Chandan Sapkota's blog

Nepalese economy in trouble-- Economic Survey 2008/09

noreply@blogger.com (Chandan Sapkota) — Mon, 13 Jul 2009 10:32:00 +0000

Almost all the economic indicators registered negative growth rate in the last fiscal year, according to Economic Survey 2008/09 release by the Ministry of Finance (see the tables below). The forecast for this fiscal year does not look any better. The plunge in manufacturing and agricultural sectors is very troubling for a struggling economy. Troubles in growth rate, balance of trade deficit, inflation rate, national debt…

The economy grew at 3.8 percent against a forecast of around 7 percent (last year the growth rate was 5.3 percent). GDP growth rate is estimated to be 4.7 percent next fiscal year (2009/10). GDP per capita reached US$473 (Thank God, Nepal remittances inflow continued to increase!). Agricultural sector grew at 2.1 percent (last year it was 4.7 percent) and non-agricultural sector grew at 4.8 percent (last year it was 5.7 percent). Inflation rate hit 13.1 percent in mid-March 2009 as against 7.2 percent in mid-March 2008. GDP deflator (a measure of the level of prices of all new, domestically produced, final goods and services-- expressed as (nominal GDP/real GDP)/100) rose from 6.3 percent to 12.2 percent.

Summary of macroeconomic indicators:

Annual growth rate of GDP by economic activities:

As a percentage of GDP, domestic savings is down to 8 percent from 11.21 percent last fiscal year. Thanks to increasing remittances gross national savings has increased to 32.32 percent (% of GDP) from 31.53 percent last fiscal year. Exports have increased by around three percentage points to 15.70 percent from the first eight months of last fiscal year’s 12.08 percent. However, imports have increased to 37.42 percent from last fiscal year’s 32.66 percent, thus increasing the hole in balance of trade (BoT). Note that balance of payments (BoP) has been in positive territory. Revenue/GDP increased to 14.8% from 13.2% last fiscal year but total government expenditure/GDP increased to 22.2% from 19.7% last fiscal year. Budget deficit/GDP decreased to 3.8% from 4.1% last fiscal year.

Gross fixed capital formation as a percentage of GDP barely increased to 21.25 percent from 21.11 percent from last year. On gross fixed capital investment front, government investment/GDP was 4.1 percent (up from 3.1% last fiscal year) and private investment/GDP was 17.1 percent (down from 18% last fiscal year). Gross investment/GDP stood at 29.7 percent (down from 32.8% last fiscal year). Similarly, the gap between gross domestic savings and gross investments/GDP increased to -21.7% from -21.6% last fiscal year. The resource gap-- saving-investment gap (gross domestic savings minus gross domestic fixed capital formation)-- (% of GDP) was 2.60 percent from -0.26 percent last fiscal year (again, thanks to increasing remittances).

The ratio of investment to GDP decreased to 29.7 percent to 31.8 percent from last fiscal year. Exports/GDP increased to 21.7 percent from 20.6 percent from last year. Due to impressive revenue collection, revenue mobilization/GDP increased to 14.8 percent against 13.2 percent last fiscal year. Outstanding debt/GDP increased to 41 percent from 39.6 percent (first eight month of fiscal year), showing that expenditure continue to outweighed national income. Foreign debt/GDP also increased to 28.5 percent from last fiscal year’s 26.4 percent. Meanwhile, domestic debt/GDP actually decreased to 12.5 percent from 13.2 percent in last fiscal year.

Well, the government admits that it is doing a bad job managing the economy:

A big question mark has emerged on our skill of overall economic management in a situation where the Nepalese economy entangled in the vortex of economic sluggishness amidst the double-digit price rise thereby adversely affecting the purchasing power and living standard of the Nepalese people. Hence, there is the necessity of wider reform initiatives on development efforts, investments, and regulatory areas for expanding the economy. The nation is also being made to bear adverse supply shock due to frequent Bandhs, chakka jams, strikes etc. For this, national imperative is making sufficient legal arrangements and ensuring effective enforcement of those provisions for completely banning Bandhs, strikes especially against transportation and movements of the people for allowing the country's economy move ahead in a smooth and natural way, and also providing relief to the people's livelihood.

The impact of exports delay on trade

noreply@blogger.com (Chandan Sapkota) — Sun, 12 Jul 2009 00:57:00 +0000

On average, each additional day that a product is delayed prior to being shipped reduces trade by at least 1 percent. Put differently, each day is equivalent to a country distancing itself from its trade partners by 85 km on average. Delays have an even greater impact on developing country exports and exports of time sensitive goods, such as perishable agricultural products. In particular, a day’s delay reduces a country’s relative exports of time-sensitive to time-insensitive agricultural goods by 7 percent.

More here. Due to road obstruction and closure (bandhs), the Nepalese export-based manufacturing firms have been unable to supply pre-ordered goods in time. It led to cancellation of contract from companies in the West. This is having a severe impact on the whole exports industry, leading to closure of several firms. Between January and June 2009 alone, there were over 500 road obstructions and closures in different parts of the country. This has been a cancer affecting the whole industrial sector in Nepal.

Links of Interest (07/10/2009)

noreply@blogger.com (Chandan Sapkota) — Sat, 11 Jul 2009 00:26:00 +0000

$20 billion to boost food supplies to the hungry committed by the G8

Olivier Blanchard explains “the perfect storm”

World Economic Outlook July update (economic growth projected to be 2.5 percent in 2010)

More agricultural subsidies for poor farmers in Nepal (the more subsidies Indian farmers receive, the more Nepali farmers need to compete in the heavily integrated market)

Female time poverty reinforces the persistent female income poverty (because the gender division of labour between paid and unpaid activities, distinct from childhood, seems to have important implications to female accumulation of capital)

The reason for an ever-growing Nepal’s fiscal budget is…

noreply@blogger.com (Chandan Sapkota) — Thu, 09 Jul 2009 21:35:00 +0000

… because

“there has always been a holier-than-thou attitude of the government in power and its finance minister. As one of the architects of Nepal´s fiscal budgets says, whoever is the finance minister at the helm, he does not want to be seen as chicken-hearted but rather a lion-heart, no matter what negative consequences his budget may cause to the economy.”

More here. Last year, the fiscal budget presented by the Maoist finance minister was 45% higher than the year before. But real expenditures fell short of the allocated budget. Why inflate fiscal budget when we cannot spend it?

Nepal’s central bank gets active, finally!

noreply@blogger.com (Chandan Sapkota) — Thu, 09 Jul 2009 21:23:00 +0000

So, the central bank of Nepal,for the first time, is doing what it is supposed to do long ago. After liquidating Nepal Development Bank (NDB), it is now going after its promoters, who swindled almost Rs 1.08 billion while ruining the bank’s balance sheet. Some of the promoters are Madoff of Nepal!

Collier on development in dangerous places

noreply@blogger.com (Chandan Sapkota) — Wed, 08 Jul 2009 06:25:00 +0000

Paul Collier makes a case for intervention (military and aid) because of lack of security (internal rebellion) and accountability. A mouthful of discussion and provocative recommendations that sound as bizarre as it could get but is probably one in the right direction.

Chad is not alone. It is one of a group of about 60 small, impoverished, post-colonial countries that “came unnatural into the world.” With neither the social unity needed for cooperation, nor the size to reap the benefits of larger scale, they are structurally unable to provide the public goods—such as security—that are critical for decent quality of life and imperative for economic development. They have diverged from the rest of mankind. They will never tap their vast reservoir of frustrated human potential unless the international community, at least for a time, supplies basic public goods that go beyond the typical aid agenda. This, stated baldly, is the thesis of my new book, Wars, Guns, and Votes. It is a troubling thesis. I have come to it reluctantly, and the international community has shied away from it, as have the societies of the bottom billion themselves.

