Incentives matter: In defense of Nepalese civil servants

A majority of Nepali people have the habit of blaming the civil servants, bureaucrats and public institutions for their miseries. They are partially right. The day-to-day operations of public institutions are run by civil servants and bureaucrats. The public has to deal with them to get past red tapes and to basically get anything done that requires the Government of Nepal’s seal. The civil servants are at times rude and openly speak of ‘fast track services’ involving unethical practices. This is prevalent in pretty much every public institution you can think of.

Why are such tendencies rampant within our public institutions? The answer lies in the way they were/are built and governed, insufficient public sector wages, and unwarranted political interference. The last one is the worst of all evils, which is killing all incentives to perform better, instilling a culture of inefficiency, and treating consumers as slaves when they should be treated as kings.

These factors are eroding the morale of civil servants and making them inefficient. The initially honest civil servants, who struggle hard to pass the Public Service Commission examination, plunge headlong into corrupt and illogical environment where they find it hard to live by their principles and morals. They get consumed by the corrupt institutional structure, evil machinations of political leaders and union bosses. Those brave enough to challenge the system are faced with a situation where they are forced to quit; others succumb to it until they retire.

Let me give an example of how the state of our public institutions erodes incentives and efficiency of civil servants. Take a tour of the Department of Mines and Exploration, which comes under the Ministry of Industry (MoI). The building looks like it has never been painted since being constructed. The hallway leading to the office of the undersecretary stinks horribly bad, probably because the toilet has not been cleaned for days. Water is dripping from pipes hung on the ceiling. The walls are dilapidated and floors are not properly swept. The smart, energetic undersecretary is given a room that has an old computer which takes minutes to boot up. It consists of a simple desk with a Nepali language newspaper, few documents and a telephone on it. It is irrational on our part to expect professionalism and efficiency from this civil servant when his working space is worse than that of a receptionist in a private firm or I/NGO.

The sorry state of office used by this undersecretary is not an isolated case. Visit offices inside Singha Durbar itself. The first floor occupied by the Ministry of Commerce and Supplies and the MoI stinks of dirty toilet nearby while the parking area is littered with broken bricks and torn papers. The floors of the building have not been properly wiped, and the civil servants’ offices are cramped, messy with inadequate lights. Some workers do not even have computers. They are surrounded by piles of documents improperly stacked in folders. The staffs are not properly dressed and look perennially disconsolate and listless. Under such conditions, how on earth will the morale of civil servants be high and how can we expect them to be professional?

No wonder the productivity of our civil servants and corruption in public institutions are one of the worst in South Asia. The regretful state of our public institutions and the facilities in there are a big disincentive for civil servants to work hard and be efficient. That being said, do not make the mistake of jumping down to the conclusion that all public institutions are like this. Some of the offices that get loads of donor money and good yearly budget allocations are no less well-off and equipped than private sector offices. But, that is a different story for later.

While the sorry state of our public buildings and inadequate facilities are part of the story accounting for inefficiency of our civil servants, insufficient wage is another major incentive-killer. The salary and benefits of civil servants do not even come close to the one received by their counterparts in private sectors and I/NGOs. It is hard for a civil servant to live in major urban areas with just, on an average, Rs 15,000 a month. Since inflation is already pretty high, their real purchasing power is decreasing. This means it is even harder for them to keep up with normal household expenses, coupled with health and education costs of their children. Given such conditions, civil servants have every incentive to earn extra money from other means, which usually constitutes unethical practices like taking bribes. This partially explains the inefficiency and delay to get anything done from our public institutions.

The biggest evil of all is political interference by selfish and uneducated politicians who have no idea about the value of and respect for competent civil servants and meager salary they earn with respect to their workload. Instead, our civil servants are humiliated by the politicians time and again. Some politicians slap high-level district officials for not sending comfy vehicles to pick them up from district airports; some place unqualified and incompetent party cadres to high-level positions in public institutions, while honest civil servants work for years to get promoted; some forcefully take luxurious vehicles from virtually bankrupt institutions; some arbitrarily transfer civil servants to offices that have nothing do with their acquired knowledge and experience; and some send receipts of personal expenses to be paid by insolvent state-owned enterprises.

The civil servants are compelled to comply with and adjust to these kinds of undeserved demands. It is imprudent on our part to expect that the balance sheets and public sector books be clean when the devils of disasters are prying on the efficacy of our civil servants.

Blaming them for all the wrongs in public institutions is injudicious and bigoted analysis. The blame should be directed to the working condition and those who are disinclined to change it for good, paltry wage and excessive politicization of bureaucracy.

[Published in Republica, June 4, 2011, p.6]

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Food insecurity and trade in South Asia

[This was published in Trade Insight, Vol.1, No.7, 2011, pp.20-24]

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Food Insecurity: Can Trade Address It?

Chandan Sapkota

Food insecurity is a major national as well as regional issue in South Asia. Most of the countries in the region are reeling under high food prices, which are pushing up overall inflation, and deficit food production. Food-price inflation is having a negative impact on poverty reduction[1], progress in achieving the Millennium Development Goals (MDGs), and overall macroeconomic balance. Given this mounting problem closely linked to the livelihood and survival of mil- lions of people in the region that has the largest number of poor people in the world, ensuring food security is a pressing concern.

Solving the problem of food insecurity has become even more imperative in South Asia because the region’s total population is expected to be 2.3 billion in 2050 (up from 1.6 billion in 2011), but the area would remain the same (4.8 million sq.km).[2] This is equivalent to about one–fourth of the total projected world population in 2050. Furthermore, by 2050, South Asia will have the highest population density (486.8 persons per sq. km) of all the regions in the world. Increasing agriculture productivity and smoothening supply within and across borders are vital to ensuring food security for such a large population.

