries, as they did in East Asia, but in services such as retail trade and distribution. Though such services have higher productivity than much of agriculture, they are not technologically dynamic in Africa and have been falling behind the world frontier.

[...]The African economic landscape’s dominant feature – an informal sector comprising microenterprises, household production, and unofficial activities – is absorbing the growing urban labor force and acting as a social safety net. But the evidence suggests that it cannot provide the missing productive dynamism. Studies show that very few microenterprises grow beyond informality, just as the bulk of successful established firms do not start out as small, informal enterprises.

[...]Two decades of economic expansion in Sub-Saharan Africa have raised a young population’s expectations of good jobs without greatly expanding the capacity to deliver them. These are the conditions that make social protest and political instability likely. Economic planning based on simple extrapolations of recent growth will exacerbate the discrepancy. Instead, African political leaders may have to manage expectations downward, while working to increase the rate of structural transformation and social inclusion.

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Trade liberalization and informal sector

Abstract of a working paper by Arias et al (2013), who argue that the entry costs to informal employment is significantly lower and that trade liberalization leads to a rise in the number of informal sector workers as previously idle workers enter the labor market:

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Informal employment is ubiquitous in developing countries, but few studies have estimated workers' switching costs between informal and formal employment. This paper builds on the empirical literature grounded in discrete choice models to estimate these costs. The results suggest that inter-industry labor mobility costs are large, but entry costs into informal employment are significantly lower than the costs of entry in formal employment. Simulations of labor-market adjustments caused by a trade-related fall in manufacturing goods prices indicate that the share of informally employed workers rises after liberalization, but this is due to entry into the labor market by previously idle labor.

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