Thursday, February 10, 2011

Investment climate reform in Southern Sudan

Southern Sudan is a new country (official name not decided yet) with an overwhelming majority deciding to secede from Sudan. According to the final count, announced in Sudan’s capital, Khartoum, 98.83 percent of the more than 3.8 million registered voters in southern Sudan chose to separate from the north. In many parts of the country the vote was over 99 percent.

My good friend Abraham Akoi returned back to Southern Sudan and is working at the Ministry of Finance. Salva Kiir Mayardit, south Sudan's president, tapped Abraham to become the deputy director of administration and finance at the ministry. He argues: “Our political and financial institutions are weak. Civil liberties are not strong. There are no good hospitals and no good supply of medicines.And only 15 percent of south Sudanese know how to read and write. That's not very good for democracy."

An interesting question is that how the new country is preparing to spur economic growth and make it investor-friendly after over two decades of brutal civil war in the oil rich region? A number of development and multilateral agencies are working to help it better human development and business climate. The WB’s investment climate blog lists the initiatives taken so far in easing business environment.


    • Legal framework. Eight laws have been enacted enabling business entry, operations, and exit. Another nine that allow basic registration, contract, agency, property rights, and insolvency are ready to enact.
    • Business entry. The business registry was strengthened and registration reinstated following suspension in December 2005. Businesses can incorporate within a day. About 8,000 businesses—most domestic and small or medium-size—have been registered since July 2006. A business-registration campaign resulted in an additional 1,100 businesses within the first six months of 2010.
    • Investment policy and promotion. The new Investment Promotion Act 2009 established the Southern Sudan Investment Authority, resulting in the targeted, proactive pursuit of potential investors and re-investors.
    • Public-private dialogue. The establishment of the Southern Sudan Business Forum enables consensual policy development. Through its working groups, the forum has helped revise the Micro Finance Policy being developed by the Bank of Southern Sudan and drafted and promulgated the Investment Promotion Act 2009.
    • Trade logistics. As a result of improvements in the Customs Chamber since 2008, Sudan has significantly reduced the number of days traders need to complete import-export procedures. The time needed to import was reduced from 83 days in 2007 to 46 days in 2010, and the time to export from 56 days in 2007 to 32 days in 2010. The 2009 Customs Amendment Act was approved by the Council of Ministers. The customs clearing system has been automated and this will lead to even greater time and cost reductions. The system links 21 regional offices and the Tax Chamber, and it allows for electronic approvals and the submission of electronic manifests.

A lot of work needs to be done. And, I hope that with dedicated youths like Abraham, it will be done soon.

Tuesday, February 8, 2011

Capitalism comes with open system and instabilities

A good rundown of the state of macroeconomics so far. Sourced from Alex Leijonhufvud’s CEPR Policy Insight No 53 “Nature of an economy”.

