Transplanting the Chinese model of growth

Here is a response from Justin Lin:

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“We can learn many lessons from other countries’ experiences. But I try never to expect to transplant other countries’ models to China, because the specific opportunities in China will be different from other countries. And you know, I think we cannot directly transplant China’s models to any other country, including other middle-income countries or developing countries, even less so in high-income countries. But there’s always something that we can learn from other people. As the Confucian saying goes, if you walk with two people, you can always draw inspiration from the successful one and avoid the mistakes of the unsuccessful one.”

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On replicating the process of structural transformation in China:

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“One is that economic development in any country is a process of continuous technological innovation, industrial upgrading and diversification, and structural transformation. Any country starts with more than 85 percent of its population living on agriculture when its income level is low. To become a high-income country, the population living on agriculture will reduce down to 10 percent or less. This structural transformation is inevitable. In this process, a well-functioning market will be necessary for improving resource allocation. But at the same time, the market alone will not be enough.

For example, at the agrarian stage, farmers produce mostly for their own consumption. Only a small amount of produce is traded in the nearby market with people known to each other. Under such a situation, the need for infrastructure—such as roads for transportation—is limited, and a legal system for contract enforcement is not required. When the production moves to manufacturing, the economies of scale become larger, and producers will mostly produce for other people and not for themselves any more. The market range will expand, and trading becomes arms-length. To facilitate the transaction, roads are needed for transportation, and legal contract enforcements are needed. Capital for equipment investment and maintaining operations will also increase with the improvement of technology and the increase in the size of the market. So to make the change in the structure of production feasible, the infrastructure, legal system, and financial system also need to be changed accordingly.”

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And, the role of the state:

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“No matter how smart they are, individual entrepreneurs will not be able to carry out all those changes by themselves. You need to have a state to help them—to coordinate those kinds of changes. The problem I see is that, to be successful in economic development, one needs to understand the nature of this process, and to allow the market to play a fundamental role. But at the same time you need to have a government to facilitate the workings of the market, in order to make this kind of technological innovation, as well as structural transformation, feasible—to help carry it out smoothly and rapidly. This is one lesson that we can learn from China.”

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Big is good: Firm heterogeneity and exports

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This paper contributes to the more recent strand in the analysis of trade flows that uses data on exports of individual firms. In all countries of the world, relatively few firms participate in world trade, thus suggesting that besides country level barriers to trade, characteristics of a firm such as its size and productivity are relevant for participation in trade. Using firm level data, this study attempts to model and estimate the decision of Indian firms on their participation in trade. Firm heterogeneity is an important determinant of the decision to export. Exporting firms are significantly larger, more r&d-intensive, low wage-intensive, more productive and more profitable than non-exporting firms. The multinomial results reveal that the probability of survival of new firms in export markets is lower when compared to those which have been exporting in the previous years.

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Here is a piece by Srinivasan and Archana 2011.

Dangers of uncontrolled real estate plotting

Raping one of the hills in Budhanilkantha (Kathmandu Valley) with real estate plotting. Uncontrolled urbanization first, environment last priority for the builders. It is wrong. Period.

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Nepalese industrialists and unions strike a deal

Good news! Seems like most of the issues related to industrial strike and labor-related industrial woes are being addressed in the latest deal between the three main trade unions and industrialists (represented by FNCCI). The deal will go into effect beginning March 15.

Main features of the deal:

• No industrial strike for four years.
• Increase in monthly salary and daily wage plus social security for workers. Remuneration per month has been increased by Rs 1500 (monthly salary increased by Rs 50 and dearness allowance by Rs 1450). This has increased minimum wage to Rs 6100 per month from Rs 4600. Daily wages have been increased to Rs 226 from Rs 190. Monthly remuneration has been increased by 32.6 percent and daily wage by 18.9 percent.
• Employers and workers have also agreed to contribute 20 percent and 11 percent of their respective basic remunerations for implementing different social security schemes for workers.
• The trade unions promised to extend their full cooperation to employers in curtailing the work force if any enterprise is forced to fully or partially close operations due to rise in labor cost or other adverse market conditions.
• The workers have committed themselves to fully cooperate with the employers to increase industrial productivity.
• They have also agreed not to take part in any political activities during working hours.

Most of the issues I raised in yesterday’s piece were addressed. Good for both FNCCI and unions. Let us just hope that the terms of the deal will be honored by both sides.