While there are many factors that are causing food prices to rise at the national, regional and global levels, one of the ways to mitigate the impact—with regard to access, availability and price volatility—is to facilitate agriculture trade by removing trade restrictions and by enhancing cooperation on smoothening the flow of agriculture goods from surplus to food deficit nations. It should, however, be realized that achieving food security is a multidimensional task that involves international trade as well as, inter alia, new technology and input availability, environmentally sustainable farming and appropriate supply management practices.[3]

This article examines the extent of agriculture trade, food insecurity and agriculture trade restrictions in South Asia.

Agriculture trade

Intra-regional trade in South Asia is low when compared to other regional blocs such as the Association of Southeast Asian Nations (ASEAN) and the European Union. South Asia’s intra-regional merchandise exports (imports) were about 5.6 percent (2.5 percent) of its total world merchandise exports (imports) in 2009. However, the share of intra-regional trade in agriculture goods is higher. In 2009, agriculture exports within South Asia were around 12.8 percent of the region’s total world agriculture exports.[4]

Specifically, intra-regional exports of food stuffs—that is, meat products, sugar, cocoa, cereal products, vegetable products, beverages, and residual and waste from food industries—were 17.2 percent of South Asia’s total food stuff exports to the world. Likewise, South Asia’s intra-regional agriculture imports accounted for 8.5 percent of its total global agriculture imports. Notably, intra-regional imports of animal and animal products made up 22.2 percent of the region’s total world imports of such products (Table 1).

Table 1: Agriculture exports and imports within South Asia (percentage of region's export & import to world)* [5]
Intra regional exports
Commodity group	2005	2006	2007	2008	2009
Animal & animal products	3.78	4.25	3.98	4.32	4.73
Vegetable products	17.52	14.87	16.04	15.95	13.92
Food stuff	14.95	26.41	17.33	16.46	17.2
Intra regional imports
Commodity group	2005	2006	2007	2008	2009
Animal & animal products	20.83	19.68	16.77	21.22	22.18
Vegetable products	11.67	10.98	10.82	7.86	6.67
Food stuff	11.3	33.64	35.73	37.29	15.61

Source: Author’s computation using UN Comtrade database; *UN Comtrade database (HS 2002 classification). Animal & animal products (Chapters 1–4); vegetable products (Chapters 6–15); and food stuff (Chapters 16–23).

As a share of the country’s total agriculture trade with the world, Bhutan mostly exports to and imports from South Asia. The figures are also high for Afghanistan and Nepal. The other countries trade less with South Asian neighbours relative to their total trade with the world (Table 2). While Afghanistan trades mostly with Pakistan, Bhutan and Nepal trade mostly with India. The low share of intra-regional agriculture trade for other countries suggests that either there is low complementarity in agriculture trade within the region or the market structure with regard to price, quality and volume is unattractive.

Table 2: Intraregional agriculture trade (share of world trade), 2009
Country	Export	Import
Afghanistan	66.78	14.04
Bangladesh*	4.35	19.46
Bhutan	94.03	97.49
India	9.83	3.92
Maldives**	9.67	36.27
Nepal	79.2	37.76
Pakistan	18.71	9.58
Sri Lanka	7.99	21.74

Source: Author’s computation using UN Comtrade database; *2007; **2008

Overall, India and Sri Lanka have trade surplus in agriculture goods. Bhutan had surplus in 2008, but a deficit of about US$5 million the following year. While agriculture trade deficit of Afghanistan, Bangladesh, the Maldives and Nepal is increasing, Pakistan saw a decrease in deficit in 2009 when compared to the previous year (Table 3).

Table 3: Total agriculture trade balance (million US$)
Country	2008	2009
Afghanistan	-18.01	-30.94
Bangladesh*	-190.03	-306
Bhutan	16.19	-4.95
India	1086.6	340
Maldives**	-7.01	-8.94
Nepal***	-15.71	-27
Pakistan	-113.88	-54.85
Sri Lanka	19.13	41.43

Source: Author’s computation using UN Comtrade database (Chapters 1-23 considered as agriculture goods); *Figures for Bangladesh correspond to 2006 and 2007;**Maldives 2007 and 2008; ***Nepal 2003 instead of 2008

Food security

Food prices have been surging in all South Asian countries since 2007, not only impacting macroeconomic stability, but also pushing millions of people below the poverty line. Food prices have been rapidly increasing in most of the countries following a convergence in their growth rate in 2003 (Figure 1). In the recent period, food price inflation in Pakistan, followed by Nepal, is the highest in South Asia. Apart from adversely affecting poverty reduction efforts in the region, rising food prices also slow down the progress being made in achieving the MDGs.

Figure 1: Growth rates of food price index in South Asia (%)

Source: ADB. 2010. Key Indicators for Asia and the Pacific 2010. Manila: Asian Development Bank

It is estimated that a 10 percentage increase in food prices will increase the number of poor people (millions) living below US$1.25-a-day by 3.8, 0.01, 22.8, 6.7, 0.6, 3.5, and 0.2 in Bangladesh, Bhutan, rural India, urban India, Nepal, Pakistan, and Sri Lanka, respectively.[6] The impact of higher food prices is severe because South Asian people, on average, spend more than half of their income on food consumption. Higher prices/price instability without a corresponding purchasing power, reduce savings and increase vulnerability. It is estimated that an average person in Bangladesh, Nepal, Pakistan and Sri Lanka spends, respectively, 56.05 percent, 57.88 per- cent, 46.99 percent and 63.55 percent of his/her total expenditure on food.[7] With total South Asian population projected to reach 1.9 billion in 2025 and 2.3 billion in 2050, food insecurity will intensify if agriculture production does not keep pace with population growth.

