Highlights of Mahatma Gandhi National Rural Employment Guarantee Act (NREGA)

Highlights of MGNREGA, the largest employment guarantee public works program in the world. In later posts, I will post summaries of audit reports to check if these conditions are fulfilled. Also, I will post how NREGA is doing so far. Here is a previous blog post on NREGA.

Eligibility: Any person who is above the age of 18 and resides in rural areas is entitled to apply for work.

Entitlement: Any applicant is entitled to work within 15 days, for as many as he/she has applied, subject to a limit of 100 days per household per year.

Distance: Work is to be provided within a radius of 5 kilometers of the applicant’s residence if possible, and in any case within the Block. If work is provided beyond 5 kilometers, travel allowances have to be paid.

Wages: Workers are entitled to the statutory minimum wage applicable to agricultural laborers in the state, unless and until the Central Government “notifies” a different wage rate. If the Central Government notifies, the wage rate is subject to a minimum of Rs.60 per day.

Timely payment: Workers are to be paid weekly, or in any case not later than a fortnight. Payment of wages is to be made directly to the person concerned in the presence of independent persons of the community on pre-announced dates.

Unemployment allowance: If work is not provided within 15 days, applicants are entitled to an unemployment allowance: one third of the wage rate for the first thirty days, and one half thereafter.

Worksite facilities: Laborers are entitled to various facilities at the worksite such as clean drinking water, shade for periods of rest, emergency health care, and crèche.

Employment guarantee scheme: Each State Government has to put in place an “Employment Guarantee Scheme” within six months of the Act coming into force.

Permissible works: A list of permissible works is given in Schedule I of the Act. These are concerned mainly with water conservation, minor irrigation, land development, rural roads, etc. However, the Schedule also allows “any other work which may be notified by the Central Government in consultation with the State Government.”

Program Officer: The Rural Employment Guarantee Scheme is to be coordinated at the Block level by a “Program Officer”.

Implementing agencies: Works are to be executed by “implementing agencies”. These include, first and foremost, the Gram Panchayats (they are supposed to implement half of the works), but implementing agencies may also include other Panchayati Raj Institutions, line departments such as the Public Works Department or Forest Department, and NGOs.

Contractors: Private contractors are banned.

Decentralized planning: A shelf of projects is to be maintained by the Program Officer, based on proposals from the implementing agencies. Each Gram Panchayat is also supposed to prepare a shelf of works based on the recommendations of the Gram Sabha.

Transparency and accountability: The Act includes various provisions for transparency and accountability, such as regular social audits by the Gram Sabhas, mandatory disclosure of muster rolls, public accessibility of all documents, regular updating of job cards, etc.

Participation of women: Priority is to be given to women in the allocation of work, “in such a way that at least one-third of the beneficiaries shall be women”.

Penalties: The Act states that “whoever contravenes the provisions of this Act shall on conviction be liable to a fine which may extend to one thousand rupees”.

State council: The implementation of the Act is to be monitored by a “State Employment Guarantee Council.”

Cost sharing: The Central Government has to pay for unskilled labor wages and 75% of the material and semi-skilled, skilled labor wages. State governments have to pay the 25% of the material costs and unemployment allowance, if liable.

Capital controls, the financial crisis, and the developing countries

The recent financial crisis has reignited debate on capital controls. Before the crisis, most financial institutions believed government control of the inflows of capital was bad for a nation’s economy and credit rating. During the crisis, however, several countries, including Brazil, Colombia, Thailand and Malaysia among others, imposed capital controls that helped reduce economic volatility. This has cleared the stigma that capital controls are bad for the economy, according to a distinguished panel of experts hosted by Carnegie.

Marcos Chamon, an economist at the IMF, highlighted the findings of a recent IMF Staff Position Note on controls in capital inflows and Jorge Arbache, a senior economic adviser to the president of the Brazilian Development Bank, and Boston University’s Kevin Gallagher discussed the policy space available to developing countries for imposing capital controls. Carnegie’s Eduardo Zepeda moderated.

Capital Controls and the Global Financial Crisis

Capital inflows are fundamentally positive when there is a general need for additional financing for productive investment and risk diversification, explained Chamon. However, when there are sudden and temporary surges that could potentially increase macroeconomic volatility, capital controls can be valuable tools.

During the crisis, net capital flows into emerging markets dropped by more than US$ 200 billion between the third and fourth quarters of 2008. Capital controls could help manage that kind of economic volatility:

• Changed perception: “The recent crisis has added ammunition to the already abundant stock of evidence in favor of controlling short-term capital controls in developing countries to curb vulnerability and avoid undue macro-economic imbalances,” argued Zepeda.
• Controls help economic resilience: Recent evidence from countries such as Malaysia and Thailand, who had imposed capital controls prior to the crisis, shows the strong resilience of their economies during and after the crisis, argued Chamon.

Conditions for controls: Chamon added that capital controls might be appropriate when: 

1. currency is overvalued.
2. further reserve accumulation is undesirable.
3. there are concerns about inflation or overheating of the economy.
4. there is a limited scope for fiscal tightening.
5. there is a high risk of financial fragility even after prudential reform framework.

• Not bad any more: The post-crisis economic soundness of the countries that imposed capital controls before the crisis has cleared the bad perception associated with such policy, stated Gallagher. Even credit rating agencies have stopped downgrading the rating of countries that impose capital controls.
• Weak institutions: Arbache stated that countries with weak institutions are more likely to impose greater control on capital inflows and outflows.

The Trade Regime

Policies to prevent and mitigate financial crises are forbidden in large parts of the trade regime. The panelists suggested that there should be exceptions for capital controls in trade and investment treaties between countries.

• Barriers to controls: Trade and investment treaties pose significant barriers to the effective use of capital controls, argued Gallagher.
• Lack of policy space: Most trade agreements do not leave their signatories policy space for capital control. For instance, the WTO and the U.S. Bilateral Investment Treaty and Free Trade Agreement do not allow members to adopt controls in capital inflow and outflow, Gallagher added.

The Example of Brazil

Brazil imposed several capital control measures, including taxes on capital account transactions and on fixed-income and equity inflows. Arbache argued that a more vigorous capital control is needed as a short-term policy option. The Brazilian economy is facing a number of pressing problems, which might require capital controls combined with structural policies for fiscal reform, including:

• appreciating exchange rate.
• widening current account deficit .
• decreasing export competitiveness.
• rising asset prices.
• rising inflation pressure.
• monetary policy that is losing its effectiveness.

Capital Controls as a Tool

Capital controls might be suitable for curbing sudden short term capital flows, Gallagher offered. They could be one of several tools used to stem financial market instability. In such a case, capital controls should be a coordinated effort among a majority of the central banks, concluded Gallagher.

[Source: This summary is adapted from an event on capital control organized at Carnegie Endowment. Yours truly wrote the event summary for TED program.] Click here, here and here for the speaker’s presentation.

Definite economic meltdown with indefinite bandas in Nepal

My latest piece is about the economic costs of the Maoist-imposed strike in Nepal. Yesterday, due to public and diplomatic pressure, the Maoist party ‘postponed’ the conflict (as if imposing strike is their property right!). My point is simple: if the parties continue with strikes, then the Nepali economy will collapse. Here and here are my previous costs estimate of bandas.

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Impending Economic Tsunami

Definite economic meltdown with indefinite bandas

Pretty much everything is in a standstill since May 1. The UCPN-Maoist has imposed an indefinite strike to topple the government. In a nation of over twenty-eight million people, few hundred of thousands of supporters, both willing and reluctant, are bused into cities, including Kathmandu, to show discontent over the ruling of the existing government.

This is battering the ailing economy hard. The political leaders need to understand that there will be no peace and the constitution would mean very little if there is an economic tsunami.

A dysfunctional economy will inflict more pain than the political upheavals we have been witnessing since 1996. Without urgent remedial policies for the collapsing economy, no matter who and which party runs the government, the situation will only get bad. Most of the causes of and remedies for the collapsing economy can be traced back to an unstable political climate and persistent strikes. More on this in a minute.

First, lets be clear about the deteriorating macroeconomic situation. The official inflation rate has been hovering around 12 percent and is not expected to come down anytime soon if supply-side constraints persist. For the first time in more than three decades, the balance of payments (BOP) is in deficit, reaching Rs 23.53 billion in the first eight months of this fiscal year against a surplus of Rs 32.58 billion in the same period last fiscal year. This is primarily caused by a decline in the growth of remittances and a soaring trade deficit. Bandas and political instability are two of the main factors causing soaring trade deficit.

