Very Keynesian:
Self-interest is still the best motivator we know – or more accurately, the only consistent motivator. So I’m for market economies. But I’m for market economies with strong safety nets, with adult supervision in capital markets, with public provision of goods the private sector does badly (like basic research and much of education.) An idealized New Deal is about as far as I go.
The UNDP has published Human Development Report 2009, an annual publication that ranks countries based on the level of human development (HDI). This year’s topic is Overcoming barriers: Human mobility and development, which explores how better policies towards labor mobility can enhance human development. With Human Development Index (HDI), the development agency ranks countries based on the progress made in human development.The HDI provides a composite measure of three dimensions of human development: living a long and healthy life (measured by life expectancy), being educated (measured by adult literacy and gross enrolment in education) and having a decent standard of living (measured by purchasing power parity, PPP, income).
The HDI value for Nepal is 0.553, placing it in 144 position out of 182 countries included in the study. The higher the index value, the better is human development in a given country. The report notes that between 1980 and 2007 Nepal's HDI rose by 2.16% annually from 0.309 to 0.553 today. HDI scores in all regions have increased progressively over the years although all have experienced periods of slower growth or even reversals.
| Nepal’s human development index 2007 | ||||
| HDI value | Life expectancy at birth (years) | Adult literacy rate (% ages 15 and above) | Combined gross enrolment ratio (%) | GDP per capita (PPP US$) |
| 1. Norway (0.971) | 1. Japan (82.7) | 1. Georgia (100.0) | 1. Australia (114.2) | 1. Liechtenstein (85,382) |
| 142. Swaziland (0.572) | 113. Guyana (66.5) | 128. Yemen (58.9) | 134. India (61.0) | 163. Uganda (1,059) |
| 143. Angola (0.564) | 114. Tajikistan (66.4) | 129. Papua New Guinea (57.8) | 135. Morocco (61.0) | 164. Afghanistan (1,054) |
| 144. Nepal (0.553) | 115. Nepal (66.3) | 130. Nepal (56.5) | 136. Nepal (60.8) | 165. Nepal (1,049) |
| 145. Madagascar (0.543) | 116. Mongolia (66.2) | 131. Mauritania (55.8) | 137. Swaziland (60.1) | 166. Madagascar (932) |
| 146. Bangladesh (0.543) | 117. Pakistan (66.2) | 132. Morocco (55.6) | 138. Kenya (59.6) | 167. Myanmar (904) |
| 182. Niger (0.340) | 176. Afghanistan (43.6) | 151. Mali (26.2) | 177. Djibouti (25.5) | 181. Congo (Democratic Republic of the) (298) |
The HDI is a broader measure of well being, as opposed to using GDP figures. This is how Nepal stands in HDI and GDP per capita.
In Human Poverty Index (HPI), Nepal ranks 99th among 135 countries for which the index has been prepared.
| Selected indicators of human poverty for Nepal | ||||
| Human Poverty Index (HPI-1) | Probability of not surviving to age 40 (%) | Adult illiteracy rate (%ages 15 and above) | People not using an improved water source (%) | Children underweight for age (% aged under 5) |
| 1. Czech Republic (1.5) | 1. Hong Kong, China (SAR) (1.4) | 1. Georgia (0.0) | 1. Barbados (0) | 1. Croatia (1) |
| 97. Haiti (31.5) | 88. Uzbekistan (10.7) | 128. Yemen (41.1) | 71. Venezuela (Bolivarian Republic of) (10) | 125. Pakistan (38) |
| 98. Equatorial Guinea (31.9) | 89. El Salvador (10.7) | 129. Papua New Guinea (42.2) | 72. Occupied Palestinian Territories (11) | 126. Ethiopia (38) |
| 99. Nepal (32.1) | 90. Nepal (11.0) | 130. Nepal (43.5) | 73. Nepal (11) | 127. Nepal (39) |
| 100. Rwanda (32.9) | 91. Kazakhstan (11.2) | 131. Mauritania (44.2) | 74. Kyrgyzstan (11) | 128. Burundi (39) |
| 101. Pakistan (33.4) | 92. Guatemala (11.2) | 132. Morocco (44.4) | 75. Syrian Arab Republic (11) | 129. Afghanistan (39) |
| 135. Afghanistan (59.8) | 153. Lesotho (47.4) | 151. Mali (73.8) | 150. Afghanistan (78) | 138. Bangladesh (48) |
In Gender-related Development Index (GDI), Nepal scored a value of 0.545. Its GDI value is 98.6% of its HDI value. Out of the 155 countries with both HDI and GDI values, 111 countries have a better ratio than Nepal's. Meanwhile, Nepal ranks 83rd out of 109 countries in Gender Empowerment Measure (GEM), which reveals whether women take an active part in economic and political life.