Size matters: the production of public goods, by nature, is characterized by economies of scale.Security and accountability are two public goods that make economic development possible. […]Poverty, stagnation, abundance of valuable natural resources, and ethnic diversity made rebellion easy. Further, governments faced a dilemma: a large and well-equipped military might help to discourage rebellion, but it might also increase the risk of a coup d’état.

[…]The costs of civil war are, as Hobbes observed, enormous: life is solitary, poor, nasty, brutish, and short, and even the possibility of war is enough to deter investment and stunt growth. Thus, without security, economic development is extremely difficult. […]for the bottom billion the accountability of government to citizens may be more than a nice bonus: it may substantially improve the chances of development. If countries of the bottom billion are structurally unable to supply security and accountability, then some form of international supply is required. Below a threshold per-capita income of around $2,700, democracy actually appears to increase the risks of many forms of political violence, including rebellion. The societies of the bottom billion are way below this threshold. This is not an argument against the pursuit of democracy, but it does imply that security and accountability are distinct needs.

[…]ordinary people are still befuddled by an outdated rhetoric: international pressure for accountability is presented by threatened elites as a return to colonialism. Protected by this conveniently emotive assertion, presidents grandly claim that they are defending national sovereignty. However, since they are usually not accountable to citizens, what they are really defending is presidential sovereignty. […]As public goods, security and accountability are like that malaria vaccine: those who need them cannot adequately supply them.

[…]Any international intervention should be acceptable both to the citizens of the recipient society and to citizens of the providing societies, and most suggestions for action fail this test. Most, but by no means all. […]Peacekeeping and “over-the-horizon guarantees” (a promise of military intervention if it becomes necessary) are effective ways to provide security.

Making aid conditional on government actions can also help. But those actions should relate to the accountability of government to citizens rather than to the adoption of economic policies, which was the past practice of donors. Policy conditionality detracts from the accountability of government to citizens because it relives government of responsibility for some economic decisions.

Bill Easterly argues that Collier “wants to de facto recolonize the “bottom billion”” and that his research is based on “one logical fallacy, one mistaken assumption, and a multitude of fatally flawed statistical exercises.” When Easterly uses the word “recolonize”, I feel he is speaking like a desperate leader in developing country who wants to cling to power by any means, often by drumming up support for his rule by blaming ‘foreigners attempting to recolonize their nation and sovereignty’ (say, blame-of-last-resort argument). Collier (indirectly) addressed this issue in his piece. Easterly fails to see it.

Given that Collier’s evidence base collapses when subject to scrutiny, it is all the more disturbing that his policy recommendations are remarkably interventionist. Collier tells bottom-billion societies that are recovering from civil war that they must accept international “peacekeepers” (a nice euphemism to help us forget that these are soldiers who kill people), whose deployment is decided by the Western powers.

Foreign armies invade and control the whole political process—yes, the word “neocolonial” is overused, but with Collier’s recommendations I think one could drop the “neo.” Such aggressive interventions will almost certainly have unintended negative consequences. Will Western violence beget more local violence? Will there be a violent backlash against foreign intervention? Foreign armies will likely kill some innocents in the process of peacekeeping. The motto “first, do no harm” puts the burden of proof on the academic interveners. Collier falls short by intercontinental ballistic missile range.

Larry Diamond disagrees with Collier:

None of these endemically poor countries can climb out of misery without better governance. Collier appreciates this, but he does not fully grasp the vital distinction between Asia’s developmental dictatorships and Africa’s dictatorial disasters. The classic authoritarian Asian tigers—Korea, Taiwan, Singapore, Indonesia—all had near-death experiences with communism that led them to realize it was time to “develop or die.” None faced ethnic complexity as daunting as in Nigeria or Ethiopia, but Singapore and Indonesia did have to work to forge an overarching national identity. Whatever their other faults, all of these countries’ ruling elites (and later the regimes in China and Vietnam) came to identify their own political interests with generating the public goods necessary for transformative development.

By contrast, the typical African ruling elites have settled into a different pattern of behavior and expectations. Security—for the individual ruler and his family, clique, and party—derives from generating private goods and stashing them away in real estate and numbered bank accounts abroad. To say that the West has indulged this pattern does not begin to capture our complicity in the problem. When foreign aid funds up to half the recurrent budget of many of these morally bankrupt states, it is not hard to draw a nearly straight line from aid to venality.

Nancy Birdsall likes three S’s-- sovereignty, size and security-- but is skeptical about over-the-horizon military guarantee.

I am less confident, however, about Collier’s endorsement of over-the-horizon military guarantees. I would recommend other interventions, less exciting but better grounded in experience and evidence.

An arrow towards Easterly:

[..]speaking of evidence, there has been plenty of grousing about Collier’s reliance on econometric results to “prove” that one thing (peacekeeping, democracy) causes another (growth, increased violence). I am inclined to be more tolerant. He is putting big issues on the table, and in reality the issues get more attention because he is purporting to show they matter. Would there be a Collier TED talk and an essay in Boston Review if he had never published a “scholarly” article?

The kind of internal security guarantees Collier suggests need not be off the table. Even if the empirical work behind his assertions is flawed, the story he constructs starts from first principles and is compellingly consistent with history and current experience. You never know where and under what conditions over-the-horizon military guarantees would be the best solution. But there are other proposals the development community should advocate as well, and first. Even though they do not involve guns and war, we ought not ignore and underfund them.

Edward Miguel’s note of dissent:

Africa is still lagging behind the most successful Asian countries, and many of its gains are fragile. Still, I disagree with Collier: the past decade surely offers hope.

Mike McGovern’s disagreement:

Culture and history interact with political economy, regional and international political dynamics, and the personalities of key actors in complex ways. This is why, even though I suggested for Liberia and Sierra Leone many of the recommendations Collier proposes, I reject his strategies when applied generally to the “bottom billion.” […]Rather than coercing potentially rogue leaders into governing responsibly, this policy primarily emboldens military officers to stage coups.

Collier’s response to these criticisms here (especially directed at Easterly)

In presenting his own optimistic case for autonomous recovery and convergence, William Easterly utterly misrepresents the argument of The Bottom Billion as being that of a “poverty trap” and then argues at length that there is no such trap. Indeed, he is so eager to criticize that he appears to have confused me with Jeffrey Sachs, the true evangelist of the poverty-trap thesis, which I explicitly reject. Certainly, growth is complicated. My argument is that a few salient factors have been important in the persistent divergence between rich and poor countries, while in no sense suggesting that this is an exhaustive account. An example is dependence upon natural-resource wealth, which makes the politics of development more difficult. Another is being landlocked without natural resources and surrounded by bad neighbors. Does Easterly deny that these are intractable problems that have contributed to the current stark disparity in living standards? […]It is important to recognize that behind expressions of statistical fastidiousness lurks a recognizable philosophical hostility to public action that has no statistical foundation whatsoever. In critiquing the scope for international action, Easterly simply trots out disaster stories.

But since Easterly has mounted an aggressive critique, I will take a moment to defend myself. Eight years ago my colleague Anke Hoeffler and I proposed that three economic characteristics—low income, slow growth, and dependence upon natural resources—all made conflict more likely. Each of these propositions has since become considerably more robust. The balance of the statistical evidence suggests that the propositions are correct.

