Stagflation in Nepal

The Kathmandu Post reports that sustained low growth, rising food prices, and high unemployment in the Nepali economy might be a case of stagflation.

Leading experts view the current inflationary pressures combined with low growth rate of around 3.5 present represents initial indications of stagflation, an economic condition of rising prices, high unemployment and slow growth.

“There has been sustained price rise, albeit with declining output which means growth will shrink in the coming days. Since investments are shrinking, the unemployment situation will deteriorate,” Professor Bishwambher Pyakuryal told the Post explaining how the economy portraits a gloomy outlook.

Inflation in the country in the first quarter was around 8.9%. Inflation rate has been hovering around on average of 7% for the past three years. Meanwhile, GDP growth rate is around 2.5-3%. Well, I am not sure whether this is stagflation or an indication of this, especially when the price rise is caused chiefly due to rising food prices and fuel prices (both of them are technically temporary). The inflation rate would have been much more higher had the government not subsidized petroleum fuel products for more than three decades. Consumer demand has been pretty much static for the past couple of years. So, the upward pressure is coming from producers trying to refill depleting stock. People are unnecessarily raising the alarm!

Zoellick offers 10-point plan for tackling food crisis

The World Bank President Robert Zoellick writes in the FT today and offers ten point plan for tackling food crisis:

First, we should agree in Rome to fund fully the World Food Programme’s emergency needs, support its drive to purchase food aid locally and ensure the unhampered movement of humanitarian assistance.

Second, we need support for safety nets, such as distributing food in schools or offering food in return for work, so that we can quickly help those in severe distress. The World Bank, working with the World Food Programme and the Food and Agriculture Organisation, has already made rapid needs assessments for more than 25 countries. In Rome we should agree on co-ordinated action.

Third, we need seeds and fertiliser for the planting season, especially for smallholders in poor countries. Together, the FAO, the International Fund for Agricultural Development, regional development banks and the World Bank can expand this effort by working with civil society groups and bilateral donors. The key is not just financing, but fast delivery systems.

Fourth, we need to boost agricultural supply and increase research spending, reversing years of agricultural underinvestment. We must be neither Luddite nor advocates of a single scientific fix. The Consultative Group on International Agricultural Research has been receiving about $450m a year. We should double this investment in research and development over the next five years.

Fifth, there needs to be more investment in agribusiness so that we can tap the private sector’s ability to work across the value chain: developing sustainable lands and water; supply chains; cutting wastage; infrastructure and logistics; helping developing country producers meet food safety standards; connecting retailers with farmers in developing countries; and supporting agricultural trade finance.

Sixth, we need to develop innovative instruments for risk management and crop insurance for small farmers. Next week the World Bank’s board will consider weather derivatives for developing countries, with Malawi being identified as a likely first client. Should Malawi suffer a drought it would receive a payout to offset the price of imported maize.

Seventh, we need action in the US and Europe to ease subsidies, mandates and tariffs on biofuels that are derived from corn and oilseeds. The US’s use of corn for ethanol has consumed more than 75 per cent of the increase in global corn production over the past three years. Policymakers should consider “safety valves” that ease these policies when prices are high. The choice does not have to be food or fuel. Cutting tariffs on ethanol imported into the US and European Union markets would encourage the output of more efficient sugarcane biofuels that do not compete directly with food production and expand opportunities for poorer countries, including in Africa. We need to find ways to advance to second-generation cellulosic products.

Eighth, we should remove export bans that have led to even higher world prices. India has recently relaxed its restrictions. But 28 countries have imposed such controls. Removing these could have a dramatic effect. With only 7 per cent of global rice production traded on markets, if Japan released some of its stocks for humanitarian purposes and China sold 1m tons of its rice, we could damp the price immediately.

Ninth, we should conclude a Doha World Trade Organisation deal in order to remove the distortions of ag­ricultural subsidies and create a more adaptable, efficient and fair global food trade. The need for rules that are agreed multilaterally has never been stronger.

Tenth, there should be greater collective action to counter global risks. The interconnected challenges of energy, food and water will be drivers of the world economy and security. We might explore an agreement among the G8 and key developing countries to hold “global goods” stocks, modelled on the International Energy Agency, governed by transparent and clear rules. This would act as insurance for the poorest people, offering affordable food.

