Changing understanding of poverty, progress and revised goals

Kaushik Basu explains:

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Early in 2013, the World Bank Group adopted two overarching goals to guide its work and in April 2013 these were endorsed by the Group’s Board of Governors. The goals, stated briefly, consist of the following: (i) to end extreme, chronic poverty in the world by 2030 and (ii) to promote shared prosperity in every society. To give these goals the concrete shape essential to drive a large organization and gauge success and failure, they had to have measurable forms. 

It was decided to define extreme poverty as living on less than $1.25 (ppp adjusted) per person per day. Since the aim is to end chronic poverty and since frictional poverty—stemming from unexpected economic fluctuations in poor countries, political conflict and war—cannot as yet be brought to an end, the first goal is formalized as a target of bringing the number of people living below this ‘poverty line’ to less than 3% of the world’s population.

The second goal, with its oblique reference to growth and distribution, is defined, formally, as the aim of fostering the per capita income growth of the poorest 40% of people in each country.

Since these targets were set not as goal posts to be touched and retreated from, it is implicit that the goals must be pursued in ways that are environmentally, socially and economically sustainable over time. In other words, achieving these goals through a blend of higher economic growth and improved social programs should not create a liability for future generations—through excessive fiscal burden, social strife or environmental damage. In brief, prosperity should be shared not just across space, but also across generations. This sustainability target is not as easy as it may seem at first sight. It has practical and political challenges galore, as documented, for instance, in Stern (2007). In addition, there are some intricate conceptual challenges.

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High (financial) cost of migration

Here is a revealing piece on the global supply chains and how Nepalese migrant workers are related to it.

The piece also tracks the cost of migration to Malaysia. It comes out to be over $1000 plus interest.

Excerpts from the article:

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At some point, he paid $250 to a recruiter who promised to line him up with a good foreign job. That recruiter then connected him to a broker in Kathmandu, one of more than 750 registered with the government. Dhong left his passport with the overseas broker—and waited. On Oct. 14, 2012, he got the call. He was told to get to Kathmandu’s Tribhuvan International Airport for a flight in three hours and to bring the equivalent of $500, or about six months of his dairy wages. There was no way Dhong could come up with that much cash, pack, and leave so quickly, so the broker told Dhong to bring as much money as he could to the office, then head to the airport at the same time the next day. Dhong and his wife borrowed about $350 from a local lender. He gave it to the broker, saying it was all they had. The broker took the cash and told Dhong to meet yet another agent, the third link in Dhong’s own personal supply chain, at the airport.

Dhong grabbed a black-and-tan backpack holding his shaving kit, a single change of clothes, two Bibles (one in Nepalese, one in English), and three family photos. He said goodbye to his crying wife and daughter, then jumped onto a microbus on a loud and dusty Kathmandu road. As promised, the third agent was at the airport, holding Dhong’s passport. He demanded money, but Dhong had nothing left to give. So the broker told Dhong to sign a debenture agreement promising to pay $400 more. If Dhong didn’t sign and if he didn’t quickly pay, he would lose the job. He had yet to start work, and already he was $1,000 in debt.

Dhong signed and got his passport and a sheaf of documents. He says all the brokers involved told him never to mention the fees, because, “If any worker reveals it to anyone, he will be sent back to Nepal immediately, and he will be charged and punished.” Later that afternoon, Dhong climbed aboard a plane for the first time in his life. There were 41 others headed for Flextronics on the same flight. When the recruits landed in Kuala Lumpur on Oct. 15, a representative from Flextronics met them at the airport. He took their passports and put them on a bus that took them south of the city, then past a security gate to two high-rise towers the company rented as a hostel for the men.

By the end of October, the drive to produce cameras was in full swing. Dhong and the other men on the day shift rose around 5 a.m. to get ready and line up for buses that drove them to the factory for a 7 a.m. start—the trip could take more than an hour in the crush of traffic. When he arrived at the plant each morning, Dhong slipped into a white clean-room suit covering his body head to foot, including a tightly cinched hood. A cotton mask hid most of his face. Except for breaks, Dhong and the others stood throughout their 12-hour shifts beneath white drop-tile ceilings and fluorescent lights. Their lines were named after American states: New Mexico and Rhode Island. About 3,000 women from Vietnam and Indonesia also worked in the plant, according to the recruiting agents in Nepal, but the Nepalese workers say they had little contact with them. Contracts for Dhong and the other Nepalese men set their base salaries for 12-hour shifts at about $178 per month. It was the minimum monthly salary mandated by the government of Nepal for its citizens living in Malaysia.