  • Keynes proposed that flexible money wages would not lead to full employment. In fact, very flexible wages would produce financial catastrophe (The General Theory).
  • IS-LM model showed that unemployment was due to sticky wages, i.e. downward inflexibility of money (nominal) wages.
  • Then the problem came when the Phillips curve was pasted onto the IS-LM model. How can you have both rising inflation and rising unemployment? So, came the Quantity Theory of Money, which Friedman used to attack Keynesian economics. It gave logical reasoning to the conundrum faced when Phillips curve was combined with IS-LM model. The concept of ‘natural rate of unemployment’ came up.
  • The Monetarists believed that flexible wages were sufficient to guarantee that the economy would converge to the natural rate of unemployment. Keynesians argued that if desired saving did not equal investment, then flexibility of wages would not make it converge to the natural rate of unemployment. Monetarists ignored S-I problem and also the role of credit markets in furthering or hindering the coordination of saving and investment. Monetarists were more interested in stabilizing price level.
  • Robert Lucas argued that the instability of the Phillips curve and the Fisher premium could be explained while obeying the dictates of optimal choice theory (rational expectations). He believed that only “unanticipated” changes in the growth rate of the stock of money would cause unemployment to deviate from its natural rate. Friedman did not share this position. S-I problem was forgotten.
  • Edward Prescott came up with Real Business Cycle theory, which showed variations in output and employment were optimal responses to exogenous (i.e. unexplained) variations in productivity growth. It became the main vehicle for the development of dynamic stochastic general equilibrium (GSGE) theory.
  • New Classicals and New Keynesians converged on 'the ‘New Neoclassical Synthesis”, which incorporated some of the “frictions” of the Keynesians while the latter adopted the DSGE framework developed by the former.
  • However, though advances were made in understanding the advances of markets, little progress was made in understand how an economy works. The Old Synthesis was wrong back then and the New Synthesis is also wrong today. It does not recognize the instabilities lurking in the economic system, argues Leijonhufvud. The behavior of individual agents and of the economy as a whole differ in a deep recession or high inflation from normal times.
  • Leijonhufvud maintains that economists did not pay attention to their ontological presuppositions, i.e. they failed to grasp the nature of the reality (the object of study) and to adapt one’s methods of inquiry to it. Economists have imposed preconceived methods on economic reality in such a manner as to distort their understanding of it. They start from optimal choice and fashion an image of reality to fit it.
  • A “closed” model (and optimal choice) in economics essentially implies that agents are automatons lacking free will and a choice. So, whatever happens, there is always equilibrium. It assumes that economic agents possessed the knowledge of the future required for the calculation of intertemporal optima. So, the present beliefs about the future induce actions that create the future (what George Soros calls “reflexivity”). Rational expectations is a special case of reflexivity. It makes the economy a closed system. Agents are supposed to possess (probabilistic) knowledge of an objective reality—a reality that they have been able to learn.
  • The mathematical representation of the system closed by assuming rational expectations made it possible to prove a variety of propositions—such as Ricardian equivalence and other policy ineffectiveness theorems—that ran counter to the received wisdom of the time.
  • The heterogeneity of expectations associated with the lack of synchronicity means that there will be a range of indeterminancy within which the market clearing price may temporarily settle.
  • In the “open system” many prices will be indeterminate (albeit within limits), economic behavior has to be understood as fundamentally adaptive, behavioral time horizons are variable, and the sets of markets and relative prices may change endogenously.
  • In economics crises, budget constraints are not “soft” but they are broken. In deflation or depression crises, the budget constraint violations are concentrated in the private sector. In high inflation or hyperinflation crises, it is the sovereign that violates equal-value-in-exchange. Standard general equilibrium theory, even in its modern dynamic stochastic variants, is not particularly helpful when budget constraints are violated.
  • The image of a capitalist economy as a stable general equilibrium system somewhat hampered in its functioning by “frictions” is an inadequate guide to the realities we have to cop with. Instability is a part of the capitalist system.
  • Government resources have to be used to bring the private sector out of a deep recession or depression. Resources have to be transferred from the private to the public sector to bring high inflation under control. It gets further troublesome if the finances of one sector are already strained when the other gets into trouble.

So, two main points: (i) Think of an economy as an “open system” in the ontological sense of Tony Lawson; and (ii) The economy is not globally stable but harbors instabilities.

Saturday, February 5, 2011

Food price inflation fueling a sense of injustice


But for all the noisy media coverage and declarations by senior policymakers, few people have remarked on the actual motives of those who, in 2008, destroyed property in Argentina, Egypt, India, Indonesia, and Peru and brought down Haiti's government and are currently causing havoc in Tunisia and across the Middle East. After all, food riots have occurred throughout history but have not usually correlated with hunger or food prices. For the most part, the planet's 700 million-900 million hungry people have suffered in silence. And price volatility does not necessarily lead to screaming crowds, either. There are many more examples of people accepting volatile prices than rioting over them. So there is more to the protests than the logic of the pocketbook. A key psychological element -- a sense of injustice that arises between seeing food prices rise and pouring a Molotov cocktail -- is missing.