Food insecurity and price instability affect hunger and malnutrition. Though the state of hunger in South Asia has improved when compared to the level in 1990, it is still high. According to Global Hunger Index 2010[8], the hunger situation in Bangladesh and India has improved from “extremely alarming” to “alarming”, and in Pakistan and Sri Lanka from “alarming” to “serious”. The state of hunger in Nepal, however, has remained the same: “alarming”. Overall, hunger in South Asia is “alarming” and worse than in Sub-Saharan Africa.

Undernourishment is also a major concern in the region. Almost 26 percent of the population in Bangladesh is undernourished. The figures (percentage of the population that is undernourished) for India, Nepal, Pakistan and Sri Lanka are 22, 16, 23, and 21 respectively. Similarly, a large proportion of children under five years are underweight. It is as high as 43.5 percent in India and as low as 21.1 percent in Sri Lanka. Ensuring reliable, adequate and nutritious food items is essential to address malnutrition in the region. Hunger and undernourishment have long-term economic implications as they reduce people’s capacity to work efficiently and fight against diseases by undermining the immune system.

Regional cooperation

Realizing the urgency to address food insecurity through regional cooperation after the food crisis of 2007–2008, South Asian leaders, during the 15th Summit of the South Asian Association of Regional Cooperation (SAARC) held in Colombo, agreed to expedite the operationlization of the SAARC Food Bank, which is expected to serve as a regional food security reserve for SAARC member countries during normal food shortages and emergencies. The Food Bank’s reserve of food grains has been raised from 241,580 metric tons (MT) to 486,000 MT. But the SAARC Food Bank is yet to become fully functional. If properly designed and implemented, it could help relieve pressure on some countries facing urgent food shortages.

Increased agriculture productivity and production is crucial to having enough stock for trade in the region. Agriculture production has been consistently increasing in all countries but arable land has remained the same. This means that productivity has risen, and needs to rise further to feed an increasing population. For instance, the Maldives has one of the highest cereal yields but the lowest arable land in South Asia (Table 4). Since its population is expected to increase by over 13 percent between 2011 and 2050 and rising sea level is expected to inundate large swathes of its land, it will find difficult to ensure food security, let alone generate surplus production for trade. In such circumstances, exports from countries such as India and Pakistan that have a relatively high level of production and area of arable land become crucial.

Table 4: Arable land and cereal yield in South Asia
Country	Arable land (million hectares), 2007	Cereal yield (1000 kg per hectare), 2008
Afghanistan	8.53	1.34
Bangladesh	7.97	3.97
Bhutan	0.13	1.95
India	158.65	2.65
Maldives	0.004	3.92
Nepal	2.36	2.36
Pakistan	21.5	2.67
Sri Lanka	0.97	3.66

Source: World Development Indicators, World Bank

India produces the lion’s share of the total South Asian food production. In 2009, it produced 748.84 million of food, three times higher than the total production by other South Asian countries combined (Figure 2).

Figure 2: Total food production in South Asia (million MT)

  * India on right y-axis and others on left y-axis

Source: Author’s computation using FAOSTAT database (Total food production = Sum of total production of cereals, citrus fruit, coarse grain, fibre crops primary, fruit excl melons, jute & jute-like fibers, oilcake equivalent, oil crops primary, pulses, roots and tubers, treenuts, and vegetables & melons).

That said, since arable land is expected to be the same (or decline in the worst case scenario), it is imperative to increase agriculture yield by adopting new technologies and novel farming techniques, and using improved quality seeds.

India is the world’s second biggest producer of wheat, sugar and rice and has a sizable surplus, which is beyond the limit set by the government, in domestic stock. Currently, the Indian government is ready to export surplus food grains, especially when grain prices are record high, but is waiting to assess the total domestic demand that will be mandated by the upcoming Food Bill.[9] After the food crisis of 2007–2008, India had restricted exports of major food items. It is yet to relax those restrictions.

While it is politically justified to restrict exports when there is domestic production deficit, following the same policy even when there is surplus is not a smart move and represents a wasted opportunity for alleviating regional food insecurity. It is estimated that restrictions on rice exports explained almost 40 percent of the increase in global rice price in 2007–2008.[10]

The Food and Agriculture Organization of the United Nations argues that agriculture trade liberalization acts as a catalyst for change and promotes conditions in which the food-insecure are able to raise their income, live healthier and be more productive. But not all will gain from liberalization. Those that are hurt and are increasingly vulnerable have to be taken care of by implementing appropriate safety net programmes such as food-for-work, school feeding and in-cash or in-kind transfers. For instance, Bangladesh extended its work-for-food programme in response to damages caused by natural disasters and rise in food prices.[11]

Trade barriers and food crisis

Food security is a multidimensional issue and agriculture trade is one tool to address food shortages. Though intra-regional trade in agriculture goods is higher, in relative terms, than total intra-regional merchandise trade in South Asia, a host of barriers constrain such trade.

Some countries have not relaxed exports restrictions despite having a surplus of food grains. Furthermore, most countries are imposing high tariff, para-tariff and non-tariff barriers in agriculture trade.[12] Most countries protect most agriculture goods under the Agreement on South Asian Free Trade Area (SAFTA) by putting them on their sensitive lists. Tariffs on goods on the sensitive lists do not have to be cut as per SAFTA’s Tariff Liberalization Programme. The most-favoured-nation (MFN) applied tariff on agriculture goods in South Asia is higher than in some other regions. It was 29 percent during 2006–2009, com- pared to just 9.93 percent in ASEAN. High trade barriers—both export restrictions and import barriers—are complicating efforts to mitigate food insecurity in the region.

