Links of Interest (01/09/2009)

1. Reservation policy, which gives voters the ability to observe the effectiveness of women leaders, does work in improving women’s access in politics and reducing discrimination, argue Duflo, Pande, Topalova, Chattopadhyay, and Beaman. Paper here. (I wrote an opinion piece (The Economics of Reservation) supporting reservation policy in government scholarships and public sector jobs in Nepal. Nepal has one of the highest women representations in parliament in the world- a product of this positive discriminatory policy.)
2. Keynes advocated regulating the economy through investment, not consumption, combined with a low and permanent rate of interest, writes Peter Clarke.
3. The importance of great managers
4. It is wrong to assume that emerging markets won’t recover until America rebounds.
5. The meager benefits of the Doha Round, trade and development
6. Why did ADB-assisted water resource management fail in Sri Lanka?

The authors argue that this failure is largely attributable to a lack of understanding of the Sri Lankan context characterised by:

• a multi-party system with governments often held together in fragile coalitions
• strong cultural values attached to water
• a vocal civil society fearful of water privatisation, and
• a politicised media willing to exploit controversies

The guiding principle of the projects was that Sri Lanka’s water resources management should be holistic and efficient. This new policy introduced a number of unfamiliar approaches to the sector, some of which were highly controversial, including the idea of entitlements (ownership rights to water) and water tariffs to introduce demand management.

Coming after controversial attempts to institutionalise land reforms in Sri Lanka, and high profile cases of water privatisation elsewhere in the world, these moves were seen by some civil society groups as steps towards commodification and privatisation of water resources.
The focus on efficiency and increasing tariff were seen a threat to paddy cultivation and small farmers, causing public anger, while endogenously-designed strategies for water conservation were ignored as possible alternatives to entitlements and demand-management. (Source: Eldis)

Are unions and youth wings constraining industrial sector growth in Nepal?

There are questions about whether and how YCL's and unions' activities affect appropriability. The article in question is here. I am trying to flesh out more below:

YCL is the problem! Why?

• It confiscated property and is threatening businesspersons of death threats (actually, it is alleged that it first tortured and then murdered at least two businessmen).
• It has opened extralegal camps in major industrial districts. Why business a militant youth wing  has in an industrial district?  It is for the sole purpose of bullying businesspersons and to collect forced donations.
• This means companies are having trouble retaining earned profits and property. This is  a case of poor appropriability, the chief cause not being absence of law but because of the YCL's activities, which are quietly and deliberately ignored by the governing party.

This  is a direct blow to smooth functioning of the private sector and economic activities in the economy. They have tried to destabilize private property- one of the crucial institutions for economic growth. See this paper by Acemoglu, Johnson, and Robinsion about how Botswana progressed simply because it had a very strong institutions of private property. See this article (Red tapes under the red flag) as well.

Maoist-affiliated trade unions are the problem! Why?

• They have closed down many industries (jute industry, manufacturing plants, garment and textile sector, cement factory, paper factory to name a few).
• They have even been in dispute over wage and hiring practices with multinational companies and joint ventures, the major source of FDI in the country. Remember what happened to Dabur Nepal and Colgate Palmolive recently!?!
• They have been pressuring the private sector to hike wages and to hire staff permanently.

This is a direct blow to the contract enforcement process in an economy. If there are differences, corrective and judicial institutions take care of them. This is a constitutional process facilitating a rule of law. This helps existing investors and potential investors to make investment decisions with high degree of certainty and encourage them to invest with little doubts. However, the unions have scared them away as they have been trying to bypass the legal procedure and take matters on their own hand, often resorting to vandalism, threats to life and property, and closing down factories. This sends a signal of bad investment climate. Nepal ranks at the bottom of Doing Business rankings and the Global Enabling Trade rankings. See this article as well. Note that Nepal has the most cumbersome hiring and firing regulations in the World. This is a direct result of the activities of the YCL and unjustified diktats of trade unions.

It is not the YCL's and Maoist-affiliated trade union's job to force companies to accept a minimum wage. Leave that to security forces and judiciary. It is the job of the lawmakers and government to fix minimum wage. The minimum wage act was revised recently, jacking up minimum wage in three different sectors. The private sector has complied accordingly. Given this, why does the unions have to vandalize companies and close down factories.

Regarding hiring and firing practices, it is up to a company's management to offer temporary or permanent jobs to its employees. The Employment Act stipulates that companies hire staff permanently after just over 240 days of regular work. The private sector has been complying with this provision. Some have gone roundabouts by firing workers after some months- a decision based on their own discretion and is largely dependent on profits. The private companies are not charity organizations. They operate on the basis of profits earned from the sales of goods and services.

