ABC clouds and climate change in Nepal

This kind of story scares me when it happens in developing countries, which severely lack manpower and firepower to deal with issues like  fires, wildfires and increasing accumulation of clouds above the skies of major cities, leading to rise in temperature.

According to this news piece, two major national parks in Nepal are burning creating Asian Brown Cloud (whatever that means!) over Kathmandu and other cities. This is compounded by increasing smoke emission from motor vehicle, factories, and cooking gas.

According to NASA, wildfires appear to be raging in or very close to some of the national parks and conservation areas, including Langtang National Park and Makalu Barun National Park, located along the northern border of the country. The forest fire raging in Langtang National Park in Rasuwa district for the last seven days is said to be the worst of all.

According to a NASA report today, there was a reduction of solar radiation to the surface by as much as 15 per cent in Kathmandu. Thirty-seven domestic flights were delayed due to poor visibility caused by hazy weather on Sunday.

A weatherman also blamed the dust particles passing through the northern Indian and Pakistani cities coupled with thick wildfire smoke for the ABC. Apart from Kathmandu, Biratnagar, Pokhara, Dhangadhi and Bhairahawa have also been affected by the ABC, which is concentrated three km above the earth’s surface and can travel halfway around the globe in less than a week.

Can the aid agencies and climate change advocates do something about this? Oh well, who cares about the change going on above in the skies over Nepal. I have not heard of any such international effort to tackle such issues happening in real time in Nepal, at least not since the time I became aware of these issues!

Higher education and development

Nice series of articles about the role of science and technology (higher education) in achieving economic development on SciDev.

Anyone seeking to tackle the problems facing the developing world must remember two simple facts of life. First, none of these problems — from food shortages and the spread of disease, to achieving sustainable economic growth — can be addressed without the use of science and technology.

Second, harnessing science for development depends on the skills of a country's people. And that in turn requires a robust and effective higher education system — the only mechanism that can produce and sustain these skills.

But in the recent past, many governments overlooked this critical information. Few developing countries, for example, refer to either science or higher education in their Poverty Reduction Strategy Plans — the documents that guide donors, and others, on a country's investment priorities.

Here is an interesting article that argues for more donor funding on improvement in research activities in the developing countries rather than commissioned studies in specific areas.

If donor agencies genuinely want to recognise 'ownership' in the development dialogue, then funding institutional research capacity should be an essential ingredient of bilateral development cooperation.

Developing countries and the financial crisis

The developing countries face a financing gap of $270-$700 billion (that’s a pretty wide range!) due to the financial crisis, according to a new report by the WB. It argues that developing countries are likely to face higher spreads and lower capital flows than over the past seven years, leading to weaker investment and slower growth. The low income countries are still feeling the burnt of fuel and food crisis, which depleted international reserves. Then the ensuing global financial crisis led to lowering of commodity prices, especially primary goods- the main export items of LICs, leading to lowering of terms of trade. This is likely going to increase deficit. All the problems occurring at the same time or in sequence will put enormous pressure on fiscal stability.

One of the main worries for the developing countries is the decline in remittances, the life blood of small economies like Nepal which has more than a million citizens working abroad. Remittances contribute to approx 20% of GDP. Surprisingly, remittances inflows have been increasing until recently in Nepal. No one knows how long it will last until the crisis cripples remittances inflow. But, it is expected to decline soon. The World Bank estimates that remittances will nosedive in 2009 and will recover in 2010.

The paper said that 94 out of 116 developing countries have experienced a slowdown in economic growth. Of these countries, 43 have high levels of poverty. The most affected sectors are those that were the most dynamic, typically urban-based exporters, construction, mining, and manufacturing. Cambodia, for example, has lost 30,000 jobs in the garment industry, its only significant export industry. More 500,000 jobs have been lost in the last three months of 2008 in India, including in gems and jewelry, autos and textiles. The ILO predicts that global job losses could hit as much as 51 million people and affect 30 million workers.