It is not yet clear how big a role food riots played in the toppling of the Tunisian government. But if history is any guide, Tunisians' feelings of being cheated were more important than actual food prices. Take Cameroon's experience in 2008, for example. That year, this West African nation suffered one of the most serious and protracted food riots in the world, and scores were left dead after the crowds eventually dispersed. Remembering the crisis, Alexander Legwegoh, a Cameroonian academic and an expert on urban poverty and food security, and Bernard Motuba, an accountant who left Cameroon for Canada, said that it was not just bills that caused the violence: expensive fuel drove taxi drivers to strike and then, anger over merchants' profiteering on staple products broadened the protest. "The government knew a group of merchants was taking advantage of everyone and that this would grow to a political crisis." Yet, according to Legwegoh and Motuba, as the protesters' numbers swelled, the size of loaves of bread for sale in the markets shrank while their price tags remained the same.

The real culprits, then, were retailers who stockpiled grain in hopes that prices would continue to go up. This speculation spun Cameroon's food system further out of control and bred hatred. Motuba describes the food merchants as "cutthroat business guys who don't give a damn about people." When the government sent inspectors to grocery stores and warehouses to auction off any illicit surpluses, the public cheered. Prices had not returned to their earlier levels, but a seeming restoration of justice helped calm the rioters' tempers, whose fury, according to Motuba and Legwegoh, had been rooted more in a feeling of exploitation than a fear of starvation.

[…]Policymakers today must be mindful of the psychological causes of food riots when they discuss the correct mix of trade and protectionism that will safeguard our food security. If they simply embrace the efficiency of the market, public feelings of injustice may cause more trouble than the volatile price of food itself.


More by Evan Fraser and Andrew Rimas in Foreign Affairs magazine here.

Friday, February 4, 2011

Status of the Doha Round negotiations so far

Adapted from WTO Director-General Pascal Lamy’s statement:


On Agriculture, on templates and on the associated work on base data, Step 2 on drafts of actual proposed formats are being tabled and discussed in each of the three pillars.  Moreover, Members are meeting bilaterally and in small groups to come to an agreed understanding of some parameters, including OTDS.  Additional drafts are also in preparation and work on base data is progressing with the verification process.

On modalities, the Chair has continued his consultations.  Members are also meeting on clarification of certain technical aspects of the modalities.

In NAMA, on NTBs, one concrete, positive change has been the movement into text-based negotiation through the creation of small drafting groups to undertake work in three areas:  transparency, remanufactured goods and horizontal mechanism.  The process of cleaning texts on the Horizontal Mechanism and Transparency is advancing.  On remanufacturing, however, the small group is still facing serious challenges.  Concerning other NTB areas such as textile labelling, conformity assessment and international standards, the discussions are still at a more and too general level.

Concerning tariffs, discussions are taking place.  The sectoral proponents continue to organize meetings on their sectoral initiatives.  However, it is clear that the kind of engagement we are seeing on the NTB side is still missing on tariffs.  This needs to change if we are to get to the same place by Easter.

Regarding Services, in market access, the Special Session confirmed that the request/offer negotiations had to be focused and intensified and that the  first cluster of 14 February will focus on Modes 3 and 4, and the ICT group of sectors.  Of course, this would not be to the exclusion of any other sector or issue that Members wished to raise.

In domestic regulation, there was consensus for the Chair to prepare a revised text for March.  There is a real opportunity to make progress here, provided that the result is not a bracket-laden text that serves only to solidify existing positions.  In GATS rules focused on dedicated discussions on government procurement and subsidies.  The Working Party is also preparing for a discussion on services statistics for the purpose of the discussion on Emergency Safeguard Measures.

In response to requests from several delegations, the Chair of the Special Session has proceeded to establish a small consultative group to advance work on the text of the proposed LDC waiver.

In the Rules area, in December, the Chair appointed three Friends of the Chair, who have been asked to consult on specific bracketed anti-dumping issues with an eye to developing convergence, bottom-up texts for consideration by the Group.  These issues include product under consideration, material retardation and causation of injury.  The Chair intends to appoint further Friends in the anti-dumping area, and to extend the process to horizontal subsidies.  He is also considering naming contact groups on some of the most intractable anti-dumping and subsidy issues.  In the area of fisheries subsidies, the Chair has appointed co-facilitators to work on technical aspects of fisheries management.  The Group has also received five new proposals in this area, including substantial new proposals on both the scope of the disciplines and the nature of special and differential treatment.