Theoretically, agriculture trade liberalization leads to, inter alia, a reduction in the price of agriculture imports in the importing country and helps increase agriculture output by providing attractive price signals to farmers in the exporting country. However, as noted above, not all will be winners from liberalization. The losers will have to be taken care of by implementing appropriate social safety net programmes.

During the recent food crisis, Afghanistan increased food supply by using buffer food stock grains, targeted food aid to the most vulnerable population, and gave subsidies on agriculture inputs. Pakistan relaxed import tariff on sugar, released grains from its buffer stocks, and provided subsidies on food stuff sold through state-owned food depots. Bangladesh and India also followed similar policies, but imposed restrictions on rice and sugar exports. Nepal released food stocks from government depots and subsidized food items at fair price shops. Sri Lanka reduced import tariff and implemented non-targeted subsidies.

Increasing production and productivity is key to addressing the availability of adequate food. Without surplus production and trade complementarity, it is hard to increase agriculture trade aimed at addressing food insecurity. Countries like India that have surplus food stocks should take the initiative to relax export restrictions at least in the region. Meanwhile, all countries should prioritize agriculture and focus on increasing production and productivity. Inadequate investment in agriculture, irrigation, rural infrastructure, technology, better storage and packaging facilities at the farm level, and marketing process, poor trade facilitation, and restrictions on access to ports and/or inter-country roads usage, among others, are the major hurdles that need to be addressed to increase agriculture trade and to ensure food security.[13] This should be supplemented by reducing, to the most reasonable extent, all forms of trade restrictions that hamper the free flow of agriculture goods in the region.

Creating a policy environment where farmers are incentivized to be more productive and engaged in agriculture activities is also crucial for food security. For this, policies should be designed in such a way that farmers are encouraged to cooperate so that there are economies of scale even when there is fragmented small-scale land holdings. Furthermore, food price stability is also an important aspect that needs to be adequately addressed to ensure food security in the region. Agriculture sector firms should be given enough incentives to produce goods that are vital to maintaining food security. Importantly, these policies have to consider the impact of climate change on agriculture production and trade as well. All of these will require greater regional coordination to reduce food security and trade policy inconsistencies.

 

References

[1] About 44 million people fell below the poverty line of US$1.25 a day due to high food prices between June and December 2010, according to Ivanic, M., W. Martin, and H. Zaman. 2011. “Estimating the short-run poverty impacts of the 2010–2011 surge in food prices.” World Bank Policy Research Working Paper 5633, Washington, D.C.

[2] Figures computed from United States Census’s international population projection available at http://www.census. gov/ipc/www/idb/region.php

[3] Karapinar, Baris. 2010. Introduction: Food crisis and the WTO. In Karapinar, Baris and Christian Haberli (eds.). Food Crisis and the WTO. Cambridge: Cambridge University Press. pp. 1–22

[4] Author’s computation using UN Comtrade database (HS 2002 classification). Agriculture products include Chapters 1–23. All data unless otherwise cited are direct data computed using UNCOM- TRADE (HS 2002 classification).

[5] UN Comtrade database (HS 2002 classification). Animal & animal products (Chapters 1–4); vegetable products (Chapters 6–15); and food stuff (Chapters 16–23).

[6] Asian Development Bank. 2011. “Global food price inflation and developing Asia.” Available at www.adb.org/documents/ reports/global-food-price-inflation/food- price-inflation.pdf#page=30

[7] Estimates by Economic Research Service, using the 1996 ICP data, by United States Department of Agriculture (USDA).

[8] International Food Policy Research Institute. 2010. “Global Hunger Index 2010.” www.ifpri.org/publication/2010- global-hunger-index-background-facts- and-key-findings

[9] Mukherjee, Kritiivas. 2011. “Food rights bill holds key to India farm exports plan.” http://in.reuters.com/article/2011/05/14/ idINIndia-56866620110514

[10] Martin, Will and Kym Anderson. 2010. “Trade distortions and food price surges.” Paper presented at the World Bank- UC Berkeley Conference on Agriculture and Development- Revisited, Berkeley, 1–2 October 2010.

[11] Coady, David, Margaret E. Grosh and John Hoddinott. 2003. Targeting of transfers in developing countries: Review of Lessons and Experience. Washington, D.C.: The World Bank.

[12] See Samaratunga, Parakarma and Manoj Thibbotuwawa. 2006. “Mapping and analysis of South Asian agricultural trade liberalization effort.” ARTNeT Working Paper Series No. 26.

[13] “Agricultural Trade and Poverty: Can trade work for the poor?”, FAO Agriculture Series No. 36, 2005.

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The Keynesian path to global economic prosperity

Just finished reading Paul Davidson’s The Keynes Solution: The Path to Global Economic Prosperity. The book explains how the recent global financial and economic crises occurred (basically being hostage to neoliberal doctrines), the Keynesian alternatives to prevent such crises, and the Keynesian solutions to the recession. Davidson argues that Keynes’s original ideas have been distorted by “New Keynesians” to fit issues like sticky wages in neoclassical models, primarily to save and highlight the latter one.

He argues that Keynes recognized capitalism was the best system humans have devised to achieve a civilized economic system society, but it had two major faults:

• its failure to provide persistent full employment for all those who want to work
• its arbitrary and inequitable distribution of income and wealth

Keynes held the view that unless these faults were corrected, capitalism will always be unstable and subjected to economic booms and busts.

He cites Keynes’s letter to George Bernard Shaw (January 1, 1935) where Keynes expressed his belief on a new economic philosophy (later known as Keynesianism) that details economic faults of a “money-using, market-oriented capitalists” economic system and what policies would prevent these flaws while maintaining the benefits of a capitalist system. A year after that Keynes published The General Theory of Employment, Interest and Money.