Union strikes and productivity in Nepal

My latest piece is about labor strikes in the industrial sector, its implication for workers and economy, and the productivity issues hinged with these increasing wage and allowance. My point is that if the unions want to industrialists to double minimum wage (instead of simply adjusting existing wage with inflation), they should also guarantee that labor productivity would also double. Else, why double wages when the industrial sector is losing competitiveness and is in a downturn?

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Union strikes & productivity

The trade unions and industrialists, who are represented by Federation of Nepalese Chambers of Commerce and Industry (FNCCI), have locked horns over increasing salary and allowance of industrial sector workers. This has halted production, including in Hetauda Industrial Estate. Meanwhile, the industrialists brave enough to resist the unions’ diktat are being admonished and manhandled by party cadres and union activists. The Maoist-affiliated trade union, All Nepal Trade Union Federation (ANTUF) has been the most active and belligerent in the whole union versus industrialist drama. The other two trade unions that are complicating the matter are CPN (UML)-affiliated General Federation of Nepalese Trade Unions (GFONT) and Congress-affiliated Nepal Trade Union Congress (NTUC).

While the demands of the unions are valid as per the existing labor law, they are far too stretched in terms of the need and ability of firms to fulfill them. The scale of demand for wage increase is beyond the capacity of most of the firms, which are seeing razor thin profit margins and some are falling short of the minimum demand required to keep up their operations running. In such a situation, demanding extremely high wages that are inconsistent with inflation rate and without a guarantee of an increase in labor productivity shows foolhardiness of the unions, who seem to be motivated to go for strike not for labor welfare reasons, but for political ones.

The existing labor law has a provision that allows the government to revise minimum wage every two years by consulting with both workers and employers. Two years ago, the government had fixed monthly salary of Rs 4600 (Rs 3050 basic salary and Rs 1550 dearness allowance) and wage of Rs 190 per day. The usual trend is that minimum wage is adjusted with inflation. Since inflation is hovering around 10 percent, it would have been justified if the unions’ demanded for an increase in salary and allowances by the same percent. However, they have asked for an increase in daily wage by more than double the existing amount. The industrialists argue that they can increase salary by 23.7 percent only. But, the trade unions want monthly salary to be increased to Rs 10,000 and daily wage to Rs 400. Furthermore, they are demanding additional provisions like insurance, provident fund and social security of workers. So, employers and unions are at loggerheads over wage, allowance and labor welfare issues.

Given the state of our ailing industries, it is pretty much impossible for them to fulfill the unions’ demands. If the unions stick to their guns, then there is no prospect for amicable solution to industrial discord, which is not only reducing production, but also labor productivity and eroding competitiveness of domestic industries. If the industries close down, then it will be the poor workers who will lose jobs, not the union leaders who are basking on political blessing and stash of cash from membership fees and (forced) donation. The trade unions should first consider the state of our industries and economy before making wild demands and going on for a strike that will do nothing but decimate our ailing industrial strength, which is essential for bringing about structural transformation in the economy.

Allow me to highlight some of the issues the unions leaders and union members should keep in mind before heedlessly going on strike demanding something that cannot be fully fulfilled, at least right now.

First, demanding pay hike during prosperous industrial periods is reasonable. Unfortunately, this is not such a time. No firm will increase salary beyond the mandatory adjustment of basic wages with inflation if profits do not rise. Worse, for some companies that are just making break-even increasing salary without corresponding increase in sales revenue will mean losses. Going on strike and halting production will further decrease firm’s revenue, which means not only employment and wage freeze, but also layoffs. By vehemently going into strike, the unions are not only depriving their own members of a potential salary hike in the future, but also employment opportunities to aspiring employees. The tragic fate of the garment and textile industries is still fresh in our memories.

Second, the industrial sector is growing at a very slow pace. It registered negative growth rate (-0.2 percent) in 2009, down from a peak of 18.8 percent in 1992. Fortunately, it recovered slightly last year. Also, the industrial sector contributes just around 16 percent to our GDP and the manufacturing sector just about 6 percent. Against such a backdrop, how can the industries increase salary and allowance whose scale that is being demanded is not justified by the performance of any industrial variables right now? The willful act of the unions will further worsen the performance of the industrial sector.