On regional trade agreements, Members agreed to begin the review of the Transparency Mechanism for RTAs as required by the General Council Decision, with a view to making it permanent.  Two proposals have been received from the United States and Ecuador and are to be discussed by the Group starting on 4 February.  Other elements of the review include statements from the Chairs of the two implementing bodies:  the CRTA and the CTD, and the Secretariat, indicating their experiences with the Mechanism thus far.  Discussions on systemic issues which remain dependent on the submission of text-based proposals by Members are also to be taken up; in this regard, one new proposal from Bolivia has been received.

In the area of Trade facilitation, the newly established Facilitator-led process appears to be working well and has already produced results.  Negotiations in 14 different groups led to streamlined language and a lower number of square brackets.  There was a noticeable change in gear, delegations were focused and committed to cleaning-up the text.  Delegations appreciate the bottom-up mode of operation and the balance in treatment of the two main pillars (TF measures and S&D) and equally value the fact that there was no overlap in meetings and full interpretation of all events which is an issue on which notably, the African Group has been insisting on.

As regards Trade and Environment, on Paragraph 31(i), some Members are working together to build on specific texts or revisit existing one.  While a submission by the African Group on a roster of experts to assist developing countries with respect to specific trade obligations under multilateral environmental agreements gathered some support, further consultations will be held to refine the proposal.  On Paragraph 31(ii), Members have started with text-based negotiations.  Finally, on Paragraph 31(iii), a lot of work remains to be done to further define the “universe of environmental goods” and the related structure of the outcome, including modalities of treatment.  Members have also recently expressed renewed interest for the topic of environmental services.

As regards the negotiations on the establishment of a multilateral system of notification and registration of geographical indications for wines and spirits, intensive drafting sessions have been taking place by a small group of experts drawn from co-sponsors of the different proposals, the “W/52 Group”, the “Joint Proposal Group”, and Hong Kong, China, with the results reported to an open-ended informal consultations. 

On 27 January, the Chair circulated a paper on Notification and Registration, resulting from Member's own texts and the outcome of the drafting group.  This represents the current state of play, with full attributions of different wording, following a concerted effort to reduce square brackets.  This text is now “work in progress”.  Wok will now continue on the elements of Legal Effects/Consequences of Registration and Participation.

On the Work Programme on Special and Differential Treatment, discussions have been taking place on the basis of the most recent revision of the Chair's non-paper on the Monitoring Mechanism.  This work is being undertaken in small group informal consultations.  A number of constructive textual proposals have emerged during the consultations.

On Dispute Settlement, an updated draft legal text was presented and discussed on sequencing, and points of convergence were identified with respect to possible solutions to post-retaliation.  There has been more substantive engagement on effective compliance and time-savings.

Finally, let me take also the opportunity to report on my consultations, as DG and not as TNC Chair, on the two TRIPS implementation issues of TRIPS/CBD and GI extension.


Thursday, February 3, 2011

Exports prospect of Nepal

My latest piece is about exports prospects of Nepal in the fiscal year 2010/2011. I did a simple annual estimation from five months data of this fiscal year. The main point is that exports this fiscal year might not increase while imports will increase relative to previous two years. Nothing has fundamentally changed with regards to productive capacity and efficiency in the economy. So, the underlying problems that have been plaguing our export and industrial sectors still persist. Unless we solve these exogenous and endogenous problems, export prospects will remain gloomy.


Nepal's exports prospect

The latest macroeconomic update released by the central bank shows a favorable growth in exports, and decline in both trade deficit (the difference between monetary value of exports and imports) and balance of payments (BoP), which basically is an accounting record of all the monetary transactions between Nepal and the rest of the world, deficit. While many marveled at the decline in trade and BoP deficits, a bitter truth about the state of our export and industrial sectors was pretty much ignored: We are still stuck in the same mess we have been for a couple of years now and growth prospect of exports and industrial sectors look as gloomy as it was last year.

