Bill Gates on Jeff Sachs and international development

Bill Gates writes:

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In the end, I hope poverty fighters will not let what they read in this book stop them from investing and taking risks. In the world of venture capital, a success rate of 30 percent is considered a great track record. In the world of international development, critics hold up every misstep as proof that aid is like throwing money down a rat hole. When you’re trying to do something as hard as fighting poverty and disease, you will never achieve anything meaningful if you’re afraid to make mistakes.

I greatly admire Sachs for putting his ideas and reputation on the line. After all, he could have a good life doing nothing more than teaching two classes a semester and pumping out armchair advice in academic journals. But that’s not his style. He rolls up his sleeves. He puts his theories into action. He drives himself as hard as anyone I know.

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NEPAL: Major findings of Annual Household Survey 2012/13

The CBS is publishing annual household survey (AHS) data (no online link to the document yet) starting FY2013 to compliment the low frequency surveys (NLSS, NLFS). These high frequency survey data on key household characteristics could play an important role in steering public policy and development debates in the right direction. Basically, data on demography, housing, consumption and employment/economic activity are included. The household consumption data may also used to estimate final consumption figures in the national accounts estimate. Exercise caution while comparing annual household survey data with that of NLSS and NLFS. The latter ones are standard surveys that are used to compare various indicators (poverty, inequality, labor force participation, etc) within and across countries. The annual survey may not be as forceful as the periodic surveys. That said, they can still be used to capture changing expenditure and employment dynamics.

The average nominal per capita consumption in 2012/13 was NRs44,596, with the share of poorest 20% population at 7.6% and the richest 20% population at 45.8%. In urban and rural areas, per capita consumption was NRs84,134 and NRs.36,694, respectively.

Regarding consumption pattern, 59.2% of household expenditure was spent on food, followed by 11.6% in rent, 4% in alcohol and tobacco, 3% in education, 1.1% in durables, 0.8% in utilities, and 20.4% in non-food items. Looks like households spent more on alcohol and tobacco than education and durables combined! As a share of consumption, the poorest quintiles consume more alcohol and tobacco than the richest quintiles. Also, high inflation is particularly going to be severe in the case of poorest households because they spend about 67.1% of income on food and 17.2% on non-food items. For households in the richest quintile, this is 40.6% and 26.4%, respectively.

The AHS 2012/13 puts unemployment rate at 3.3% and labor force participation rate at 81.1%. Labor force participation includes the population employed (at least for an hour) in the past 7 days and those actively searching for jobs. Discouraged workers are not included in the labor force. Male and female unemployment rate stood at 3.2% and 3.4%, respectively. While urban areas had the highest unemployment rate (8%), folks between 20 and 24 years had unemployment rate of 7.7%. Also, unemployment was highest in the richest quintile (5.3%).

Labor underutilization rate stood at 27.8%, which includes unemployment rate (3.3%), time related underemployment (13.4%), skills mismatch (4.2%), and inadequate earnings (6.9%). Labor underutilization rate is highest in urban areas and also among households in the highest consumption quintiles. Those people who are willing to work for more than 40 hours in a week, but are not getting that much of work hours are clubbed under time related underemployment. Those folks whose skills are not fully utilized in the present job are clubbed under skills mismatched. Those people earning is less than half of the mean income are clubbed under inadequate earnings.

Agriculture, forestry and fishery accounted for about 66.5% of total employment in 2012/13, followed by 6.8% in wholesale and retail trade, 5.2% in manufacturing, and 3.4% in education.

A majority of the population is of working age (15-59 years) — almost 57%. There are 88.5 males per 100 females (partly reflective of the large number of males who go abroad) and average household size is 4.6.  About 15.4% of households have 1-2 persons and 37.9% have 3-4 percent, meaning that 53.5% of households have less than or equal to 4 persons. About 36.6% of households are headed by less than 40 years old. About 25.3% of households are headed by females.

While a majority of the households owns a house, just 10.2% households take it on rent for living. But, the renter households are higher in urban areas (38.8%) than rural areas (just 3.6%). In urban areas, 57.5% households own a house. Now, the richest quintile appears to rent more than the lower quintiles. A general trend is that the richer your household is, the higher the probability that you will be living in a rented place. Quite surprising!