As to method, my colleagues and I adopt the statistical approach of “general-to-specific,” in which insignificant variables are systematically and progressively deleted by the rule of stepwise deletion: this is not data mining. If it were, our results would not have been accepted by professionally refereed economics journals. Easterly’s twists on my remarks concerning new results—where a doubling of the sample and other improvements led to a minor refinement in our previous results on the effect of ethnic diversity—typify his bias. If doubling a data set should not lead to any changes in results, he should not have titled one of his papers, “New Data, New Doubts.” Our more recent results on peacekeeping are, as we readily admit, a first attempt. We very much hope to encourage or provoke other researchers to work on the question. But it should be said that in 2008 this work was assessed by a panel of Nobel-laureate economists who found it a sufficiently solid basis for their policy recommendation: peacekeeping was a good use of public money.

Nothing could better illustrate the true nature of the disagreement about peacekeeping than Easterly’s accusation of colonialism. This accusation is founded on coarse thought, not statistical rigor. Colonialism was an oppressive system in which non-democratic empires conquered territories and ran them according to the interest of their own elites. International peacekeeping is temporary, sanctioned by democratic governments whose electorates have no appetite for empire, and aimed at establishing governments that are accountable to their own citizens. Conflating peacekeeping with colonialism is too crude to constitute abuse.

Pranab Mukherjee’s budget for FY2009/10

noreply@blogger.com (Chandan Sapkota) — Mon, 06 Jul 2009 21:07:00 +0000

The Indian Finance Minister Pranab Mukherjee presented fiscal budget for this year. It focuses on generating GDP growth rate of 9%, investing in infrastructure projects, and social welfare (inclusive development). More here and here. It is of Rs 10 trillion, India’s biggest-ever budget.

It is, not surprisingly, a continuation of the Congress party-led government's left-of-centre, pro-poor and populist policies.

There will be a sharp rise in deficit financing to pay for welfare schemes such as the landmark jobs-for-work programme - which has seen a near 150% rise - in the villages and social security schemes for unorganised workers.

So the bulk of the money to fund all this will come from printing currency and borrowing from India's central bank. There is also an implicit assumption that some money - nearly $10bn - will be raised by auctioning electromagnetic spectrum for telecommunications and divesting minority government holdings in state-run companies.

There are a few sops for the middle class though. Modest relief has been given to income tax payers, a small (only 3% of Indians pay income tax) but influential section of the country's middle class.

High on the list of policy priorities of the government is the enactment of a new food security law that envisages providing 25kg of rice and wheat each month at a subsidised rate of three rupees (or six cents) a kilo to each poor family. This was one of the pre-election promises made by the Congress.

More here. The budget is very much (and rightly) Keynesian.

"My primary objective right now is to come back to high growth rate. My target is to touch 7% GDP growth this year and take it to 8% to 9% thereafter," Mukherjee said. "If we are supported by a good monsoon this is more than possible," he added.

"When external trade is in bad shape and revenues are going down, I'm providing stimulus (through extra spending) to pull up growth domestically," he said. He added that between interim Budget and now, the government has increased spending by Rs 60,000 crore - Rs 40,000 crore by the Centre and Rs 20,000 crore by the states.

The FM said, "It will be a domestic demand generated growth. Since the contribution of direct tax to GDP is high, once demand revives and industry is back on a high growth path, we can expect higher revenue." He added, "I have spoken to all states and the industry and sought their contribution. With the help of the states we will be able to roll out GST, a major reforms in indirect taxes on schedule," he said.

The way Indian budget is being allocated will have an impact on the Nepalese budget, which is set to be unveiled later this month.

Does imposed institutional reform work?

noreply@blogger.com (Chandan Sapkota) — Sat, 04 Jul 2009 18:56:00 +0000

A very interesting article about the consequences of French imposed institutional reforms in Europe and, most importantly, if it worked? The authors show that it did work in fine-tuning institutions that later contributed a lot in economic growth of the European countries.

The French institutional reform intervention in European:

After 1792, French armies invaded and reformed the institutions of many European countries. The package of reforms the French imposed on areas they conquered included the civil code, the abolition of guilds and the remnants of feudalism, the introduction of equality before the law, and the undermining of aristocratic privilege. […]They were imposed “Big Bang” style from the outside. And, institutions such as the civil code were self-consciously designed and were not necessarily “appropriate” for the lands on which they were imposed. If externally-imposed and “Big Bang” reform is generally costly or if designed institutions like the civil code create major distortions, the reforms should have had negative effects on nineteenth-century Europe.

French intervention in Europe worked:

In particular, our results are strongest for the later part of the nineteenth century, which we see as evidence for the fact that French-induced reforms created an environment favourable to the Industrial Revolution, which reached Continental Europe precisely in those decades. French reforms involve no effort to be “appropriate” to local conditions and were imposed from the outside “Big Bang” style. Nevertheless, they appear to have spurred significantly faster economic growth in the second half of the nineteenth century, once the process of industrialisation throughout Europe was underway.

Why did the intervention work?

[…] success may have been due to the fact that the reforms it imposed were much more radical than is typically the case. Many reforms fail because they are de facto reversed shortly after the implementation. The French, instead, reformed simultaneously several aspects of economic, social and political institutions of the “ancient regime” of Europe, thereby significantly weakening the powers of local elites and making a return to the status quo ante largely impossible. Even when some pre-revolution elites returned to power after 1815, there was a permanent change in the political equilibrium. This scope and radicalism of the French reforms are common with the post-war reform experiences in Germany and Japan and stand in contrast with many other reform experiences.

It would be interesting to contrast the French (reform) intervention in Europe and the current reform programs imposed on developing countries by the aid and development agencies. The way French “Big Bang” reforms worked in Europe (after 1850) and the way institutional reforms are imposed upon developing countries right now are very different in methodology, intent and interest!

The reason why French intervention worked is that the institutional reforms were “radical” that shattered power centers with vested interests that were constraining growth. The French Revolution “destroyed (the institutional underpinnings of) the power of oligarchies and elites opposed to economic change; combined with the arrival of new economic and industrial opportunities in the second half of the 19th century, this helped pave the way for future economic growth.” One interesting finding is that evolved institutions are not inherently superior to those ‘designed’.

Short-term fiscal love!

noreply@blogger.com (Chandan Sapkota) — Fri, 03 Jul 2009 17:00:00 +0000

Paul Krugman makes a case for a new fiscal stimulus and why we should worry more about decreasing unemployment rather than debt.

Right now the risks associated with additional debt are much less than the risks associated with failing to give the economy adequate support.

Views from the bottom: Listen to what the poor people are saying

noreply@blogger.com (Chandan Sapkota) — Wed, 01 Jul 2009 18:47:00 +0000

My latest op-ed (Views from the bottom) is based on ODI Working Paper#301 (Governance and citizenship from below: Views of poor and excluded groups and their vision for a New Nepal). There is a lot more to write about the voices of the poor, the evolution of their relation with the local administration officials, their assimilation in the ‘mainstream’ society, and what they think are their priorities to solve the problems plaguing their progress in the society. I will discuss these issues in greater detail in blog posts later this week. For now, I think it is worth posting the whole article below.

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Views from the bottom

Politicians and policymakers argue that they are working on to ensure that in “New Nepal” poor people and marginalized classes will have adequate representation and say over things that matter to them the most. On a regular basis, we hear politicians bragging about the work they do in favor of poor people, even if the policies they advocate have little to do with priorities of poor people. What exactly are the priorities of poor people and excluded groups and what do they think about the evolution of local power relations between citizens and state in the post-revolution era?

The findings of a recent study on national participatory governance show considerable differences in priorities identified by poor people and policymakers. The voices (published as a report by Overseas Development Institute (ODI), Working Paper #301) of people at the bottom of income and social strata indicate the level of disconnect between state and its citizens. “A poor Bahun/Chhetri squatter settlement in Kanchanpur district emphasized that they had never been visited by government, NGOs, donors or the media, while a Dalit community in Bhaktapur asked the telephone number of the National Planning Commission in order to follow-up once the study report is released,” the report, which is based on research carried out in 21 communities in 10 districts, notes.

It is not surprising that the priorities of communities across the country are not homogenous and are often hinged on religious, gender, economic and social issues. For instance, Gurungs in Tanahun wanted a Buddhist temple while Mushar Dalit community in Siraha wanted a community house to conduct community activities and to house guests. Meanwhile, women in Western mountain districts aspired for an access to a flour mill and smokeless stoves. For some communities in Makawanpur, control of soil erosion and bridges were the most important priorities.

That said, on major issues there are commonalities in priorities, which are often missed by politicians and policymakers “working” for them from the capital. The major (tangible) priorities, in descending order, outlined by the poor and marginalized people are roads, education, health, water, electricity, irrigation, land, toilet and veterinary services. Their priorities are as simple as it could get and don’t require a grand, multi-year project to initiate them.
People wanted roads in order to establish connection between markets and production sites, to overcome geographic isolation and to promote local destinations as tourist attraction. They wanted removal of user fees in health services and public education as well as an end to unequal access to scholarships and an expansion of range of treatment and medicines.

Meanwhile, Dalits – who make up 13 percent of the population – not only yearned for expansion of access to water services but also an end to discrimination and humiliation in the usage of water and an end to vulnerability caused by land insecurity. For instance, due to ownership of scattered land plots among ‘upper caste’ in Achham, in the case of a Dalit’s death, families were forced to take “a long circuitous route through the hills to avoid sullying ‘upper caste’ properties.”

Furthermore, poor people felt a sense of deprivation and inconvenience to use kerosene in the absence of electricity. The study states, “The demand for electricity was linked to a sense of frustration at the inefficiency of government—in many places poles had been erected a number of years earlier, symbolizing the promise of electricity, but the wiring had never been provided. Even in cases where lines came, house connections were often beyond the financial means of poor households.”

Partly because of their willingness to freely assimilate with Dalits, the Maoist party had more supporters from Dalit community in Pyuthan. Still now ‘lower castes’ such as Sarkis and Dalits are forced to use separate sitting arrangement and utensils in local tea shops and hotels in the name of preserving ‘ritual purity’. Note that though discrimination against Dalits was outlawed in 1960s, it is yet to be reflected in practice.

Rural communities were concerned about augmenting production through better irrigation and expanded veterinarian services for their livestock, which is an important domestic business for some households. For instance, the report notes that poor Bahun/Chhetri community in Achham district refused to cooperate unless the researchers were connected to irrigation service providers. This depicts the level of disconnect between policymakers and poor people.

In some districts, poor people were resorting to illegal occupation and smuggling in the absence of income-generating opportunities and microcredit services. A Mushar community in Siraha resorted to illegal timber collection while some households in Kanchanpur involved in smuggling goods from India to sell at lower prices in the local market.

Muslims, who comprise 4.3 percent of the total population, felt vulnerable to multiple and overlapping sources of exclusion based on religious identity, status as minority language speakers, and identity as Madhesis when dealing with government officials from the hilly region. This is sensitive and alarming issue because “religious tensions exist beneath the surface”. There should be a measured monitoring of this sensitive issue. Note that Muslims had the lowest drop in poverty rates (6 percent) as opposed to Bahun/Chhetri (42 percent) and Dalits (21 percent) between 1996 and 2004, according to National Living Standard Survey II.

The study also identifies key supply-side constraints such as corruption (local administration officials explicitly demanding bribes to register deaths and births in VDCs), limited information flows about public services and development programs, lack of consultation, capture of community user groups by elites, human rights abuses by government agencies, lack of knowledge about legal rights and communal unity fractured by caste-based alliances with varying interests that constrain effective interaction between poor people and local administrations. How to break these constraints? The poor people and excluded groups offer solutions as well – there needs to be equal treatment with respect while seeking public services, improved communication and access to information, larger role for supportive brokers between different groups and local administrations, and increased representation in public offices.

The poor people and marginalized groups need a workable idea that addresses their immediate needs and helps them not only become financially stronger but also gives an opportunity to break socio-economic barriers and engage in state building. This does not require lengthy assessment by experts and grand ideas dogged in an established ideology. It requires listening to the grievances of the poor people and workable ideas proposed by them. The tarnished credibility of politicians and the effectiveness of aid industry would improve if they actually listen to the voices of the poor people and marginalized groups.

(Republica, July 1, 2009)

Interesting debate between Krugman and Taylor

noreply@blogger.com (Chandan Sapkota) — Tue, 30 Jun 2009 18:38:00 +0000

Watch Paul Krugman and John Taylor argue about fiscal stimulus, debt, inflation, interest rates, healthcare and more…

Indonesia: Economic crisis and the developmental state

noreply@blogger.com (Chandan Sapkota) — Tue, 30 Jun 2009 06:00:00 +0000

Degol Hailu argues that policy responses to the economic crisis is turning Indonesia into a developmental state. I think the same can be said about pretty much every country that initiated some trade restrictions and implemented fiscal stimulus in the past two years. We are becoming more Keynesian than ever!

In the first quarter of 2009, rubber exports fell by 32 per cent. Farmers have suffered most. In some provinces tapping has completely ceased. The policy response was to cut shipments of rubber exports by 700,000 tons, a cartelist measure that was taken in concert with Thailand and Malaysia. The hope is to keep prices high and maintain constant income levels, just as the Organisation of Petroleum Exporting Countries (OPEC) does.

The price of tin, another major Indonesian export, fell from US$23,595 per ton in July 2008 to US$12,355 in April 2009. The government suspended the quota system that set minimum limits on tin exports. When prices were high, provinces such as Bangka Belitung and the Riau Islands were required to export at least 90,000 and 15,000 tons of tin, respectively. By suspending the minimum quota, the government is encouraging producer to cut their output and keep prices stable in the face of slow global demand. As a result, tin production fell from an average of 120,000 tons between 2005 and 2007 to 80,000 tons in 2008.

The target for the footwear and textile industry is to switch the above percentages: 60 per cent for domestic consumption and 40 percent for exports. As part of its stimulus package, the government is providing direct subsidies for the purchase of machinery under the Machinery Revitalisation Programme.

Rcently, the footwear industry received a cash subsidy of US$5.17 illion, and US$22.1 billion was provided to the textile industry. The government stepped in and launched a scheme to increase cotton output to 48,000 tons in the next few years, and to double the area under cultivation to 40,000 hectares. The provision of subsidised seeds and farm inputs has already started in Gunung Kidul, Yogyakarta, Pati, Kudus, Blora, East Java, and South Sulawesi provinces.

The government’s response to the crisis has also included macroeconomic policy changes. The interest rate was cut to 7.8 per cent in 2009 from 9.5 per cent in 2008. A fiscal stimulus of US$7 billion, or 1.4 per cent of GDP, has also been announced. The stimulus comes in the form of tax cuts (76.5 per cent of it), infrastructure expenditure (16.8 per cent) and direct subsidies (6.7 per cent). Fortunately, 2009 started with a fiscal deficit of 1.2 per cent of GDP, which gave the government room for deficit financing.

Agriculture subsidy working in Malawi

noreply@blogger.com (Chandan Sapkota) — Sun, 28 Jun 2009 22:34:00 +0000

A carefully designed state-led agriculture subsidy program successful in Malawi:

The farmers’ success is not a coincidence: After facing a famine four years ago that threatened one-third of the country’s 13 million people, around half of whom live in poverty, tiny Malawi has utilized a $60 million policy of state subsidies for agriculture to become a net grain exporter. Malawi has transformed itself from a ward of the international community into one of the most successful agricultural economies in southern Africa: The landlocked, geographically diverse country, covered in green rolling hills and dotted with freshwater lakes, now exports thousands of pounds of corn to neighboring, starving Zimbabwe, a nation once known as the breadbasket of the region.

State agriculture subsidies are hardly what the doctor–or, in this case, the international aid community and the World Food Program–ordered. But Malawi triumphed precisely by ignoring the world’s leading pro-privatization agricultural experts. In fact, the "Malawi model" could turn out to be one of the only African success stories in recent years.

[…] Starting in 2004, it launched the nationwide Agricultural Inputs Subsidy Program, in which roughly half of Malawi’s small farmers were given coupons to buy fertilizer and seed at a rate far below the market price. Critically, the government focused the program not on the most destitute, but on the poor farmers who at least had some land and the ability to work the plots, thus guaranteeing a return on their investment in the form of more efficient grain output. At the same time, the government invested in training programs, helping farmers learn about new types of irrigation and management to improve their yields. And once the farmers produced, the Malawian government created funds designed to buy a percentage of the maize crop and store it for future emergencies. In this way, the state hoped to ensure that it would never be caught in a famine having to rely upon private traders to supply staple crops.

And, the danger of getting overly obsessed with “invisible hand” (liberalization and privatization) in vulnerable sectors, i.e. sectors whose performance would have a direct bearing on the very survival of poor people!

In many poor countries, when governments stopped handing out seeds and fertilizer, or providing warehouses to store farmers’ grain, the meager private sector was not equipped to fill the void. Unlike in the developed world, home to giant agribusinesses, in Africa the small private grain sellers and buyers have little capital or ability to raise money. And with little financing, it is nearly impossible for the private sector to develop large stocks of seed and fertilizer, or to build large warehouses necessary to store significant quantities of staple foods. Forced to rely upon the private sector, farmers in turn could not buy large quantities of seed, or store grain between harvests; and even if the resources were available, farmers often could not afford to buy fertilizer and seed. In many nations that had liberalized agriculture, crops simply rotted.

With private traders unable to store crops, governments selling off their warehouses to the private sector, and no one investing in agricultural research, developing nations have been left dangerously short of any food reserves. Yet for years, donor nations ignored the downside to privatization, even as country after country suffered through famines made worse by a lack of food stockpiles–and as rich countries, in a great irony, subsidized their own farmers. As former President Bill Clinton told a United Nations conference on food security last year, referring to wealthy nations’ push for agriculture privatization: "We all blew it."

A simulation of potential trade policy scenarios under the WTO showed that small country like Malawi would emerge as losers of agricultural trade liberalization. So, it does not make sense to argue for complete agriculture trade liberalization. Also, it does not make sense to blindly follow the market principles, though the best system if certain conditions are predetermined, and argue for full privatization, deregulation and liberalization of the agriculture market. Another relevant question here is: Would the developing countries lose or gain from agriculture trade liberalization (includes scrapping agriculture subsidies in the US, the EU, and Japan? Some say the developing countries would be worse off if agriculture subsidy in the West is eliminated. It really depends on if (households) a country is a net exporter or importer, its production and distribution cost structure, and demand of such goods in the global market, among other factors.

My take on why economics matters

noreply@blogger.com (Chandan Sapkota) — Sat, 27 Jun 2009 01:24:00 +0000

I wrote this essay two years ago for no particular reason. I just noticed this one in one of my folders and felt like posting it here as it is!

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Why Economics Matters?

Economics as a subject is very rich and diverse in context. It covers issues beginning from the Stone Age to the agricultural society to the present day society. One way or the other, every activity we do is related to economics. From a layman who does not have knowledge of economics to a planner or a freedom activist, everyone uses economics concepts to make choices and decisions.

People make decisions at the margin, i.e. constrained by budget or resources, they make decisions so that the expected outcome is as close to optimality as it can get. This simple concept of making decisions at the margin is what economists call opportunity cost, the cost of the next best alternative forgone. By taking decisions at the margin, say sorting out expenditures out of a weekly paycheck, people first prioritize necessities and then limit consumption and recreation expenditures within the horizon of their budget. In doing so, they try to consume, invest, and save in such a way that their choices are optimal, at least to them. A simple concept like opportunity cost helps unravel a logical foundation and reasoning for human actions. This is economics at daily use at the individual level.

Economics is always in use in business and commerce. A simple concept of equilibrium of demand and supply helps an entrepreneur decide whether an investment will be profitable or not. The entrepreneur knows that when quantity demanded of a commodity or service outstrips quantity supplied, then there is a chance to reap profits by producing that commodity or service. Meanwhile, through concepts like decreasing, constant, and increasing returns to scale economics helps provide answers to questions like why only a handful of firms exist in an industry or why a monopoly firm deliver goods at a lower price. It also answers why consumers tend to benefit if there are many firms competing with each other to produce similar or differentiated goods. Through concepts like increasing returns to scale, transportation cost and preferences for product diversity, economics helps explain why industries tend to cluster in one location and why they produce slightly differentiated products. This is economics at daily use at the industry level.

Economics is a vital tool to managing an economy at the macro level. Economics helps indentify if and why there is an investment gap in an economy. It helps answer why it is appropriate to have varying tax rates contingent on income level. It helps to measure progress or downslide of an economy and sometimes correctly predict the causes of such a change. It unravels the secret of why excess money supply is bad and why depreciation of currency is sometimes good for an economy dependent on exports. If an economy is overheated (say with investment), then economics tells us how to cool down the situation through either upping interest rate and tax rates or limiting government expenditure and money supply or both. This is economics at daily use at the national level.

Economics is used to answer sources and causes of historical events like the industrial revolution, which changed the trajectory of material progress of humanity. Economics provides answers to more intriguing questions like why industrial revolution occurred in England, why not in Africa, and why at a specific period in history. Economics helps measure the relative prosperity of nations (GNP per capita). It provides answers to questions like why there is persistently high level of poverty in sub-Saharan Africa, and why the East Asian Tigers continue to prosper while the African nations stagnate or even perform worse. By looking at the amount of natural, labor and capital resources and cost of trading, economics helps explain why countries tend to produce and export a limited range of commodity, in which they have comparative advantage, and why the countries engage in international trade. Moreover, it unearths answers to conundrums like the tragedy of commons. Economics uses an eclectic combination of mathematics, statistics, behavioral science, and simple human reasoning to find appealing and convincing reasoning to these problems. This is economics at use in the history and at the international level.

As engaging as it sounds, economics is by no means a clear, uncontroversial subject. For a given topic, especially in macroeconomics, there are many opposing views, which are correct in their own right. The ideological difference between Keynesians and Monetarists over small versus big government is as lively today as it was after the Great Depression. This ideological difference is still raging on issues like taxation, regulation, and foreign aid among others. Meanwhile, other heterodox schools of thought – institutional, Marxist, socialist, feminist, Austrian, supply-side economics- have their own explanation for major events in the economy. They hardly converge on methodology and mechanism, which give rise to diverse views, correct in their own right, making economics ever engaging.

Economics is not a perfect science. Events like the Great Depression, stagflation in the 80s and recent financial meltdown are all unprecedented events. They rarely occur and sometimes economists are unable to predict them ex-ante. However, they search for and provide answers ex-post. This helps policymakers to be aware of causes and consequences of occurrences of such events so that if symptoms of such nature appear again, they could take remedial measures preemptively. This means that economics as a subject is always in a continuum and is never complete. The more we learn about economics and how it matters to the world, the more we realize that there is something more to learn; circumstances change, so does variables affecting the economy and their roots and explanation. However, whatever we learn from economics as it continuously evolves, it helps us better fathom a problem by identifying sources, causes, and consequences. Economics matters because its laws, theories, and concepts rule our lives. Economics matters because it helps optimize the use of scarce resources, and make choices and decisions at the margin so that productivity and efficiency are as close to optimal level as it can get.