| The GDI compared to the HDI – a measure of gender disparity | |||
| GDI as % of HDI | Life expectancy at birth (years) 2004 | Adult literacy rate (% ages 15 and older) 2004 | Combined primary, secondary and tertiary gross enrolment ratio 2004 |
| | Female as % male | Female as % male | Female as % male |
| 1. Mongolia (100.0%) | 1. Russian Federation (121.7%) | 1. Lesotho (122.5%) | 1. Cuba (121.0%) |
| 110. Algeria (98.4%) | 183. Nigeria (102.1%) | 128. Senegal (63.1%) | 137. Guatemala (92.6%) |
| 111. Iran (Islamic Republic of) (98.4%) | 184. Uganda (102.0%) | 129. Morocco (62.9%) | 138. Zambia (92.0%) |
| 112. Nepal (98.4%) | 185. Nepal (101.9%) | 130. Nepal (62.0%) | 139. Nepal (91.6%) |
| 113. Honduras (98.4%) | 186. Kenya (101.5%) | 131. Bhutan (59.5%) | 140. Senegal (90.0%) |
| 114. Burkina Faso (98.4%) | 187. Pakistan (101.0%) | 132. Burkina Faso (58.8%) | 141. Sudan (89.3%) |
| 155. Afghanistan (88.0%) | 190. Swaziland (98.0%) | 145. Afghanistan (29.2%) | 175. Afghanistan (55.6%) |
Nepal has an emigration rate of 3.9%. The major continent of destination for migrants from Nepal is Asia with 95.0% of emigrants living there. In 2007, US$1,734 million in remittances were sent to Nepal. Average remittances per person were US$61, compared with the average for South Asia of US$33.
| Remittances | |||
| Total remittance inflows (US$ millions) | Remittances per capita (US$) | ||
| 1. India | 35,262 | 1. Luxembourg | 3,355 |
| 1. India | 35,262 | 67. Sri Lanka | 131 |
| 17. Pakistan | 5,998 | ||
| 36. Sri Lanka | 2,527 | ||
| 45. Nepal | 1,734 | 91. Nepal | 61 |
| 63. Iran (Islamic Republic of) | 1,115 | 98. Bangladesh | 41 |
| 151. Maldives | 3 | 102. Pakistan | 37 |
| 133. Maldives | 10 | ||
| 157. Burundi | 0 | 157. Burundi | 0 |
| Global aggregates | |||
| South Asia | 53,201 | South Asia | 33 |
| Least developed countries | 17,293 | Least developed countries | 26 |
| Medium human development | 189,093 | Medium human development | 44 |
| World | 370,765 | World | 58 |
If the political process continues to be as messy as it is today, then once again the human development goals would be overshadowed and progress on these fronts stalled. As of today, stalemate in finding a solution to the political impasse has been the most binding constraint to forging a national strategy to make progress in human development fronts.
Richard Posner reviews Keynes and his masterwork:
Baffled by the profession's disarray, I decided I had better read The General Theory. Having done so, I have concluded that, despite its antiquity, it is the best guide we have to the crisis. And I am not alone in this judgment. Robert Skidelsky, the author of a superb three-volume biography of Keynes, is coming out with a book titled Keynes: The Return of the Master, in which he explains how Keynes differed from his predecessors, the "classical economists," and his successors, the "new classical economists" and the "new Keynesians"--and points out that the new Keynesians jettisoned the most important parts of Keynes's theory because they do not lend themselves to the mathematization beloved of modern economists.
[…] Keynes was the greatest economist of the twentieth century. To expel him from the profession is to confirm the worst prejudices of present-day economists by embracing their bobtailed conception of their field. […] Keynes wanted to be realistic about decision-making rather than explore how far an economist could get by assuming that people really do base decisions on some approximation to cost-benefit analysis.
