What determines food aid to developing countries?

Nathan Nunn and Nancy Qian argue that food aid is determined by recipient country’s food shortages. But, food aid from some of the largest donors is the least responsive to production shocks in recipient countries. Also, food aid usually goes to counties with colonial ties.

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We examine the supply-side and demand-side determinants of global bilateral food aid shipments between 1971 and 2008. First, we find that domestic food production in developing countries is negatively correlated with subsequent food aid receipts, suggesting that food aid receipt is partly driven by local food shortages. Interestingly, food aid from some of the largest donors is the least responsive to production shocks in recipient countries. Second, we show that U.S. food aid is partly driven by domestic production surpluses, whereas former colonial ties are an important determinant for European countries. Third, amongst recipients, former colonial ties are especially important for African countries. Finally, aid flows to countries with former colonial ties are less responsive to recipient production, especially for African countries.

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Challenges for South-South development cooperation

[Adapted from Ratnakar Adhikari’s article in Trade Insight magazine, vol.6, No.3-4, 2010. p.25-28]

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The history of South-South development cooperation (SSDC) is nearly as old as the history of North-South development aid. However, this issue has come under the scanner of development practitioners only in the recent past due primarily to their increased significance in the backdrop of the global financial crisis, which was feared to result in a global resource squeeze. Although SSDC is not likely to replace traditional development cooperation, it is likely to be of tremendous significance in the days to come—thanks mainly, but not exclusively, to the growing economic prowess of advanced developing countries.

Growing salience

The evolving dynamics of cooperation among Southern countries and its potential to contribute to global prosperity constitute probably the single major reason to discuss the growing salience SSDC. For the least-developed countries (LDCs), handicapped by several supply-side constraints to take advantage of the growing global economic integration, SSDC offers an opportunity over and above traditional official development assistance (ODA). Although the burgeoning SSDC is often ascribed only to the growing economic clout of the emerging economies, there are several factors that have contributed to this phenomenon, some of which are discussed below.

First, SSDC should be seen in a broader context of the increased economic integration among developing countries. While the LDCs were largely reliant on developed countries for trade in the past, there seems to be a trend towards increased flow of South-South trade. For example, South-South trade has nearly doubled between 1995 and 2008 to reach nearly 20 percent.¹ Similarly, South-South flow of foreign direct investment (FDI) has reached 16 percent, up from 12 percent in the 1990s.

Second, there is an expectation among the partner LDCs to learn from the economic and development success of Southern donors. At a general level, the United Nations Economic and Social Council (ECOSOC), for example, argues that many Southern donors have come up with successful development models or practices, which can be more appropriately replicated in other developing countries.²

Third, due to the inability of the traditional donors to live up to their ODA promises, the LDCs have found it necessary to tap into the funding offered by Southern donors. The LDCs find such assistance more practical and efficient in terms of disbursement causing fewer significant delays compared to that of traditional donors.³ SSDC is also presumed to be based on solidarity,⁴ and the principle of equality, as opposed to clientalism that characterizes traditional aid relationship. Some Southern donors are found to be more flexible and responsive to the national priorities of partner countries.⁵

Current status of SSDC

The Reality of Aid Management Committee has compiled the disbursement data of South-South ODA from various sources for 2008 (Table). It is, however, necessary to note that unlike North-South ODA data, which are prepared by the Development Assistance Committee (DAC) of the Organization for Economic Cooperation and Development (OECD), due to several difficulties associated with the collection of South-South ODA data,⁷ the data presented below should not be considered as authoritative.

Disbursement of selected South-South ODA flows, 2008 (US$ million)
South-South donor	Amount	% of GNI	% of total South-South ODA
Saudi Arabia	5,564	1.5	40
Venezuela	1,166–2,500	0.71–1.52	18
China	1,500–2,000	0.96–0.08	14.4
South Korea	802	0.09	5.8
Turkey	780	0.11	5.6
India	569	0.05	4.1
Taiwan	435	0.11	3.1
Brazil	356	0.04	2.6
Kuwait	283	0.18	2
South Africa	194	0.07	1.4
Thailand	178	0.07	1.3
Israel	138	0.07	1
United Arab Emirates	88	…	0.6
Malaysia	16	0.01	0.1
Argentina	5–10	0.003–0.005	0.07
Chile	2–3	0.003	0.02

Source: Adapted from Reality of Aid Management Committee. 2010. A Challenge to the Aid System? Special Report on South-South-South Cooperation:South Cooperation. Manila: IBON Books.