Aggregates of global crisis and development impact

noreply@blogger.com (Chandan Sapkota) — Wed, 24 Jun 2009 18:04:00 +0000

This one comes from Duncan Green’s blog post about summary of the development impact of the global crisis:

Unemployment (ILO)

Gender impact of the economic crisis in terms of unemployment rates is expected to be more detrimental for females than for males in most regions of the world and most clearly in Latin America and the Caribbean (only regions where expected to be less detrimental for women are East Asia, developed economies, and non-EU south-eastern Europe and CIS)
Global unemployment could rise to 220 million people (6.8 per cent) in 2009, up 39 million on 2007.
Number of working poor (people unable to earn enough to lift themselves and their families above the poverty line) could rise to 1.3 billion ($2/day), 746m ($1.25/day).
Under a worse case scenario, global unemployment could be as high as 239 million (7.4 per cent) in 2009.
Under a worse case scenario, the number of working poor could rise to 1.4 billion ($2/day), 857m ($1.25/day).

Economic Growth (IMF / UN-DESA / World Bank)

World economic output is expected to contract by 1.3 [2.6] {2.9} per cent in 2009, down from growth of 3.2 [2.1] {1.9} per cent in 2008, and 5.2 {3.8} per cent in 2007 (IMF [UN-DESA] {World Bank}).
Economic output in emerging and developing economies [{developing economies only}] is expected to grow by 1.6 [1.4] {1.2} per cent in 2009, down from 6.1 [5.4] {5.9} per cent in 2008, and 8.3 {8.1} per cent in 2007 (IMF [UN-DESA] {World Bank}).

Bank Bailouts (IMF / calculation for Oxfam by James Henry)

As of February 2009 headline support to the financial sector by advanced economies had reached 43 per cent of their GDP, compared with 2 per cent in emerging economies (IMF).
On a worldwide basis, as of January 2009, banks and other financial service firms have already digested at least $8.7 trillion of state sponsored financing ($903 billion of government capital injections, $661 billion of toxic asset purchases, $1.38 trillion of subsidized loans, $5.76 trillion of debt guarantees). N.B. This is not all upfront cash - guarantees reflect the value of the insured assets (James Henry).

Fiscal Stimuli (ILO)

Total fiscal stimulus packages are currently (March) 3.16 per cent of global GDP.

Poverty Impacts (UN-DESA)

Between 73 and 103 million more people will remain poor or fall into extreme poverty in comparison with a situation in which pre-crisis growth would have continued.
Most of this setback will be felt in East and South Asia, with between 56 and 80 million likely to be affected, of whom about half are in India. The crisis could keep 12 to 16 million more people in poverty in Africa and another 4 million in Latin America and the Caribbean.

Remittances (World Bank)

Officially recorded remittance flows to developing countries were estimated to be $305 billion in 2008, up 8.8 per cent from $265 billion in 2007; but in real terms, remittances are expected to fall from 2 per cent of GDP in 2007 to 1.9 percent in 2008.
In 2009, remittances to developing countries are expected to fall by 5.0 per cent to $290 billion – 1.8 per cent of developing countries’ GDP.
Considering that remittances registered double-digit annual growth in the past few years, an outright fall in the level of remittance flows as projected now will cause hardships in many poor countries.
The persistence of the migrant stock will contribute to the persistence (or resilience) of remittance flows in the face of the crisis.
South-South remittances from Russia, South Africa, Malaysia and India are especially vulnerable to the rolling economic crisis. Also the outlook remains uncertain for remittance flows from the GCC (Gulf Cooperation Countries) countries.

Trade Flows (Bloomberg / IMF / World Bank)

The Baltic Dry Index (a benchmark indicator of shipping costs, which serves as a proxy for world trade flows):
Is 58 per cent lower than its one year high in June 2008
Has recovered from its one year low in Dec 2008 (93% below June ’08 peak)
IMF expects world trade volumes to contract this year, falling by 11.0 per cent
World Bank expects world trade volumes to contract this year, falling by 9.7 per cent

Foreign Direct Investment (Institute of International Finance / World Bank)

Volume of net private capital flows to emerging markets is likely to decline dramatically to $141 billion in 2009, after an estimated $392 billion in 2008, and a record volume of $888 billion in 2007 (IIF).
A modest revival of flows is now starting to become evident and the IIF projects that the 2010 volume will reach $373 billion (IIF).
Net private capital inflows to developing countries fell to $707 billion in 2008, a sharp drop from a peak of $1.2 trillion in 2007. International capital flows are projected to fall further in 2009, to $363 billion (World Bank).

Vulnerable Countries (World Bank / IMF / Economist)

According to the World Bank, 43 developing countries are highly exposed to the poverty effects of the crisis (with both declining growth rates and high poverty levels).
The IMF identifies 26 highly vulnerable low income countries.
The Economist identifies 17 vulnerable emerging-market economies on the basis of current account, short-term debt, and banks’ loan/deposit ratio.

Food and Oil Prices (FAO)

Are now on the rise again after bottoming out in Jan/Feb.

No lowering of interest rates in Nepal

noreply@blogger.com (Chandan Sapkota) — Tue, 23 Jun 2009 22:03:00 +0000

A piece about Nepal’s banking sector on Bloomberg. The governor makes sense here--

Kshetry said he can’t lower interest rates to support economic expansion because of high inflation. Nepal’s inflation rate climbed to 11.9 percent in March from 9 percent a year earlier because of a shortage of food and fuel, Kshetry said.

The central bank raised the cash reserve ratio to 5.5 percent from 5 percent and the key bank rate to 6.5 percent from 6.25 percent in October 2008. It has kept policy rates unchanged since, Kshetry said.

Troubled banks in Nepal

noreply@blogger.com (Chandan Sapkota) — Tue, 23 Jun 2009 20:21:00 +0000

A day after liquidating Nepal Development Bank (NDB), of which I argued for immediate liquidation, it has been know that another bank (I suspect there are many such low performing banks who play with balance sheet) is in trouble. World Merchant Banking and Finance Limited, after a year in operation, loaned Rs 9 million to a contracting company without properly assessing the loan-seeker’s ability to pay back the loan. Being unable to recover loans and to avert a negative balance sheet, it created a fictitious story-- that it recovered loan from the company and lent it to someone else.

When all this happened, the central bank was completely kept in dark by the incompetent management of the bank. Okay, it is partly the central bank’s fault to not tap on this shady practice for over five years.

This illegal practice of transferring the ´troubled´ loan into a new person´s name continued for five years till 2007, when borrowers started asking the finance company to release some of the land held as collateral by the finance company. "To coax the management the borrowers paid back Rs 700,000 of the loan amount. But we did not agree," said the source. Then subsequently, the borrowers started claiming they did not owe any money to the finance company and it had failed to deduct the installment amount that borrowers had paid over the years, which, the finance company calls a "total lie." "We challenge the borrowers to show cash receipt if they had truly repaid the loan amount," said the source.

Then the matter went to the police and in January 2008, it asked the finance company to submit all the documents involved in the loan transaction. Then the central bank became wary of malpractices going in the financial institution and in April 2008 it warned World Merchant to discontinue the illegal practice of transferring liability of loan amount to new persons.

And, a persistent problem of moral hazard because of the institutionally (and human resource wise) deficient and inefficient central bank.

