Energy from kites and moving out of poverty

In this brief talk, Saul Griffith unveils the invention his new company Makani Power has been working on: giant kite turbines that create surprising amounts of clean, renewable energy.


Jacqueline Novogratz tells a moving story of an encounter in a Nairobi slum with Jane, a former prostitute, whose dreams of escaping poverty, of becoming a doctor and of getting married were fulfilled in an unexpected way.

Brookings’s recommendation for the G20 summit

The Brookings Institution has published an interesting collection of articles (recommendation for the upcoming G20 Summit in London).

Here is Eswar Prasad:

The crisis is likely to encourage emerging markets to export and save even more in order to build up larger stocks of foreign exchange reserves and thereby protect themselves from future financial turmoil. Self-insurance through reserve accumulation is costly, but emerging markets see little choice; borrowing from the IMF carries a stigma and remains a toxic proposition for emerging market politicians. In tandem with rising US government borrowing, this could result in larger imbalances and greater risks. Thus, the world economy again faces the classic collective action problem of how to align countries’ incentives so they take into account the effects of their policies on global financial stability.

Greater coordination of macroeconomic stimulus measures would increase the global bang for the buck of individual countries’ policies. Such coordination would not only have a direct effect by preventing leakage of any one country’s stimulus measures, but would also bolster confidence.

Here is Paul Blustein on revitalizing trade:

So the principles guiding the G-20 should be these: Make sure that the rules-based trading system survives. Don’t try now to open markets more than they already are; rather, focus on keeping protectionism, and quasi-protectionism, from becoming long-lasting features of the international economy, so that globalized trade can help the world recover and prosper anew. To the extent that anti-market policies are adopted, aim to keep them temporary and limited in scope.

One way the G-20 could give a shot in the arm to the WTO would be to declare a moratorium on new bilateral and regional pacts.

What should a new global risk assessor look like?

Nick Stern writes:

Any forthright, disinterested assessment of the global economic system’s stability requires two sorts of independence. First, the institution making the analysis and judgments must not have anything other than its own reputation riding on its assessment; in particular, its own policies or lending should not be shaped in any way by its judgment. That means it should not have any policy or lending facilities. Thus it cannot be part of the existing international financial institutions (IFIs), all of which are policymaking, governmental or lending institutions.

Second, the institution must be independent of the big countries or parts of the global economic system that might contribute to future instability. Therefore it cannot be subject to interference by the board of the institution. That means that its assessments cannot be part of the IFIs in their current form, or indeed any form that may emerge from reform proposals. The fact is, main shareholders, through their board membership, always interfere in any statement that they think might be interpreted as critical of their country.

Reality about Nepal’s GDP growth rate

If you don’t like numbers and econ jargons, then you’ll probably not enjoy this article! Anyway, I wanted to write about the trend in GDP growth rate in Nepal and if the economy can attain a double-digit growth rate, which the Maoists government likes to trumpet over and over again. Nothing wrong with that but my point is that growth projections has to be realistic. Given the loss in price and quality competitiveness in the international markets, labor disputes, unfriendly fiscal policies, downward slide in foreign employment, and question mark on the soundness of the monetary situation, the economy is not even in a position to sustain 5% growth rate for three consecutive years. For how and why, read the opinion piece here.

The economy has never seen a double-digit growth rate in the past five decades. The highest GDP growth rate (9.6 percent) was attained in 1984. This was not surprising given the fact that it was simply a recovery from three consecutive years of recession. The growth rate in 1983 was minus 2.98 percent. In no other years have growth rate touched this upper bound. More troubling is the fact that the growth rate has never been stable. Roughly, every increase in growth rate is followed by a decline. The economy experienced more bouts of growth decelerations than accelerations, i.e. more episodes of declining growth rates than increasing growth rates. Since 1960, the economy witnessed 19 instances of an increase in GDP growth rate and 25 instances of growth collapses. There are no instances of sustained growth rate of over five percent for three consecutive years. The average GDP growth rate in the past five decades was 3.57 percent.

Given this historical peek at GDP growth rate of Nepal, it appears that the growth projection for the next three years by the finance minister was very unrealistic in the first place. Unrealistic because even during the heyday of liberalization policies designed according to the Washington Consensus - pushed vigorously by international financial institutions and development agencies during the 90s - the economy did not witness sustained growth rate of over five percent for three consecutive years. Now, the economy does not even have the necessary conditions and institutions to sustain growth rate of over five percent even for two years. This would require a vibrant private sector, entrepreneurial citizenry, business-friendly fiscal policy, less red tape, and more importantly, infrastructure required for unleashing the entrepreneurial spirits in the economy. We severely lack all of these conditions right now. The populist talk of double-digit growth rate has no real substance on it.

There two figures say a lot about GDP growth rate in Nepal.

Fyi, this evening I am off to FEI Educator’s Night at the Hershey Company, Harrisburg, PA. I am getting this award :)

Education (human resources) sector in Nepal

As evidenced by the increasing enrollment rates among Nepali people, the supply of education among those entering the workforce has been increasing since 1991. A push for universal primary education has drastically increased enrollment in primary and secondary education.