South-South ODA from the top 16 countries for which data were available reached close to US$14 billion. Four major donors, namely Saudi Arabia, Venezuela, China and India, collectively account for over 76 percent. Saudi Arabia, a major aid donor since 1973 as measured by the ODA-gross national income (GNI) ratio, provided more than US$5.5 billion in development assistance representing 1.5 percent of its GNI. This figure is 40 percent of the total development assistance provided by the top 16 developing-country donors.

Although most assistance provided by the major South-South donors is in the form of project aid, there are also components of technical cooperation, budget support and humanitarian assistance. Among the top four donors, Venezuela’s case is unique in the sense that its oil deals assume the form of balance-of-payments (BoP) support.⁸ However, like Northern donors, the motives behind South-South ODA are not entirely altruistic.

Saudi Arabia’s official aid policy has an explicit objective of promoting its non-oil exports. Chinese commercial interests are mainly reflected in the desire to obtain an uninterrupted supply of energy and raw material resources from partner countries. For example, when providing aid to Angola, China does not directly provide funds to the government but mandates a Chinese construction company to build infrastructure and expects the government of Angola to provide Chinese companies operating in the field of oil the right to extract oil through the acquisition of equity stakes in a national oil company or through the acquisition of licences for production.⁹ Similarly, India’s ODA —particularly for the construction of infrastructure—mainly to Bhutan and to a lesser extent to Nepal is aimed at securing hydroelectricity and energy for itself.¹⁰ India’s pledge of US$500 million in concessional credit facilities to resource-rich African LDCs (Burkina Faso, Chad, Equatorial Guinea, Guinea-Bissau, Ivory Cost, Mail and Senegal) and one developing country (Ghana) shows Indian tendency to follow the Chinese model for resource extraction from Africa.

Similarly, geopolitical interests are reflected in the choice of partner countries. Saudi aid is mostly provided to Arab countries. Venezuelan aid mainly goes to Latin American and Caribbean countries. Indian assistance is targeted predominantly at South Asian countries with Bhutan receiving 46 percent of total aid, and the Maldives and Afghanistan receiving 19 and 16 percent respectively. However, China’s aid is much more diversified, with Asian countries receiving 40 percent, followed by Africa (25 percent), and Latin and Central America (13 percent).¹¹

Saudi Arabia’s support predominantly to the Muslim countries in the Arab region (including relatively better-off countries such as Turkey and Egypt, themselves donors, and Morocco compared to poor countries in sub-Saharan Africa) and two Muslim countries in South Asia (Bangladesh and Pakistan and not to Nepal and Bhutan, despite the latter being LDCs) shows the influence of religious and cultural factors in its country-selection process.¹² Similarly, Brazilian technical cooperation programmes in Portuguese-speaking African countries (77 percent of its total assistance to Africa) and East Timor (96 percent of its total Asian assistance) shows the significance of the language factor.¹³

Solidarity interest, together with geopolitical interest, is seen dominant in the ODA provided by Venezuela, a founder member of Alternativa Bolivariana para las Americas (ALBA). This initiative focuses on integration among Latin American countries, through a “socially-oriented trade bloc”¹⁴ proposed as an alternative to the Free Trade Area of the Americas.

Challenges facing LDCs

While the growing importance of SSDC is a reality the LDCs cannot ignore, SSDC is not free of all the problems that have dogged the issue of development aid in general, and also presents additional challenges.

Tied aid

While traditional donors have made significant progress in untying aid, assistance under SSDC, particularly by the major donors, is primarily tied.¹⁵ For example, in the case of Chinese aid to Africa, 70 percent of the infrastructure construction projects have to be awarded to “approved”, mostly state-owned, Chinese companies. Although the remaining 30 percent contract can be awarded to local companies, they too are mostly established in joint-venture arrangements with Chinese companies.¹⁶ Even the labour component of the contracts is fulfilled by imported Chinese workers in countries as varied as Mauritius, Nepal and Sri Lanka.¹⁷

Similarly, at least 85 percent of the value of South-South concessional loans granted by India under its India Development Initiative was meant to be tied to Indian procurement.¹⁸ Examples include a US$40 million credit line for railway reconstruction in Angola, and a donation to Sierra Leone of US$800,000 for the construction of 400 barracks.¹⁹ Similarly, Venezuelan BoP support is primarily tied to oil imports, and Korean bilateral aid is also predominantly tied.²⁰

Lack of transparency

There is a serious lack of accessible and comprehensive information on South-South ODA. This could be because even the major Southern donors do not have central coordinating agencies to manage and monitor development assistance at the national level. The problem is further compounded by the deliberate secrecy on both sides of the partnership.²¹ This is particularly so in the case of Arab donors and China. For example, sloppy distinctions between Chinese investment, loan and aid on the one hand, and "proposed", "agreed", "under construction", "concluded", "realized", "(un)confirmed" nature of supports on the other, provided by China under China-Africa technical cooperation make it almost impossible to know the exact nature and magnitude of support extended by China.²²