During the first five months of this fiscal year, merchandise exports increased by 8.5 percent to Rs 27.3 billion, which is an improvement by Rs 2.1 billion over the same period last fiscal year. Meanwhile, imports increased by 0.6 percent to Rs 154.3 billion, which is an increase by Rs 0.9 billion over the same period. Hence, trade deficit amounted to Rs 127 billion, a decrease of Rs 1.4 billion. The decline in imports and an increase in remittances helped overall BoP deficit to shrink to Rs 3.4 billion from Rs 14.6 billion over the same period. In short, this is the story about the status of our external sector in the past five months of fiscal year 2010/11.

Now, an intriguing exercise would be to project the likely performance of exports and imports for the full year, which the central bank should have done but is not doing so far. Based on the trend in the last two fiscal years, the annualized figures for exports and imports for this fiscal year are expected to be Rs 63.3 billion and Rs 379.6 billion, respectively. Based on this calculation, the trade deficit will be between Rs 316.3 billion and Rs 318.4 billion. Simply, it means that Nepal will be importing six times as much as it exports by the end of fiscal year.

Rather than comparing five months figures as the central bank did, let us compare the annualized numbers with previous years’ data, which gives a better picture of the performance of exports sector. In a nutshell, the core message is that exports performance during this fiscal year will not be different from what it was in the last two years. The deepening of the global economic crisis severely affected exports last fiscal year, when it stood at Rs 61.1 billion as compared to Rs 67.7 billion in FY 2008/09. On an average, exports during the last two years was around Rs 64.4 billion, which is still higher than what is expected by the end of this fiscal year. Following the same methodology, imports this fiscal year will be higher than the average of last two fiscal years. It means that trade deficit will also be higher. Overall, the exports sector’s performance this fiscal year does not seem encouraging and there is little reason to bask on improved yet incomplete data for the first five months of this fiscal year.

Before going into the potential reasons for dismal performance of exports sector, let me first discuss a little bit more about how our exports are expected to perform until 2012. According to Global Economic Prospects (GEP) 2011, exports, as a share of GDP, are expected to continuously decline, reaching 9.9 percent in 2012 from 11 percent, 12.9 percent and 15.7 percent in 2011, 2010, and 2009, respectively. Meanwhile, imports are expected to continue increasing in pretty much the pattern it is doing so far. This means trade deficit is expected to further widen in 2012. Worse, due to weak foreign currencies, thanks to lose monetary policy in the West, our exchange rate is expected to appreciate, making our exports costlier abroad, which will put further strain in the performance of this sector. Add to this the impact of rising inflation rate in Nepal, our exports will be even more uncompetitive in 2012, if the underlying constraints that plague this sector are left unaddressed.

Now, you might be wondering what’s up with all these numbers and performance of exports sector? Well, the reality is that its performance largely determines the strength of our industrial sector, our external/macroeconomic balance, and to some extent our economic growth rate. With the existing state of exports and other economic fundamentals, Nepal’s real GDP growth is expected to be 3.7 percent and 4 percent in 2011 and 2012, respectively. It means that Nepal’s real GDP growth rate will be second lowest in South Asia in the next two years.

The main point is that despite a marginal increase in exports, slow growth rate of imports, and declining balance of payments deficit in the first five months of this fiscal year, we still are in a deep trench. Our economic fundamentals have not changed. The same problems that have been plaguing our exports sector are obstinately persistent. Supply-side constraints such as intermittent blockades, labor disputes, and lack of adequate infrastructures (primarily road transport and electricity) are further eroding our competitiveness. These constraints are mostly exogenous in nature. They are making our exports uncompetitive and are also preventing diversification of exports basket.