The WB says that financial crisis will have long-term implications for developing countries. Debt issuance by high-income countries is set to increase dramatically, crowding out many developing country borrowers, both private and public.Developing countries that can still access financial markets face higher borrowing costs, and lower capital flows, leading to weaker investment and slower growth in the future.

In order to aid stimulation of developing economies, the WB has launched an Infrastructure Recovery and Assets (INFRA) program (among other programs), which, it says, will channel investment in infrastructure so that badly needed investment is not completely dry. This is a form of fiscal stimulus ($15 billion) in the developing countries.

What’s amazing is that the whole argument for investment on infrastructure to stimulate the economy began with American Recovery and Reinvestment Act, launched by the Obama administration. Most of the development agencies have been arguing for similar stimulus in the developing countries. What I don’t understand is that why were these development agencies waiting for this disaster (and for so long) to channel in investment on infrastructure projects in the developing countries? For decades it was known that there is deficient supply of infrastructure in the developing countries. Still, there was no such aggressiveness in improving on this front by providing aid and expertise to the developing countries.

For instance, the most binding constraint on growth in the Nepali economy is bad infrastructure. You don’t need a sophisticated analysis to realize that it is the most binding constraint on growth (actually, I tried it myself in a recent paper!). People know that there is deficient supply of infrastructure and markets and production sites are not linked. Still, the development agencies did not invest on this crucial sector that would have produced the biggest bang for a buck.

All of a sudden, there is a renewed vigor to pour in investment on infrastructure sector in the developing countries. Everyone wants to ‘follow the herd’. Nothing wrong with this initiative but I think it is too late and too little to stimulate developing economies by focusing investment in infrastructure only. Widen social safety nets, free them of some of the harsh conditionality on lending so that countries can use funds in the sectors that they think are going to be affected the most, provide them expertise (not command the actions) on prudent and productive investment, and so on.

Anyway, here are addition discussion about the impact of financial crisis on the poorest countries. Duncan Green discusses this issue here. Here is Shanta Devarajan’s views on if Africa needs a fiscal stimulus, largely dependent on foreign aid (he says, it depends). Here is a post based on UNU’s paper on the impact of financial crisis on the developing countries. And, here is a post about the need for social protection safety nets like CCTs during this financial crisis.

Sen on Smith and capitalism

Amartya Sen on Adam Smith, current financial crisis, and capitalism

All the affluent countries in the world – those in Europe, as well as the US, Canada, Japan, Singapore, South Korea, Taiwan, Australia and others – have depended for some time on transactions that occur largely outside the markets, such as unemployment benefits, public pensions and other features of social security, and the public provision of school education and healthcare. The creditable performance of the allegedly capitalist systems in the days when there were real achievements drew on a combination of institutions that went much beyond relying only on a profit-maximising market economy.

The need for supervision and regulation has become much stronger over recent years. And yet the supervisory role of the government in the US in particular has been, over the same period, sharply curtailed, fed by an increasing belief in the self-regulatory nature of the market economy. Precisely as the need for state surveillance has grown, the provision of the needed supervision has shrunk.

Despite all Smith did to explain and defend the constructive role of the market, he was deeply concerned about the incidence of poverty, illiteracy and relative deprivation that might remain despite a well-functioning market economy. He wanted institutional diversity and motivational variety, not monolithic markets and singular dominance of the profit motive. Smith was not only a defender of the role of the state in doing things that the market might fail to do, such as universal education and poverty relief (he also wanted greater freedom for the state-supported indigent than the Poor Laws of his day provided); he argued, in general, for institutional choices to fit the problems that arise rather than anchoring institutions to some fixed formula, such as leaving things to the market.

Meanwhile, here is one of the most realistic statements about what economics is all about by Rodrik:

Economics is really a toolkit with multiple models - each a different, stylized representation of some aspect of reality. One's skill as an economist depends on the ability to pick and choose the right model for the situation. Economics' richness has not been reflected in public debate because economists have taken far too much license. Instead of presenting menus of options and listing the relevant trade-offs - which is what economics is about - economists have too often conveyed their own social and political preferences. Instead of being analysts, they have been ideologues, favoring one set of social arrangements over others.

More here

VDIS: Guilty have the upper hand!