On June 14 this year, Binit Mani Upadhyaya, CEO of the finance company, was arrested after borrowers lodged a complaint at the Commission for the Investigation of Abuse of Authority. Since then depositors have withdrawn around Rs 400 million from the finance company. "But we are not facing cash crunch as the central bank is indirectly pumping money into the financial institution," the source said.

M2 is going up and so is inflation, despite a deflation in India. If this continues, then the Nepalese financial market will be hit by a terrible storm!

Roads, connectivity and markets

noreply@blogger.com (Chandan Sapkota) — Sun, 21 Jun 2009 13:29:00 +0000

The importance of roads in establishing a link between production site and market:

As recently as 5 years ago, farmers in Belanting had to pay Rp15,000 ($1.26) to take 100 kilos of rice to the market, a fee that significantly cut into their already narrow profit margins. Today, Mr. Maca says he only pays Rp1,000-less than 10% of what he previously did- and profits from his farm have more than doubled.

That’s from a project funded by ADB in Philippines.

Why Nepal Development Bank (NDB) should be put to rest?

noreply@blogger.com (Chandan Sapkota) — Sun, 21 Jun 2009 06:33:00 +0000

My latest op-ed about why a troubled bank in Nepal should be put to rest (I provide the links to some stuff here):

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Let NDB go away

CHANDAN SAPKOTA

The banking sector is one of the few industries performing reasonably well most of the time. This has been one of the most attractive industries for employment and internship and investors, thanks to impressive performance of commercial banks and some development banks. However, there are some banks- whose balance sheet is weak; liabilities are in far excess of assets; who engage in risky deposit schemes with unreasonably high interest rate offers just to entice depositors; and engage in shady practices with backing from incompetent management and promoters- whose dismal performance is fueling anxiety among depositors and investors.

The failure of few of these banks to correctly assess their own capacity and ability to cater to the interests of depositors and investors has created an environment where the public is questioning soundness of the entire banking industry. This has impeded efforts to foster healthy competition, ensure market confidence, and promote a bankable banking industry where a run on one bank would not become a contagion and drag the whole industry down.

Nepal Development Bank (NDB) - which aspired to “enter the new millennium with profitability, size and efficiency on par with the best of the banks in the world”- is one of the zombie banks that have been a victim of its own irresponsible acts (recall the fate of Nepal Bangladesh Bank in 2006). The central bank has asked NDB management to furnish details on why it should not be liquidated. In any case, given the mess NDB is right now, it is in the interest of depositors, investors and the whole banking industry to liquidate NDB immediately.

According to media reports, the central bank estimated that NDB had bank deposits and cash worth Rs 196.20 million and its cumulative loss amounted to Rs 690.2 million (the bank management did not even know the full scale of its losses and claimed it amounted to Rs 640 million only). The non performing loans (NPL) comprised over 50 percent of its loan portfolio. The negative capital adequacy ratio of 48.31 percent was far less than 11 percent allowed by the central bank.

What is surprising is that even with dubious balance sheet and mounting losses, NDB management showed sheer irresponsibility by asking the NRB not to liquidate the bank. The irresponsible management team’s stubbornness is being amplified by lobby groups such as the Association of Nepali Development Banks (of which NDB is not even a member!) and the Association of Finance Companies. They have asked the central bank to revive the dead bank. For what? To vindicate NDB management of its reckless and stupid decision as if nothing wrong happened. The bank should have been liquidated back in 2004 and action taken against the then executive chairman and promoter Uttam Pun, who, unfortunately, went roundabout NRB’s weak regulatory power and used Appellate court, which itself is ineffectual in dealing with financial cases, to rescind the central bank’s action.

The central bank has rightly intervened and has also tried to calm down wary depositors and the market. Its plan to liquidate NDB to contain further losses and not let the bank operate with phony balance sheet that does not even satisfy minimum requirements, let alone prospect for profits, for sound banking practices is exactly what is needed at the moment. The NRB, despite regulatory and institutional weaknesses, has to show that it is tough and capable of reigning in banks that taint the image of the otherwise healthy banking industry. To avert the spread of contagion (of bank run) arising from the failure of NDB, NRB has also assured safety of deposits. This is required at the moment but should not be a permanent stamp due to fears of moral hazard. Now is the time to ponder upon establishing a national deposit insurer that would insure deposits up to a certain limit.

If the central bank does not liquidate banks like NDB, then the banking industry might engage in risky lending and unsustainable deposit schemes hoping that ultimately the government and NRB will bail them out in case of bankruptcy. The NRB needs to send a strong signal to the market that it is a responsible and strict watchdog of the banking industry. Veering away from this responsibility might foster unhealthy banking practices, where a single bank failure could pose a systemic risk to the whole banking industry. At the moment, the failure of NDB does not pose this kind of risk. However, failure to let it go would foster malpractices by unscrupulous board of directors, loss of taxpayer’s money and risk consumer’s deposits, leading to more sicker and zombie banks whose downfall might be contagious. Continued existence of banks like NDB would decrease the industry’s competitiveness, which is the last thing the economy needs at a time when successful international banks are preparing to enter the Nepali financial market in 2010 according to the WTO rules.

For now, the government and the central bank should fully liquidate NDB, take action against its management team and promoters, and send a signal to depositors that their deposits are safe and to the market that the central bank is vigilant and committed to fostering healthy competition in the banking industry.

Samuelson on Mankiw, dollar, and bubbles

noreply@blogger.com (Chandan Sapkota) — Fri, 19 Jun 2009 02:27:00 +0000

Part II of an interview with Samuelson:

In one of Greg Mankiw's articles, he said that maybe when the interest rate gets down to zero and it's threatening to be negative, you should give a subsidy with it. Well, that's what fiscal policy is!

I think it's almost inevitable that, with a billion people in China wide awake for the first time, and a billion people in India, there's going to be some kind of a terrible run against the dollar. And I doubt it can stay orderly, because all of our own hedge funds will be right in the vanguard of the operation. And it will be hard to imagine that that wouldn't create different kind of meltdown.

But there never has been a true macro efficient market. You just have to look at the record of economic history the ups and downs. Bubbles are self-generating. And I'm not sure most of the people that get caught up in the middle of a bubble can be described as irrational. It seems pretty rational to buy a house and flip it in the next few weeks at a profit when that's been happening for along time. It works both ways.

I think it would be surprising if, down the road -- not in the long long run but in the somewhat short run -- we don't have some return of inflation. On the other hand, I'm of the view that if we come out of this with some kind of temporary stabilization at least, and the price level is let's say 10-12% above what it was before we got into the meltdown, I think that's a price I would be willing to pay!

I'm against inflation, but what I worry about is continuing, galloping, self-reinforcing inflation. I would not try to roll things back to some sacred earlier price level.

Links of Interest (06/16/2009)

noreply@blogger.com (Chandan Sapkota) — Thu, 18 Jun 2009 01:45:00 +0000

Interview with Paul Samuelson (Part I)

I am a cafeteria Keynesian. […] Well, reasonable men are not reasonable when you're in the bubbles which have characterized capitalism since the beginning of time.

Milton Friedman. Friedman had a solid MV = PQ doctrine from which he deviated very little all his life. By the way, he's about as smart a guy as you'll meet. He's as persuasive as you hope not to meet. And to be candid, I should tell you that I stayed on good terms with Milton for more than 60 years. But I didn't do it by telling him exactly everything I thought about him. He was a libertarian to the point of nuttiness. People thought he was joking, but he was against licensing surgeons and so forth. And when I went quarterly to the Federal Reserve meetings, and he was there, we agreed only twice in the course of the business cycle.