That said, some endogenous factors such as the lack of entrepreneurship and innovation in exports sector, the ignorance about the rapidly changing and globalizing market, and the inability to embrace a change in restructuring production, marketing and distribution structures of firms are some of the other factors ailing the growth of industrial and export sectors. This is corroborated by the World Bank’s projections in GEP 2010 and GEP 2011. The GEP 2010 projections showed higher growth rate in exports and in exports as a share of GDP, but they were revised down due to persistent negative impact of the above-mentioned constraints.

Most of these are non-economic constraints. So, the set of solutions are political consensus on national agenda regarding export and industrial promotion, amicable settlement of labor disputes, and simplification of rules and procedures regarding construction of infrastructures directly related to these sectors. It should be aided by promotion of entrepreneurship in and restructuring of exports sector. Else, our exports and industrial competitiveness will continue to decline, resulting in a widening trade deficit, prolonging of BoP crisis, further slowing down of growth rate, and stagnating employment opportunities.


[Published in Republica, February 3, 2011, p7]

Persistence of Keynesian economics: 75th anniversary of The General Theory

February 2011 marks the 75th anniversary of one of the groundbreaking economics books written by JM Keynes in 1936: The General Theory of Employment, Interest, and Money. Luzzetti and Ohanian (full paper here) shed light on the influence of Keynes’s ideas in shifting economic paradigm and policy. They assert that the long-lasting clout of Keynes’s General Theory was due to the fact that Keynes was “in the right place at the right time”.


As the Depression persisted for years in the UK and the US, it became increasingly difficult to reconcile chronically high unemployment with equilibrium theory that posited wage adjustments would reduce unemployment to normal levels. The General Theory was, in large measure, written in response to the inability of equilibrium theory to confront the Great Depression.

Furthermore, US macroeconomic time series following the publication of the General Theory appeared consistent with Keynes’s predictions. As government spending soared in the 1940s, rising from about 16% of GDP in 1939 to 48% of GDP in 1944, the unemployment rate plummeted from 17.2% to 1.2% (Margo 1993). This increased economists’ confidence in the Keynesian model, and the stable and prosperous economy of the 1950s and 1960s further solidified this confidence.

But perhaps the central factor behind the longevity of the General Theory was a series of breakthroughs in econometric methods that began in the 1940s. These methodological developments transformed the qualitative ideas of the General Theory into quantitative propositions. These breakthroughs included Haavelmo’s 1944 paper that integrated more formally probability theory with econometric methods, and other Cowles Commission classics on identification, estimation, and causal ordering.

These econometric developments formed the basis of the toolkit used to analyse business cycles following the General Theory both among university economists and policymakers. Throughout the 1960s, the economy continued to grow with remarkable stability, and for many observers, this stable prosperity was due in considerable part to the General Theory’s tenets.


And, Keynesian economics started to lose steam by the early 1970s due to poor forecasting performance of Keynesian econometric models; increasing recognition of supply-side factors as drivers of fluctuations (Kydland and Prescott 1982); and the breakdown of the Phillips curve, the authors argue. Here is a partial rebuttal to this view as well.

But, Keynesian economics is back again after the recent global financial and economic crisis. It will persist.


The notion of an inflation-unemployment trade-off and aggregate demand management remain at central banks, and the Keynesian vision provides a well-established framework for carrying this vision on within the context of policies that tie central bank behaviour to the joint mandate of promoting both low unemployment and price stability. This makes it politically unimaginable for a central bank, faced with a crisis, to argue it is unlikely they can increase output and trying to do so might make matters worse.

The General Theory will continue to have a large audience among policymakers as long as governments are pressed to boost nominal spending during periods of crisis, whether or not those efforts are effective.


Wednesday, February 2, 2011

The Doha Round and drought


The Doha Round — when completed — will oil the wheels of international trade in commodities, giving the developing world its fair share of the market.  It will improve the workings of what is no more, in the end, than a transmission belt, between countries where there is demand and countries where there is supply.  For food trade, the climate crisis makes a properly functioning transmission belt even more imperative.  Droughts, and other natural catastrophes, should not deprive parts of the globe from food.


That’s Pascal Lamy pitching for the passage of the Doha Round and managing food price spikes.