Furthermore, while a majority of dwelling of households in rural areas is mud bonded, in urban areas the majority of dwelling is pillar bonded. Given the large number of households in rural areas, the overall average for Nepal is 49.5% dwellings that are mud bonded. Also, the poorest quintiles tend to have more mud bonded dwelling (58.7%) and the richest quintiles tend to have pillar bonded (45.3%). Sounds obvious, but it is always good to get the near-exact  numbers.

About 43.7% of households have toilet with flush connected septic tank and just 6.1% of households have toilet with flush connected to public sanitation. About 20.2% of households in the richest consumption quintile have toilet with flush connected to public sanitation. Overall, 31.6% of total households do not have toilet facility (among lowest consumption quintile households, the figures is 63.4%).

In terms of access to ICT, 82.1% of households have access to mobile phone, with households in the richest quintile have 95.4% access to mobile phone. About 60% of households in the poorest quintile have access to mobile phone.

Trip to Manang (& Pokhara)

Post by Chandan Sapkota.

Road

Road

Mini waterfall.

Lamjung Himal

Commercial sheep farming in Timang.

Dhukurpokhari, Manang, @3060 meter

Phewa Lake

Begnas Lake

Snapshot of what living standards survey tells us about remittances in Nepal

Understandably, there is a lot of interest on the impact of migration and remittances on the Nepalese economy, which receives remittances to the tune of 25% of GDP and was the third largest recipient (% of GDP) in 2011. I see a lot of numbers thrown around to justify various points (including illogical and inconsistent arguments), and I too get a lot of questions on the data and the impact on Nepalese economy.

Below is a chart showing remittances data sourced from Nepal Living Standards Surveys (NLSS). And yes, there are internal remittances as well!

More on remittances in Nepal here (dig in the archives for information, data and analysis!). A recent Al Jazeera news story here. And, here is a link to a research paper titled 'Remittances in Nepal: Boon or Bane?'.

Nepal and the knowledge economy

As economies shift workers and economic activities from low productivity to high productivity sectors, especially when they are near the middle-income threshold, advancing the knowledge economy helps them overcome the ‘middle income trap’— crucial for a continued and meaningful structural transformation. A knowledge economy not only propels high value added services activities, but also contributes to moving manufacturing activities up the value chain. Think of it as follows: With cheap labor cost a country can competitively produce normal garments and light machinery goods—all require either copying already existing techniques or importing intermediate raw materials and technology to produce these goods. But, to climb up the value chain and to not get stuck at lower middle- to middle-income levels, there has to be progress on four fronts so innovation and mastery of management skills takes place domestically, and these are readily absorbed by the backward firms in the value chain— contributing to a continual build up of competitiveness.

The four essential elements of a knowledge economy, according to WB’s Knowledge Economy Index, are:

1. Economic and institutional regime: tariff and non-tariff barriers, regulatory quality, rule of law
2. Education and skills: adult literacy rate, gross secondary enrollment rate, gross tertiary enrollment rate
3. Information infrastructure: Telephones per 1,000 people, computers per 1,000 people, internet users per 1,000 people
4. Innovative systems: royalty payments and receipts ($ per person), technical journal articles per 1 million people, patents granted to nationals by US Patent and Trademark Officer per 1 million people

So, where does Nepal stand in the cross-country knowledge economy indicators? Well, it stands well below the average for Asia and the Pacific. Below is a chart from ADB’s highlights from a forthcoming report titled “Asia’s Knowledge Economies: Next Policy Agenda”.

Below is a chart, sourced from Kenichi Ohno’s discussion paper on middle-income trap, showing how countries can move up the value chain and avoid the middle-income trap.

