Chandan Sapkota's blog

Development impact of the Doha Round

noreply@blogger.com (Chandan Sapkota) — Wed, 25 Nov 2009 05:37:00 +0000

There has been a lot of debate about the gains from the Doha Round. It was initially estimated that the developing countries would gain tremendously and would help them not only achieve development goals (especially poverty reduction) but also bridge the income gap with the developed world. However, the exact benefit of Doha Round is still debatable. Generally, analysts use models (like CGE) and simulate the likely Doha scenarios (the likely framework that would be agreed upon) to estimate the impact of policy changes in the future as against the situation in the base year. Integrating the service sector in the modeling is a daunting task and is highly speculative as there are not convincing models to move in that direction yet.

In 2005, a World Bank study put a bombshell on the overly optimistic estimations from gains from trade. The study showed that under the "likely Doha scenario", the global gains in the year 2015 would be just $96 billion, with only $16 billion going to the developing world. This means the developing countries would see a one-time increase in income of just 0.16 percent of GDP. Also, it showed that only 6.2 million people would be lifted above the $2 per day poverty line (it represents just 0.3 percent of those living in poverty worldwide). Worse, most of these gains would go to the developed world and those that goes to the developing world is largely distributed among few countries. Half of all the benefits are expected to flow to just eight countries: Argentina, Brazil, China, India, Mexico, Thailand, Turkey, and Vietnam. Furthermore, this study by Carnegie Endowment shows that total gains from trade to be between $32-55 billion, with rich nations getting $30 billion; middle income countries like China, Brazil and SA getting $20 billion; and poor countries getting $5 billion (about $2 per head).

Amidst the increasing momentum on resuming Doha trade talks, a study by the Peterson Institute for International Economics (PIIE) has shown that the Doha deal could deliver $300-700 billion in global welfare gains, with the benefits 'well-balanced' between the developing countries. In a new policy brief, Kevin Gallagher and Tim Wise argue that these assertions rest on "shaky assumptions, controversial economic modeling, misleading representations of the benefits, and disregard for the high costs of Doha-style liberalization for many developing countries." They wonder how the economists found another $150-$350 billion in benefits for developing countries that the World Bank missed in 2005.

The gains in the new study from agriculture and non-agricultural market access (NAMA) are of the same order of magnitude as previous studies, about $100 billion, with the vast majority going to rich countries.

The new estimates for services, sectorals, and trade facilitation are highly speculative, use methodologies that are unproven, and assume far more ambitious outcomes than seem at all likely at this point.

Peterson finds high gains in services and sectorals because they assume that developing countries will make big concessions and that those same countries are big winners (from lower prices) even if they lose significant parts of those sectors to imports.

The estimates of $365 billion in gains from trade facilitation are particularly exaggerated, because they assume not only agreement on reforms but resources for the vast investments in infrastructure and human capital needed to make them happen.

The claims of “balance” are unfounded, as developing countries receive less than one-third of the projected income gains. Previous modeling has shown that many poorer regions, such as Sub-Saharan Africa, are projected to be worse off after an agreement.

As with most such projections, researchers disregard the costs of liberalization for developing countries. Tariff losses just from NAMA reforms are estimated at $64 billion, far more than the estimated gains to developing countries. As countries struggle to recover from the financial crisis, this is not the time to cut needed government revenues. Terms of trade for developing countries are projected to decline significantly, as they shift back toward primary production rather than forward toward industrial or knowledge-based development.

Their recommendations:

The US and the EU should agree to honor WTO rulings that have found their subsidies for cotton and sugar to be in violation of existing trade rules that forbid exporting products at subsidized prices.
The WTO should take positively "special safeguard mechanism" provision, especially granting poor countries some policy space on maneuvering tariffs in staple food items like rice, corn, and wheat. This was the main reason why the negotiations in 2008 failed.
For manufacturing sector, "special and differentiated treatment" should be re-enshrined for developing nations.
Real gains from trade facilitation can only be captured through significant investment in infrastructure and human capital. The existing "aid-for-trade" proposals are inadequate.
There should be a moratorium on North-South preferential trade agreements because these deals exploit the asymmetric nature of bargaining power between developed and developing nations.