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To understand my new state of mind … you have to know that I believe myself to be writing a book on economic theory which will largely revolutionize not I suppose at once but in the course of the next ten years the way the world thinks about economic problems. When my new theory has been duly assimilated and mixed with politics and feeling and passions, I cannot predict what the final upshot will be in its effect on actions and affairs, but there will be a great change and in particular the Ricardian Foundations of Marxism will be knocked away.

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Keynes was in favor of an expansionary policy in the short run to tackle rising unemployment and economic recession. In fact, observing the high unemployment rate in Europe before the Great Depression of 1929, he argued, “In the long run we will all be dead.” He was in particular against classical argument that whatever happened in the market (unemployment and recession) is a process of market adjustment. For Keynes, during economic distress, recovery must always be the first priority; this should be followed by reform (and concerns about deficit and debt should be secondary).

Davidson tries to dispel arguments that are frequently alluded to Keynes. For instance, he argues that Keynes maintained unemployment is primarily cause by lack of liquidity, not sticky wages:

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[…] the fundamental cause of unemployment was not due to the fixity of wages and prices preventing a free market from operating to ensure full employment … the cause involves the fact that savers are demanding increased liquidity from the financial assets that they use to store their savings. The problem of unemployment was to be found in the operation of financial markets and the motives of savers to save.

[…] Keynes specifically stated that his theory of unemployment did not rely on the assumption of wage and/or price rigidities. He claimed that his theory provided a different analysis where the cause of unemployment was related to the operation of financial markets and the public's desire to hold liquid assets. (p. 163)

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Davidson argues that the Keynesian solution during recession is to promote increased market demand (via government intervention) for the products of business firms, thus creating profit opportunities that will encourage enterprises to hire more people. Recovery should be the first strategy during recession, not fiscal deficit or debt. Then when recovery is achieved, reforms should be the strategy to fix inefficiencies in the market.

He is critical of neoclassical belief that government involvement is always bad for the economy. This is taken as an axiom by them and need not be proven. Any logical theory hinged on this axiom looks okay. But, the axiom itself is doubtful. However, “Keynes’s liquidity theory of an entrepreneurial economy demonstrates that government has the capacity to cure, with the cooperation of private industry and households, economic flaws inherent in the operation of a money-using, market-oriented capitalist economy.”

He argues that the reason why economists and analysts misinterpret the main message behind Keynes’s arguments is that they never read carefully what Keynes really said. Instead, they depend on some else’s information and analysis, leading to distortion of ideas as it filters down to successive people. He charges that present day neo-Keynesians attribute sticky wages to Keynes and blend it with neoclassical economics to get neoclassical Keynesian synthesis.

Davidson argues that even Paul Samuelson misinterpreted and misread Keynes. But, Samuelson saved Keynesian ideas in the US by making it compatible with some of the classical theories because it was hard to go against McCarthy anticommunist movement at that time.

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[…] Samuelson admits he did not understand Keynes’s analysis. Instead, he assumed that Keynes was presenting a traditional general equilibrium classical theory model where wage and price rigidity caused unemployment. (p.170)

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Davidson concludes:

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Paul Samuelson saved the term “Keynesian” in economic textbooks from being completely destroyed by the McCarthy anticommunist movement at the time. The cost of such a saving, however, was to sever the meaning of Keynesian theory in mainstream economic theory from its General Theory analytical roots. Keynes’s revolution demonstrated that in a money-using, market-oriented capitalist economy, supply side market imperfections, including the fixity of money wages and/or prices or a liquidity trap, are not necessary conditions for the existence of significant and persistent unemployment. Furthermore, Keynes demonstrated that flexible wages and prices and pure competition are not sufficient conditions to ensure full employment in our economic system, even in the long run.

Samuelson’s view of Keynesianism prevented Keynes’s revolutionary analysis from sweeping mainstream economics off its classical theory axiomatic foundations. Neoclassical synthesis Keynesianism coming at the same time as mathematics in economics became popular provided a double whammy that aborted Keynes’s revolutionary theory. What passed as conventional economic wisdom of mainstream economists at the beginning of the twenty-first century is nothing more than high-tech and more mathematical versions of nineteenth-century classical Walrasian general equilibrium theory.

In winning the battle against the forces trying to prevent the teaching of suspected communist-inspired Keynesian economics in our universities, Samuelson ultimately lost the war that Keynes had launched to eliminate the classical theoretical analysis as the basis for real-world economic problems of employment, interest, and money. In 1986, Lorie Tarshis recognized this fact when he noted: “I never felt that Keynes was being followed with full adherence or full understanding of what he had written. I still feel that way.”

Today mainstream economics—whether it goes under the title of old neoclassical Keynesians, New Keynesians, old classical or new classical theorists, Arrow-Debreu-Walrasian economics, post- Walrasian theory, behavioral economic theory—still relies on the classical axioms that Keynes discarded in his attempt to make economics relevant to the real-world problems of unemployment and international trade and international payments. As a result, these problems still plague much of the real world in the globalized economy of the twenty-first century. [pp.177-179]

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Meanwhile, David Gordon, senior fellow at the Mises Institute, takes on Davidson for discarding purchasing power of money while advocating increase in monetary units to increase productivity. He also argues that since future is uncertain and predictions about future based on mechanical view of efficient markets is wrong, then why would that change if government enters the scene by pumping money (stimulus).

I think Gordon get it wrong here. Future is uncertain and predictions based on the presumption of efficient markets usually turn up untrue because the baseline is prosperous period when everything seems right. When accidents happen (as Keynes says capitalist system is inherently unstable), then markets cannot recover by itself (or even it does, it will take long time and inflict a lot of pain in the form of loss of business confidence and increase in unemployment). It needs a jolt by an exogenous actor—the government pumping in money when liquidity dries up. This changes the scene because slumped demand from private sector is covered up by government spending. This applies when the economy is in distress and the monetary system cannot affect consumer and investment behavior to induce growth (reference to liquidity trap). During distress recovery should be a priority. Then follows reform of dysfunctional and inefficient policy and institutional settings.