Right now the industrial output and productivity are declining. Profits are razor thin and some companies are falling short of the minimum demand required to keep up their operation costs. Global recession is expected to hit with full force Nepal in mid-2009. Even if there are genuine concerns of the unions (apart from minimum wage and working conditions), this is not a time to put pressure on the private sector, create unfriendly business climate, and pull down factory shutters. If companies go bankrupt, then there will be no employment, forget about minimum wage and working conditions! The best for now is to let the companies stabilize and engage in negotiation to reach a sustained solution.

Oh, about the usage of the word "appropriability", I did define the word in the article. I did not fully explain this jargon because the article was supposed to be below 950 words (good if it is below 800 words). I became familiar with poor appropriability issues from this paper by Hausmann, Rodrik, and Velasco. I do understand that I should have fleshed out a little bit more on what appropriability really means in layman's term! But, space issues constrained me! About low salary, I worked in Kantipur Publications for more than a year and I did feel the salary was too low! It was fairly competitive!! [I don't know how fair it is for a low skilled worker to demand a wage rate fetched by high skilled workers!?!]

Also, poor appropriability of returns to investment is one of the two main constraints (the other is power crisis) on industrial productivity and output, at present (stress on the word, at present). Poor appropriability is definitely a constraint on the economy but it might not be the most binding one. However, poor appropriability and power crisis are the two most binding constraints on the industrial sector. No doubts about that! I think for the whole economy, the most binding constraint to growth is coordination failures in the movement to new tradable activities. More about this in my upcoming research paper. So wait!

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Update: Good news is that the Maoist prime minister says he is going to dissolve the YCL's militant structure and return back confiscated property within three weeks and three months, respectively. I hope their action matches rhetoric this time!

Feldstein on fiscal policy

Even Martin Feldstein says Keynesian economics work when the credit market is distressed badly:

In a paper, Mr. Feldstein noted that the usual method of reviving the economy — lower interest rates — was failing to work because of “a dysfunctional credit market.”

That left fiscal stimulus to offset what he described as a decline of $400 billion a year in consumer spending. “While good tax policy can contribute to ending the recession, the heavy lifting will have to be done by increased government spending,” Mr. Feldstein said.

He pushed for big spending, carried out quickly. Among his proposals: replace depleted military supplies and equipment and step up financing for “useful research.” He also said that the shortage of “shovel ready” projects should not be a deterrent in a recession that is likely to last long enough to plan and execute new projects.

“It is of course possible that the planned surge in government spending will fail,” Mr. Feldstein said. But he expressed the “hope that the new program of fiscal spending in combination with mortgage market reforms will be sufficient to return the economy to full employment.”

Constraints to industrial sector growth in Nepal

At present, the major constraints to growth of industrial sector in Nepal seems to be poor appropriability of returns to investment and power crisis. Poor property rights and contract enforcements caused by the extralegal bullying behavior of the politically indoctrinated and militant youth wings and unions are falling heavy on the already ailing industrial sector. Meanwhile, more than 12 hours of power cuts has brought industrial activities to a grinding halt. Due to power crisis, productivity in the industrial sector has decreased by 50%. So the bust factors for the industrial sector at present in the Nepali economy are poor appropriability and load-shedding. That is the main point of my latest opinion piece.

Bust factors: Poor appropriability and load shedding

…Broadly speaking, at present two problems – low private appropriability of returns to investment and load shedding – bedevil the industrial sector in particular and the economy in general. The first one is the direct result of the ruling party’s inability to discipline its militant youth wing (YCL) and trade union that are headstrong in waging an all out war against the private sector under the pretext of labor rights and better working conditions. The second problem is engendered by the previous government’s visionless energy policies and withdrawal of investment in hydropower due to senseless sabotage of projects by the Maoists during their rebellion. Despite earning high returns on investment, as indicated by the eagerness of new firms to secure contracts, one wonders why private investment is still low in the potentially lucrative hydropower sector.

…All these are issues related to lack of property rights and contract enforcement, which have fuelled uncertainty over retaining profit and return to investment. Illegal occupation of industrial districts and manufacturing plants by politically motivated, militant youth wings is an encroachment on private property rights. Furthermore, incessant pressure (often threats to life and property) on the business sector to permanently hire temporary staff is a mockery of contract enforcement mechanism in the economy. The unjustified demand for increasing wages at a time when the industrial sector is going bust is beyond sound economic reasoning. Worse, some lawmakers are encouraging the extralegal acts of the militant youth wings and trade unions by eulogizing their terror campaign as a war against the oppressive and exploitative bourgeois class, a wrong-headed belief hinged on the outdated Marxist philosophies.