Elections and economy policy

noreply@blogger.com (Chandan Sapkota) — Sun, 22 Nov 2009 22:59:00 +0000

We explore the impact of elections on the quality of economic policy and governance in developing countries. We argue that not only do elections likely have a positive structural effect on economic policy, but they may also have a disruptive cyclical effect. Elections introduce frictions; they are periodic events, the timing of which may affect politicians’ incentives to reform. We also argue that achieving accountability in developing countries requires more than elections. When the quality of the electoral process is poor, elections simply do not create the structural effect we would expect.

We introduce into our estimations proxies for the structural effect of elections (the frequency of elections) and for their cyclical effect (the number of years that separate each year from the nearest election). We find that elections in developing countries have both a cyclical and a structural effect on policy.

An election that is not “free and fair” is a broken technology; it cannot be expected to hold governments accountable to citizens. Hence, the overall conclusion from our analysis is that the frequency and conduct of elections matter. Our results suggest that elections are a key instrument in achieving accountability. But elections fail to achieve accountability if they are infrequent or uncompetitive.

That’s from Chauvet L. and P. Collier, 2009. More here.

Fig: Democracy, elections, and economic policy (82 developing countries, 1978-2004)

Links of Interest (11/20/2009)

noreply@blogger.com (Chandan Sapkota) — Fri, 20 Nov 2009 05:04:00 +0000

China will become of the world’s largest economy in 2032 (but not in terms of income per capita!)

Forecasting macroeconomic developments (Also, see top-down versus bottom-up macroeconomics)

An interesting Turkish blog

Gambling on a sinking nation (remember a Cabinet meeting underwater in Maldives)

The effectiveness of fiscal and monetary stimulus in depression (In short, analysis of budgets and central bank policy rates for 27 countries covering the period 1925-39 shows that where fiscal policy was tried, it was effective.)

Chavez slams GDP methodology after his economy contracted in 3Q

The impact of the Doha Round on Kenya (Kenya’s GDP will boost by a 0.2 percent; it will see losses in the manufacturing and mining sectors but gain in agricultural and processed food sectors)

Zedillo Commission Report on reforming the World Bank

WDI now in Google search (try the new stuff; its cool; see a sample below)… also, try WB Data Visualizer (you can do similar stuff in Google Spreadsheet plus copy the code and use it elsewhere!)

Not satisfied playing with data? Try WB Data Finder (a sample below):

GDP growth (annual %) - 2008

Source: World Bank Data - Annual GDP Growth Rate

The lessons on reducing poverty from the BRICs

John Perkins on stopping terrorism (trade fairly!)

Global economic crisis and South Asia

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

Dipak Dasgupta, Lead Economist for South Asia at the World Bank lists four reasons that have helped South Asia's growth rate from plunging down drastically as a result of the global economic crisis, which took South Asia’s growth down by about 3 percentage points (from 8.6% in 2007 to 5.6% in 2009). The World Bank expects GDP growth to recover to nearly 7 percent per annum on average in 2010-2011.

1. Remittances held up much stronger in South Asia than in other regions. In Nepal, the reliance on remittances is the highest, and without these flows, growth in consumption would have collapsed.

2. The resilience of some key export-oriented sectors also helped. Garments in Bangladesh and IT software exports from India, for instance, have held up relatively well.

3. FDI inflows to South Asia suffered a decline during the peak crisis period but have since picked-up sharply in India, Pakistan and Sri Lanka.

4. Policy responded early in the crisis, helped by domestic factors such as the pre-election fiscal spending in India. The size of fiscal stimulus announced was over 3 percentage points of GDP in India and significant also in Bangladesh. Interest rates were lowered sharply in most South Asian countries.

Gupta argues that the region faces two big challenges: food price inflation and fiscal deficits.

