The chart says it all.
Nepal has the highest labor cost in South Asia and probably the lowest labor productivity. Where is our labor cost competitiveness going? Hello, labor unions?? Hello, FNCCI?? Hello, government??
Friday, September 23, 2011
Wednesday, September 21, 2011
Four million missing women each year in developing countries
The latest World Development Report 2012 (Gender Equality and Development) argues that “countries that create better opportunities for women and girls can raise productivity, improve outcomes for children and make institutions more representative, and advance development prospects for all.”
- Excess female mortality after birth and “missing” girls at birth account for an estimated 3.9 million women each year in low- and middle-income countries.
- About two-fifths are never born due to preference for sons, a sixth die in early childhood, and over a third die in their reproductive years.
- Ensuring equal access and treatment for women farmers would increase maize yields by 11 to 16 percent in Malawi and by 17 percent in Ghana.
- Improving women’s property rights in Burkina Faso would increase total household agricultural production by about 6 percent, with no additional resources—simply by reallocating resources such as fertilizer and labor from
men to women. - The Food and Agriculture Organization estimates that equal access to resources for female farmers could increase agricultural output in developing countries by as much as 2.5 to 4 percent.
- Eliminating barriers that prevent women from working in certain occupations or sectors would have similar positive effects, reducing the productivity gap between male and female workers by one-third to one-half and increasing output per worker by 3 to 25 percent across a range of countries.
- Among developing countries, girls now outnumber boys in secondary schools in 45 countries, and there are more young women than men in universities in 60
countries. - Women in low-income countries not only outlive (life expectancy) men but live 20 years longer than they did in 1960.
- Gaps in labor force participation have narrowed with over half a billion women having joined the workforce in the last 30 years.
The report calls for action in four areas:
- Addressing human capital issues, such as excess deaths of girls and women and gender gaps in education where these persist
- Closing earning and productivity gaps between women and men
- Giving women greater voice within households and societies
- Limiting the perpetuation of gender inequality across generation
In South Asia:
- Missing girls at birth in South Asia —excluding India— was 1,000 in 2008.
- But, missing girls at birth increased in 2008 in India to 257,000.
- The abuse of new technologies for sex-selective abortions, such as cheap mobile ultrasound clinics, accounted for much this shortfall, despite laws against such practices in many nations.
- In countries like Afghanistan and Pakistan, discrimination by parents toward girls is still a serious problem.
- Bangladesh and India have maternal mortality ratios comparable to Sweden’s around 1990, and Afghanistan’s similar to Sweden’s in the 17th century.
- Maternal mortality ration was 280 maternal deaths per 100,000 live births in 2008.
- In 2008, there were about 95 girls for every 100 boys in primary school in the region.
Monday, September 19, 2011
Over five decades of experience with SEZs
A nice review (by Thomas Farole) of what we have learned from special economics zones (SEZs) in the past 50 years. SEZs are primarily aimed at attracting FDI, to increase employment, to support wider economic reform strategy, and to test application of new policies and approaches to industrial growth. SEZs have been increasingly becoming popular in developing countries after its success in East Asia, which enjoyed a favorable export-led growth. Its number has grown rapidly: from 176 zones in 47 countries in 1986 to 3500 zones in 130 countries in 2006.
Traditionally, EPZs were designed to attract FDI by allowing companies to exploit low-cost labor and other relaxed barriers to investment (regulatory, infrastructure, tax, exchange controls, licensing). Mauritius, Malaysia, South Korea, China, Taiwan, Honduras, El Salvador, Madagascar, Bangladesh, Vietnam and Dominican Republic successfully operated SEZs and created thousands of jobs in manufacturing sector and bring about structural transformation. Typically most of the industries in SEZs are labor intensive and assembly-oriented activities, including light manufacture goods such as textiles, apparel, leather, and light electrical and electronic goods.
However, this model is reaching its limit due to changed macroeconomic and regulatory environment in the global economy. Now, the relevance of SEZs will depend on “the effectiveness with which they are designed, implemented, and managed on an ongoing basis that will determine success or failure.” Just attracting investment, creating jobs, and generating spillovers to local economy, and adopting a compelling master plan will not suffice. Since Nepal is ready to enact a SEZ bill and is preparing to build SEZs, it will have to learn from SEZs experience in the past and how effective it will be in the rapidly changing global markets and demand.
Lesson learnt as outlined by Farole:
- Some countries have been more successful in attracting FDI, encourage export-oriented production, and create jobs than others.