Trade deficit reached Rs 206.07 billion, a 62.9 percent growth against 29.5 percent growth in the first eight months of last fiscal year. Exports declined by 8 percent while imports surged by 43.9 percent. Meantime, remittances reached Rs. 146.93 billion, a 9.9 percent growth as compared to 58.9 percent growth last year. The rapid rise in trade deficit is drawing down official reserves, which is sufficient to fund only 6.6 months of merchandise and service imports. We used to have reserve enough to fund nine months of imports. Worse, current account deficit (% of GDP) is expected to be in the negative territory and GDP growth rate to stagnate around 4 percent for at least until 2015, according to the IMF's estimate.

On top of this, there is liquidity crunch in the market. Recently, we experienced a severe shortage of domestic currency. The Indian rupee is gradually becoming a favored currency option due to loss of confidence in the Nepali rupee. While the housing sector is bubbling, other productive sectors are suffocating with a lack of liquidity. The central bank has already injected net liquidity of Rs 69.1 billion so far this year. The commercial banks are jacking up interest rates, making it harder for investors to withdraw money and serve interest payments. Despite high interest rate, deposit growth is lower than last year's. The inter bank lending rate increased by 8.85 percent from 6.38 percent. This means that even banks are wary of lending to each other. Most of the variables are progressively getting bad. Much worse is yet to come, if the current political instability, strikes, bandas, and economic stalemate persist.

How does this affect an ordinary citizen? Well, the worse these variables get, the precarious the situation will become because markets will lose confidence in the economy. It will result in closure of many factories. Unemployment rate, which is around 46 percent, will increase as firm will lay off workers and freeze hiring. Worse, would-be entrepreneurs will withhold investment. With a deteriorating situation, foreigners will pull out their investment from sectors ranging from consumer goods to hydropower. Importers will also lose confidence in the ability of domestic firms to supply goods in time, leading to cancellation of orders as was done by the Wal Mart and Gap Inc at the height of the last revolution. The need for social safety nets will increase and livelihood of many rural people will perish as intermediate buyers quit markets. Ultimately, the most vulnerable people will be hit by the strongest tides of the tsunami. The poor will be the ultimate losers. The politicians will be the last one to get hit, if they do.

In terms of costs to the economy, in a worst-case scenario, a back-of-the-envelope estimation of the costs of bandas shows that per banda day the economy bleeds 88 percent of the total value of goods and services produced in a day. This one shot, standalone estimation also shows that the industrial sector would suffer Rs 346 million per day. An average Nepali citizen of working age population would lose Rs 117 per banda day.

The crux of this mess lies in political instability and bandas. There is already a vicious strike-unemployment cycle in the economy. In terms of GDP per capita, we are the poorest nation in Asia. Frequent and fickle bandas will make us even poorer. In a country that has approximately 70% of the population live below $1.25 a day and has high population growth rate, income per capital will only go down and poverty will only increase.The most unfortunate situation is that even though we have money (budget surplus of Rs 4.40 billion in the first eight months of FY2009-10) to spend, we are not being able to do so due to politically-induced disruptive activities even at local level. 

The UCPN(M) should take some responsibility for the deteriorating macroeconomic situation. The economically destructive activities of YCL; incessant pressure exerted by militant labor unions on the weak industrial sector; forced donation campaign tantamount to illegal tax collection; deliberately inflicting troubles in firms operated by foreign companies; disruption of supply lines; and a threat to life and property of entrepreneurs are the infamous activities mostly associated with the largest party in the parliament.

If they are returning to power, then they will have to explain to the citizens how they are going to rescue Nepal from the impending economic tsunami. The CPN(M) have not uttered a single word about their economic policy to ward off the grave challenges confronted by our economy. 

Dahal and Bhattarai must explain, in plain terms, at least their strategy to salvage the economy; to revive the industrial sector; to return back illegally confiscated property; to provide employment to thousands of indoctrinated and duped YCL cadres who have been promised jobs and other opportunities; to provide safety nets to the laid off workers from the industrial sector; to rehabilitate its indoctrinated supporters; to address starvation in the Western region; and to reduce poverty. They need to realize that people did not join CPN-Maoist because of their belief in the failed Marxist-Leninist doctrines, but because of poverty and state apathy in instituting an inclusive society. These cannot be addressed by imposing bandas and by trying to topple the government with pernicious political strategy.

