Economics, India and Pakistan

Better trade relations (should) overshadow military might and enmity! India and Pakistan cannot afford to quibble around LOC and Kashmir issues forever. SAFTA is virtually dead just because of cold ties between these two nations. Every time there is a SAARC summit, the central focus is on bitter ties between these two countries rather than on regional trade, poverty, and cooperation.

...Not only does Mr. Zardari want better ties with Delhi, he notes that "there is no other economic survival for nations like us. We have to trade with our neighbors first." He imagines Pakistani cement factories being constructed to provide for India's huge infrastructure needs, Pakistani textile mills meeting Indian demand for blue jeans, Pakistani ports being used to relieve the congestion at Indian ones. For a country that spent most of its existence trying to show that it's the military equal of its neighbor, the agenda amounts to a remarkable recognition of the strides India has made in becoming a true world power.

...To his credit, Mr. Zardari's answer involves more than simply passing around the collection plate. When I ask whether he would consider a free-trade agreement with traditional archenemy India, Mr. Zardari responds with a string of welcome, perhaps even historic, surprises. "India has never been a threat to Pakistan," he says, adding that "I, for one, and our democratic government is not scared of Indian influence abroad." He speaks of the militant Islamic groups operating in Kashmir as "terrorists" -- former President Musharraf would more likely have called them "freedom fighters" -- and allows that he has no objection to the India-U.S. nuclear cooperation pact, so long as Pakistan is treated "at par." "Why would we begrudge the largest democracy in the world getting friendly with one of the oldest democracies in the world?"

More here.

Easterly's lesson on development economics

As always, Easterly gibes at the development aid community (depression mindset of the development community) obsessed with for forever focusing big reforms from big governments in the developing countries. He is unhappy with the leftist leaders in Latin America for making stinging comments against capitalism. And, he offers a brief lesson on development economics; this time going after Arthur Lewis!

Development economics -- the study of how poor countries can become rich -- was forever cursed by the timing of its birth after the Great Depression. That gave development economics a bias toward relying on governments, rather than markets, to create growth. The early development economists ignored a century and a half of European and North American development through individual enterprise, remembering only that their governments forcefully intervened to stimulate output during the 1930s.

...the U.N.'s Depression mindset prompted them to ask an expert commission led by Sir Arthur Lewis in 1950 to prepare a report on unemployment in underdeveloped countries. Its report concluded that "economic progress depends to a large extent upon the adoption by governments of appropriate . . . action," and that political leaders must have a strategy for such growth, reflecting "the facts of each particular case."

Few at the time disagreed. Oxford economics professor S. Herbert Frankel wrote a rare protest in 1952. He believed poor, ordinary people had "peculiar aptitudes for solving the problems of their own time and place," a confidence later vindicated by homegrown success in Botswana, the East Asian tigers, India, Chile, Turkey and China.

Lewis later received a Nobel Prize in Economics. Poor Frankel was basically forgotten.

Development economics still bears the scars of the Depression.

XDR TB: The Forgotten Plague

The dangers of another health epidemic (Extensively Drug-Resistant TB). The good news is that it is preventable but more consolidated effort and funding/aid from the international community is needed. No time to debate the ideological differences between Sachs and Easterly; the danger is real, it is preventable, and it needs to be done now so that no more lives are perished. The methodology and supervision of effective use of funding/aid is, however, debatable. Sometimes sub-optimal outcomes can be better and can save lives while cruising on an ideological debate for optimal aid spending.

In 2005 the disease was diagnosed in 9.2 million more people, almost exclusively in the developing world, and 1.7 million people died from it. More alarming is a growing subset of TB cases, estimated at half a million, that are resistant to more than one of the handful of anti-TB drugs. While they still make up only 5% of the total annual TB burden, these cases of multidrug-resistant and extensively drug-resistant TB are mushrooming, fueled by the surge in AIDS and by health-care systems that have ignored the threat of TB for too long.