My latest op-ed is based on two reports released last month. One measures how business-friendly an economy is and the other measures how competitive a given economy is. Nepal does not do well in both the rankings. I argue that the main reason for stalemate in reforming reforms is because of a lack of consensus (political) on economic issues, mainly economic growth and broad-based economic development. I think the political parties need to agree on and abide by the principle of rules-based economic system so that the messier political rattle does not infect economic reforms as has been in the past.
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Two crucial reports related to the state of Nepali economy concerning business-friendly environment, competitiveness and the economy’s overall openness were released last month by two reputed institutions. Given the level of political turmoil and a complete disregard for the need to stimulate the economy by reforming key sectors and resolving major stumbling blocks that have been impeding economic activities, it is no wonder that the reports painted a bleak picture of the economy. In a nutshell, last year, dirty political game and bickering for more political clout and wealth clouded the need for forging a consensus on chalking out an actionable inclusive plan for structural transformation of the lagging economy.
Probably the most important report that is looked upon closely by business community and donors is the Doing Business Report 2010. It shows that the progress in fine-tuning reforms that would make doing business in the economy easier stagnated at a low level. Among 183 economies, Nepal’s standing in the easy of doing business ranking is 123. Compared to the year before, doing business was not any easier last year. It is a well-known fact, but hardly acknowledged by the politicians, that economic activities are severely constrained by transport obstructions, forced closure of industries, labor union strikers, depleting industrial security, dilapidated and a short supply of infrastructure, severe power shortage and labor market rigidities. These issues have been reflected in various indicators used in the reports.
The Doing Business Report, published annually by the International Finance Corporate (IFC), ranks countries on the ease of doing business by looking at 10 key indicators. Singapore has been consistently ranked as the most easiest/favorable nation in doing business. In South Asia, Pakistan was the top reformer, followed by Maldives and Sri Lanka. Rwanda – the same country that lived through genocide in 1994 and experienced a complete collapse of political and economic institutions – is one of the top reformers.
Led by a dedicated statesman, President Paul Kagame, the Rwandan economy has been growing registering impressive growth rates. Such a strong political resolve and leadership is virtually absent in the Nepali political economy where leaders are more interested in amassing political clout and wealth than building a consensus to leave economic activities free of political interference.
Looking at specific indicators, it becomes clear where the economy stands on various issues. Starting a business was even harder this year, slipping down in ranking by 12 points to 87 from 75 last year. It takes seven procedures to start a business—verification of the uniqueness of proposed company name; verification and certification of memorandum by a professional; purchase of stamp to be attached to registration form; filing documents with the Company Registrar’s Office; making company seal; registering with Inland Revenue Office; and enrolling the employees in the Provident Fund. The whole process takes at least 31 days and costs 53.6 percent of income per capita.
In dealing with construction permits, it takes 15 procedures, 424 days and costs 221.3 percent of income per capita. Note that it takes 424 days and costs 221.28 percent of income per capita to just build a warehouse. Meanwhile, due to pressure from politically-backed trade unions to increase wages and welfare at a time when production is decreasing, it is of little surprise that employing workers has also become difficult. The rigidity of employment index (a composite index of difficulty of hiring index, rigidity of hours index and difficulty of redundancy index) is 46. For South Asia and OECD, it was 26.3 and 26.4 respectively. A higher value represents more rigid regulations.
The only indicator in which Nepal made progress was in registering property. Nepal’s ranking went up by three positions to 26 from 29 last year. It takes three procedures, five days and costs 4.8 percent of property value to register a property. This improvement came along with the passage of the Finance Act 2008, which reduced the fee for registering a property from 6 percent to below 4.8 percent of the property’s value.
However, getting credit from financial institutions was not any easier; the ranking slipped down by four positions to 113 from 109 last year. Similarly, Nepal did a bad job in protecting investors, leading to decline in ranking by three positions to 73 from 70 last year. There was no progress in making transactions transparent, sorting out liability issues for businesses and the ability of shareholders to sue officers and directors for misconduct.