The result is, it is difficult to collect data and make an informed analysis for policy purposes. A more maligned outcome is the difficulty in establishing which Southern donor is funding which institution in which country for what purpose. There is also the question of debt-sustainability since it is difficult to ascertain how much the partner country owes to its donors. The democratic ownership of SSDC is also under question, because such aid tends to be mostly government-to-government with little involvement of the parliament and civil society.²³

Limited ownership

Although SSDC, in theory, tends to promote country ownership at the programme and project development level, it is reported that some Southern donors have preferred to fund the construction of a stadium as opposed to the priority identified by partner countries for the construction of roads. Similarly, the focus of infrastructure development on resource extraction, rather than on building productive capacity at the local level, limited use of local inputs in the process of project implementation, and the lack of a clear mechanism for technology transfer leave much to be desired.

Inadequate monitoring and evaluation

There is little public information available on the monitoring and evaluation (M&E) procedures of Southern donors.However, country experiences suggest that these donors conduct significantly fewer missions to review project progress than Northern donors. Overall, M&E systems of Southern donors seem to be largely concerned with timely project completion.²⁴

Unlike traditional donors, which are bound by the in-built DAC peer review mechanism with a strong M&E component, Southern donors are not subjected to any such M&E mechanism. Although proposals have been made by the Group of 77 countries and non-governmental organizations to strengthen the UN Development Co-operation Forum (DCF) to serve as an alternate platform for aid negotiations to DAC, there is limited progress in this direction, primarily due to the skepticism of the traditional donors and capacity of the under-resourced UN to handle these responsibilities.²⁵

Non-applicability of Paris Declaration

In order to enhance the effectiveness of development aid in general, traditional donors as well as partner countries signed on to the Paris Declaration on Aid Effectiveness (in 2005), which defines a number of commitments, and a set of indicators to measure progress towards 2010. The Declaration is based on five common sense tenets of ownership, alignment, harmonization, result management and mutual accountability.

However, the Declaration is not applicable to SSDC, except for a few Southern donors such as Korea and Turkey which have signed on to it in view of their impending admission to the DAC. Although the Accra Agenda for Action, issued in September 2008, recognizes the important role of SSDC in international development cooperation and considers it as a valuable complement to North-South cooperation, it does not exhort Southern donors to become parties to the Paris Declaration. This effectively means that Southern donors are not even obliged to make efforts to overcome the challenges facing traditional development cooperation.

Issues for UNLDC IV

Since development assistance is a core development agenda for the LDCs, the issue of SSDC needs to be extensively deliberated upon both in the run-up to the Fourth United Nations Conference on the Least Developed Countries as well as during the conference itself. It is indeed surprising that this issue has not so far entered the discussions in the run-up to event. Therefore, based on the challenges discussed above, the following issues are worth taking up.

First, as tied aid does not contribute much to the development of the local economy and local human capital and prevents the partner country from sourcing inputs from competitively priced sources, a target—possibly of 2021—should be set, for the gradual untying of aid by Southern donors.

Second, although project financing has been the preferred mode of funding for Southern donors, they should gradually move towards a sector-wide approach and eventually towards budgetary support.

Third, SSDC should be brought under some global process of discussions, negotiations, target setting, coordination, reporting, and monitoring and evaluation. While there is a near consensus on the need for the same, there is a considerable disagreement between developed countries and developing countries on which platform should be used. As a compromise, it is proposed that a two-track mechanism be adopted whereby DAC would continue to coordinate traditional ODA matters and DCF would be assigned the full responsibility of coordinating issues relating to South-South ODA. DCF should begin its activities by preparing a framework like the Paris Declaration for coordinating and monitoring SSDC

Fourth, partner-country governments, on their part, should commit to use the resources received from Southern donors in a transparent manner and involve all the major stakeholders, including parliament, the private sector and civil society, in the process of programme design, implementation, and monitoring and evaluation.