Rather than lumping all South Asian countries in the same basket (because high growth from three countries among eight in South Asia jacks up the regional average), there is a need to differentiate the countries into two blocs: high growth countries (India, Bangladesh and Bhutan) and low growth countries that suffer from instability (Pakistan, Nepal, Sri Lanka, and Afghanistan). This way it is easier and accurate to get a clear picture of each country’s constraints on growth, business environment, macroeconomic stability, institutions, governance structure, and bureaucracy . This WB blog post does take a differential look as required, which is not common among South Asian analysts (who actually exclusively look at India and Pakistan and refer it as South Asia; there are six other countries that are member of SAARC!)

Anyway, below are trend of some economic indicators for Nepal (compared with South Asian average).

Institutions, Incentives, Poverty and Inequality

noreply@blogger.com (Chandan Sapkota) — Thu, 19 Nov 2009 03:29:00 +0000

Daron Acemoglu explains why and how there is persistent inequality and what can be done about it (fix incentives and governments):

The question social scientists have unsuccessfully wrestled with for centuries is, Why? But the question they should have been asking is, How? Because inequality is not predetermined. Nations are not like children — they are not born rich or poor. Their governments make them that way.

Economist Jeffrey Sachs, director of Columbia University's Earth Institute, attributes the relative success of nations to geography and weather: In the poorest parts of the world, he argues, nutrient-starved tropical soil makes agriculture a challenge, and tropical climates foment disease, particularly malaria. Perhaps if we were to fix these problems, teach the citizens of these nations better farming techniques, eliminate malaria, or at the very least equip them with artemisinin to fight this deadly disease, we could eliminate poverty. Or better yet, perhaps we just move these people and abandon their inhospitable land altogether.

Jared Diamond, the famous ecologist and best-selling author, has a different theory: The origin of world inequality stems from the historical endowment of plant and animal species and the advancement of technology. In Diamond's telling, the cultures that first learned to plant crops were the first to learn how to use a plow, and thus were first to adopt other technologies, the engine of every successful economy. Perhaps then the solution to world inequality rests in technology — wiring the developing world with Internet and cell phones.

And yet while Sachs and Diamond offer good insight into certain aspects of poverty, they share something in common with Montesquieu and others who followed: They ignore incentives. People need incentives to invest and prosper; they need to know that if they work hard, they can make money and actually keep that money. And the key to ensuring those incentives is sound institutions — the rule of law and security and a governing system that offers opportunities to achieve and innovate. That's what determines the haves from the have-nots — not geography or weather or technology or disease or ethnicity.

Put simply: Fix incentives and you will fix poverty. And if you wish to fix institutions, you have to fix governments.

Unemployment numbers for Nepal

noreply@blogger.com (Chandan Sapkota) — Mon, 16 Nov 2009 00:52:00 +0000

It has been reckoned that around 350,000 new work forces enter into the job market each year and around 200,000 of them are finding jobs in foreign countries. Finding jobs for fresh 150,000 youths that enter the employment market is one of the major problems…

The Labor Survey conducted last year had showed 49 percent of urban and 26.9 percent of rural population was underutilized, which means they are not getting sufficient works. It also showed that unemployment has gone up to 2.1 percent of the total population from 1.8 percent in 1998/99.

Source here

Don’t believe that there are just 0.588 million people unemployed (out of about 28 million) in Nepal. The real number is much more higher. It has to do with how we calculate unemployment rate (=percentage of total labor force who are unemployed but are actively seeking and willing to do a job). Students, military personnel, retired people, parents staying at home, prisoners, people working in places that do not report income, and discouraged workers are not included. This means a whole lot of people are not included. A lot of the people in Nepal are discouraged workers, who gave up searching for jobs, thus excluding them from the labor force (which is the sum of employed and unemployed people).

Moreover, millions of workers in the agricultural sector (such as ‘hidden’ unemployed, non-wage workers, in-kind contract workers, etc) are not counted because their status does not fit within the definition of unemployed people. There are many of them because over 70 percent of the population depend on agriculture for living. Otherwise, won’t you be surprised to hear that unemployment rate in the US is 10.2% and in Nepal it is only 2.2%!