Krugman on new financial regulations

Good review of Dead Aid

A short (incomplete) review of (free) market system in Nepal

Remittances expected to fall by 5 to 8 percent in 2009

Health and growth

The hungry people are watching!

noreply@blogger.com (Chandan Sapkota) — Mon, 15 Jun 2009 19:33:00 +0000

Javier Blas reviews Enough: Why the World’s Poorest Starve in an Age of Plenty. This paragraph shows the irony of ‘invisible hand’ belief.

“Much of the chronic, everyday hunger in the world is now a man-made catastrophe, caused one anonymous decision at a time, one day at a time, by people, institutions and governments doing what they thought was best for themselves or sometimes even what they thought at the time was best for Africa,” they write.

The global food industry typifies a market dominated by few players, vested interest groups, and predatory pricing in the form of food aid, which is not only lowering food prices (crucial for meeting household needs of a farmer in the developing world) but also discouraging farmers from engaging in agriculture business (because the rate of return is very low). The aid industry is tied up with food industry and basically supply their surpluses to developing countries leading to two fiscal effects: (i) increase in debt, and (ii) decrease in revenue as farmers get displaced by the inflow of cheap food from the West. The poor always remain poor and the masters always prevail!

Nothing could illustrate the shortcomings of US food aid policy, in which Washington sells American farmers’ output in Africa rather than sending money to buy local food, better than a dialogue between an Ethiopian farmer and a US executive at a food aid meeting in Addis Ababa. The farmer asks the executive enthusiastically: “Can you help our farmers sell their beans in America?” He receives an unexpected answer: “Actually, we represent American bean growers.”

Advice from the western world has not helped, however. It is telling that one of the best agricultural programmes in Africa – a subsidy system for fertiliser and high-yielding seeds in Malawi that has transformed the country into a net exporter of corn – was objected to, even to the point of threats to withhold some aid, by the Washington-based World Bank and the Department for International Development in Britain.

Collier on ‘investing in investing’ for the bottom billion

noreply@blogger.com (Chandan Sapkota) — Sun, 14 Jun 2009 22:20:00 +0000

Paul Collier on investing in investing for the bottom billion:

… in Africa the average investment rate to GDP is less than 20 percent, whereas to catch up, to converge with other economies, it needs to be over 30 percent. So they must move from under 20 to over 30. … It means an agenda of raising the capacity to invest productively. I call that a phase of investing in investing. It is something that has partly a macroeconomic agenda, but also a microeconomic agenda. If we just say it’s hopeless, the country doesn’t have a capacity to invest, it drives them into what I call the economics of Polonius: “Neither a borrower nor a lender be.” … That is the strategy for investing in investing, building the capacity to make good investments.

[…] the typical low-income country should be investing something like 30 percent of GDP. And for low-income countries that are depleting natural assets, it should be higher than that. […] We need a phase of investing in investing, and this goes back to my earlier point. An investing-in-investing phase is even more important in the resource-rich low-income countries.

[…] Typically, there is somewhat of a bypass of the domestic construction sector by bringing in foreign construction firms, and that’s throwing the baby out with the bathwater because potentially the construction sector can generate a lot of employment in these economies; in postconflict situations, that’s enormously valuable. In technical terms, the shadow wage of young men in postconflict environments is negative. It’s worth spending money employing them even if they were to do nothing. But actually you can get them productively employed in the construction sector.

And on the role of IMF:

I think that there are three different roles for the IMF. First, for governments of low-income countries, the Fund is a source of money. Second, the Fund provides a commitment framework for donors through its programs. And the third role, which I think is the most important, is one of providing a conceptual and coordination framework to assist the many different players in the low-income development field, including various agencies and the different governments. But my larger point is that the right macro answers depend on resolving the micro and institutional issues. The right macro answers, taking the micro and institutional as given—which is what the IMF has been doing—are the wrong macro answers for development.

Fiscal policy defined

noreply@blogger.com (Chandan Sapkota) — Sat, 13 Jun 2009 21:32:00 +0000

Horton and El-Ganainy explain the basics of fiscal policy, a topic of much discussion in recent days especially relating to fiscal stimulus in almost all countries in the world. A very basic explanation that gives a taste of intro to macro econ, chapter one!

Fiscal policy is the use of government spending and taxation to influence the economy. Governments typically use fiscal policy to promote strong and sustainable growth and reduce poverty. The role and objectives of fiscal policy have gained prominence in the current crisis as governments have stepped in to support financial systems, jump-start growth, and mitigate the impact of the crisis on vulnerable groups. […] Fiscal policy that increases aggregate demand directly through an increase in government spending is typically called expansionary or “loose.” By contrast, fiscal policy is often considered contractionary or “tight” if it reduces demand via lower spending.

Besides providing goods and services, fiscal policy objectives vary. In the short term, governments may focus on macroeconomic stabilization—for example, stimulating an ailing economy, combating rising inflation, or helping reduce external vulnerabilities. In the longer term, the aim may be to foster sustainable growth or reduce poverty with actions on the supply side to improve infrastructure or education. Although these objectives are broadly shared across countries, their relative importance differs depending on country circumstances. In the short term, priorities may reflect the business cycle or response to a natural disaster—in the longer term, the drivers can be development levels, demographics, or resource endowments. The desire to reduce poverty might lead a low-income country to tilt spending toward primary health care, whereas in an advanced economy, pension reforms might target looming long-term costs related to an aging population. In an oil-producing country, fiscal policy might aim to moderate procyclical spending—moderating both bursts when oil prices rise and painful cuts when they drop.

Many countries can afford to run moderate fiscal deficits for extended periods, with domestic and international financial markets and international and bilateral partners convinced of their ability to meet present and future obligations. Deficits that grow too large and linger too long may, however, undermine that confidence. Aware of these risks in the present crisis, the IMF is calling on governments to establish a four-pronged fiscal policy strategy to help ensure solvency: stimulus should not have permanent effects on deficits; medium-term frameworks should include commitment to fiscal correction once conditions improve; structural reforms should be identified and implemented to enhance growth; and countries facing medium- and long-term demographic pressures should firmly commit to clear strategies for health care and pension reform.

Does South Asia need a counter-cyclical fiscal policy?

noreply@blogger.com (Chandan Sapkota) — Thu, 11 Jun 2009 19:06:00 +0000

Yes, yes, says that World Bank as the fear of inflation is now replaced (Nepal has over 12% inflation rate right now???) by declining growth and the impact of global slump on poverty.

South Asian countries do not have automatic stabilizers or social safety nets to counter the negative effects of economic slump. So, the only option left is Keynesian fiscal policies (as expected). However, the WB argues that the extent to which this can be used is constrained by the bloc’s high public debt. This should be least of the worries because right now all that matters for countries like Nepal (which has over 12% inflation rate) is how to balance a rise in general price level and ensure economic growth. As is popular right now, the WB recommends investment in public infrastructure such as roads, schools, and hospitals.

South Asian countries may have missed the opportunity to strengthen their fiscal position during good times, which would have enhanced their capacity to counter downturns. Timing is of the essence. Any counter-cyclical policy needs to be tailored to conditions in individual countries. The capacity of a country to undertake counter-cyclical fiscal policy depends on its ability to finance the resulting fiscal deficit, which is easier when public debt is low and external balances are in good shape.

It is essential to protect core public spending in social and physical infrastructure in the face of declining revenues. Spending targeted at vulnerable groups may need to increase. This would require reallocation of expenditures from other areas, as well as greater reliance on borrowing or grants. However, it will always be a risky proposition especially for countries with a weak track record of controlling spending and where there are fears of inflation. Once introduced such spending may be hard to reverse.

According to a number of Economists, a fiscal stimulus program for countering an economic downturn needs to fulfill the 3-Ts; it needs to be timely, targeted, and temporary in order to be effective.