[Published in Republica, May 6, 2010, pp.7]

A brief history of economic crises

The past 180 years offer a smorgasbord of financial crises to study. They include:

• The crisis of 1825-1826 – This global contagion affected Europe and Latin America. Greece and Portugal defaulted.
• The crisis of 1890-1891 – Argentina defaulted and suffered bank runs. Baring Brothers faced failure. The U.K. and the U.S. were among the nations affected by this crisis.
• The panic of 1907 – Bank runs hit Europe, North America, Latin America and Asia.
• The Great Depression – Commodity prices cratered. Interest rates and inflation soared during this global meltdown.
• The downturn of 1981-1982 – Commodity prices plunged. U.S. interest rates reached the highest levels since the Depression. This crisis hit most emerging markets.
• The debt crisis of the 1980s – Widespread sovereign defaults, hyperinflation and currency devaluations primarily hurt developing African and Latin American nations.
• The Japanese crisis of 1991-1992 – Real estate and stock market bubbles burst in Japan and the Nordic nations, also affecting other European economies. Japanese real estate prices still hadn’t returned to prebubble levels nearly two decades later.
• The “tequila crisis” of 1994-1995 – The Mexican currency collapse ensnared emerging economies in Latin America, Europe and Africa.
• The Asian contagion of 1997-1998 – This crisis began in Southeast Asia and spread to Russia, the Ukraine, Colombia and Brazil.
• The global contraction of 2008 – The bursting of the U.S. subprime real estate bubble triggered stock market crashes, currency collapses and banking crises.

The financial crises shares the following common themes:

• Capital inflows predict financial crises – “Capital flow bonanzas,” as in the U.S. in 2005, characteristically preceded the Big Five crashes and, later, the 2008 subprime meltdown.
• A wave of financial innovation often leads to crisis – The creation of new mortgage-related mechanisms intended to reduce risk boosted the 2005-2006 housing boom.
• A housing boom often portends a financial crash – Prices can take years to recover. After the Spanish, Norwegian, Finnish and Swedish crashes, home prices took four to six years to hit bottom. In Japan, real estate prices remained low 17 years after the boom.
• Financial liberalization often precedes a crisis – Throughout the 1980s and 1990s, financial crises almost inevitably followed spates of loosened financial regulation.

Source: This time is different: Eight centuries of financial folly

Krugman reviews “This Time is Different: Eight Centuries of Financial Folly”

Krugman and Wells review of Rogoff and Reinhart’s new book This Time is Different: Eight Centuries of Financial Folly. Excerpts from the review below:

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[…] From an economist’s point of view, there are two striking aspects of This Time Is Different. The first is the sheer range of evidence brought to bear. Reading Reinhart and Rogoff is a reminder of how often economists take the easy road—how much they tend to focus their efforts on times and places for which numbers are readily available, which basically means the recent history of the United States and a few other wealthy nations. When it comes to crises, that means acting like the proverbial drunk who searches for his keys under the lamppost, even though that’s not where he dropped them, because the light is better there: the quarter-century or so preceding the current crisis was an era of relative calm, at least among advanced economies, so to understand what’s happening to us one must reach further back and farther afield. This Time Is Different ventures into the back alleys of economic data, accepting imperfect or fragmentary numbers as the price of looking at a wide range of experience.

[…]So what is the message of This Time Is Different? In a nutshell, it is that too much debt is always dangerous. It’s dangerous when a government borrows heavily from foreigners—but it’s equally dangerous when a government borrows heavily from its own citizens. It’s dangerous, too,when the private sector borrows heavily, whether from foreigners or from itself—for banks are basically institutions that borrow from their depositors, then make loans to others, and banking crises are among the most devastating shocks an economy can face.

[…]One odd omission by Reinhart and Rogoff, by the way, is their failure to mention the late Hyman Minsky, a heterodox economic thinker who made a similar argument and is now experiencing a renaissance in influence.

[…]The Depression looks much more like the product of excessive private-sector debt than like the government failure of monetarist legend.

[…]Financial crises are typically followed by deep recessions, and these recessions are followed by slow, disappointing recoveries.