Trade distortions, the Doha Round, and food price volatility

noreply@blogger.com (Chandan Sapkota) — Sat, 14 Nov 2009 05:58:00 +0000

Kym Anderson has an interesting piece about the relationship between trade distortions and food prices. He argues that sudden rise in global food prices are driven by major policy shifts like tariffs and subsidies, leading to a tit-for-tat behavior by countries that produce them.

Trade-related policies contribute to agricultural market volatility and the volatility around the long-run-trend terms of trade slows national economic growth, he argues. The main point of the piece: continue with agriculture liberalization. Here is a similar argument. The disagreements on agriculture liberalization has been holding up Doha for eight years now. The author says that the more barriers in this sector, the more volatility. So, seeking a Special Safeguard Mechanism (SSM) is not good to reduce volatility. [But, how can the Doha Round pass without addressing these issues?]

The price hike of 2008 was also partly a consequence of policy changes in the US and EU, namely their decision to subsidise biofuels and set mandates/targets for their use domestically in response to rising fossil fuel prices. It led other governments to impose food export restrictions to insulate somewhat their consumers from the price rise, which pushed international food prices even higher and, domino-like, drove more exporting countries to follow suit. Some food-importing countries also lowered temporarily their import tariffs, to reduce the rise in their domestic food prices.

The parallel movement of food and energy prices is consistent only after the previous half-century. The author finds that the coefficient of correlation between 1960 and 1999 is -0.18, compared with 0.84 for 2000-07. The comparison may not be quite accurate because of the timeframes between these two periods but the high and positive R-squared value for 2000-07 gives us some information about the way food and energy prices move (in tandem). Note that agriculture constitutes around 3% of global GDP, 6% of global trade, and 8% of global exports (exports of non-farm primary products is 31% and all other merchandise exports is 25%).

Governments of many developing countries harmed their farmers directly by taxing their exports and indirectly by encouraging manufactures and overvaluing their currencies. This meant that price incentives facing farmers in many developing countries were depressed by both own-country policies and the protective policies of high-income countries.

The good news is that many developing countries have reduced hugely their anti-agricultural export policies, and even some high-income countries have lowered their trade-distorting assistance to their farmers – albeit replacing part of it with more-direct assistance to farmers that are only somewhat decoupled from production.

The argument against SSM and giving some policy space to deal with contingencies in the developing countries are not consistent with the evolving consensus among experts that such measures need to incorporated in the Doha Round. Without these measures it would be hard to deal with national crisis triggered by disruptions in agriculture production and trade. For instance, what happens if there is extended drought in a country and producers chase after higher priced markets abroad-- this will lead to starvation. To check the population from starving, some contingency measures are essential. Some hooks to full agriculture trade liberalization is required for the survival of the Doha Round.

Even a recent WTO World Trade Report emphasized for inclusion of “trade contingency measures”. The report argues for “trade contingency measures” that would give some policy maneuver for countries to deal with domestic pressure to prop up domestic markets affected by the crisis. The contingency measures discussed in the report include safeguards measures, anti-dumping and countervailing measures, the re-negotiation of tariff commitments, the raising of tariffs up to their legal maximum levels, and the use of export taxes. These are needed because too little flexibility in trade agreements may render trade rules unsustainable.

Also, note that the drastic rise in food prices was not necessarily triggered by protectionist measures, which was the resulting response to the food crisis (which was especially caused by demand factors).Trade distortion is one of the many causes of the drastic rise in food prices:

Rising incomes per head in the emerging economies
Changing pattern of food consumption (shift from food to meat reduces food supply as it is being used to rear animals)
Subsidised biofuels production in the West raise demand for maize
Aggregate maize, rice, and soybeans production stagnated in 2006 and 2007 (partly due to drought)
Increasing speculation because of declining stock

Martin Wolf dismisses the idea that liberalization is the only answer:

The political focus of the Doha round on lowering high levels of protection is largely irrelevant. The focus should, instead, be on shifting the farm sector towards the market, while cushioning the impact of high prices on the poor.

The move towards genetically modified food in developing countries is as inevitable as that of the high-income countries towards nuclear power. At least as important will be more efficient use of water, via pricing and additional investment. People will oppose some of these policies. But mass starvation is not a tolerable option.

Futile efforts to regain the lost glory of Nepalese garment industry

noreply@blogger.com (Chandan Sapkota) — Wed, 11 Nov 2009 04:30:00 +0000

In my latest op-ed, I argue that exclusively chasing for duty-free access for Nepali garment and textile exports to the US markets is not a panacea for the problem associated with this dying industry. I think nothing is going to move forward even if Nepali exporters gets preferential treatment in the US market because after the end of MFA in 2005, the market is already flooded with similar exports from other countries that enjoy economies of scale in production and are more efficient and competitive (price and quality) than Nepali exporters. Last year, I wrote an op-ed (Times up for garment industry) arguing why the garment and textile industry cannot be depended upon for export-led growth.

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Futile efforts

CHANDAN SAPKOTA

During her visit to the US late September, Deputy Prime Minister and Foreign Minister Sujata Koirala touted that her delegation lobbied hard with some US Congressmen to pass a bill that would treat Nepali garment and textile sector preferably in the US market. She boasted that there were “positive and promising” responses from the US regarding duty-free access, which could, in principle, resuscitate the dying export-based garment and textile industry.

Each time a high-level delegation visits the US, they implore for preferential treatment of Nepali garment and textile industries. This fruitless effort has been continuing since the end of Multi-Fiber Agreement (MFA)—which established a system of quotas to limit the quantity of imported textiles and apparel products from specific countries to the US, Canada, and the EU — in 2005, after which the Nepali garment and textile industry has seen drastic decline in exports and market share in the West.

The value of garment exports between January-April 2009 was less than 10 percent of what was exported in the same period in 2004. This sector has already shed over 90 percent of jobs and 98 percent of firms. In the first five months of 2009, the value of readymade garment exports was US$3.4 million, a 49 percent drop from the same period last year. Recall that the garment sector was once the highest foreign currency exchange earning sector. Now, its contribution is minimal and agricultural goods like pulses have more weight on the export basket.

In a way, the political and financial resources invested so far in securing preferential access to the US market sounds reasonable. However, after more than four years of lobbying, there is hardly any progress. The policymakers are bogged down into this issue as if this is the only sector that would help stimulate export-led growth and employment generation. Exploration of other comparatively advantageous sectors have been overshadowed by the obsessive focus on securing preferential access to a market that is already flooded with similar goods from countries which enjoy huge cost and competitive advantage over Nepali exporters.

At this juncture, we need to ask two questions: What is the chance of getting preferential access to the US markets under present circumstance? If it does, will Nepali garment and textile exporters then be able to regain the lost market share?

________________________________________________

Unfortunately, there is no positive answer to these questions. A senior diplomat, who is quite familiar with these issues, from the State Department opined that it is very “unlikely” that Nepal would get preferential access to the US market under the present circumstance. Unfortunate this might be but it is not surprising. By now the Nepali lobbying troupe has a fair idea of how hard it is to secure preferential treatment from the US Congress; despite over four years of lobbying, things have not moved a bit in the positive direction. It should have been a clear indication that the entire effort might be a lost cause, not because we don’t need to prop up this sector but because we can’t do it under present labor and economic conditions in particular and the incapacity to fulfill enhanced labor, quality and environmental requirements brought about by increasing globalization in general. The senior official advised Nepali leaders and lobbyists to be a bit more realistic and not chase for something that is not attainable. Now, revert back to what DPM Koirala touted while she was in DC in September? It seems like she has not fully fathomed this issue.

Now, let us assume that Nepali garment and textile exporters get preferential access to the US market. Will this help revive the lost glory of this industry? It seems unlikely because of five reasons. First, due to persistent labor problems ranging from bitter disputes on minimum wage to hiring and firing provisions, the firms are simply unable to supply pre-ordered goods on time.

Second, investors are discouraged to invest in this sector due to unmanageable red tapes and irresolvable industrial relations. Third, the problem is further compounded by frequent bandas and transport strikes. The cumulative effect is that delivery is costly and not possible within the stipulated timeframe, leading to loss of valuable customers like WalMart and Gap Inc. This is more of supply than demand issue.