Third, factors such as load-shedding, supply bottlenecks and donation campaigns are increasing cost of production of firms. It was reported that according to Small Factory Foundation Survey 2066, load-shedding has already forced closure of 41 percent of medium-scale factories. Furthermore, about twenty thousand workers lost jobs when five dozen big and small firms closed own in Birgunj-Pathalaiya industrial corridor of Parsa district. In such situation, without a decrease in cost of production, increase in profits is unimaginable. The pay hike (plus bonus and allowance) of workers depends on the rise in profits, which simply is not the case right now, thanks partly to destructive activities of the unions themselves. In fact, these factors have led to an increase in cost of production, eroded competitiveness both domestically and abroad, and led to a decrease in exports.

Fourth, low appropriability of private returns, i.e. the inability of the private sector to retain returns on investment, is taking its toll in industrial activities and economic growth. Poor property rights and slack contract enforcements engendered by the extralegal bullying of investors by the politically indoctrinated and militant youth wings and unions are falling heavy on the already ailing industrial sector. This is scaring away investors, both foreign and domestic. It will eventually cost jobs of the union members. The more destructive the unions get, the more it is going to cost the workers, industries and the country.

Fifth, remember that the militant activities of Young Communist League (YCL) severely crippled productive capacity and production in the industrial sector. It scared away foreign companies like Colgate Palmolive and shut down several garment firms. They not only harassed businessmen and terrorized business community by launching donation campaigns and confiscation of private property, but also illegally occupied industrial districts and disrupted production in several manufacturing plants in 2008. The very institution (private property) required for economic growth was handicapped by the YCL and Maoist-affiliated trade unions. In 2009, this was reflected in negative growth rate of industrial sector and a decline in annual GDP growth rate. Furthermore, net foreign direct investment inflow has been just 0.3 percent of GDP. The recent activities of the unions in the industrial sector bear the hallmark of the infamous industrial campaign launched by YCL in 2008. There is no benefit, but all loses in this endeavor.

Finally, can the unions guarantee that labor productivity will rise by the same proportion if salary and allowance are increased by the amount they are demanding? If not, then there is no point increasing salary and allowance beyond the one set by the minimum wage law and a simple adjustment with inflation. Note that, Nepal has the lowest labor productivity in South Asia. The labor unions should first convince the government and industrialists that labor productivity will increase if salary and allowance are increased. Then only their demands have logic. Else, there is every reason to speculate that all the drama staged by the unions has vested interests and are politically motivated.

[Published in Republica, March 24, 2011, p.6]

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The Japanese virtue

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“In the face of calamity, a decent people has proved extremely resilient: no looting; very little complaining among the tsunami survivors. In Tokyo people queued patiently to meet their tax deadlines. Everywhere there was a calm determination to conjure a little order out of chaos. Volunteers have rushed to help. The country’s Self-Defence Forces, which dithered in response to the Kobe earthquake in 1995, have poured into the stricken area. Naoto Kan, the prime minister, who started the crisis with very low public support, has so far managed to keep a semblance of order in the country, despite a series of calamities that would challenge even the strongest of leaders. The government’s inept handling of the Kobe disaster did much to undermine Japan’s confidence in itself.”

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Read this article in The Economist.

Nepal, India & China – growth and trade compared

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China’s GDP growth rate has always been higher than that of Nepal’s. Since 2002 Indian growth rate started rising higher, but Nepal’s declined and then stayed below 5%. (Source: WDI)

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GDP per capita of China and India is rising very fast. But, Nepal’s is pretty much stagnant (or rising at a very slow pace). (Source: WDI)

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Since 1997 exports of goods and services (share of GDP) started to decline in the case of Nepal. Both China’s and India’s exports had been ever-increasing up until 2007, when the global financial crisis started and then followed by global economic crisis. China’s drop in exports was more pronounced than that of India’s after the economic crisis. Latest data show that exports of both the countries are picking up. (Source: WDI)

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India is the most important exports destination for Nepalese exporters. Almost 64 percent of total merchandise goods are exported to India. Exports to both India and World declined after 2008. Exports to China is very low as of now. (Source: DOTS, IMF)

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Imports from India accounts for almost 57 percent of total merchandise goods imports. Imports from China is picking up, thanks to cheap and competitive products. (Source: DOTS, IMF)

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Trade deficit is ever-increasing. Trade deficit with India was around US$1.08 billion in 2009 and with the world (excluding India) US$1.04 billion. Trade deficit with China is increasing but below US$500 million. (Source: DOTS, IMF)

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Nepal’s share of trade deficit (with respect to total trade deficit) is the highest with India, accounting for over 50 percent of total trade deficit. With China, it is around 15 percent of total trade deficit. (Source: DOTS, IMF)

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