…On top of the poor appropriability problem stays the load-shedding issue. Power outage, which is expected to exceed 15 hours daily from next month, is severely crippling the industrial and service sectors. Businesspersons complain that power outage in every six hours is negatively affecting efficiency and productivity of the industrial sector. Already, productivity has slowed down by 50%. More worrisome is the fact that several small and medium-size enterprises (SMEs) are going out of business. These SMEs not only produce final goods but also supply intermediate goods to big firms. A sudden halt in this process means that the industrial sector will soon be in short supply of intermediate goods which would then affect final industrial output. It is impossible for the private sector to increase wages and hire staff permanently at a time when both production and demand are declining and profits are razor thin. These factors will not only decrease domestic investment but also scare away foreign investment, a sign already visible in the economy. Already, several domestic jute mills, local FM radio stations, cyber business, paper factories, and tourism sector are going bust.

Read the full opinion piece here.

Oh, did I mention that I wrote this piece while in Amtrak train ride from NY to my college! For some reason, I love writing (and thinking) while traveling!!

Sub-Saharan Africa fact of the day

Sub-Saharan Africa has just over 10% of the world’s population, but is home to more than 60% of all people living with HIV—25.8 million.An estimated 1.9 million people were newly infected with HIV in sub-Saharan Africa in 2007, bringing to 22 million the number of people living with HIV. Two thirds (67%) of the global total of 32.9 million people with HIV live in this region, and three quarters (75%) of all AIDS deaths in 2007 occurred there.

From UNAIDS

Links of Interest (1/3/2009)

Easterly on The Poor Man’s Burden

Today, just when we were getting over the long, toxic legacy of the Depression and its misguided emphasis on statist plans to fight poverty, this financial crash threatens to take us back to the bad old days. To avoid such a return, we must keep some principles in mind.

First, we must not fall into the trap of protectionism—neither unilaterally nor multilaterally, neither in rich countries nor poor. Protectionism will just make the recession spread further and deeper, as it did during the Depression.

Second, when changing financial regulations to repair the excesses of the past several years, don’t strangle the financial system altogether. You can’t have a Revolution from Below without it. This lesson is especially salient as Washington bails out Wall Street banks and failing industries and intervenes in the U.S. financial sector to an unprecedented degree. This bailout might turn out to be the bitter medicine that saves “finance capitalism” from a stronger form of anticapitalism, but in developing countries, open economies are still an open question.

Third, keep slashing away at the enormous red tape that is left over from previous harebrained attempts at state direction of the economy. Learn from the combined dismal track record of state-owned enterprises but also from the unexpected success stories: Private entrepreneurs are far better than the government at picking industries that can be winners in the global economy. Although fierce opposition will be inevitable, to adopt these policies would be to turn the bad hand we’ve been dealt into an outright losing one.

Fourth, don’t look to economists to create “development strategies,” and don’t back up such experts with external coercion like IMF and World Bank conditions on loans. Such efforts will be either a waste of local politicians’ time or positively harmful. Jeffrey Sachs alone can take partial credit for the rise of two xenophobic rulers hostile to individual liberty—Evo Morales and Vladimir Putin—after his expert advice backfired in Bolivia and Russia. If like-minded experts couldn’t get it done in the 50 years after the Great Depression, they can’t do it in the next 50 years. Nothing in the current crash changes these common-sense principles.

Five economists who gave prophetic warnings about the global financial crisis

Nafta’s unhappy anniversary

Rainfall and the probability of conflict

Antonio Ciccone argues that a 5% income shock (say by drought) raises the likelihood of civil conflict by 15 percentage points.

To see whether impoverishment causes the onset of civil conflict, I take a detailed look at data on rainfall levels in years before the outbreak of civil conflicts in Sub-Saharan African countries between 1980 and 2006. It is well known that living standards in these countries tend to be below trend in drought years and above trend when rainfall levels are above average. If civil conflict is triggered by sudden impoverishment, civil conflict onset in Sub-Saharan Africa should therefore have been more likely following drought years.

…If civil conflict onset is partly driven by sudden impoverishment, conflict outbreak in Sub-Saharan Africa should be more likely following below-average rainfall years. I find this to be the case. This result, combined with the effect of rainfall on income, allows me to estimate the effect of sudden impoverishment on the probability of civil conflict onset. My estimates indicate that a negative 5% income shock raises the likelihood of civil conflict by 15 percentage points.

More here

This is consistent with Fisman and Miguel’s argument that in Africa an income drop of 5% increases the risk of civil conflict in the following year to nearly 30%.

However, Simeon Djankov and Marta Reynal-Querol disagree by arguing that poverty does not have an effect on civil wars.

In Nepal, during the Maoists rebellion (1996-2006), the GDP growth rate averaged 4.1% which is barely different from the average growth rate of one decade before. However, head count poverty rate declined by more than 11 percentage points. This means that conflict did not substantially affect GDP growth rate. This can be explained by the rise in remittances inflow, even during peak time of conflict. This means declining poverty did not affect the likelihood of conflict in Nepal during 1996-2006. The effect of remittances far outweighed the negative effect of conflict on poverty and growth (though growth rate did plunged to –0.1% in 2001).

The figure below shows the increase in remittances: