Growth, Geography and Resource Abundance

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“This paper examines the growth experience of the Central Asian economies after the breakup of the Soviet Union. In particular, it evaluates the impact of being landlocked and resource rich. The main conclusions are: (1) Over the period 1994–2006, the landlocked resource-scarce developing countries of Central Asia grew at a slower pace than other landlocked resource-scarce developing countries; on the other hand, resource-rich developing countries in Central Asia grew at the same pace as other resource-rich developing economies. (2) Having “good” neighbors pays off in the form of growth spillovers; this calls for greater regional cooperation and enhanced regional integration through regional transport infrastructure, improved trade facilitation, and enhanced and coordinated economic policies. And (3) countries with a higher share of manufacturing exports in GDP grow faster, and the more sophisticated a country’s export basket, the higher its future growth; Central Asian countries should, therefore, take a more aggressive stance in supporting export diversification and upgrading.”

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Here is the full paper by Jesus Felipe and Ustav Kumar. They have also constructed an index of opportunities and ranked countries based on their sophistication of export basket. Meanwhile, the geographic proximity argument was also made by Paul Collier (I think it was in one of the paper he wrote for Commission for Growth & Development).

Open trade plus social protection for sustained growth

A joint report (Benefits of Trade for Employment and Growth) by the OECD, the ILO, the WTO and the WB, prepared for leaders attending the G20 Summit in Seoul, states that while open trade is always good, it must be complemented by properly designed domestic policies, including employment and social protection policies to ensure that benefits from trade are widely shared. While the crisis has limited growth in many countries, this should not be a reason to go for trade protectionist policies. Instead, trade should be kept open and it should be backed up by social security policies.

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The economic crisis showed how open economies are exposed to external shocks, the report adds. But openness to trade also helps economies recover more quickly as they are more adaptable and less dependent on limited domestic demand.

Trade is contributing to the economic recovery. But with high unemployment persisting in many countries, governments must resist protectionism, the organizations say. They underscored that a successful conclusion to the Doha Development Agenda would send a positive signal that governments continue to oppose protectionism and seek new opportunities for growth, development and job creation through trade.

For open trade to boost growth and jobs on a sustained basis, complementary policies to address adjustment problems and distributional concerns are needed to help workers who may lose their jobs as a result of increased international competition. Relevant measures include stable macroeconomic policies, effective labor market and social protection policies, investment in education and enhancing export sectors in developing countries.

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While batting for the case of free trade, the report points out a study about NAFTA’s impact on Mexico that finds that on average a 10% reduction in tariffs led to productivity growth of 4-8%. Also, it cites an OECD (2003) study that shows that over the long term, an increase in 10% in trade exposure (trade as a percentage of GDP) was associated with a 4% increase in output per working-age person. However, this report by Eduardo Zepeda et al (2010) shows that under NAFTA, Mexico’s annual growth of GDP per capita has stagnated; there is not much change in total investment; macroeconomic vulnerability has increased; and progress in job growth has been weak. NAFTA’s promise of broad-based dynamic growth has fallen short of its stated goals. So, even if trade as a percentage of GDP increased, economic growth rate was very low. Nepal has one of the highest degree of trade openness (as a percentage of GDP), but its growth is stunted for years now. 

While the studies cited in the report are making valid points, evidence of to its contrary should also be heeded. It means that government should be thinking of why the same expected results were not seen in other countries despite similar trade openness policies. The prerequisites for translating trade openness’s positive impact on growth are missing in many developing countries. The developed countries who vouch for more trade openness should ensure that there is ample funding to institute the required prerequisites in the developing countries, who ideally would get funding based on their initiation on trade openness. There is Aid for Trade and EIF for LDCs facilities in the WTO regime. But, it looks like a sympathetic gesture to quiet the disquiet voice in trade negotiations. It should be seriously thought of in terms of sufficient funding, technology transfer, capacity building, infrastructure, etc.

Also, check out the latest simulation result of changes in employment and real incomes  following good liberalization under the assumption that the G-20 countries implement a 50% MFN tariff reduction and reduce NTB by 50% on an MFN basis. South Korea, China, India, and Thailand benefit the most in terms of increase in real income in the long run. Mexico is going to lose.

Industrial Priority in Nepal

Can a developing country afford to promote all the products and industries? When there are limited resources and unlimited wants/demands, then you have to prioritize in such a way that the outcome is the most optimal one. I put this simple econ concept in the Nepali industrial context and argue that the government cannot and should not try to promote all the products. It should disregard all the pressure from yes-men businessmen who wants the government to promote their industries, but the return the government gets from promoting them is less than the cost of promotion. So, Nepal should have a discriminatory industrial policy and product promotion plan. Read more in my latest article.

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Industrial Priority

A member of the National Planning Commission (NPC) recently said he just became aware of the fact that the government has limited resources and cannot fulfill everyone’s desire. While he was surprised to realize a basic economic conundrum-- i.e. there are unlimited wants, but limited resources-- I was perplexed reading that he acknowledged this basic fact after being appointed to the chief advisory body for formulating development plans and policies for the government. Needless to say, this view is even more prevalent in the public sphere, including businessmen and entrepreneurs. Making increasingly more and complex demands with the government, irrespective of its capacity to fulfill them, has become common.

The public, industrialists, unions, and policymakers have to fathom and digest the fact that we have limited resources and cannot fulfill everyone’s demand. The government should fulfill demand (think of tax concessions, subsidies, marketing, capacity building, technology, and infrastructure) of only those sectors that will give the nation the highest socio-economic, if not economic only, returns. It means discriminately yet judiciously prioritizing the sectors that will receive support from the government.

How can we know ex-ante that the sectors to be prioritized will give the highest return? Based on past and present trends and future potentials, we can initially prioritize promising sectors, experiment with them with different policy options, and evaluate if the final outcome meets expectations of lower cost, high returns and relatively stronger socio-economic impact.

Several countries that have resilient exports sector and strong economic growth have adopted this strategy. For instance, Chile and Ethiopia prioritized salmon and floriculture industries, respectively. At the early stage Chile provided finance and technical support to salmon industry, and Ethiopia facilitated finance, land and transport coordination required for floriculture industry. Their exports-related government and private agencies played the role of ‘pathfinder’ institution by consistently attempting to pursue the development of these sectors and co-ordinate activities accordingly. The coordination among all related government agencies, private sector and other stakeholders created the necessary conditions for take-off of these industries. Now, they are one of the top exporters in the world in the respective products and these sectors contribute substantially to their exports revenue. Nepal can learn valuable lesions from their experience of experimentation and prioritization of selected products for exports promotion.

Given the dismal performance of industrial and export sectors, it is apparent that our industrial priority did not pick up steam as it did in other countries with which our exporters compete with in the international market. The result is evident—exports have declined and domestic industrial sector is struggling to grow at around two percent annually. The misplaced sectoral priority and policy incoherence in the industrial and exports sectors have cost the nation dearly, resulting in a near collapse of garment and textiles industry, which was the backbone of exports sector until 2004. Our policymakers and entrepreneurs failed to comprehend competitive force unleashed by increasing globalization of the world economy.

To remain competitive, Nepal needs to reprioritize production, products, and industries. Prioritization and promotion should be of those sectors that hold the most prospects for economic and socio-economic returns. It should be based on careful consideration of factors such as the increasing globalization and the rise of global production sharing; the recent crises in food, fuel and financial markets; climate change; the rapid rise of our neighbors—India and China; and the rise of entrepreneurial economies, especially the LDCs that produce similar kind of goods and services Nepal produces and exports.

We need to smartly reallocate resources with an objective to promote only those industries that have potential for highest rate of return on investments and socio-economic impact on the lives of the people. If need be, we should not hesitate to part ways from past practices. It might mean completely stopping prioritization and promotion by the government of uncompetitive industries like garments and textiles sector, unless it changes its failed strategy of focusing on the US and the EU markets only, where there is very little chance of recovery due to our uncompetitive production structure and nonconformity with quality standards, among other factors.

The Ministry of Commerce & Supplies (MoCS) is trying to restructure industrial priority by taking stock of the changing global markets and limited resources, amidst unlimited industrial demands, at our disposal. It recently updated industrial and trade policies, and released Nepal Trade and Integration Strategy (NTIS) 2010, which identified 19 sectors having high “exports potential and socio-economic impact.” Mind you, there is plenty of room for improvement in these policies (see NTIS 2010, July 3, and Industrial Policy 2010, May 29, Republica). But, still they are one of the best and coherent ideas we have so far in terms of industrial and exports promotion.

Already, the government is facing resistance from businessmen involved in sectors that were not among the 19 products identified by NTIS 2010. For instance, the garment and textiles businessmen made hue and cry after the industry did not appear in the priority list. They argued that the industry still contributes the highest exports revenue and hence deserves more and continued support from the government. What they do not tell is that its growth rate has been declining at a rapid pace and hopes for revival is dim unless they change their production structure and destination markets. We should not drain state resources in promotion of this kind of moribund industry. We already experimented for over two decades with the garment and textiles industry. The government and the private sector failed miserably to not only promote this product abroad, but also to overcome supply-side, economic and non-economic constraints internally.

Our policymakers should not succumb to pressure from industrialists who have been running inefficient firms, whose cost of government support is higher than the return on government investment in their promotion. We should discriminately yet judiciously promote only those sectors that hold the best prospect for survival and sustained growth. It should focus on clearing uncertainties and constraints related to technology, marketing and infrastructure aspects in sectors that have high export potential. Since there are limited resources at the government’s disposal, it should choose few products from among the 19 products identified by NTIS 2010 and fully pump in resources to promote them. Ignoring the idea of spray-gun approach to promoting all the products and industries would be an efficient and optimal decision.

Meanwhile, our bureaucrats need to realize that MoCS alone cannot help promote the priority industries and products if other government agencies think that this initiation is beyond their playground. Promoting priority industries requires concerted effort and attention of a whole range of ministries-- ranging from agriculture, finance, science and technology, and foreign affairs ministries—private sector, politicians, and trade unions. Faltering export and industrial sectors is a collective problem and the optimal solution can be reached through collective action.

Keeping in mind that there are limited resources and unlimited wants, let us experiment with the sectors that have the highest exports and growth potential and socio-economic impact. Else, our exports and industrial sectors will continue to fade away, leaving us unproductively wasting limited resources for lost causes.

[Published in Republica, November 10, 2010, pp.6]

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An Equilibrium Model of Sex and Matching

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We develop a directed search model of relationship formation which can disentangle male and female preferences for types of partners and for different relationship terms using only a cross-section of observed matches. Individuals direct their search to a particular type of match on the basis of (i) the terms of the relationship, (ii) the type of partner, and (iii) the endogenously determined probability of matching. If men outnumber women, they tend to trade a low probability of a preferred match for a high probability of a less-preferred match; the analogous statement holds for women. Using data from National Longitudinal Study of Adolescent Health we estimate the equilibrium matching model with high school relationships. Variation in gender ratios is used to uncover male and female preferences. Estimates from the structural model match subjective data on whether sex would occur in one's ideal relationship. The equilibrium result shows that some women would ideally not have sex, but do so out of matching concerns; the reverse is true for men.

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The full paper is here. I have not read the full paper. I just posted the abstract, which itself is pretty interesting. There is economics in everything and economists are trying to go everywhere!! The main point of the paper makes me laugh: “The equilibrium result shows that some women would ideally not have sex, but do so out of matching concerns; the reverse is true for men.”

Climate Change: Emissions Projection

The top band shows the range of estimates across models for emissions under a business-as-usual scenario, i.e. temperature will rise by 5 degree Celsius above the pre-industrial era temperature. The lower band shows a trajectory that could yield a concentration of 450 ppm of CO2 emissions (with a 50 percent change of limiting warming to less than 2 degree Celsius). Greenhouse gas emissions include CO2, CH4, and N2O. Negative emissions (eventually required by the 2 degree Celsius path) imply that the annual rate of emissions is lower than the rate of uptake and storage of carbon through natural processes (for example, plant growth) and engineered processes (for example, growing biofuels and when burning them, sequestering the CO2 underground). The baseline for projection is usually the emission level during pre-industrial era.

Source: WDR 2010: Development and Climate Change, pp.10, figure 5

Climate Change: Drought in Ethiopia

“A boy stands in a dried up pond near Moyale in the lowlands of Ethiopia's Oromiya zone. A devastating drought has left an estimated 737,000 Ethiopians struggling to survive without access to clean water. Beyond Ethiopia, the drought has spread out to affect more than 8.3 million people, including 1.2 million children aged under five, across the Horn of Africa.”

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“One of thousands of goat carcasses at Goraye in Oromiya region.”

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Photo credit: Andrew Heavens, Flickr

Migrant networks and FDI

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Although there exists a sizeable literature documenting the importance of ethnic networks for international trade, little attention has been devoted to studying the effects of migrants on foreign direct investment (FDI). The presence of migrants can stimulate FDI by promoting information flows across international borders and by serving as a contract enforcement mechanism. This paper investigates the link between the presence of migrants in the US and US FDI in the migrants' countries of origin, taking into account the potential endogeneity concerns. The results suggest that US FDI abroad is positively correlated with the presence of migrants from the host country. The data further indicate that the relationship between FDI and migration is stronger for migrants with tertiary education.

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Full paper here. Here is a draft version