Now, what can be done to promote the knowledge economy? Some of the recommendations from the road map outlined in the ADB report are as follows:

Innovation:

• Increase investment in R&D (at least 1.5% of GDP)
• Create knowledge hubs and focus on gaining IPR for inventions
• Pursue imported technologies and adaptation of R&D to build the base for domestic capabilities
• Green innovation in energy and agriculture
• Expand quantity and quality of innovation infrastructure (IT parks, innovation hubs, R&D labs, incubators)
• Support start-up entrepreneurial firms
• Expand financing for innovation by promoting capital markets

Education:

• Increase tertiary education enrollments and access to technical and vocational education and training and skills development
• Revitalize established and large university campuses with greater financial and administrative autonomy
• Promote a diversified education system
• Incentivize industry giants to set up leading research labs in universities
• Support establishment of technology incubation centers and technology accelerators

ICT:

• Improve network readiness and invest in backbone ICT infrastructure
• Invest in next-generation mobile broadband infrastructure
• Promote market competition and liberalization in telecom sector
• Augment use of ICT to strengthen e-governance and service delivery

Economic and institutional regime:

• Better coordination across various agencies to promote knowledge based economy
• Accelerate commercialization of innovation in key sectors with high social impact (off-grid solar and wind power technologies)
• Promote high tech start-ups with a range of incentives and support mechanisms
• Provide financing for R&D of SMEs
• Strengthen IPR regimes
• Promote spread of broadband connectivity through affordable and reliable models
• Develop capital markets

NEPAL: CBS forecasts FY2014 GDP growth rate to be 5.2%

The Central Bureau of Statistics (CBS) has come up with preliminary estimates of national accounts for FY2014. It projects real GDP growth (basic prices) at 5.2% in FY2014, up from 3.5% revised estimated for FY2013 but lower than the government’s target of 5.5% targeted in the FY2014 budget. The main driver of growth is projected to be services sector (growth of 6.1%), followed by agriculture sector (growth of 4.7%, up from a sluggish 1.1% in FY2013) and industry sector (growth of 2.7%).

The size of the economy is projected to be US$19.4 billion in FY2014, slightly up from US$19.2 billion in FY2013. In Nepalese rupee, the size of the economy in FY2014 is projected to be NRs1.9 trillion.

GDP_NEPAL	FY2012	FY2013R	FY2014P
GDP growth rate (basic prices)	4.6	3.5	5.2
Agriculture	4.6	1.1	4.7
Industry	3.0	2.5	2.7
Services	5.0	5.2	6.1
Composition of GDP (%)
Agriculture	35.8	34.5	33.7
Industry	14.4	14.6	14.0
Services	49.8	51.0	52.2
GDP (current producers prices)
GDP, NRs billion	1527.3	1692.6	1928.5
GDP, $ billion	18.9	19.2	19.4

In terms of contribution to GDP growth, 62% is expected to come from services sector, followed by 31% from agriculture sector and the rest 7% from industry sector. In FY2013, the unfavorable monsoon and the shortage of chemical fertilizers brought down agriculture sector’s contribution to 11%, the same as industry sector’s contribution. The rest 78% was of FY2013 GDP growth came from services sector. 

Among the sub-sectors, wholesale and retail trade is projected to grow by 8.8%, up from 6.8% in FY2013. It is followed by other services sub-sectors such as transport, storage and communication (7.5%), hotels and restaurants (7.1%), and education (6%) among others. Real estate, renting and business sub-sector is projected to grow by 3%, marginally up from 2.7%. Agriculture and forestry sub-sector is projected to grow by 4.7%, up 1.1% in FY2013.

While manufacturing growth is projected to slow down to 1.9% from 3.7% in FY2013, construction growth is projected to recover, albeit slowly, to 2.9% from 2% a year earlier. The share of manufacturing in GDP is continuing to decline, reaching an estimated 6.1% of GDP in FY2014. Similarly, industry sector is also projected to shrink to 14% of GDP from 14.6% of GDP in FY2013.

While gross national savings are projected to increase (46.4% of GDP in FY2014) on account of the high remittance inflows, gross domestic savings are declining (8.9% of GDP in FY2014) reflecting the high consumption (91.1% of GDP in FY2014). Exports of goods and services are projected to recover slightly to 12.1% of GDP from 10.7% of GDP in FY2013, but the larger increases in imports of goods and services further widened trade deficit (goods and services).