Paul Collier offers "4 ways to improve the lives of the bottom billion"

Around the world right now, one billion people are trapped in poor or failing countries. How can we help them? Economist Paul Collier lays out a bold, compassionate plan for closing the gap between rich and poor. (Source: TED)

Lake from quake!

In this photo released by China's Xinhua News Agency, partially submerged Yuli Town of worst-hit Beichuan County, southwest China's Sichuan Province is seen Wednesday, May 28, 2008. More and more buildings and roads of Yuli Town were submerged because of the swollen Tangjiashan quake lake, Xinhua said. (Source: AP)


An aerial view shows the landslide mud that formed the Tangjiashan quake lake near Beichuan county, Sichuan province, May 26, 2008, in this picture distributed by China's official Xinhua News Agency.

This combination picture of satellite images taken by Taiwan's National Space Organisation (NSPO) shows a lake being formed by landslides caused by the recent earthquake in Beichuan county, Sichuan province, China. The top picture shows the river in 2006. The second and third image show the lake after the quake. (Formosat image © 2008 Dr. Cheng-Chien Liu, National Cheng-Kung University and Dr. An-Ming Wu, National Space Organization, Taiwan/Reuters)

WEF Report: Africa @ Risk 2008

World Economic Forum (WEF) has published a report on Africa highlighting four key risks for Africa: food security, geopolitical instability, economic shocks and climate change. It says that the prospect of sustaining 5% growth rate is credible, but a number of risks loom large, threatening future development and stability.

1. Food and Freshwater Security – How best can Africa cope with increasing food and freshwater insecurity? What are the risks and opportunities for the region?

2. Geopolitical Instability – Can Africa sustain and consolidate progress on transparent and democratically accountable governance? Can it increase its institutional capacity to prevent, manage and resolve both intrastate and interstate conflict?

3. Economic Shocks – Can African resource-rich countries reduce their commodity dependency by diversifying their economies? How can wealth be better distributed? How can African countries increase their trade benefits?

4. Climate Change, the Environment and Challenges to Africa’s Development – How will global warming affect Africa? How best can the region, countries, businesses and communities adapt to mitigate its effects?

Urgent collective action is required, including raising agricultural productivity, strengthening local adaptation to climate change, improving governance and enhancing economic resilience through diversification. Decision-makers cannot assume that tomorrow’s growth story will read like today’s. The economic fundamentals are in place, but political dynamics and the scope of structural reforms are more likely to shape the next chapter. The report concludes that for Africa – a continent characterized by huge opportunities and ever-increasing regional and global interdependence – the imperative is for collective action to mitigate these shared risks.

Easterly on The Growth Report

Easterly loathes planners. This time he blasts Michael Sepence and his team their their two year long research on finding the sources of growth. He argues that the outcome of $4m investment on Commission on Growth and Development is an inconclusive big report; their answer to high growth, as Easterly reads the report, is: "we do not know, but trust experts to figure it out."

[...]This conclusion is fleshed out with statements such as: “It is hard to know how the economy will respond to a policy, and the right answer in the present moment may not apply in the future.” Growth should be directed by markets, except when it should be directed by governments.

My students at New York University would have been happy to supply statements like these to the World Bank for a lot less than $4m.

[...]The Growth Commission correctly pointed out that such an attempt to find secrets to growth has failed. The Growth Commission concluded that “answers” had to be country specific and even period specific. But if each moment in each country is unique, then experts cannot learn from any other experience – so on what basis do they become an “expert”?

[...]The commission made the common mistake of anointing high growth rates as the measure of success, whereas high growth mysteriously comes and goes. Indeed, only two of the 13 high-growth episodes the commission studied were still going at the time of the study. Yesterday’s growth failures (for example India) are today’s successes and yesterday’s growth successes (for example Brazil) are today’s failures. Much of this volatility is inexplicable and unpredictable. To give credit to whatever leader happens to be in power during a burst of high growth is just circular reasoning (How do we know they were a great leader? Because there was high growth!).