How to make growth inclusive?

By looking at inclusive growth case studies of Brazil (inclusive growth seems likely to be enduring), Viet Nam (strong progress in achieving MDGs but inequality is undermining poverty efforts), and Ghana (growth reduced poverty but increased inequlaity), Elizabeth Stuart of Oxfam International lists three strategies to make growth inclusive.

• A redistributive agenda: Cash transfers, redistributive public expenditure on health, education, and agricultural services, and a progressive taxation system.
• Macroeconomic prudence: Sustainable, moderate levels of inflation, deficits, and debt; and counter-cyclical policies, protecting pro-poor elements of public spending
• A policy environment conducive to pro-poor private investment: Domestically owned, labour-intensive private sector, especially small and medium-sized enterprises (SMEs).

Stuart argues that growth should be taken as a means not an end itself (criticism pointed at The Growth Report).

Trade Policy, Welfare and MFN

This blog post is adapted from Robert C. Feenstra’s summary of research of the International Trade and Investment (ITI) Program at NBER. It summarizes various papers that explore and explain the causes of the great trade collapse of 2009. Here is a blog post about what economists thought were the reasons for the collapse in trade by about 30 of world GDP in 2009. Here is an earlier blog post adapted from Feenstra’s summary of recent literature on the great trade collapse of 2009.

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In the ITI program an ongoing area of research is the impact of, and explanations for, trade policies. Some studies examine the impact of policies in particular sectors. One important example is the textile and apparel sector, which experienced a large reduction in quotas as the Multifibre Agreement was phased out in January 1, 2005. Many people expected that China would take over in this sector, since it had been the most constrained in its textile and apparel exports. But Harrigan and Geoffrey Barrows show that along with these changes in market shares, there was a massive downgrading in the type of product exported from China.¹ These products at the lower end took sales away from countries such as Mexico or Guatemala, and to some extent served to offset the competitive impact on other Asian countries.

Another sector that has received attention for its ongoing trade policies is steel. Bruce Blonigen and co-authors show that the response of this industry to tariffs versus quotas, which they estimate, is highly sensitive to its market structure.²

Another topic of strong interest is the impact of free trade agreements, particularly on workers. This topic has received renewed interest for the United States in what might be considered "round two" of the debate over the impact of trade on wages and employment. Making use of broad changes in tariffs through trade agreement and detailed datasets on individuals, these studies identify potentially large effects of tariff reductions. A recent example is the work by David Autor, David Dorn, and Hanson, which examines the acceleration in Chinese exports to the United States following its WTO accession in 2001.³ They match the changes in wages and employment in local labor markets defined by "commuting zones" to the Chinese exporters to manufacturing industries in those zones. They link the rise in Chinese exports, and the implied reduction in employment, to changes in federal support payments to individuals for trade adjustment assistant, disability, retirement, and the like. They find that the deadweight loss from the increase in support payments is very similar in magnitude to the welfare gains from the increased imports: both are on the order of $30 - $70 annually per capita. But because the support payments are expected to be temporary while the welfare gains from imports are permanent, there are still gains from trade.

A second example of a study that uses data on individuals (from the decennial census) is the paper by John McLaren and Shushanik Hakobyan which analyzes the impact of NAFTA on local labor markets in the United States.⁴ Drawing on earlier theoretical work by McLaren, they allow for possible wage increases in response to anticipated tariffs cuts (as workers leave industries) and for wage decreases when the tariff cut occurs. They find a significant negative impact of NAFTA on blue-collar workers, with smaller positive or negative effects on college educated workers. Their overall message is that NAFTA has large distributional effects, even if its overall welfare impact is small.

All of these studies find sizable changes in trade flows following the enactment of the tariff changes, despite the fact that U.S. tariffs on Mexico were already low, and that tariffs on China were already at their MFN level before its accession to the WTO. Why can trade change so much in response to small tariff changes? Kyle Handley and Nuno Limao suggest that preferential agreements may reduce the policy uncertainly surrounding tariffs that could change in the future.⁵ They study Portugal, which was already a member of the EFTA and had an agreement with Spain when it joined the EEC in 1986. There was no drop in Portugal's tariffs with members of the EEC who were also in EFTA, but nevertheless there was a sizable increase in exports to EC members. Handley and Limao attribute this to a reduction in policy uncertainty, which they measure by the difference in the zero tariffs within the EEC and the MFN tariffs charged to outside members. Variation in that difference allows the researchers to identify the policy impact across industries and to explain the increase in trade.

In addition to these empirical studies, several members of the program, using game-theoretic techniques, have theoretically analyzed the question of why countries pursue preferential agreements. For example, Philippe Aghion, Antras, and Helpman model this as a question of sequential bargaining, whereby a country makes deals with a series of other countries, but the bargains negotiated must be consistent with the deals that potentially will be made in the future.⁶ The researchers show that this model generates both "building bloc" and "stumbling bloc" effects of preferential trade agreements, to use the terminology of Jagdish Bhagwati. In particular, they find conditions under which global free trade is attained when preferential trade agreements are permitted to form (a building bloc effect), and other conditions where global free trade is attained only when preferential trade agreements are forbidden (a stumbling bloc effect).

In a series of papers, Kyle Bagwell and Robert Staiger analyze games in which countries are constrained by the WTO rules and show that these rules can lead to welfare improvements.⁷ One example is the most-favored nation rule, which states that all WTO members must be treated equally. This rule means that a reduced trade barrier given to a current negotiating partner must be automatically extended to later partners. Bagwell and Staiger argue that the MFN principle makes it less likely for countries to be willing to offer concessions at early stages of the sequential bargaining process, but that this potential source of conflict can be offset by two other WTO principles: first, by renegotiation at later stages; second, by reciprocity in the concessions made by each country. Incorporating these principles into the bargaining game allows for an efficient outcome even under the MFN rule. This line of research enables Bagwell and Staiger to rationalize various provisions of the WTO.

There are other approaches, too, that can be used to rationalize the provisions to the WTO. Ralph Ossa uses a monopolistic competition model with a "home market" effect, whereby tariffs attract firms to enter the protected market.⁸ That framework can generate political economy considerations for trade policies and WTO rules that are similar to what arises from the terms-of-trade model. Using a different approach, Giovanni Maggi and his co-authors argue that WTO-type rules can be understood as arising from the inevitable incompleteness of trade agreements.⁹

The analysis of trade policy naturally leads to the question of the gains from international trade, and we conclude with this classic question. Analysis of the monopolistic competition model has shown that it gives rise to a remarkably simple formula for the gains from opening trade: those gains are equal to one minus the import share of the economy, raised to a negative power that depends on the specific details of the model. In the Krugman monopolistic competition model with homogeneous firms, that power depends on the elasticity of substitution in consumption. In the Melitz model with heterogeneous firms that have a Pareto distribution for productivities, the same formula for the gains from trade holds, but the power depends on the Pareto parameter.¹⁰ I argue that this result obtains in the Melitz model because import competition drives out a number of domestic varieties that just cancel out in welfare terms, so that the only remaining source of gains from trade is productivity improvements.¹¹ Remarkably, Arkolakis, Costinot, and Andres Rodriguez-Clare have recently argued that a similar result holds in a broader class of models. The fact that such a simple formula for the gains from trade arises in models that can be quite complex in their market structure leads them to pose the question: "new trade models, same old gains?"¹²

This view has been challenged in other recent work. Weinstein and I estimate a monopolistic competition model with heterogeneous firms, where the aggregate consumer has translog preferences.¹³ In that case, the markups charged by firms are endogenous, and we do not expect that the gains from trade depend only on the import share. We estimate the gains from rising imports over 1992-2005 for the U.S. economy, and find that the gains from reduced markups are on the same order of magnitude as the gains attributable to increased import variety.

Ina Simonovska also obtains variable markups, as discussed above, as do Beatriz de Blas and Katheryn Russ in the context of the model by Bernard, Eaton, Jensen, and Kortum.¹⁴ In that model, Bertrand competition leads to markups that equal the difference between the productivity of the most efficient and second-most efficient firms. But with entry by a finite number of potential rivals, de Blas and Russ show that these markups are not fixed by the productivity distribution of firms, but depend on the number of rivals. If opening to trade alters the number of potential rivals, then markups will also change. In that case, we can conjecture that the gains from trade will not depend on only the import share and a parameter. Understanding the class of models in which this conjecture holds true is an important direction for further research.

¹J. Harrigan and G. Barrows, "Testing the Theory of Trade Policy: Evidence from the Abrupt End of the Multifibre Arrangement," NBER Working Paper No. 12579, October 2006, and in The Review of Economics and Statistics, vol. 91(2) (November 2009), pp. 282-94.

²B. Blonigen, B. H. Liebman, J. R. Pierce, and W. W. Wilson, "Are All Trade Protection Policies Created Equal? Empirical Evidence for Nonequivalent Market Power Effects of Tariffs and Quotas," NBER Working Paper No. 16391, September 2010.

³D. H. Autor, D. Dorn, and G. Hanson, "The China Syndrome: Local Labor Market Effects of Import Competition in the U.S.," presented at the International Trade and Investment Program Meeting, March 25-26, 2011.

⁴J. McLaren and S. Hakobyan, "Looking for Local Labor-Market Effects of the NAFTA," NBER Working Paper No. 16353, November 2010.

⁵K. Handley and N. Limao, "Trade and Investment under Policy Uncertainty: Theory and Firm Evidence," presented at the International Trade and Investment Program Meeting, March 25-26, 2011.

⁶P. Aghion, P. Antras, and E. Helpman, "Negotiating Free Trade," NBER Working Paper No. 10721 September 2004, and in Journal of International Economics, vol. 73(1) (September 2007), pp. 1-30.

⁷K. Bagwell and R. W. Staiger, "What Do Trade Negotiators Negotiate About? Empirical Evidence from the World Trade Organization," NBER Working Paper No. 12727, December 2006; P. Antras and R. W. Staiger, Offshoring and the Role of Trade Agreements," NBER Working Paper No. 14285, August 2008; K. Bagwell and R. W. Staiger, "Profit Shifting and Trade Agreements in Imperfectly Competitive Markets," NBER Working Paper No. 14803, March 2009; K. Bagwell, "Self-Enforcing Trade Agreements and Private Information," NBER Working Paper No. 14812, March 2009; K. Bagwell and R. W. Staiger,"Delocation and Trade Agreements in Imperfectly Competitive Markets," NBER Working Paper No. 15444, October 2009; K. Bagwell and R. W. Staiger, "The WTO: Theory and Practice," NBER Working Paper No. 15445, October 2009; K. Bagwell and R. W. Staiger, "The Economics of Trade Agreements in the Linear Cournot Delocation Model," NBER Working Paper No. 15492, November 2009; R. W. Staiger and A. O. Sykes, "International Trade and Domestic Regulation," NBER Working Paper No. 15541, November 2009.

⁸R. Ossa, "A 'New Trade' Theory of GATT/WTO Negotiation," NBER Working Paper No. 16388, September 2010.

⁹H. Horn, G. Maggi, and R. W. Staiger, "Trade Agreements as Endogenously Incomplete Contracts," NBER Working Paper No. 12745, December 2006, and in American Economic Review, vol. 100(1) (March 2010), pp. 394-419; G. Maggi and R. W. Staiger, "On the Role and Design of Dispute Settlement Procedures in International Trade Agreements," NBER Working Paper No. 14067, June 2008; G. Maggi and R. W. Staiger, "Breach, Remedies and Dispute Settlement in Trade Agreements," NBER Working Paper No. 15460, October 2009.

¹⁰C. Arkolakis, S. Demidova, P. J. Klenow, and A. Rodriguez-Clare, "Endogenous Variety and the Gains from Trade" NBER Working Paper No. 13933, April 2008, and in American Economic Review, vol. 98(2) (May 2008), pp. 444-50.

¹¹R. C. Feenstra, "Measuring the Gains from Trade under Monopolistic Competition," NBER Working Paper No. 15593, December 2009, and Canadian Journal of Economics, 43(1), (February 2010), pp. 1-28.

¹²C. Arkolakis, A. Costinot, and A. Rodriguez-Clare, "New Trade Models, Same Old Gains?" NBER Working Paper No. 15628, December 2009, and forthcoming, American Economic Review.

¹³R. C. Feenstra and D. E. Weinstein, "Globalization, Markups, and the U.S. Price Level," NBER Working Paper No. 15749, February 2010.

¹⁴B. de Blas and K. Russ, "Teams of Rivals: Endogenous Markups in a Ricardian World" NBER Working Paper No. 16587, December 2010; A. B. Bernard, J. Eaton, J. B. Jensen, and S. Kortum, "Plants and Productivity in International Trade," NBER Working Paper No. 7688, May 2000, and American Economic Review, vol. 93(4) (September 2003), pp.1268-90.

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21st century regionalism and the WTO

Richard Baldwin argues that:

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• today regionalism is qualitatively different to that of the 1990s;
• the traditional building-stumbling-block approach and Vinerian economics on which it is premised are not up to the job of analysing this new regionalism; and
• 21st century regionalism has quite different ramifications for the world trading system than 20th century regionalism did.

In a nutshell, 21st century regionalism is not primarily about preferential market access as was the case for 20th century regionalism; it is about disciplines that underpin the trade-investment-service nexus. This means that 21st century regionalism is driven by a different set of political economy forces; the basic bargain is “foreign factories for domestic reforms” – not “exchange of market access”. As 21st century regionalism is largely about regulation rather than tariffs, regulatory economics is needed rather than Vinerian tax economics. Finally, 21st century regionalism is a serious threat to the WTO’s centrality in global trade governance, but not for the reason suggested by the old building-stumbling-block thinking. 21st century regionalism is a threat to the WTO’s role as a rule writer, not as a tariff cutter.

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Here is a link to Baldwin’s paper 21st Century Regionalism: Filling the gap between 21st century trade and 20th century trade rules

Food deficit districts in Terai region of Nepal

The Terai region is considered as the ‘bread basket’ of Nepal. However, it too is facing deficit food production this year. Even the ten major food surplus districts in the Terai region have insufficient production right now. A total of 43 out of 75 districts are facing food deficit in Nepal.

Since the major food producing region itself is facing food deficit, it will impact food availability and food security throughout the country. Also, food import bills will rise, further increasing total trade deficit. The table below shows that Mountain and Hill regions have deficit food production. Apart from the production in Terai region, a large amount is imported to meet total food demand. [Note that one ton= 1000 kg and 1mt = 10^6 tons].

Cereal production (mega tons) in FY 2009/10
Region	Total edible production	Total requirement	Balance	% balance of total requirement
Mountain	279765	376982	-97217	-26
Hill	2040441	2451345	-410904	-17
Terai	2647263	2469117	178149	7
TOTAL	4967469	5297444	-329972	-6.23

Food insufficient districts in Terai region: Sunsari, Saptari, Siraha, Dhanusa, Mahottari, Sarlahi, Rautahat, Chitwan, Dang and Kailali

Districts with decreasing food surplus in Terai region: Jhapa, Morang, Bara, Parsa, Nawalparasi, Banke, Bardia, Kapilvastu, Rupandehi and Kanchanpur

Reason for deficit production: uncontrolled urbanization and plotting of agriculture land for real estate

Nepal imported 350,000 tons of food grains during fiscal year 2009/10. Nepal´s average food grains import for the past five years before 2009/10 was 250,000 tons a year. The government had estimated food deficit of 316,000 tons across the country in 2009/10.

Good prospect in FY 2010/11 (adapted from Republica)

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Buoyed by 11 percent rise in cereal crop production in 2009/10, the government expects food surplus of 10,000 to 15,000 tons in 2010/11. The government has put paddy, maize, wheat, millet, barley and buckwheat under cereal crop category.The MoCA has projected rise in production of all crops except jute, tobacco and black cardamom.

According to MoCA´s projections, total cereal production increased to 8.61 million tons during 2010/11, up from 7.76 million tons recorded in the last fiscal year. Maize and paddy production increased by 10.85 percent and 11.45 percent respectively to 4.46 million tons and 2.06 million tons respectively compared to the figures of last year.

Production of wheat increased by 12 percent to 1.74 million tons, while barley production rose by 10 percent to 30,000 tons. Production of millet and buckwheat increased to 303,000 tons and 8,841 tons respectively.

Reason for good harvest: favorable monsoon, increasing use of improved seeds, easy availability of chemical fertilizers and lower rates of crop damage due to natural disasters.

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