Indian feels the heat of the financial meltdown

The NYT reports:

In a country where most marriages are arranged by parents, the downturn has even taken a toll on the matrimonial prospects of those in technology outsourcing. “Because there is no job guarantees for I.T. people, for the last six months brides’ families have not been accepting grooms from this background,” said Jagadeesh Angadi, a matchmaker in Bangalore.

The Indian National Association of Software and Service Companies estimates that the country’s technology sector will create 50,000 fewer jobs in 2008 than last year, although it predicts the sector will still have added 200,000 workers by year’s end. India’s technology outsourcing companies have laid off about 10,000 employees since September, according to the Union for Information Technology Enabled Services, a labor group that represents technology workers.

Meanwhile, India announced a stimulus package worth Rs 20, 000 crore.

The package, coming on the back of fresh monetary measures announced by the RBI on Saturday, includes a four per cent cut in ad-valoram duty across the board, to boost additional spending, besides enhanced credit for exporters, along with a Rs 10,000 crore mop up for India Infrastructure Finance Company.

The measures include additional plan expenditure up to Rs 20,000 crore in current year; total spending in four months till March expected at Rs 300,000 crore. A series of steps to boost exports; Rs 350 crore additional funds for export incentives; back-up guarantee to ECGC for up to Rs 350 crore; to be allowed refund of services in some areas.

The package also includes import duty on Naptha for use in power sector as well as export duty on iron ore to be eliminated. India Infrastructure Finance Company to raise Rs 10,000 crore through tax-free bonds by March 2009. PSU banks to soon announce package for borrowers of home loans upto Rs 20 lakh. An across-the-board cut on ad valorem rate to encourage additional spending; additional Rs 1,400 crore for textile sector.

Legal foundations of free markets

A new book The Legal Foundation of Free Markets published by Institute of Economic Affairs.

Here is the what this book is about:

The law, together with the institutions associated with it, plays a central role in economic prosperity, which concerns all of us. The legal foundations of free market economies, which have delivered enormous improvements to the quality of life of countless people, evolved over centuries. Their justification does not lie simply in utilitarian concepts of economic efficiency but also in moral concepts of natural law and a broader concept of freedom. Great care needs to be taken when changes are made to areas of law that can be foundational in shaping market behaviour, to ensure that they are not undermined. Similar care needs to be taken in developing other areas of law, such as competition law and environmental law, where significant inroads may be made, often justified by reference to alleged market failure. This book suggests various practical solutions to these problems, including ensuring greater jurisdictional competition, greater adherence to the doctrine of the rule of law, the restoration of economic rights, greater use of judicial lawmaking,and more constructive engagement between economists and regulators.

And, a little bit over praise the virtues of free markets and all bad stuff dumped on the government.

First, the market is more capable of producing institutions for its own enforcement than conventional wisdom permits. Where government is absent, society does not launch itself into a violent and dishonest frenzy that leads to the end of trade and the death of many of its members. Instead, private institutional arrangements emerge as the result of individuals’ efforts to find alternative mechanisms of securing peace and honesty so that they can realise the tremendous benefits of exchange.

Second, commercial rules, specifically those relating to contracts, can and do emerge where government is absent. Perhaps more importantly, private mechanisms for their enforcement emerge alongside them. Evidence from stateless societies not considered here, such as that from Somalia, and from the international arena, which I considered only briefly, supports this claim. Significantly, this latter arena is a massive one and involves thousands of traders from many different backgrounds and countries who are able to coordinate on such a level that their resulting market activities constitute nearly 25 per cent of global economic activity.

Finally, contrary to prevailing wisdom, criminal behaviour poses no special problem for markets under anarchy. Like rules for dealing with ‘peaceful theft’, such as those that emerge endogenously to govern commercial contracts, rules for dealing with ‘violent theft’ also emerge endogenously without central direction to regulate the violent disposition of some members of society. importantly, private institutions for their enforcement, including mechanisms for adjudicating claims of criminal behaviour, and mechanisms for enforcing the decisions of such adjudications, evolve along with rules regarding criminal conduct to enhance the safety individuals require for markets to function.