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Notes
¹ Onguglo, Bonapas. 2010. A More Dynamic & Transformative South–South Trade. International Trade Forum - Issue 2/2010. http://www.tradeforum.org, accessed 04.11.10.
² ECOSOC. 2008. Trends in South-South and Triangular Development Cooperation. Background Study for the Development Cooperation Forum. New York: United Nations Economic and Social Council.
³ ibid, p 29.
⁴ See Reality of Aid Management Committee. 2010. South-South Cooperation: A Challenge to the Aid System? Special Report on South-South Cooperation 2010 of the Reality of Aid. Manila: IBON Books, pp. 1–2.
⁵ For example, Venezuela, Arab donors and India have provided flexible budget and BoP support to select partner countries. (Note 2, p 28).
⁶ ECOSOC. 2008. Note 2.
⁷ ECOSOC. 2009. South-South and Triangular Cooperation: Improving Information and Data. 4 November. New York: Office for ECOSOC Support and Coordination Department of Economic and Social Affairs, United Nations.
⁸ Note 4, p 9.
⁹ Paulo, Sebastian and Helmut Reisen. 2010. Eastern Donors and Western Soft Law: Towards a DAC Donor Peer Review of China and India? Development Policy Review 28 (5): 535–552, p 538.
¹⁰ Reality of Aid Management Committee. 2010. p 12. Note 2.
¹¹ Note 4, p 9.
¹² Note 4, p 11.
¹³ Note 2, p 18.
¹⁴ Note 2, p 20.
¹⁵ Note 2, p 30.
¹⁶ Note 4.
¹⁷ The example of Chinese workers’ involvement in Mauritius is provided by Paulo and Reisen. 2010: 538. (Note 9). The example of Nepal and Sri Lanka is based on the author’s personal observation. See also Note 2, p 32.
¹⁸ Bijoy, C.R. 2010. India: Transiting to a Global Donor. In The Reality of Aid Management Committee. 2010. (Note 4).
¹⁹ ibid.
²⁰ Note 2, p 29.
²¹ Note 4, p15
²² Note 9, p 538.
²³ Note 4, p 16.
²⁴ Note 2.
²⁵ Note 9, p 549.

Generalizing poverty and inequality, and even general policy recommendations!

A new report by UNRISD (Combating Poverty and Inequality: Structural Change, Social Policies and Politics) explores the causes, dynamics and persistence of poverty; examines what works and what has gone wrong in international policy thinking and practice; and lays out a range of policies and institutional measures that countries can adopt to alleviate poverty. The main point of the report is that the existing approaches to poverty often ignore its root causes, and do not follow through the causal sequence. The report argues, “persistent poverty in some regions, and growing inequalities worldwide, are stark reminders that economic globalization and liberalization have not created an environment conducive to sustainable and equitable social development.”

It advocates a pattern of growth and structural change that can generate and sustain jobs that are adequately remunerated and accessible to all-- regardless of income or class status, gender, ethnicity or location. It calls for comprehensive social policies that are grounded in universal rights and that support structural change, social cohesion and democratic politics.

It argues that civic rights, activism and political arrangements should be in place to ensure that states are responsive to the needs of citizens and that the poor have influence over the policies that are intended for their welfare.

Basically, it is criticizing the poverty reduction approaches led by the IMF and the WB (Poverty Reduction Strategy Papers (PRSPs)), some of the social protection programs, and the MDGs. It assets that these approaches push for “discrete social policies that are often weakly related to a country’s system of production and macroeconomic policies.”

Major points about poverty and inequality and policy recommendations:

• Poverty reduction requires growth and structural change that generate productive employment. This can be done by instituting selective and well-managed industrial and agricultural policies that connect agricultural sector more productively to industry and other sectors of the economy; stimulating and maintaining and adequate level of labor demand by expanding domestic demand; investing in infrastructure, education, research, productivity, and mobility of labor; and adopting a macroeconomic framework that avoids pro-cyclical policies or restrictive monetary and fiscal policies during periods of slow growth.
• Comprehensive social policies are essential for successful poverty reduction. This can be done by reinforcing redistributive effects of economic policy; protecting people from income loss and costs associated with unemployment, pregnancy, sickness, chronic illness or disability, and old age; enhancing productive capacities of individuals and communities; and reducing burden of growth and reproduction of society, including care-related work usually unfairly borne by women.
• High levels of inequality are an obstacle to poverty reduction. Redistributive policies can include providing the poor with greater access to productive assets such as land; investing in social infrastructure to reduce drudgery of domestic work; pursuing affirmative action policies for disadvantaged groups; stimulating investment in rural infrastructure, creating PWPs and increasing access to credits; pursuing fiscal reforms that improve tax administration; and creating a stable global economic environment that responds to the needs of low-income countries.
• Poverty reduction requires effective state action. Building state capacity can be done by crafting of political coalitions needed to set and carry out policy; mobilizing resources with which to implement development objectives; and allocating resources to productive and welfare-enhancing sectors and enforcing rules governing their use.
• Politics matters for poverty reduction. Poverty reduction requires ensuing rights for citizens to organize and contest public policies as autonomous actors; including the active participation of poor, women and other disadvantaged groups; bargaining regimes or social pacts to give group voice and influence in holding corporations; and sufficiently competitive to create uncertainties in electoral outcomes, allow for periodic changes in power and prevent ruling parties from becoming complacent.
• There are many paths to poverty reduction. Following heterodox policies is one of them.
• Poverty is reduced when economic and social policies, institutions and political arrangements are mutually supportive.