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More on remittances in Nepal here and here.

Structural Change in Vietnam

Brian McCaig and Nina Pavcnik explore the structural change in Vietnam and argue that "changes in trade policy, expansion of employment in foreign owned firms, and the declining role of state owned enterprises robustly contributed toward the changing structure of employment within manufacturing."

Abstract of the paper:

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We examine the role of structural change in the economic development of Vietnam from 1990 to 2008. Structural change accounted for a third of the growth in aggregate labor productivity during this period, which averaged 5.1 percent per annum. We discuss the role of reforms in agriculture, enterprises, and international integration in this process. In addition to the drastic move of employment away from agriculture toward services and manufacturing, we also document the movement of workers away from household businesses toward firms in the enterprise sector, and the reallocation of workers from state owned firms toward private domestic and foreign owned firms. Manufacturing experienced particularly rapid growth in labor productivity and a large expansion of employment, as it grew from 8 to 14 percent of the workforce. Changes in trade policy, expansion of employment in foreign owned firms, and the declining role of state owned enterprises robustly contributed toward the changing structure of employment within manufacturing.

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Remittances in Nepal: Can a Good Thing Eventually Become Bad?

Adapted from Future Development blog:

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Can a Good Thing Eventually Become Bad?

Can a good thing eventually become bad and is there such a point when it becomes too much? Thinking about Nepal’s development, remittances appear to be precisely such an ambiguous driver. Strikingly, despite the growing importance of remittances worldwide and its increasingly high level recognition, we are missing a consistent narrative of growth and development for highly remittance dependent countries (HRDCs – a new acronym, for once, may be needed) like Nepal.

While remittances have an unambiguous direct impact on household welfare, the evidence on how they affect macroeconomic variables is mixed. Moreover, their contribution to national well-being is often under-acknowledged in those very countries they support and mixed with a sense of collective shame and fear of dependence. Here, we deliberately leave aside the thorny issue of migrant rights, recently highlighted by a feature story in the Guardian (Qatar’s World Cup ‘Slaves’), and focus on the economic impact of remittance inflows.

Nepal is an interesting case study. It is part of a small league of countries that receive a significant proportion of their income via private transfers (equivalent to 25% of GDP) and the world leader among the ones with over 10 million people.

A bit of history. The migration of Nepalese workers has been taking place for centuries, particularly to India, with which Nepal shares deep cultural and historical ties. In the 19th century, a very specifically skilled subset of Nepalese – the Gurkhas – earned their country fame in the ranks of the British and Indian armies. However, a massive shift happened much later, starting in 2000, driven by both push (the Maoist insurgency in Nepal) and pull (economic boom in the Middle East and East Asia MICs) factors. In 1996, 6 workers left legally each day. By 2013 that number was multiplied by a factor of 200. Remittances followed suit rising from just 1% of GDP in 1996 to 25.5% today.

While the contribution of remittances to poverty reduction is well  documented (and striking in the case of Nepal - Figure 1), their macroeconomic impact remains under-conceptualized as well as the ways in which they could affect the long-term growth path of recipient economies.

Figure 1: Remittances and poverty

In Nepal the remittance boom has coincided with a sharp deterioration of the trade balance (with exports tanking as imports exploded), a significant shift in the composition of value added (with services taking up the space left by agriculture and a decline of industry), and high inflation. Structural transformation, at least of the type that made East Asian economies achieve massive development progress, is not happening and Nepal appears stuck in a low equilibrium growth trap (Figure2).

Figure 2: Are "labor exports" displacing tradable goods?

What do those deep structural shifts mean for developing countries like Nepal that are still struggling to come up with a consistent growth and development strategy for the future? Leaning against the tide of high and persistent inflows would be futile but simply learning to live with remittances and over-appreciated currencies is a lose proposition.  