Despite an increase in revenue generation, partly attained by forcing tax evaders to pay taxes, the process of paying taxes was not any simpler; ranking dropped by 13 positions to 124 from 111 last year. An entrepreneur had to make 34 payments a year, spend 338 hours per year preparing tax documents and pay 38.8 percent of profit as taxes (with 11.3 percent of profit as labor tax and contributions). Likewise, trading across borders was also cumbersome. Among all the indicators, ranking in ‘trading across borders’ was the worst (down by two positions to 161 from 159 last year). Similar poor result was seen in The Global Trade Enabling Report 2009, which ranks countries based on their efficiency at border administration and environment conducive to trade, where Nepal ranked 110 out of 121 countries incorporated in the study. It takes nine documents, 41 days and costs US$1764 per container to export a standardized shipment of goods. Additionally, it takes 10 documents, 35 days and US$1,825 per container to import a standardized shipment of goods.
There was no progress in enforcing commercial contracts and in simplification of closing down a business. From the evolution of a payment dispute to its settlement, it takes 39 procedures, 735 days and costs 26.8 percent of claim to enforce a contract. Additionally, to resolve bankruptcies, it takes 5 years, costs 9 percent of estate and the recovery rate is 24.5 cents on each dollar.
Overall, there were no discernible reforms in easing bottlenecks associated with doing business in the country. Nepal lacked what strong reformers had: A long-term inclusive agenda involving relevant public agencies and private sector representatives for institutionalization of reforms aimed at increasing the competitiveness of firms and economy.
Meanwhile, in the Global Competitiveness Report 2009-2010, published annually by the World Economic Forum (WEF), Nepal ranks 125 out of 133 countries, highlighting the fact that due to a lack of progressive reforms, the economy is one of the most uncompetitive in the world. The state of infrastructure and technological readiness is so horrible that it ranks 131 and 132 respectively. Note that bad infrastructure has already been identified as the most binding constraint on economic growth. Overall, the report notes that Nepal had four “advantages” and 116 “disadvantages” in making the nation globally competitive. The economy is still factor driven and lacks the capacity for innovation and a business culture conducive to stimulating entrepreneurial activities.
Though these reports have deficiencies in accurately rating the true status of an economy, they do, however, show some interesting trends in increasing/decreasing red tapes in an economy. They highlight areas where reforms are dearly needed in order to stimulate entrepreneurial activities. Reforms can be piecemeal and experimental. It could be as simple as extending the opening hours at the borders (like in Rwanda) if commercial activity is picking up during favorable season.
Having grand reforms idea is worthless if the political leaders do not forge a consensus to create rules-based economic structure, where all political actors work to attain a common goal, i.e. broad based economic growth and keep politics out of the activities and reform proposals that are geared towards that goal. This is missing in the Nepali political sphere. No wonder the economy is without any discernible reform!
A guest post by Greg Shinsky, a fellow resident at ISH and one of the smartest, engaging and intelligent persons I have met at ISH.
The Center for American Progress, a DC-based think-tank, hosted a conference today discussing the significance of sustained US public structural deficits in the medium to long-run. The panelists emphasized that although the stimulatory measures adopted by the Obama administration were necessary, the threat of sustained deficits would lead to damaging long-run consequences. However, bringing the budget back into balance is no simple task. The seriousness of this issue raises fundamental questions about the future sustainability of both spending patterns (namely in the areas of health, defense and social security) and raising revenues (through various tax measures). Moreover, not only are both these elements of the deficit reduction equation fraught with sensitivity and complexity, the politics of Congress is unlikely to facilitate an appropriate compromise.
The speakers agreed that current political procrastination, eventually leading to an abrupt policy amendment (for instance cuts in Medicare or Medicaid), will most likely affect those members of society least able to afford sudden changes – namely the poor. For this reason, it is imperative that strong leadership addresses the problem sooner rather than later – this is especially so given that the magnitude of persistent structural deficits will only get larger with time.
Notably, Nobel Laureate Paul Krugman, dismissed arguments that we ought to be concerned about the massive fiscal stimulus ‘crowding out’ private investment. In the alternative, Krugman argued that the severity of the crisis actually means that the current fiscal stimulus describes a situation of government ‘crowding in’ of private investment (i.e. public investment is supporting what otherwise would be a mass stagnation of private investment). Skeptical of a political solution in the foreseeable future, Krugman also reasoned that there are potential budgetary savings to be realized in defense spending and the Waxman-Markey Climate Change Bill.
Krugman argues:
fiscal expansion does not crowd out private investment — on the contrary, there’s crowding in, because a stronger economy leads to more investment. So fiscal expansion increases future potential, rather than reducing it.
in the short run fiscal expansion leads to higher GDP, which leads to higher revenues, which offset a significant fraction of the initial outlay. A billion dollars in stimulus probably leads to only $600 million or a bit more in additional debt.