- SEZs should be designed to leverage country’s comparative advantage. For instance, Bangladesh used its low-wage labor factor to take off to be a successful garment exporter. It initially focused on attracting high-tech investment but was only successful when it adjusted SEZs design and incentives to suits its comparative advantage, i.e. low-wage labor. Bangladesh provided good incentives such as serviced industrial land infrastructure and relatively reliable supply of power. Infrastructure reliability is an important aspect on SEZ success.
- The incubation period is might be high. It took 5 to 10 years to build momentum in China and Malaysia.
- Private sector involvement is key. For instance, Honduras’s success is led by local entrepreneurs and private sector, who were allowed to developed zones. The government focused on providing regulatory framework, supplied critical infrastructure and services and on-site customs services.
- Failure of SEZs in Africa is primarily linked to the political interference, mainly the failure to separate political support from political objectives in zone projects. Zones are for commercial success, not a political tool. Furthermore, the success depends on how entwined SEZs are with competitiveness of national economy and national investment environment. Critical infrastructure should be adequately supplied so that zones are linked to ports and markets. There should be clear legal and regulatory frameworks.
- Small countries should look to exploit potential for using zones to link up regional suppliers and leverage economies of scale in production.
- For dynamic economic benefits, domestic firms should be encouraged to locate inside zones, strengthen forward and backward links, support business and facilitate movement of skilled labor and entrepreneurs between the zones and the domestic economy. There should be continual training of human resources. This helps in bring structural transformation.
- Sustainability should also be a top priority. It means gender balance, environment conscious activities, clear standards, and effective monitoring and evaluation. SEZs can also be seen as an opportunity to experiment with policy innovations.
Friday, September 16, 2011
Inequality: Status, Effects, Causes & Solution
This blog post is a collection of major points from the latest edition of Finance & Development magazine. It deals with inequality and its various dimension.
Global inequality is higher than inequality within nations, argues Branko Milanovic. The richest one percent of people in the world receive nearly 14 percent of global income while the poorest 20 percent receive just over one percent of global income. He argues that “global inequality seems to have declined from its high plateau of about 70 Gini points in 1990–2005 to about 67–68 points today.This is still much higher than inequality in any single country, and much higher than global inequality was 50 or 100 years ago.”
The rising inequality in both developed and developing countries is against the prediction of Kuznets upside-down “U” shaped curve and Heckscher-Ohlin-Samuelson (HOS) theorem. Kuznets argued that when everyone is poor inequality is very low. Then as people being to move form low productive agriculture to high productive non-agriculture sector, average income rises as wages also rise. This means as economy growth, inequality rises. But, economies grow richer, urban-rural gap is reduced and social security transfers (unemployment benefit, pension) lower income gap and hence inequality. The Hecksher-Ohlin-Samuelson theorem predicts that in international trade countries specialize on production of goods in which they have comparative advantage. The poor countries specialize in production of goods that requires low skill. This means demand for low skill goods rises as they cost less. Then wages of low-skilled workers increases relative to high-skilled workers. The narrowing gap between wages of different skill levels means that inequality is declining. But, are these evidence holding up now?
[The Chinese case shows application of ‘Kuznetsian’ case, may be till the half part of the curve: Gini was 30 before 1978, i.e. when the country uniformly poor and before economic reforms. Then massive growth in coastal areas major manufacturing hubs and sectors led to increase in wages of the workers involved those sectors. Meantime, China also saw massive increase in economic growth. But, inequality is still rising and has surpassed the inequality prevalent in the US. Milanovic argues that Chinese government can help reduce inequality by extending social security to people outside the state sector or introduce unemployment benefits or, preferably, implement guaranteed rural employment scheme like NREGA in India.]
In 2010, real per capita income in the United States was 65 percent above its 1980s level and in the United Kingdom, 77 percent higher. Over the same period, inequality in the United States increased from about 35 to 40 or more Gini points (see Chart 1), and in the United Kingdom, from 30 to about 37 Gini points. These increases reflect significant adverse movements in income distributions. Overall, between the mid-1980s and the mid-2000s, inequality rose in 16 out of 20 rich OECD countries. This coincidence of rising mean income and rising inequality in mature economies would no doubt have surprised Kuznets, as it did many economists.
Inequality also rose in China, a poor country with comparative advantage in unskilled labor–intensive products, whose trade-to-GDP ratio jumped from about 20 percent to more than 60 percent in 2008. The HOS theorem of globalization predicts that inequality would have fallen as wages of low-skilled workers relative to skilled workers rose. In fact, however, China’s Gini coefficient rose from less than 30 in 1980 to about 45 today. Once again, fact confounds theory.
He identifies four potential causes of rise (stable in some countries) in inequality:
- technological progress (favored skilled workers, whose wages increased more)
- institutional change (higher taxes and social transfers—redistribution)
- changing social norms (society encourage high wages by skilled workers)
- globalization (specialization in high-skilled exports increases wages of the skill group)
He stresses that social transfers, unemployment benefits, guaranteed employment in rural areas like NREGA in India, social support programs such as Oportunidades in Mexico and Bolsa Familia in Brazil might help to reduce inequality. The decline in inequality in Brazil (from Gini of around 60 in 2000 to 57 today) can be attributed to social support programs, and broader access to education that increased the supply of skilled workers. Still, Brazil remains among the five most unequal countries in the world.
Berg and Ostry explore if there is a trade-off between equality and efficiency? They say NO, especially in the long term there is no trade-off between efficiency and equality.
In fact equality appears to be an important ingredient in promoting and sustaining growth. The difference between countries that can sustain rapid growth for many years or even decades and the many others that see growth spurts fade quickly may be the level of inequality. Countries may find that improving equality may also improve efficiency, understood as more sustainable long-run growth.
[…]inequality is strongly associated with less sustained growth. […]too much inequality might be destructive to growth. Beyond the risk that inequality may amplify the potential for financial crisis, it may also bring political instability, which can discourage investment. Inequality may make it harder for governments to make difficult but necessary choices in the face of shocks, such as raising taxes or cutting public spending to avoid a debt crisis. Or inequality may reflect poor people’s lack of access to financial services, which gives them fewer opportunities to invest in education and entrepreneurial activity.
[…]a 10 percentile decrease in inequality (represented by a change in the Gini coefficient from 40 to 37) increases the expected length of a growth spell by 50 percent. The effect is large, but is the sort of improvement that a number of countries have experienced during growth spells. We estimate that closing, say, half the inequality gap between Latin America and emerging Asia would more than double the expected duration of a growth spell in Latin America.
Kumhof and Ranciere argue that higher income inequality in development countries is associated with higher domestic and foreign indebtedness.
Tuesday, September 13, 2011
Need for immediate relief for industrial sector in Nepal
This was published in Republica, September 12, 2011, p.6. Here is a piece on the same issue by Milan Mani Sharma of Republica.
At a time when the public’s confidence on bureaucracy and political leaders is ebbing down to arguably the lowest level after skyrocketing of hope following the 2006 revolution, the newly appointed Prime Minister Dr. Baburam Bhattarai’s team has announced a slew of “relief” measures to convince Nepali people that the new government feels and fathoms the desperation for tangible change. While some of the measures are consistent with the major party’s political agenda and are outright populist, they are nevertheless required in one form or the other. Pundits and talking heads can preemptively debate on the intention and nature of the relief package, but the application of these initiatives merit some time. Their success has to be judged against the intended objective and efficacy.
Now, as much as the public needs relief package, the industrial sector also deserves immediate measures to kick-start jammed growth engine and jobs creation. It needs immediate relief for two main reasons. First, due labor related problems and policy inconsistency, the investor’s morale and market confidence are pretty low right now, leading to withholding and withdrawal of investment plans. Second, due to lack of adequate supply of infrastructure and supply-side constraints, industrial output is declining and cost of production is rising, leading to low economic activities, stagnation in employment generation, and loss of competitiveness.
Unless the industrial sector gets the badly needed relief from these constraints, the dream of attaining double-digit growth—also reiterated by Finance Minister Barsa Man Pun as soon as he assumed office and trumpeted by the UCPN (Maoist) bigwigs multiple times– won’t be realized. High growth will not be attained just by customary assistance to agriculture sector—whose output and volatility largely depends on the monsoon— by offering fertilizer subsidies, investment in irrigation and promotion of agriculture cooperatives. High and sustained growth requires structural change and more reliance on industrial activities.
Unfortunately, our industrial sector— which constitutes mining and quarrying; manufacturing; electricity, gas and water; and construction sectors—has been consistently losing ground. Currently, its contribution to GDP is approximately 14 percent only. Meanwhile, manufacturing sector is fast losing strength, bringing down its contribution to GDP to 6 percent. Note that a strong and sustained growth of manufacturing sector means more jobs, stimulation of economic activities, and a high but less volatile growth rate. We just have to look at our neighbors—China and India—for example.
It does not come as a surprise that the dismal performance of industrial sector, particularly manufacturing sector, is also reflected in the export-oriented sector, one of the most important sectors through which our economy gets foreign exchange reserves. The latest annual macroeconomic data released by the central bank shows that total exports are estimated to be just Rs 64.6 billion in 2010/11, down from Rs 76.7 billion in 2008/09 but up from Rs 60.8 billion in 2009/10. When the data was released the authorities were quick to point out that exports have increased by 6.1 percent, which is higher than 5.4 percent growth of imports. There is nothing to be exuberant about on this one as the high growth rate of exports was relative to previous year when exports plunged by Rs 7 billion. A slight improvement when the base is too low obviously gives a larger bump in growth rate! Also, the relatively low growth rate of imports has to do with decrease in imports of certain commodities, thanks to restrictive policies imposed by the government.