Although there are specific recommendations and discussions, some of the points are as general (and vague) as they can get. These are easier said than done. There are contradictions as well. For instance, periodic change in power has been seen as one of the political tools to reduce poverty. It assumes that the change in power would bring more pro-poor poverty reduction policies. However, without change in power, there have been so many instances of drastic change in poverty levels (e.g. Japan ruled by LDP for over fifty years, China under one-party rule and Vietnam under similar condition, Singapore evolving similarly after the British left them in the 1970s). Implementing all the poverty-reducing policy recommendations of this report is simply out of the reach of the developing countries due to institutional and resource constraints. Not a really enlightening report as most of the points were already floated out in other papers. What could have been interesting is the near-precise process of attaining the goals set in the policy recommendations. This is missing in literature on poverty and inequality. This report also misses this crucial aspect.

Creative industries doing good during the crisis

The latest UNCTAD publication Creative Economy Report 2010 argues that the demand for some "creative industry" products -- particularly those which are domestically consumed, such as videos, music, video games, and new formats for TV programmes -- remained stable during the global recession, and this economic sector, especially if supported by enlightened government policies, may help national economies, including those of developing countries, to recover from the downturn. Here is UNCTAD’s database on creative industries.

Global exports of creative goods and services -- products such as arts and crafts, audiovisuals, books, design work, films, music, new media, printed media, visual and performing arts, and creative services -- more than doubled between 2002 and 2008, the report notes. The total value of these exports reached US $592 billion in 2008, and the growth rate of the industry over that six-year period averaged 14%.

The report says that the creative industries hold great potential for developing countries seeking to diversify their economies and participate in one of the most dynamic sectors of world commerce. The global market already had been boosted by increases in South-South trade in creative products before the recession set it in. The South’s exports of creative goods to the world reached $176 billion in 2008, or 43% of total creative-industries trade.

One of the key recommendations of the report is that developing countries should include creative goods in their lists of products, and should conclude their negotiations under the Global System of Trade Preferences so that they give more impetus to the expansion of South-South trade in this sector. The rate of growth in such trade of creative goods – from $7.8 billion in 2002 to $21 billion in 2008 – is an opportunity that should be fully realized, the report says.

South Asia and creative industries’ goods trade

In South Asia, Bangladesh, Bhutan and Nepal have less emphasis on creative-industry development, but craft industries, furniture making and handloom industries have traditionally been widespread.

In total, Nepal’s exports of creative industries’ goods were US$14.52 million and imports from South Asia were US$37.79 million in 2003. The figures are of the latest year available. Nepal exported US$ 79.50 million and imported US$ 58.75 million worth of creative industries’ goods from the world. So, in terms of trade of creative industries’ goods, Nepal has trade surplus with the world but a deficit with South Asia.

Trade of creative industries’ goods within South Asia was US$ 275.59 million of exports and US$ 255.68 million of imports in 2008. The corresponding figures for 2002 were US$ 19.98 million and US$ 28.30 million, respectively.

South Asia’s exports of creative industries’ goods to the world were US$ 11160.56 and imports were US$3481.86 million in 2008. The corresponding figures for 2002 were US$250.28 million and US$ 430.92 million, respectively. The 2008 figures represent 2.74 percent and 0.83 percent of South Asia’s exports and imports as a share of world export and imports.

Creativity, knowledge and access to information are increasingly recognized as powerful engines driving economic growth and promoting development in a globalizing world.

LDCs fact sheet on climate change

[A draft version of a short article I wrote for Trade Insight magazine, vol.6, No.3-4, 2010. Here is the published version, p.4]

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The 49 Least Developing Countries (LDCs) will suffer disproportionately from the impact of climate change. Given the level of contribution to inducing climate change relative to the size of economies and the level of fossil fuels used by LDCs, they will suffer relatively more than larger economies, which are also high emitters of green house gases. While some LDCs will experience extreme temperature patterns, affecting not only human habitat but also altering fundamentals of ecosystems, others will be exposed to the risk of inundation, loss of livelihoods, and erratic rainfalls. It is expected to affect weather pattern, health, agriculture and fisheries, ecosystem and biodiversity, and coastal zones among others. Since the LDCs lack adequate resources to cope with negative impacts of climate change, they should be assisted with adequate adaptive capacity.