Fourth, exporters from China and India, among others, are more competitive in terms of price and quality than Nepali exporters. They enjoy economies of scale and their governments have elaborate plans to prop up production and distribution efficiently. This is clearly lacking in Nepal because of the lackluster response from government and myopic business vision of investors. Until 2005, the government and exporters basked on preferential treatment and completely disregarded the need to upgrade the old production structure into a new, consolidated one so that it can compete with more efficient exporters from abroad. Fifth, Nepal cannot jump successfully into the highly-competitive US market because exporters from other countries have already eaten up the pre-2005 market pie of Nepali exporters.

This does not mean that we need to abandon the promotion of garment and textile industry abroad. It would be fruitful to look at regional markets, which has higher potential than markets abroad because of lower transportation and transaction costs. This sector could gain more if the same amount of political and financial capital is invested in lobbying to eliminate countervailing duty (CVD) of 4 percent in the recently signed Nepal-India trade treaty.

Expediting establishment of GPZs and giving tax credits and subsidy incentives to investors would also aid the process, though, to be frank, no one knows how much this will help the dying sector regain its past glory. To satisfy the never-ending fascination with Western markets, the government and the exporters need to look into niche markets rather than the entire garment and textile market, which, as argued before, are already conquered by competitive firms from other countries. Promoting selected products that reflect Nepali tradition and heritage would be one of the potential niche markets.

The illusionary notion that securing duty-free access to the US market would revive the garment and textiles sector is fundamentally flawed. Policymakers and investors should be a bit more realistic about our real manufacturing and export capacities. A preferential treatment, which is very unlikely in the present context, will not be a panacea to the multiple, intricate problems of the garment and textiles sector.

[Published in Republica, November 10, 2009]

Stupid, shameless Nepalese Minister should resign

noreply@blogger.com (Chandan Sapkota) — Tue, 10 Nov 2009 17:51:00 +0000

State Minister for Agriculture and Cooperatives Karima Begam on Tuesday afternoon slapped Chief District Officer (CDO) of Parsa Durga Prasad Bhandari at the latter´s own office premises.

State Minister Begam slapped CDO Bhandari five times, saying that he sent an ´old´ vehicle to pick her up from Simara Airport. She was in Birgunj to attend an interaction on ‘Girl education campaign for women lawmakers’.

Begam, who was accompanied by party cadres, grabbed CDO Bhandari by the scruff of the neck and slapped him five times upon her arrival at the CDO office. CDO Bhandari was then waiting to welcome the visiting minister.

“Yes, I beat up the CDO. I slapped him five times, pulling him up by the collar,” said Begum.

It is learnt that Begam had initially demanded a Scorpio belonging to the District Development Committee, Parsa. The District Administration Office had sent a Mitsubishi car from the Agricultural Tools Research Office in Birgunj.

Begam told media persons that she slapped the CDO as the latter failed to send a new vehicle to pick her up.

“The CDO has been using the Scorpio. Why can’t a minister use the vehicle?” she asked angrily. “Who is senior-- minister or CDO?

More here. Very stupid, senseless, shameless, behaviorless, illiterate, disgraced minister. She should immediately resign from her post. She does not even know how to deal with government officials, whom she treats like slaves. The police officials are already squeezed by funds and resources and have been a scapegoat for all things that go bad in security front. Leaders need to boost their morale. Instead, we have these kind of stupid acts committed by a minister against a dedicated civil servant.

The overall quality of the present cabinet is shown by the character of this shameless and behaviorless minister. For the sake of upholding justice and morale, she should be forced to resign, publicly apologize to the CDO, and stripped off all party designations!

The promise of mobile phones

noreply@blogger.com (Chandan Sapkota) — Fri, 06 Nov 2009 05:36:00 +0000

Liquidation of Hetauda Textiles Factory

noreply@blogger.com (Chandan Sapkota) — Thu, 05 Nov 2009 05:37:00 +0000

Finally, the Nepalese government has decided to liquidate a dead textile factory, which the Maoist government tried to revive believing that despite its utter lack of competitiveness, it could produce and supply textiles while creating artificial demand from the security agencies. It was populist and bad idea that only added deficits.