Expectations about higher growth in Africa

Adrian Wood asks, “Could Africa be like America?” He believes yes.

One was that a high-income Africa would be more similar in its sectoral and spatial structure to land-abundant developed countries such as the United States than to land-scarce ones such as Japan.

The other, more important sense was simply that Africa could be a high-income region.

Interesting perspective! He believes that improved expectations about potential business opportunities in Africa could lead to optimistic expectations by local entrepreneurs and hence could lead to more local (and foreign) and sustained investment.

So, and without forgetting about expanding Africa’s exports to the rest of the world, we should remember that the main market for a rich Africa will be in Africa. African countries are small, so they will export more of their output than average, but most of these exports will go to other African countries. Most African growth will consist of African businesses producing more goods and services for African customers.

If businessmen think a country will be rich, they will rationally invest and make it rich, as is happening in China. If they think a country will stay poor, they will rationally not invest and leave it poor, as has happened in Africa.

He floats the idea of Afro-EU union to improve positive expectations about investment in Africa. Interesting stuff but quite implausible! However, the idea of viewing opportunities in African through an optimistic lens is quite good because expectations about investment growth are “self-fulfilling”.

The perils of big budget to VDCs

This is an isolated case occurring in a Village Development Committee (VDC) in Morang, Nepal. The left-wing Finance Minister Dr. Baburam Bhattarai doubled VDC budget in this year’s fiscal budget.This increased trouble in one particular VDC because armed outfits also doubled the amount of money (forced/compulsory donation!) they used to demand from local government.

"There was no sense of security in the villages since long," said Murari Ghimire, Chairman of VDC Secretary Rights Protection Centre. "And the bigger budget means we are sure to be targeted by many underground outfits for donations. They are the same people asking for certain portion of the VDC budget in the past too."

With the government's new budget plan for the current fiscal year, each VDC in Morang will get from 1.5 million to 3 million rupees.

Members of the armed outfits, who used to demand "donations" in three-four digits earlier, have already begun asking "donations" in six digits following the government decision, according to the VDC secretaries.

"Big budget means hope for developmental works and thus a matter of happiness for many," said Hari Pokharel, secretary of Rangeli VDC. "But it has become more tension and terror for us."

More here.

Brief recent history of Congo

A short history of Congo from The Economist:

Benefits of free trade and the ineffective marginal change in tariff rates

Are the benefits of free trade exaggerated? Consider this excerpt from a piece in Newsweek:

"World trade is already so free, we're really talking about stuff at the margins," says Paul Krugman, a Princeton economist and this year's recipient of the Nobel Prize. "Once you are down to tariff rates as low as we have now, a few points up or down doesn't make much difference." Just as important, free-trade deals don't come cheaply; the world might be far better off spending its political capital on projects with a bigger bang-to-buck ratio.

…Cutting tariff barriers in half yields a lot of wealth and growth when their starting level is 150 percent. But today import tariffs on manufactured goods are about 5 percent in developed countries and 10 to 20 percent in developing countries; they've declined on average by 34 percentage points since the mid-1980s. Now a 50 percent cut in tariffs would yield little more than pats on the back for the world's trade negotiators.

…In a 2005 study, the World Bank reported that if trade were completely liberalized overnight, and agricultural subsidies (a sticking point in the Doha talks) completely eliminated, the world would be better off by about $287 billion by 2015—an increase of just 0.7 percent of global GDP. The benefits from the Doha round, which has humbler goals than complete liberalization, are far lower, ranging from as much as $119 billion to as little as $18 billion. The latter number represents just 0.04 percent of GDP.