Typically, LDCs have a three-year average per capita GNI of less than US$ 905; low levels of capital, human and technological development; and high economic vulnerability. They have a combined population of around 785 million. At least 470 million are projected to live in extreme poverty by 2015.[1] On top of the existing economic and social vulnerabilities, LDCs also face increasing level of climate-related incidents such as droughts, floods, declining agricultural productivity, and unusual weather patterns. A substantial portion of LDCs population who depend on agriculture and forestry for livelihood will experience higher level of vulnerability.

Most of the LDC’s consumption, production and exports are not well diversified, exposing them to greater risk from global economic shocks associated with climate change. It will affect growth and development related sectors such as health, water supply and sanitation, energy, transport, mining, construction, trade, tourism, agriculture, forestry, fisheries, environment protection and disaster management.

The IPCC’s 2007 4^th Assessment Report states that global temperature rise of 4 degree Celsius would raise sea level to such an extent that it would submerge low-lying island states (and also LDC) like Tuvalu, Kiribati, and the Maldives. The LDCs in Africa and Asia would see flooding of low-lying coastal areas, scarcity of water, decline in agriculture production and fisheries, and a loss of biological resources. The IPCC estimates that yields from rain-fed agriculture in Africa could be reduced by as much as 50 percent by the next decade. Water shortages and shrinking of arable land would not only reduce production but could trigger social and political disruption.

It notes that Africa is the most vulnerable continent to climate change. Agricultural production and food security is most likely to be severely compromised, and water stress heightened. The available stock of productive land is decreasing.[2] Note that over 70 percent of LDC’s population resides in rural areas and depend on agriculture, which employ 68.8 percent of the economically active population, for living. This sector alone contributes 28 percent of the LDCs’ GDP.

One-third of African people live in drought-prone areas. Add the miseries associated with drought and floods to the impact of water-borne diseases such as malaria, cholera and diarrhea, the final outcome could be devastating. Furthermore, as a result of climate change, the geographic distribution of malaria is likely to alter, as the existing favorable malaria regions might be unfavorable and vice versa. For instance, relatively malaria-free areas in Ethiopia, Rwanda, Somalia and the Angolan highlands might experience malaria incidences by 2050. This could reach epidemic scale as communities in these relatively malaria-free areas lack immunity to newly intruded communicable diseases.[3]

As much as 75 to 250 million people will be exposed to increasing water stress in Africa by 2020. Africa is also expected to experience a reduction in soil moisture in the sub-humid zones. Southern Africa will see a decrease in rainfall. It will affect natural water reservoirs. For instance, Lake Chad has already lost 50 percent water in the last four decades. The LDCs along the Niger River Basin such as Benin, Guinea, Mali and Niger are expected to experience a ten percent change in precipitation, evaporation and runoffs. Similar, or even worse, trend is expected in LDCs along the Zambezi River and the Gambia River.

The IPCC report has predicted that South Asia will experience temperatures above the global average. The melting of snow and glaciers in the Himalayas will likely increase flooding and avalanches by 2030. Nepal and Bangladesh are at risk of increasing flood disasters and are expected to be hit by flash floods. Meanwhile, rainfall is expected to increase during summer as well. The increasing frequency of heat waves in Asia might increase elderly mortality, especially among the urban poor population. Arid and semi-arid, and tropical Asian regions will see an increase in patients with respiratory and cardiovascular diseases. As in the case with Africa, communicable water-borne diseases might cause water-related stress in LDCs in Asia.

Irrigation-fed agriculture in Asia will be impacted as well. Rice growing areas will see a decline in production, severely impacting economic growth and development goals. It will also impact agricultural production and access to food, exacerbating malnutrition and hunger in some LDCs. By 2020, there might be a reduction of up to 50 percent of rain-fed agriculture. [4]The West and Central African countries might see production decline to the tune of 2-4 percent of GDP. That said, production of certain crops that flourish under relatively higher temperature (such as millet) than normal might increase. Unfortunately, it does not include major staple crops like rice, wheat, corn, bean and potato.

Climate change will also impact land, water ecosystems, and biodiversity. Coral reefs in costal Africa and Asia will be affected. It will also alter the migration of birds, increasing risk of their extinction. By 2080, 25-40 percent of African mammals might fall under the World Conservation Union’s list of critically endangered or extinct categories, assuming that there is no migration of mammals. Similarly, in Asia, climate change will affect the distribution, productivity and health of forests and its inhabitants. It is estimated that with one meter rise in sea level, Bengal tigers, estuarine crocodiles and mud crabs might be extinct. With high temperatures and increasing number of forest fires, Nepal might lose red pandas, leopards, monkeys and other wild animals. Additionally, temperature increase of about 2-3 degree Celsius and a decrease in rainfall might diminish grassland productivity in Asia by 40-90 percent.