Reversing the Maoist government´s policy, the government has decided to send Hetauda Textiles Factory (HTF) into liquidation, citing that the revival of the dead industry was not possible.

The cabinet meeting held on Wednesday took the decision to this effect.

“We had to admit to the cabinet that past attempts to revive the failed and long-closed industry only added financial loss and burden to the government,” said a senior official at Ministry of Industry, disclosing the cabinet decision to myrepublica.com.

HTF was closed eight years ago after it posted a huge financial loss due to its failure to compete with imported textiles, mainly from India. Prior to the closure, the factory used to consume 1,200 tons of cotton and was employing about 1,200 people.

This is what I wrote when I reviewed the Maoist government's budget on 23 September, 2008:

Demonstrating a socialist manifestation and big planner attitude, the finance minister has adorned the budget with varied slogans and a resolution to revive moribund and sick firms. The promise to inject money and resuscitate state-owned enterprises like Hetauda Textile Mills, Gorakhkali Rubber Industry and Agricultural Tools Factory completely compromises efficiency and productivity in favour of a populist political agenda of creating employment. He has put an upper limit on demand by arguing that government agencies and security forces would consume production from these incompetent companies.

Again, he needs to be given a reminder of how the Soviet Union failed miserably when it embarked on grand and fruitless investment in railways and the manufacturing sector. Corruption and inefficiency thrived as the state-owned companies created illusionary demand, that is, they created their own demand and supply, and rotated the goods and services among themselves, leading to waste of resources in one sector and shortage in the other.

Will Nepal gain from the new India-Nepal trade treaty-II?

noreply@blogger.com (Chandan Sapkota) — Mon, 02 Nov 2009 05:27:00 +0000

Paras Kharel looks beyond simple economic theoretical benefits from the revised trade treaty (2009) between Nepal and India. The devil in the trade deal is getting clear!

What has also been overlooked by Nepal is the non-binding nature of the provision for waiver of additional duties other than that counterbalancing an excise duty. That India “shall consider” waiver at Nepal’s request does not make it mandatory for India to remove it. Our negotiators have been caught napping. And there is more to it. The possible waiver of such additional duties being applicable only to products of “medium- and large-scale” manufacturing units leaves open the room for applying them on products of small-scale units. In addition, the Protocol to Article I says that the two sides “shall undertake measures” to “reduce or eliminate” non-tariff, para-tariff and other barriers that impede promotion of bilateral trade. This weak formulation does not entail a binding commitment to categorically eliminate such barriers.

The list of primary products qualifying for duty-free and quota-free access has been expanded to include floriculture, atta, bran, husk, bristles, herbs, essential oils, stone aggregate, boulder, sand and gravel. But it was unnecessary to list some of the products as they were already eligible for preferential treatment—for example, the existing list of eligible primary products included flour (atta is one type of flour) and forest produce (herbs come under non-timber forest products). There is a need to make the list clear and precise, based on standard international classification, to remove ambiguities and arbitrariness in interpretation. As things stand now, either country can impose customs duty on products not mentioned in the list, whereas the very first point on the list reads “agriculture, horticulture and forest produce and minerals which have not undergone any processing”—which is quite all-encompassing. Besides, Nepal’s strategy should be to add value to products such as herbs and essential oils through processing rather than exporting them in raw form.

It has been agreed to calculate value addition for Nepali manufactured products to get preferential access to India on a free-on-board, rather than ex-factory price, basis. This is of little help as stringent rules of origin—30 percent value addition and change-in-tariff heading at 4-digit level—that are beyond Nepal’s current level of industrialization and supply capacity have not been relaxed. The quantitative restrictions slapped since 2002 on four Nepali products—vegetable ghee, acrylic yarn, zinc oxide and copper wire rod—remain. Indian manufactured goods, meanwhile, will continue to get preferential treatment from Nepal without having to meet any rules of origin.

See this blog post for additional information.