(John Maynard Keynes, right, with US Treasury Secretary Henry Morgenthau Jr. at the Bretton Woods conference on postwar reconstruction, July 1944)

[…]It wasn’t until John Maynard Keynes offered a theoretical explanation of how it is that economies come to be persistently depressed—an explanation that was informed by historical experience but went far beyond a simple description of past patterns—that economists could offer useful advice to policymakers about how to fight a slump.

[…]The truth is that the historical record on the consequences of government debt is sufficiently ambiguous to admit of different interpretations. We read the evidence as supporting a policy of stimulate now, pay later: spend strongly to promote employment in the crisis, but take measures to curb spending and raise revenue once the crisis has passed. Others will see it differently. The main thing to notice, perhaps, is that there is no safe path: debt has long-term risks, but so does failing to engineer a solid recovery. The IMF’s research suggests that the long-term cost of financial crises is less when countries respond with strong stimulus policies, which means that failing to do so risks damage not just this year but for years to come.

[…]What the data show is a dramatic drop in the frequency of crises of all kinds after World War II, then an irregularly rising trend after about 1980, with a series of regional crises in Latin America, Europe, and Asia, finally culminating in the global crisis of 2008–2009. What changed after World War II, and what changed it back? The obvious answer is regulation.

[…]Why didn’t more people see this coming? One answer, of course, lies in Reinhart and Rogoff’s title. There were superficial differences between debt now and debt three generations ago: more elaborate financial instruments, seemingly more sophisticated techniques of assessment, an apparent wider spreading of risks (which turned out to have been an illusion). So financial executives, policymakers, and many economists convinced themselves that the old rules didn’t apply.

[…]Now that the multiple bubbles have burst, there’s obviously a strong case for a return to much stricter regulation. It’s by no means clear, however, whether this will actually happen. For one thing, the ideology used to justify the dismantling of regulation has proved remarkably resilient. It’s now an article of faith on the right, impervious to contrary evidence, that the crisis was caused not by private-sector excesses but by liberal politicians who forced banks to make loans to the undeserving poor. Less partisan leaders nonetheless fret over the possibility that regulation might crimp financial innovation, even though it’s very hard to find examples of such innovation that were clearly beneficial (ATMs don’t count).

”

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Esther Duflo on aid, development and RCTs

Was the 2008 financial crisis unprecedented?

Not at all! It would be a mistake to consider this crisis unprecedented and assume that "this time is different", according to a new report (particularly, see pp.11; this blog post is a summary of that section). For a discussion about growth in developing countries after the 2008 financial crisis, see this.

There were similar crises before: the US in the early 1990s during the Savings and Loans (S&L) debacle, costing 3% of GDP; Japan and Sweden in 1992; Mexico in 1994; Hong Kong, Indonesia, Malaysia, the Philippines, South Korea, and Thailand in 1997-98 (cost of bank restructuring: 50%, 25% and one-third of GDP in Indonesia, Japan and Thailand and South Korea respectively) ; Brazil and the Russian Federation in 1999; Turkey in 2000; and Argentina and Uruguay in 2002.

The 2008 crisis follows a pattern seen many times before. The pattern is captured by Hyman Minsky model.

1. In a successful capital economy, the financial structure abets enterprise but when finance fosters speculation the performance of a capitalist economy falters. Keynes defined enterprise as the "activity of forecasting the prospective yield of assets over their whole life" and speculation as the "activity of forecasting the psychology of the market."
2. Some exogenous event improves the prospects for profits, justifying speculative bets. Usually financial liberalization is followed by speculation as happened after the financial liberalization in Japan in the 1980s and in Sweden preceding 1992 crisis. The 2008 financial crisis was preceded by a significant increase in asset prices, fueled by leverage, low interest rates, and the perception that financial innovation had tamed financial risk.
3. Expectations take off, losing touch with reality. Euphoria, optimism, irrational exuberance, manias, bubbles, blindness to risk, animal spirits are some of the way to describe the psychological forces at work.
4. Credit system permits highly leveraged investments in the pursuit of socially valuable goods. But it also enables the pursuit of short-term capital gains in real estate, commodities or financial assets. Borrowers tend to progress from hedge finance (where the yield on an asset is sufficient to pay the interest and principal of the loan that financed) to speculative finance (where it is sufficient to pay only interest) to Ponzi finance (where the borrower is wholly dependent on capital gains).
5. A negative event triggers a reversal in the cycle. The greater the leverage, the more violent the downward journey. Prices fall and leveraged borrowers are unable to honor their debt.