But it doesn't have to be this way. TB is an entirely preventable and treatable disease. And the drug-resistant strains beginning to emerge in Africa, Russia, China and India, say experts, are epidemics of our own making. Unlike HIV, the tubercle bacillus succumbs to powerful medications. But these drugs are not where they need to be, and when they are, spotty monitoring and poor health infrastructure make it hard to ensure that patients take their daily doses for the six months that are needed to eradicate the infection--all of which encourages drug-resistant strains to survive and keep the disease going.

Lessons from the US financial crisis to the Nepali financial sector

Here is a nice article from my colleague (we worked worked together at The Kathmandu Post business desk back in 2004/05) Santosh Pokharel, who is currently studying economics at the University of Virginia, about the lessons Nepal’s premature financial sector and the central bank can be learn from the current US financial crisis, triggered arguably by the bust in housing bubble, leading to collapse of powerful investment firms and run on banks.

Bank runs are not new to Nepal. The most recent one happened in 2006, forcing the central bank to overtake troubled Nepal Bangladesh Bank. He predicts that there might already be a bubble developing in Nepal’s share market and real estate market. I won’t be surprised if this bubble bursts (mainly triggered by rising inflation or some banks plunging in trouble) because the tremendous growth in these sectors is not consistent with the average GDP growth rate of 3% in the past seven years.

…The growth in the equity market is good for the overall development of the economy. However, speculative growth where the "fundamentals" of the underlying market are not sound creates a market bubble. There are no economic or financial statistics that supports the current boom in equity and real estate. Considering the growth rate of 2-3 percent for the last five years, a few significant national-level investment projects and a wounded economy staggering out of a decade-long conflict, it's hard to argue against the premise that the current share and land markets are a bubble.

All of this has coincided with the increased exposure of commercial banks and finance companies to equity and real estate. Responding to the public's interest in stocks and real estate, these financial institutions have been providing easy loans to people wishing to invest in them. This has helped to inflate share and land prices and create a market bubble.

…In the Nepali banking context, there are reasons to be concerned about the exposure of commercial banks and finance companies to equity and real estate market. Because of lack of investment opportunities in other sector, financial institutions have been pouring money in real estate and equity market. While unprecedented remittance inflow has helped sustain the deposit mobilization growth even in the light of growing number of these financial institutions, there aren't enough areas for investment outlays to support the growing deposit base. Hence financial institutions don't have much of a choice but to provide loans for investment in equity and real-estate market.

…Anticipating higher returns, people without any background in investment or any professional guidance are taking out loans to invest in these markets. Because of increasing competition, financial institutions are providing loans without proper credit and income check. All of these factors have helped to inflate stock and real-estate prices. However, when the bubble finally busts either in equity or real estate market, there will be an immediate impact on the balance sheet position of these financial institutions.

Is the Indian growth rate sustainable?

No! according to this piece which puts doubts on the sustainability of Indian economic growth rate, which the author argues is more cyclical in nature than is structural as has been assumed so far.

During the fiscal years 1980-81 to 1990-91, the average GDP growth rate was 5.38 per cent... In comparison, the average growth rate between 1990-91 and 2006-07 was 6.23 per cent, an increase of less than one percentage point.

On the other hand, reforms in China had galvanized the economy to such an extent that they had an inexplicably long run of double-digit real GDP growth rate. India has never achieved a double-digit growth rate.

The sectoral detail is even more alarming. Agricultural growth decelerated from an average of 3.39 per cent in the pre-reform period to 2.77 per cent. Even the industry didn't really do too well. The average growth rate was lower by nearly 0.57 per cent, as it decelerated from 6.72 per cent to 6.15 per cent.

…Let's take the agricultural sector.A sector that supports nearly 70 per cent of the country's population has seen a steady decline. A slide that even reforms failed to stem. India's agricultural productivity, in most cases, is one of the lowest in the world…So what have reforms delivered to the nearly 70 per cent of India's population? Nothing!