Meanwhile, it is projected that the costal zones in the Gulf of Guinea will face destruction due to rising sea levels. Massawa, one of Eritrea’s port cities, could see inundation of infrastructure and economic installations from a one meter rise in sea level, resulting in cost of over US$ 250 million. In Asia, Bangladesh, Myanmar and Cambodia would be hit hard by rise in sea level, which will affect not only the coastal infrastructure but also fishery industry and livelihoods.

The damage to the environment is already done. We have to live up with the impact of excessive emissions even if it is scaled down to 1990 levels. This warrants the necessity of building adaptation capacities of LDCs to help them cope with and mitigate the negative impacts of climate change. For adaptation measures, the LDCs will require substantial funding, both financial and technological. Innovative and novel water management strategies are required to help South Asia cope with rising incidence and intensity of floods during monsoon and decrease in water level during dry season.

Adaptation practices such as diversification of livelihood activities, institutional reforms like rules and governance structures that are geared to address emerging concerns about climate change, adjustment in farming operations, and greater flexibility in labor migration for income purposes, among others will be helpful to LDCs. Other adaptation measures include early warning system, malaria research, promotion of biotechnology especially of seeds that are drought- and insect-resistant crops, creation of national and regional grain stock/food bank, better and affordable crop insurance mechanism, conditional/unconditional cash transfers, and food price subsidies. Furthermore, to give increased momentum and weight to adaptation, climate change agenda has to be incorporated into development priorities at the national and regional levels in LDCs.

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[1] http://www.unohrlls.org/UserFiles/File/Publications/Factsheet.pdf

[2] LDC Report 2009, UNTCAD: http://www.unctad.org/en/docs/ldc2009_en.pdf

[3] The Impact of Climate Change on the Development Prospects of the Least Developed Countries and Small Islands Developing States, UN-OHRLLS 2009. Unless cited otherwise, most of the statistics mentioned in this article are sourced from this paper.

[4] IPCC 2007, Climate Change Impact, Vulnerability and Adaptation, Summary for Policymakers. http://www.ipcc.ch/pdf/assessment-report/ar4/wg2/ar4-wg2-spm.pdf

Exports and Imports within SAARC

SAARC Exports Matrix, 2009 (US$ millions)
Reporting Countries\Partner Countries	AFG	BGD	IND	MDV	NPL	PAK	LKA
Afghanistan		1.0	109.7		0.0	108.5	0.0
Bangladesh	4.1		268.2	0.0	10.6	77.4	8.9
India	469.2	2181.1		107.5	1417.3	1449.4	1732.9
Maldives		0.0	2.9		0.0	0.0	14.0
Nepal	0.0	41.9	388.3	0.0		0.8	0.1
Pakistan	1357.6	365.2	231.9	3.6	0.7		213.1
Sri Lanka	0.0	18.8	298.2	50.8	0.2	50.8
SAARC Imports Matrix, 2009 (US$ millions)
Afghanistan		4.6	516.1		0.0	1493.3	0.0
Bangladesh	1.1		2748.6	0.0	46.1	282.8	20.7
India	120.7	234.9		3.2	427.1	273.8	328.0
Maldives		0.0	118.3		0.0	3.9	55.9
Nepal	0.0	11.7	1559.0	0.0		0.8	0.2
Pakistan	119.4	75.8	1079.9	0.0	0.8		55.8
Sri Lanka	0.0	9.7	1906.2	15.4	0.1	234.4

Apparently, India has the lion’s share of both exports and imports within the SAARC region. Data is not available for Bhutan. Nepal trades with only four members in SAARC, which has a total of eight members. India and Bangladesh are the two most important export destinations in South Asia for Nepal. (Source: IMF’s DOTS database)

Prem Khanal on CEO's salary ceiling in Nepal

[This article, authored by Prem Khanal, was published in Republica daily, 2010-12-12. Here is my take on the same issue published in Republica daily two months ago.]

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CEO's salary ceiling

Barely a week after the announcement of the much-delayed budget for the current fiscal year, Nepal Rastra Bank came up with a harsh policy that for the first time checks perks and remunerations of CEOs of banks and financial institutions. Perks and salary of CEOs have been a matter of debate for some time worldwide, particularly after the 2008 global financial crisis. There are numerous examples in the Western countries where greedy chief executives were recklessly found engaged in incentive-guided risk-taking lending, which put their entire institutions at high risk of collapse and ultimately compelled the government to use huge amount of taxpayers’ money to save those troubled institutions. In Nepal, such a scenario can’t be ruled out. Undoubtedly, there is a sea difference between closure of a local grocery store and a bank and the government can’t be a silent spectator when a bank meltdowns and general people lose their lifetime’s savings.