Crowding in raises future GDP — which raises future tax revenues. And the rise in revenues relative to what they would have been otherwise offsets at least some of the burden of debt service.
Robert Zoellick, President of the World Bank Group, gave a speech today at SAIS. He shared his views on the crisis, especially what's up after the global financial crisis. He blames the rational choice theory and the lax oversight by central banks. He argues that the US won't have the same economic clout as it had before the crisis. China, India, Brazil and other developing nations will emerge more stronger than ever. This won't mean that the US will totally lose its clout. It will still have influence over economic and political matters but not to the extent prevalent before the crisis. He opines that that addressing large deficits and controlling inflation would determine the strength of the dollar and the US economy. Trade protectionism due to the global financial crisis has been a "low-grade fever but the temperature is rising." Similar point was also made by other economists as well. He also called for harmonization of the Doha Round with regional agreements. The IMF's managing director also gave similar speech last week.
Some seeds of today’s troubles were sown by the responses -- or lack of them -- to the financial crises of the late 1990s. After the Asian financial crisis, developing countries determined they never again wanted to be exposed to the tempests of globalization. Many “insured” themselves through managing exchange rates and building huge currency reserves. Some of these changes contributed to imbalances and tensions in the global economy, but for years governments muddled through amidst generally good growth.
...the alluringly simple design of “rational markets” theory led regulators to take a holiday from the realities of psychology, organizational behavior, systemic risks, and the complexities of markets and humans.
The current assumption is that the post-crisis political economy will reflect the rising influence of China, probably of India, and of other large emerging economies. Supposedly, the United States, the epicenter of the financial crisis, will see its economic power and influence diminish.
The future for the United States will depend on whether and how it will address large deficits, recover without inflation that could undermine its credit and currency, and overhaul its financial system to preserve innovation while adding to safety and soundness.
Over 10 to 20 years, the Renminbi will evolve into a force in financial markets.Countries and markets may also experiment with financings denominated in Special Drawing Rights –or SDRs— which reflect a portfolio of major currencies. [...] Of course, the U.S. dollar is and will remain a major currency. But the Greenback’s fortunes will depend heavily on U.S. choices. Will the United States resolve its debt problems without a resort to inflation? Can America establish long-term discipline over spending and its budget deficit? Is the country restoring a healthy financial sector capacity for innovation, liquidity, and returns, without producing the same risk of big bubbles and institutional breakdown? The dollar’s value will also depend on the extent to which we see the return of a dynamic, innovative private sector economy.
Central banks performed impressively once the full force of the crisis hit. But there are reasonable questions about how they handled the build-up, including asset price inflation and significant failures of supervision. We have yet to see whether Central Banks can handle the recovery without letting inflation get out of control.
On the protracted Doha Round:
The Doha Round could cut, discipline, and even eliminate some agricultural subsidies that for years were left outside the rules-based trading system. It could modestly open markets for manufacturing and agricultural goods in developed and major developing economies. It could “bind” barriers of major developing countries at much lower levels, increasing the sense of mutual contributions and limiting the risks of big jumps in tariffs. The Doha Round could also open service markets and cut developed country tariff peaks that limit basic manufacturing and value-added production in poorer countries. The Round could correct rules that have been bent to limit trade too freely. These are real gains and would demonstrate the capability of developed and major emerging economies to compromise to achieve a mutual and systemic interest.
We need more help for the poorest countries that have been less able to seize growth opportunities from trade. [...]The new agenda needs to build on early efforts by WTO’s Director General, Pascal Lamy, supported by the World Bank Group, to link trade facilitation to aid for trade. To capitalize on lower barriers to trade, poorer countries need: regional integration to build bigger markets and access for land-locked countries; energy; infrastructure; logistics systems; ready access to trade finance; assistance with standards; and streamlined customs and border procedures.
On Africa's potential:
Over time, Africa can also become a pole of growth. The messages I hear in most African countries are the same: Africans want energy, infrastructure, more productive agriculture, a dynamic private sector, and regionally integrated markets linked to open trade. It is a message one might have heard in a devastated Europe 60 years ago.
China’s African prospects -- which include resource development and infrastructure -- are likely to be complemented by others. Brazil is interested in sharing its agricultural development experience. India is building railways. These are the early days of a trend that will build.