…if the OECD countries let in just 14 million additional migrants by 2025—that's about 700,000 extra migrants a year, spread across the entire rich world—the global economy would be better off by $356 billion. By comparison, if the world could completely eliminate agricultural barriers, the benefit would amount to barely half that: $182 billion.

Maoists, education tax, and private schools

Here is an article written by NYU professor Jonathan Zimmerman, who first narrates his teaching experience in a “Red” district in Nepal and then argues that Maoists’ decision to ban private schools is unjust.

In Pyuthan, the district where I taught, Maoist attacks forced private schools to close in 2001. Four years later, amid another round of violence, private schools across the country shut down. They reopened two weeks later, following a concerted campaign by parents, students, and human rights organizations.

Now these same groups are protesting the new Maoist government, which entered electoral politics two years ago and won a parliamentary majority this spring. Tired of Nepal's endemic corruption and inefficiency, voters wanted something new. They also hoped that legislative politics would moderate the Maoists, who would now have to compromise with other parties.

It hasn't worked out that way. Turning a deaf ear to protests, the Maoists are moving ahead to ban private investment in primary and secondary schooling by 2011. The goal, they say, is to reduce inequality in education.

But, there's every reason to believe that the ban would reduce education, period. At least 1.5 million Nepali children attend private schools, which now account for almost one-third of the country's 41,000 schools. If their schools are closed, where will these students go?

Some will stay home, just as they did during the first Communist attacks. Others will flood into the strapped government schools, which are already so crowded that they often hold classes outside.

So far, I don’t know if the Maoists have put out a statement saying they are planning to ban investment in private and secondary education. This might be an internal policy of the Maoists-affiliated teacher’s union and its education bureau, which is extremely is ideological and pretty much inconsistent with the advancement in science and technology in recent decades.

In this year’s budget the left-wing Finance Minister Bhattarai imposed a 5% tax on all private schools. This is a horribly bad policy. I think the main reason why he taxed the private schools was to increase sources of revenue to fund populist development projects outlined in the budget. This is how Bhattarai justifies this bad redistributive policy:

Bhattarai said the tax would be paid not by parents and students, but by educational institutions from their profits. "The operators of educational institutions have a responsibility to pay the tax from their profits. The money collected will be utilised for the welfare of children in remote areas" said Bhattarai.

The finance minister is categorizing the private education sector as a “for-profit” sector. To some extent, some private schools do act like for-profit business sector. Using this as a pretext as to impose a flat tax rate on all private schools is a misguided policy move. Also, consider the following paragraph from a commentary:

Dr. Baburam Bhattarai´s education tax policy can be relevant to those schools, which choose to pay taxes as "profit" organizations. But his call for all private schools to consider for investing in other area than education is nothing but thoughtless syndrome of totalitarian dream for state control. Dr. Bhattarai has to understand the fact that the "non-profit" organization provision of the democratic government is one of fundamental factors of mixed economy system.

The Maoists have been against the private schools because of the exorbitant tuition fees. The waged a war on the private schools and had bombed several of them. The quality of private school education exceeds the public school’s by a wide margin.

This is not the end of the story. The Maoists government has also decided to give academic credentials to all former-rebels who left school to join “people’s war”. One of my friends termed this as “Bachelor of People’s War”. No where in the world (save Nepal) you can find a finance minister who promises a degree to former-rebels based on the number of years they spent fighting against security forces! More here.

Bhattarai further stated that those without academic credentials would also receive the certificates. Why? Apparently because they possess sufficient skillls and knowledge but could not go to school because of financial or other problems.

Put another way, when this degree-for-experience (D4E) plan is carried out, the path to earning a degree will not be the old-fashioned way of studying hard to fulfill the requirements, but of having a political leader vouch that you were in the jungles of Rolpa toting a gun at a time when you should have been at school in Tulsipur.

Assuming that the D4E is not a new rung placed on the career ladder of ambitious young Maoists, it is destined to be a corruption-ridden plan. It won't help anyone in the job market. And there is a better way to teach the former rebels how to fish for themselves.