The situation has gotten so worse that we cannot even finance our petroleum imports (Rs 75.07 billion in 2010/11) by exports revenue. Diversification of exported product and destination is not happening as our export basket is squeezing and we are increasingly dependent on India for both exports and imports. Overall, exports of goods and services have declined from as high as 27 percent of GDP in 1997 to less than 15 percent today. Meanwhile, imports of goods and services have exploded to 28 percent of GDP. This has resulted in total trade deficit of around 22 percent of GDP. Similarly, an estimated Rs 2.93 billion of balance of payments surplus following two successive years of deficit has more to do with a fluke of handsome transfers and reimbursements as our economic fundamentals have not changed much. Our current account deficit is still negative despite a surge in remittances.
You might be wondering how all these dismal numbers are related to the above-mentioned call for industrial relief. Well, persistent labor dispute, which exacerbated after the UCPN (Maoist) affiliated unions formally entered the industrial sector as an organized group plus the destructive activities of Young Communist League (YCL), hit investor and market confidence pretty hard. It led to closures of multinational companies and withholding of investment spending. The unruly activities of trade unions, which are run by people who care more about themselves and party leaders rather than job security and welfare of workers they claim to represent, was continuing even when the relief package was announced. Recently, it cost us Surya Nepal Private Limited’s Biratnagar-based garment manufacturing unit. The popular Fire and Ice restaurant in Thamel is the latest victim of few unruly trade union members who are trying to dictate management level appointment, which is beyond their jurisdiction and obligation. Furthermore, the inadequate supply of infrastructure (power and roads network) and other constraints such as policy inconsistency, security, and sporadic blockade of major trade routes are also contributing to withdrawal of investment, capital flight and closure of firms. Domestic investors are moving to service sector (save hotel and restaurants) that has relatively low union pressure and less cost of doing business.
These constraints are also identified as problematic factors for doing business in Nepal by the latest Global Competitiveness Report 2011-2012, which has ranked our economy as 125th most competitive (out of 142) in the world. We are ranked the lowest in supply of electricity and second worst in supply of infrastructure. The ranking is miserable in labor regulation, labor market efficiency, productivity, security, production sophistication, and innovation. The business sector thinks government instability is the most problematic factor for doing business, followed by inefficient government bureaucracy, policy instability, corruption, inadequate supply of infrastructure, and restrictive labor regulation.
It is leading to an erosion of our industrial capacity, without which growing at a steady 5 percent growth rate—let alone a double-digit rate—is impossible. Hence, the call and need for immediate industrial relief. A tentative relief package could be: taming labor militancy and smoothening industrial relations; policy consistency on key issues related to investment regime and sectoral support; effective end of syndicate; credit at low interest rate to key sectors where we enjoy comparative advantage consistent with our land, labor and capital resource endowment; emergency measures to supply power for at least two shifts in manufacturing plants; fast track endorsement of investment plans and lowering cost of doing business in Nepal; enactment of SEZ bill; and industrial security. These are doable and are not populist measures.
PM Dr. Bhattarai and FM Pun are well aware of these constraints and the challenges faced by the industrial sector. Now, they should at least make an effort to bring out industrial relief package to restore confidence of investors and markets. Of course, they will face resistance from their own party and other vested interest groups. But, it should be rightly confronted with as demanded by the emergency nature of our eroding strength of industrial sector.
Monday, September 12, 2011
Middle men in agriculture market
This incident shows how middle men in agriculture distort the market. The farmers never get the true price for their agriculture products. Moreover, most of the subsidized agricultural inputs get routed by agents.
The Sapahi farmers are also demanding that the government find market for their produces and punish people creating artificial shortage of chemical fertilizers, seeds and pesticides.
How can you not find market for agriculture produce when in fact the market is seeing food prices? Incentives structure (price) is failing to work here.
Sunday, September 11, 2011
Update on the human cost of Maoist insurgency in Nepal
- Killed: 17,828
- Disappeared: 1,452
- Disabled: 5,912
- Displaced: 89,171
- Property loss suffered: 14,348
Source: Republica, September 10, 2011, p.3 (quoted Ministry of Peace and Reconstruction)
The latest numbers are higher than the previous estimate.
Pic sourced from NepalStats
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