Agreed, as the existing pay scales of chief executives, in some cases, are difficult to justify, a mechanism forged in consultation and participation of stakeholders was in fact an urgent need. More than their salaries, which the banks have to publish in their annual reports, the problem lies in perks that come in terms of vehicles, housing and entertainment costs for chief executives. Since most of such perks are opaquely hidden in account sheets beyond understanding of general shareholders, it is perceived that they are grossly misused for personal benefits.

Having said that, my impression of the directive is that it is too rapid and does more harm by contributing to weakening competition and discouraging innovation in addition to barring best performing employees to enjoy prosperity. Sorry to say, but going by the directive, particularly the first two pages containing the concept of the directive, one gets a sense that Nepal’s chief executives of private banks are being punished for being innovative and for being able to generate healthy returns to investors and corporate tax to the state. Already shaken by a slump in realty sector, fears deepen for the banking sector that the directive can halt the development of one of the most successful and transparent businesses of Nepal.

Till date, Nepal doesn’t have a single incident where the financial health of a financial institution had been problematic just because of high perks and salary of chief executives. In fact, we do have a glaring example of how the fully state-owned and largest Rastriya Banijya Bank and partially state-owned Nepal Bank Limited slipped into a deep financial problem when we relied on cheap and uncompetitive chief executives to lead those institutions for decades. The result: Both institutions were declared technically insolvent and the country had to take a hefty loan of over Rs 5 billion to renovate their financial health but even after a decade of reforms they are still fragile enough to spark a financial meltdown.

Having belatedly woken up to waning credibility of the central bank, the measure seems to have been taken to secure quick popularity and restore the tarnished reputation of the central bank. But bear in mind that the latest effort made by the central bank is not at all a foolproof remedy to deal with what it calls ‘a looming problem in Nepal’s financial sector.’

The NRB seems to be rejoicing on its successes that it has patched up one hole in the financial sector but it seems unaware of the fact that the new measure has opened new big holes for the ‘innovative’ chief executives to continue securing hefty pay in the future. The NRB directive mandated that the perks and salary of chief executive of banks and financial institutions should either be less than 5 percent of the three-year average of employees’ expenditure of the concerned institution or less than 0.025 percent of the total assets recorded a year earlier, whichever low.

One of the ways to raise their earnings will be to raise the volume of staff expenses. For that, they will either try to persuade board of directors to raise the volume of employee expenditures or show soft corner when staffs demand higher pay. Even sometimes the board might find itself helpless in resisting proposals to raise staff expenses in order to retain competent chief executives by raising their pay. Another way will be to increase the volume of total assets so that the chief executive can secure more pay in the coming year. For that matter, chief executives will be encouraged to extend more loans and investments, the two components that command a lion’s share in the assets of a financial institution so that they can claim more remuneration next year. The ultimate consequences of such risk-taking attitude, if it starts showing in Nepal’s financial system, will be far devastating than risk posed by the existing pays to them.

The NRB seems to have tactfully averted a possible confrontation with the powerful and influential CEOs by allowing the incumbent chief executives to continue enjoy their existing earnings even after renewal of their contract of hiring in the same institution. So, established banks and financial institutions will not have to face any serious impact of the new directives as they will continue to have the incumbent chief executives as long as they want. But upcoming financial institutions will face a major problem in finding competent executives. As the staff expenses and total assets of upcoming banks will be in small volume, no experienced chief executive will think of joining a new institution. That sort of situation will discourage new financial institutions coming into operation, thereby limiting competition.

Despite all the above agreements, my objection to the directive is only that the measures are too rapid and too harsh and provides “one-fits-all” prescription to all banks and financial institutions, irrespective of their financial health and past performances. Instead, I think all the banks and financial institutions should have been first divided into two categories – financial institutions having negative and positive capital adequacy ratios (CAR) – and different set of directives put in place for them. The recent NRB’s directive and parameters devised to cap the executives´ pay is perfect to those institutions having negative CAR. However, among the financial institutions having positive CAR, the capping should be slightly relaxed to those institutions that make normal profits, say having return on assets (ROA) up to 2 percent.

However, there should be no restrictions on perks and salaries for chief executives of those institutions that are making healthy returns, say ROA of more than 2 percent on average for the last three years. What ultimately matters at the end of the day is not the chief executives´ salary and benefits per se but how they are performing and how healthy is the financial condition of their institution. If a financial institution makes an impressive return by sincerely obeying all the directives of central bank and prudently meeting all standard parameters, and its CEO ensures good returns to shareholders, the chief executives of such institutions should be allowed to enjoy higher rewards. This is how a state is supposed to promote innovations and entrepreneurship.

(Published in Republica, December 12, 2010,p.6)