Per capita GDP in local currency is estimated to grow by 12.4%, up from 9.4% in FY2013. However, due to the depreciation of Nepalese rupee against the US dollar, per capita GDP in US$ terms is projected to decline. In FY2014, per capita GDP is projected to be US$703 (NRs69,919). The high inflow of remittances is seen in the large different between per capita GDP (and also per capita GNI, which includes net factor income from abroad as well) and per capita GNDI (which includes net transfers from abroad on top of per capita GNI). In FY2014, per capita GNI and per capita GNDI are projected to be US$717 and US$967 (NRs71,305 and NRs96,155, respectively).

Few explanations to note here:

• Real estate sector is struggling to grow as the 25% lending cap to real estate and housing fixed by central bank is helping to lower BFIs exposure to this sector.
• The high growth of services activities are primarily driven by remittances-backed consumer demand of mostly imported goods. Hence, services sector activities are the largest contributor to GDP growth and also a major revenue generator for the government.
• The favorable monsoon and timely availability of agricultural inputs jacked up agriculture sector growth. The MOAD projected paddy, maize and millet production to grow by 12%, 9.9% and 6.1%, respectively. In FY2013, while paddy and maize production decreased by 11.2% and 9.3%, respectively, millet production grew by a mere 2%.
• The less than expected growth of construction sector indicates the slow capital expenditure despite the timely full budget in FY2013.
• Despite the improving political environment, the manufacturing sector failed to pick up. In fact, its growth rate is projected to decline to 1.9% from 3.7% in FY2013. It reflects the structural bottlenecks and persistent supply-side constraints.

Starting this year, the CBS has also come up with quarterly estimates of GDP. It is supplying seasonally unadjusted and seasonally adjusted quarterly data. This is a good initiative. Now, the CBS should work on producing timely quarterly data (for FY2104, the first two quarters data are produced so far) and the annualized growth rate based on these.

Earlier, the ADB, the WB, and the IMF projected GDP growth at 4.5%.

Nepal Economic Update: FY2013 performance, FY2014 outlook and excess liquidity

This blog post is adapted from summary section of Nepal Economic Update (April 2014) published by the World Bank's Nepal office. Earlier, the ADB published Macroeconomic Update (February 2014) [presentation here] and Asian Development Outlook 2014 [presentation here]. The special focus on the WB's update is dealing with excess liquidity. ADB focused on boosting Nepal's export competitiveness. 

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The enabling environment for development has improved but opportunities need to be effectively leveraged through focused policy action. The successful election of a new parliament and subsequent formation of a popularly mandated government provide a more conducive environment for private sector activity and economic policy. The uncertainties brought about by Nepal’s prolonged political transition and electoral period have acted as a break on private sector investment and diverted attention of the bureaucracy away from difficult and important reforms. Going forward, it will be important for the government to signal, from the start, that increased political stability will be put to profit to tackle the country’s formidable challenges. This will involve a balancing act to ensure that the arduous process of constitutional drafting can be carried-out in tandem with regular and improved government operations.

Nepal has significant resources in the form of remittances from abroad, but the economy cannot use these resources in a productive manner to enhance the overall welfare of all citizens. The budget process does not work -funds cannot be used to build decent infrastructure that would bring in the private sector- and inefficiencies in the financial sector hinder the optimal allocation of resources to private agents. In view of these challenges, the GoN should set a new course for policy and tackle emerging risks. The appointment of a new Finance Minister with deep experience and reformist credentials is a positive sign and initial declarations of Minister Mahat committing to “take forward the second round of reforms […] in partnership with the private sector” are also encouraging.

Specific priorities include:

1. Developing a growth promotion vision/agenda: because the numerous challenges facing Nepal make achieving clarity over policy goals and priorities particularly difficult. The Nepalese authorities have formulated the aspiration of graduating to “developing country” status by 2022, but have not articulated the vision for development that would underpin it and identify those policies and reforms that are the most urgent. In the absence of such clear prioritization, the process of development planning is likely to remain un-strategic.
2. Resolving Nepal’s ‘fiscal paradox’: Nepal, today, is in a paradoxical situation. It is the only country in South Asia to record a budget surplus (helped by buoyant revenue growth), its level of indebtedness is modest, it is flush with liquidity (thanks to large remittance inflows) and yet it struggles to maintain investment at already low levels. Fiscal discipline is a means to an end, but in Nepal it appears to be pursued as an end in itself, with the government unable to plan and implement the budget. This bottleneck needs to be addressed urgently.
3. Boosting investment: Faster and sustained economic growth will not be possible without higher levels of investment but Nepal’s model of growth appears premised on remittance financed consumption. The public sector has a key role to play to unlock investment by: (i) providing a friendlier environment for the private sector –domestic and foreign- to find it attractive to bid for projects in Nepal, and (ii) developing the essential public infrastructure needed for firms to thrive and private funds to be crowded-in. The fate of Nepal’s “National Pride Projects” demonstrates that such synergies are not currently taking place.
4. Tackling enduring financial sector risks and managing excess liquidity: Uncertainty over the true health of the financial sector remains the single most important macroeconomic risk for Nepal. First, although unlikely, a financial sector crisis would have devastating effects on public finances and economic growth. Second, the ability of the financial sector to provide adequate credit to deserving borrowers is currently hampered by inter alia (i) distortionary policies (ii) low levels of effective access to finance, (iii) poor risk management practices by monetary authorities and banks amplified by deficient information, and (iv) limited recourses of banks vis-à-vis delinquent borrowers. As a result, the financial sector is operating at sub-optimum and the current excess liquidity in the system is largely a reflection of this state of affairs.

After a difficult year in FY13, the economy is poised to recover, albeit modestly. In FY13, Nepal achieved only modest growth of 3.6%. This was due largely to poor performance of the agricultural sector as well as very modest levels of industrial activity. The only source of relief came from the services sector. The main difference in FY14 is expected to come from the agricultural sector with expanded production on the back of a good harvest, while strong remittance inflows will continue to drive services sector expansion.

Nepal’s internal and external balances are sound but not for the right reasons.

• The combination of low expenditure and robust revenue growth accounted for a large budget surplus and declining debt. With a significant increase in foreign grants the overall government surplus ballooned to NRs 56.0 billon. Reflecting this comfortable fiscal position the GoN did not issue any fresh T-Bills in the first half of FY14 and domestic debt fell to NRs 217.61 billion. While much of the blame for low rates of budget execution and important bunching had been blamed, hitherto, on delayed budget approval, this was not the case in FY14 when a full budget was unveiled on day one of the fiscal year. In other words, Nepal is yet to come to grips with deep structural inefficiencies in the process of budget planning, formulation and execution.
• Nepal’s external position is comfortable thanks to large remittance inflows. On the external side Nepal has benefited from the depreciation of the rupee but also –and much more significantly- from a sharp further increase in inward remittances, which are expected to amount to over 30% of GDP in FY14.

Monetary policy has sought to achieve a delicate equilibrium between controlling inflation and supporting economic activity but the optimal balance may evolve and call for corrections. Significant inflation, close to double digits, appears to have become a feature of the Nepali economy. While expanded agricultural output may contribute to dampen inflationary pressure, the significant growth in the money supply may eventually generate inflationary expectations and second round effects as well as translate into lower reserves. From that view point, the evolution of the quantity and quality of credit to the private sector will be important to monitor.

For FY14, the outlook is cautiously optimistic. The previous assessment estimated that growth would reach 4-4.5% in FY14, essentially driven by increased agricultural output and improved execution of the budget. While the pace of capital expenditure may be below initial expectations, inward remittance inflows have been significantly above projected levels and should provide an additional boost to the services sector. On balance therefore, growth is projected to reach 4.5%, especially if capital spending picks up in the second half of the year.

As remittances have become a defining feature of the Nepali economy the country must learn to manage excess liquidity. The significant buildup of liquidity in the financial sector reflects both strong push factors (remittance inflows translating into a build-up of net foreign assets) and weak pull factors (slowing credit growth and loose monetary policy). In the short term, the NRB will need to strike a delicate balance between encouraging sound credit growth –so as to not compromise economic activity objectives- and containing inflation. At present this balance is particularly difficult to achieve because of uncertainties over the true health of the banking sector, weak risk management systems and market failures. In the short run, the NRB may need to expand its toolset to deal with excess liquidity. In the medium run, resolving structural bottlenecks to efficient credit market functioning is a precondition for monetary policy to operate more smoothly and efficiently and for ample available resources to be allocated to grow Nepal’s productive potential.