As always Easterly blasts the WB and similar 'development expert' models. He argues that growth is accidental and unpredictable by bringing in Hayekian perspectives of serchers and spontaneous order.

What to do in a world of such unpredictability? There are some general principles and they do not require experts. Another Nobel laureate gave the crucial insight a long time ago – the answer is freedom for multitudinous individuals to figure out their own answers. Friedrich Hayek said: “Liberty is essential to leave room for the unforeseeable and unpredictable; we want it because we have learned to expect from it the opportunity of realising many of our aims. It is because every individual knows so little and ... because we rarely know which of us knows best that we trust the independent and competitive efforts of many to induce the emergence of what we shall want when we see it.”

The evidence for this vision is not found in those baffling fluctuations of growth rates, it is in the levels of development attained in the long run. Confirming Hayek, systems that give more liberty to individuals – featuring both more economic and political freedoms – are associated with much less poverty. The evidence for this comes from both history (for example old, despotic, poor Europe compared with modern, free, rich Europe) and cross-country comparisons (for example South Korea compared with North Korea, former West Germany compared with East, New Zealand compared with Zimbabwe). This alternative paradigm has a much smaller role for experts, because experts cannot direct or impose freedom from the top down (or else it would not be freedom).

I do not totally agree with Easterly and think that industrial policy and highly specific government intervention can work to rectify market failures. More here and here. More on the Growth Report here and here.

Nepal becomes a Federal Democratic Republic

Today Nepal became the newest member of the federal republic clubs. Nepal was declared Federal Democratic Republic today by first meeting of the Constitution Assembly. With this comes the ending of centuries old monarchy in Nepal. More here. More from BBC News.

To loud cheers and resounding handclaps, the first sitting of the Constituent Assembly (CA) unanimously declared the country a republic late on Wednesday night, with only four votes against. The much-anticipated meeting took the decision late on Wednesday night after a nearly ten-and-a-half-hour delay, effectively ending the 240-year-old institution of monarchy and making the king an ordinary citizen.

The Chairman of the CA KB Gurung announced that the proposal to declare the country a federal democratic republic which was tabled at the CA meet was passed with a majority vote on Wednesday at the historic meeting held at the Birendra International Convention Centre (BICC) in the capital. Out of a total 564 votes, the proposal garnered 560 votes in its favour, while only four votes were cast against the proposal.

“In the context of implementing a republic in the country, the CA meeting directs the now then King residing at the Narayanhiti palace and the private secretariat structure concerning him to leave within fifteen-days,” said Gurung reading out the government’s decision. He also directed the Nepal government to immediately control and manage the Narayanhiti palace which has now become a national property.

Home Minister Krishana Prasad Sitaula, on behalf of Prime Minister Girija Prasad Koirala, tabled the proposal for the implementation of a federal democratic republic at the CA meeting before the final votes were cast.

The CA, elected through the landmark election held last month, formally passed the proposal, bidding farewell to the only Hindu King of the world.

Emerging from the meeting, NC leader and Minister for Peace and Reconstruction Ram Chandara Poudel said,” Today we have agreed to transform the country into a federal democratic republic and oust the king and replace it with a presidential system.” Poudel added that the cabinet will sort out all the remaining issues such as the powers and duties of the president and the Deputy-President. In a meeting held at Baluwatar in the run-up-to the first CA sitting, the ruling Seven-Party alliance (SPA) agreed on a provision of a constitutional president who will execute his duties on the recommendations of the cabinet. However, in what appeared to be an eleventh-hour syndrome, the major constituents of the CA failed to reach a common agreement on other key issues until late Wednesday evening.

The 601-member CA is assigned with the responsibility of writing a new constitution and ushering the country into a new era.

On Tuesday, a total of 568 CA members took the oath of office and secrecy after being elected in the landmark CA polls conducted under First-Past-the-Post and Proportional Representation electoral systems in April.

The former rebels CPN-Maoists won 220 seats in the April 10 ballot, Nepali Congress won 110 seats, while the CPN -UML secured 103 and the newly emerged party Madhesi People’s Rights Forum (MPRF), representing Madhes the country’s southern plains along the Indian border, won 52 seats.