…The government's average annual development expenditure growth rate plummeted by more than 6 percentage points, falling from an average 15.97 per cent during 1980-81 to 1990-91 to an average of 9.75 per cent during the post-reforms period…When the focus is only on reducing the fiscal deficit, the brunt of fiscal correction is often borne by a reduction in capital expenditure. With the quality of fiscal correction remaining questionable, the growth potential of the Indian economy gets compromised.

…High growth, recorded during the last few years, seems to be more cyclical in nature than structural. Strong global growth, benign inflationary situation and ample liquidity sloshing around caused by a loose monetary policy, both globally and in India, led to this strong growth.

…The sustainability of growth would also depend on high savings rate. However, a closer look at the composition of India's savings rate does seem to suggest that the recent spurt in the rate has more to do with cyclical factor than real structural improvement.

Financial meltdown and the developing countries: the Philippines revises down economic growth rate

Here it comes the impact of the financial meltdown on developing countries.

Economic growth in the Philippines has been revised down (by approximately one percentage point) from an expected growth rate of 5.5-6.4 percent to 4.4-4.9 percent, noting that the country “will not be spared” from the impact of the US economic slump.

…The revised Philippine economic growth, measured through the rise in gross domestic product (GDP), is seen at 4.4 percent to 4.9 percent. Barely three months ago, the Development Budget Coordination Committee pegged the country's GDP growth at 5.5 percent to 6.4 percent.GDP in 2009 may grow by only 4.1 percent to 5.1 percent from an initial projection of 6.1 percent to 6.9 percent.

…The US is one of the largest trading partners of the Philippines. Latest data from the National Statistics Office show that 9.3 million Filipino workers are in the Americas.

More here.

The role of institutions and hydro power development in Nepal

In Nepal, everyone is talking about hydropower development to the tune of 10,000 MW in the next 10 years. This was in fact rightly prioritized in recent budget speech by the finance minister. However, is it so easy to generate electricity from hydro power at this scale (it is estimated investment amounting to US $ 2.75 billion is needed)? Here is my take on the budget speech.

The chairman of Power Trading Corporation of India (PTC), T.N. Thakur, rightly stresses on the need for right institutions to attract shortfall in investment to generate hydro electricity of this scale. Whatever the politicians and ministers say, ultimately the quality of institutions rule! Also, the private sector will not jump into this industry on its own because of huge overhead costs, uncertainty, and risks. The government has to lead the way, give enough confidence to the private sector by sharing risks and costs, build right social and political institutions, and finally let the private sector unleash its magic!!

Q: Does Nepal have the right institutions to create the right kind of environment for the development of hydropower?

Thakur: You have to build some institutions. Today, I am very happy with the government and the politicians I have met, including the prime minister of Nepal. They have at least realized the need for developing hydropower. Prime Minister Pushpa Kamal Dahal is very forthright and businesslike. He has really given a lot of confidence to the people in India, saying that this is the right time to invest in Nepal. I met the Minister for Water Resources Bishnu Poudel and his secretary; I feel that they are eager to meet the target set by the government. I have also called on Deputy Prime Minister Bamdev Gautam and Finance Minister Dr. Baburam Bhattarai. Today, I see tremendous political will to go ahead with the plan to generate 10,000 MW.

Q: Obviously you have met many Nepali officials. What is your assessment?

Thakur: You should have the right kind of institutions here to further your hydropower projects. You have to make a number of institutional reforms and create the right kind of policies. Actually, 15 years ago we were in a similar situation. We invited investment, but private investors were unwilling to put money in India. So the government decided to develop a power market and set up the PTC at the national level. As a result, the PTC buys and supplies energy to power-deficit states as per their demand.

So, the whole thing is that people should feel confident and secure that if you invest in Nepal, the project will go ahead without any hassles and that investors will get their due return. If that sort of confidence is generated, investors will come forward. Otherwise, why would investors come to Nepal and invest when you do not have the right kind of environment and policies. Let us be frank, no investor will come here for charity. They will come here to earn money.