Not only primary and secondary enrollment, net tertiary enrollment is also increase and is at its highest level. Since there is a free flow of labor between India and Nepal, any discrepancy in demand for and supply of labor in the market is compensated by importing labor from India. At present, 15% of the labor market demand in the skilled sectors is fulfilled by importing human resources from India, according to the ILO.

Despite being low, the quality of human resource is also improving in recent years. The labor productivity is consistently increasing in the domestic market and any shortfall in human resource is substituted by importing human resource from the Indian labor market.

Nepal’s youth and adult literacy ratio has satisfactorily improved since 1991. Though Nepal’s literacy rate is still slightly below the regional and LIC average, it is improving and the trend is encouraging.

Public spending on education (% of GDP) is satisfactory and is increasing in recent years. Based on income per capita and the size of the economy, Nepal’s expenditure on education is not that different from other low income countries. In fact, looking at the per capita income of regional counterparts like India, Bangladesh, and Pakistan, Nepal’s spending is pretty impressive.

Finally, the return to investment in education is low in Nepal. This is indicative of the fact that the economy is not suffering from a shortage of human resources because if it were so, then the wage rate of the existing employees should have been high. The shadow price of a binding constraint should be high and rising; if supply of skilled workers is binding, then firms would be offering them increasingly higher wages. This seems not to be the case in Nepal.

Source: Adapted from Patrinos & Psacharopoulos[1], 2002

These data and analysis are difficult to reconcile with a hypothesis that the provision of education (human resource) is a binding constraint on Nepal’s economic growth.

Note that I am not saying education (lack of human resources) is not a constraint on growth in the Nepali economy. As is seen above, it is definitely a strong constraint. However, I don’t think it is as binding a constraint as bad infrastructure is. Here is my take on bad infrastructure as the most binding constraint on economic activity in Nepal. I have expanded on it a lot and will post the whole stuff later on. So far, I have discussed these constraints: taxes, coordination failures, and a discussion of the evolution of the exports sector. Discussion on other constraints to follow soon.

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[1] Data correspond to studies done in the year indicated in the table. Dilip Parajuli from the World Bank did the study on returns to investment in education for Nepal in 1999. Latest data available are used. Readers should be cautious in interpreting these data for comparative purposes because some of the data for countries correspond to the state of education sector two decades ago.

Who gets hit the most by slow growth and recession?

This one pager argues that the working poor (the bottom 20th percentile in the income distribution) are hit less intensely than regular workers. Why? Because “wages at the bottom of the distribution are already so low that there is little room for further cuts”. Moreover, a large portion of the poor workers do part-time work, which is a desired over full-time workers by employers in order to put down pressure on payroll.

Zepeda, Alarcon, Soares, and Osorio look at the effect of recession and slow growth on the working poor. They study slow growth in Chile (2000-2003) and Mexico (2000-2004), and recession in Mexico (1994-1996) and its effect on the working poor. In a country where most of the working poor are engaged on agricultural sector and do part-time work to earn an extra income, this feature is kind of expected.

Is this a matter of relief or comfort? Well, not really! The paper does not say that poor do not get hurt; what it says is that the working poor are affected less intensely than full-time wage earners. The working poor might loose income marginally but the fact is that this marginal loss in income means a lot to their share of household income and the corresponding consumption budget. Also, it is generally agreed that poor people have the highest marginal propensity to consume. Social protection, cushioning the loss in marginal income, and social safety are necessary to not only help the poor but also to stimulate local economy.

… that periods of slow growth and recession in Mexico and Chile improved the poor’s relative income. That their labour income does not fall as much as others’ during crises may offer comfort, but even a small decline can exact a heavy toll. Safety nets and emergency assistance help protect minimum consumption levels, but policies to confront economic crises should not be mere mitigation strategies. They should include interventions to strengthen human capacity and improve the poor’s main asset: labour.

In a related IPC working paper the authors look at the changes in labor markets and the dynamics of inequality and poverty in Brazil, Chile, and Mexico. One interesting finding is that the earning per worker is a function of slow-moving changes in the structure of employment and the characteristics of workers and rapid changes in the prices of labor for specific workers. The structure of employment is affected by demographic changes, education, and structural transformation in employment from agricultural labor.

Demographic changes, better education and the decline of agricultural labour are among the most significant changes in the structure of employment, and they contribute to observed changes in earnings. Among the most important changes in prices contributing to the change in earnings are changes in the returns to formal and informal employees relative to the self-employed; changes to full-time employment relative to part-time workers; changes in the returns to urban workers relative to rural workers; and change in the earnings of workers in services relative to workers in agriculture. In general, changes in earnings frequently favoured low-earning workers, mostly because of the change in the returns for their labour. This is in contrast to the changes in the structure of employment, which tended to favour high-earning workers.

Geithner and Keynes

US Treasury Secretary Timothy Geithner echoes Keynes in an article published in the WSJ:

Simply hoping for banks to work these assets off over time risks prolonging the crisis in a repeat of the Japanese experience.

The Public-Private Investment Program is better for the taxpayer than having the government alone directly purchase the assets from banks that are still operating and assume a larger share of the losses. Our approach shares risk with the private sector, efficiently leverages taxpayer dollars, and deploys private-sector competition to determine market prices for currently illiquid assets.

When financial institutions come to us for direct financial assistance, our government has a responsibility to ensure these funds are deployed to expand the flow of credit to the economy, not to enrich executives or shareholders.