To date, the prescriptions of the development community have been mostly adapted from the Dutch disease analogy, but these appear ill-fitting for HRDCs:

• Fiscal contraction to avoid overheating may work in other countries facing short-lived shocks but would not help Nepal, which faces huge public infrastructure and social needs.
• Sterilization of inflows has allowed China to maintain a competitive exchange rate; for Nepal it could be unsustainably costly given the magnitude and persistence of inflows. Likewise devaluation could spur unsustainable long term inflation.
• Tax policies focusing more on consumption and less on income/tradables could hurt the poor.

More sensible responses emphasize structural transformation to make up for lost competitiveness, but they still appear half-baked: 

• Labor market flexibility is particularly challenging because large outmigration may contribute to making domestic labor more rigid (low supply, high reservation wage). Is it a coincidence that Nepal has one of the highest average wage rates in the SAR region?
• Trade liberalization may incentivize exports but could just as well annihilate import competing industries, exacerbate the negative spillovers to tradables production and increase consumption of remittance-backed imports. How else to interpret Nepal’s huge trade deficit?
• Investment incentives may work when the economy is thriving but prove self-defeating if remittances themselves partly drive the poor investment climate (through both economic and governance spillovers). In Nepal, remittances have failed to translate into investment at both macro and micro levels, but they are surely behind the real estate bubble that drove the financial sector to near-collapse in 2011.

We need a new, fitting and consistent narrative. The framework of the Dutch disease (and its resource curse spinoff) only go so far because remittance inflows are more sustainable than resource booms, more countercyclical and less prone to the governance problems associated with state intermediation of revenues (including aid). What we need, in other words, is a “Nepali cure” tailored to the needs of HRDCs. Can you help us find it?

The views expressed are solely those of the authors and do not necessarily reflect the views of the institutions they are associated with.

Doing Business 2014: Nepal ranked 105 out of 189 countries

In its latest Doing Business 2014: Understanding Regulations for Small and Medium-Size Enterprises, the IFC has ranked Singapore as the top economy in terms of ease of doing business. The other top ranked economies are  Hong Kong SAR, China; New Zealand; the United States; Denmark; Malaysia; the Republic of Korea; Georgia; Norway; and the United Kingdom.

The report ranks economies based on performance in ten indicators: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, and resolving insolvency. This year’s report data cover regulations measured from June 2011 through May 2012.

Ukraine was the global top improver in 2013. The other economies that have made the most progress in several areas of regulation last year were Rwanda, the Russian Federation, the Philippines, Kosovo, Djibouti, Côte d’Ivoire, Burundi, the former Yugoslav Republic of Macedonia, and Guatemala

South Asia

In South Asia, Sri Lanka made the most progress and was ranked 85 out of 189 economies, followed by Maldives (95), Nepal (105), Pakistan (110), Bangladesh (130), India (134), Bhutan (141), and Afghanistan (164). 

Rankings could go up or down depending on progress in business regulatory environment, progress by other countries (based on data revisions and methodology) and addition of new countries in the ranking (this year Libya, Myanmar, San Marino, and South Sudan were added).

The data for all sets of indicators in Doing Business 2014 are for June 2013 except for paying taxes data that refer to January–December 2012.

Nepal

In terms of ease of doing business, Nepal ranked 105 out of 189 countries. In 2013, Nepal ranked 103 out of 185 countries. Between DB2014 and DB2013, Nepal initiated one reform in starting a business, which helped increase its ranking 6 positions in that specific indicator. Specifically, Nepal reduced the administrative processing time at the company registrar and established a data link between agencies involved in the incorporation process. However, Nepal’s ranking dropped in all other indicators (except protecting investors, on which there was no change in ranking). It appears more progress made by other economies dropped ranking of Nepal by 2 positions below last year’s ranking. Here is a blog post based on DB2013.

• In South Asia region, Nepal has the best ranking (24) in registering property. It requires 3 procedures, 5 days and 4.9% of property value to register a property in Nepal.  The regional average is 6 procedures, 99.4 days (250 days in Afghanistan), and 7.2% of property value. 
• In terms of documents to export, Nepal has the worst performance in the region, requiring 11 documents against the regional average of 8. Sri Lanka has the best performance with just 5 documents required for exporting a container. 
• In terms of number of procedures required to enforce contracts, Nepal has best performance in the region with 39 required procedures as against 43 for regional average.
• In terms of time taken to resolve insolvency, Nepal has the worst performance in the region. While it takes 5 years to resolve insolvency in Nepal, the regional average is 3 year. Furthermore, recovery rate is also the lowest in Nepal (24.5 cents on the dollar) compared 29.1 for the region (50.6 for Maldives).