I got a lot of angry comments (okay, I got good ones as well) when I wrote this opinion piece defending the government of Nepal’s decision to implement Voluntary Disclosure of Income Scheme (VDIS), which was designed to give an opportunity to tax evaders to reveal sources of their assets and income and pay 10% of it to clear outstanding tax payments before they face the regulatory music. I had hoped that the government would enforce this provision to the fullest. Sadly, the government is bowing down to the illegitimate demands of business executives, who are the principle tax evaders.

It is ironic that the government has yielded to demands of tax evaders, who are in a way guilty of committing a crime, i.e. conceal true worth of assets and income and not pay taxes to the government. The government has spared application of VDIS in investments made in labor-intensive industries like hydropower, physical infrastructure, and “other productive services” (uff, another loophole!).

I can’t understand why the FNCCI, the apex representative body of the business sector, is so ferociously arguing against VDIS. Is this an indication that the business executives have amassed more ‘black money’ than is thought? It is a golden opportunity for them to turn ‘black money’ into ‘white money’. They are ignoring this at their own peril!

The Maoists government should live up to its promises and proposed policies. People have already heard too much (and redundant) rhetoric. Time for action! By this, I mean real action, which might often come at the expense of few crooked business executives going down or behind bars! The VDIS is one of the few policies I have been supportive of the Maoists government.

Why let the guilty have an upper hand?

Documentary on the financial crisis

Very interesting video from Frontline:

Getting Keynes and animal spirits right

Robert Shiller explains:

Adherents to Keynes’s message were so eager to get this simple policy implemented, on both sides of the Atlantic, that they failed to notice – or perhaps they intentionally disregarded – that the General Theory also had a deeper, more fundamental message about how capitalism worked, if only briefly spelled out. It explained why capitalist economies, left to their own devices, without the balancing of governments, were essentially unstable. And it explained why, for capitalist economies to work well, the government should serve as a counterbalance.

The key to this insight was the role Keynes gave to people’s psychological motivations. These are usually ignored by macroeconomists. Keynes called them animal spirits, and he thought they were especially important in determining people’s willingness to take risks. Businessmen’s calculations, he said, were precarious: “Our basis of knowledge for estimating the yield 10 years hence of a railway, a copper mine, a textile factory, the goodwill of a patent medicine, an Atlantic liner, a building in the City of London amounts to little and sometimes to nothing.” Despite this, people somehow make decisions and act. This “can only be taken as a result of animal spirits”. There is “a spontaneous urge to action”.

To a remarkable extent we have got into the current economic and financial crisis because of a wrong economic theory – an economic theory that itself denied the role of the animal spirits in getting us into manias and panics.

It is the role of the government at two levels to see that these events do not occur. First, it has a duty to regulate asset markets so that people are not falsely lured into buying snake-oil assets. Such standards for our financial assets make as much common sense as the standards for the food we eat, or the purchase medicine we get from the pharmacy. But we do not want to throw out the good parts of capitalism with the bad. To take advantage of the good parts of capitalism, when fluctuations occur it is the role of the government to see that those who can and want to produce what others want to buy can do so. It is the role of the government, through its counterbalancing fiscal and monetary policy, to maintain full employment.

The principles behind such an economy are not the principles behind a socialist economy. The government insofar as possible is only creating the macroeconomic conditions that will allow the economy to function well.

That is the role of government. Its role is to ensure a “wise laisser faire”. This is not the free-for-all capitalism that has been recommended by the current economic theory, and seems to have been accepted as gospel by economic planners, and also many economists, since the Thatcher and Reagan governments. But it also is a significant middle way between those who see the economic disasters and unemployment of unfettered capitalism, on the one hand, and those who believe that the government should play no role at all.

The idea that unfettered, unregulated capitalism would invariably produce the good outcomes was a wrong economic theory regarding how capitalist societies behave and what causes their crises. That wrong economic theory fails to take account of how the animal spirits affect economic behaviour. It fails to take into account the roles of confidence, stories and snake oil in economic fluctuation.

Also see this opinion piece by Martin Wolf