Doing Business 2014: Nepal
DB rank 2014	105	out of 189 countries
DB rank 2013	103	out of 185 countries
Topic ranking (out of 189 countries)
Topics	DB 2014 Rank	DB 2013 Rank	Change in Rank
Starting a Business	97	103	6
Dealing with Construction Permits	105	97	-8
Getting Electricity	98	99	1
Registering Property	24	22	-2
Getting Credit	55	52	-3
Protecting Investors	80	80	No change
Paying Taxes	126	121	-5
Trading Across Borders	177	173	-4
Enforcing Contracts	139	137	-2
Resolving Insolvency	125	123	-2

Distance from frontier

The report also provides a new measure called ‘distance from frontier’, which benchmarks economies to the frontier in regulatory practice. In other words, it measures the absolute distance to the best performance on each indicator. When compared across years, the distance to frontier measure shows how much the regulatory environment for local entrepreneurs in each economy has changed over time in absolute terms, while the ease of doing business ranking can show only relative change.

An economy’s distance to frontier is indicated on a scale from 0 to 100, where 0 represents the lowest performance and 100 the frontier. For example, a score of 60 in DB 2012 means an economy was 60 percentage points away from the frontier constructed from the best performances across all economies and across time. A higher score in DB 2013 indicates an improvement.

Compared to DB 2013, in DB 2014, in Nepal, there was improvement in starting a business, dealing with construction permits, getting electricity and registering property. Trading across borders worsened. There was no change in other indicators. 

TOPICS	DB 2014 DTF(% points)	DB 2013 DTF(% points)	Improvement in DTF(% points)
Starting a Business	81.52	79.09	2.43
Dealing with Construction Permits	76.89	75.37	1.52
Getting Electricity	74.22	72.82	1.4
Registering Property	84.59	84.43	0.16
Getting Credit	68.75	68.75	No change
Protecting Investors	53.33	53.33	No change
Paying Taxes	64.4	64.4	No change
Trading Across Borders	34.43	35.91	-1.48
Enforcing Contracts	47.3	47.3	No change
Resolving Insolvency	25.95	25.95	No change

Did India’s National Rural Employment Guarantee Scheme Improve Welfare and Reduce Poverty?

Abstract from a recent paper by Deininger and Liu, who show that NREGA contributed to increase in consumption in the short run and and brought net benefits to SCs and STs. Furthermore, it even created productive assets.

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This paper uses a three-round 4,000-household panel from Andhra Pradesh together with administrative data to explore short and medium-term poverty and welfare effects of the National Rural Employment Guarantee Scheme. Triple difference estimates suggest that participants significantly increase consumption (protein and energy intake) in the short run and accumulate more nonfinancial assets in the medium term. Direct benefits exceed program-related transfers and are most pronounced for scheduled castes and tribes and households supplying casual labor. Asset creation via program-induced land improvements is consistent with a medium-term increase in assets by nonparticipants and increases in wage income in excess of program cost.

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More on NREGA here. Here is a recent co-authored research report.

Progress in reducing gender inequality

Nepal has made consistent progress in reducing gender inequality, according to Global Gender Gap Report 2013. However, much more needs to be done in moving up the ranking. This necessitates further improvements in economic participation, education attainment, health and survival and political empowerment.

Below is a chart that shows the rank and score of Nepal in global gender gap index, which provides insights into access to resources and opportunities (note that it does not give insights into the actual levels of the available resources and opportunities).

The index is aggregated based on scores in the following four indicators:

• Economic participation and opportunity – salaries, participation and highly skilled employment
• Educational attainment – access to basic and higher levels of education
• Political empowerment – representation in decision-making structures
• Health and survival – life expectancy and sex ratio

Overall, Nepal ranks 12th in labor force participation; 1st in sex ratio at birth (female/male); 22nd in women in parliament; 115th in estimated earned income (PPP US$); 125th in literacy rate; 126th in enrollment in primary education; and 110 in professional and technical workers.