Lessons for developing countries from Finland’s state-led growth success

noreply@blogger.com (Chandan Sapkota) — Wed, 28 Oct 2009 15:18:00 +0000

Finland is one of the examples of successful state-led development, where the state helped in capital accumulation (reflected in an "unusually" high investment rate) in manufacturing industries while at the same time committing itself to upholding the market economy. With this it was able to smoothen coordination failures and informational externalities, thus aiding the process of specialization and production. In a research paper No. 2009/35 (The Finnish Development State and its Growth Regime), authors Markus Jantti and Juhana Vartiainen argue that the state acted as a net saver, and credit was rationed to productive investment outlays. They also argue that incomes policies and welfare reforms were important in sustaining the necessary political compromise that underpinned the Finnish development state.

Note that Finland was still an agrarian economy until 1930s. As late as in the 1950s, more than half the population and 40 per cent of output were still in the primary sector. Per capita GDP was only half of that of Sweden. Yet by the late 1970s, Finland had become a mature industrial economy.

Finland is an example of a late but successful state-led industrialization that was carried out rapidly. The economic policy strategy that achieved this was a judicious mix of heavy governmental intervention and private incentives. Governmental intervention aimed at a fast build-up of industrial capital in order to ensure a solid manufacturing base. At the same time, however, it was made clear that the aim of heavy-handed state intervention was not to establish a planned economy as a permanent solution. Rather, the government and the constitution made it clear that the basic property rights of capitalism would ultimately be respected. [...]From the 1950s onwards, as trade unions became stronger, the labour movement became a more active partner in this more or less implicit social contract. Thus, in a manner similar to that of Austria, Korea and Taiwan, decision-making has been quite corporatist.

Public savings accounted for as much as 30 per cent of aggregate savings during the 1950s and 1960s. This surplus was channelled partly to support private investments in capital equipment throughout the country, and partly to start public companies in some key sectors of the economy. State companies were established in the basic metal and chemical-fertilizer industries as well as the energy sector. As late as in the 1980s, state-owned companies contributed about 18 per cent of the total industry value-added in Finland. [...]Low and rigid interest rates and administrative rationing of credit to some areas of business investment, at the expense of depositors and households.In the period 1960-84, gross fixed capital formation was 26.3 per cent of GDP, a figure exceeded in the OECD area only by Norway. [...]A pragmatic cooperation between organized private agents (bankers and business leaders), on the one hand, and government officials and civil servants, on the other, has played a key role in enhancing economic growth.[...]The programme of rapid capital accumulation also presupposed wage moderation and the acceptance of higher taxes. Upholding industrial competitiveness and profitability thus acquired high priority on the economic-political agenda. The crude instruments to accomplish these were comprehensive income policy settlements as well as repeated devaluations.[...]The implicit social contract was not limited to upholding industrial competitiveness. Social welfare reforms were gradually introduced at the same time, which can also be interpreted as an attempt to buy wage moderation with the promise of welfare services.

The question now is: are these measures applicable to other countries or can they be emulated in other less developed countries? The authors say No but policymakers can derive "indirect" lessons form Finland's success!

The specific policy package described in this paper is hardly applicable today. We know now that the crude accumulation of physical capital is not the key to rapid economic growth. Instead, today’s leading doctrines of economic development and development assistance emphasize property rights, good infrastructure as well as education, particularly that of women. Using public funds to boost expensive physical investment projects is clearly no longer a relevant policy goal. Nor would such a programme be feasible since the regulation tools of the 1950s—credit rationing, soft monetary policy, public ownership of key industries—have become obsolete.

Furthermore, Finland’s success story may have been due to rather favourable but transitory circumstances. The crucial phase of state-led economic growth and the buildup of welfare services coincided with favourable demographics, so that reforms created more winners than losers. Once the demographic structure becomes less advantageous, it is less certain that there will be such a happy congruence between the demands of the market economy and the political aspirations of voters.

Finland’s example offers a general message of hope for many countries affected by conflicts and poverty. Consider Finland’s history up to the Second World War: a small, backward country colonized by more powerful neighbours, torn by a violent civil war just as independence was within reach, and subsequently limited in its political manoeuvring room by the geopolitically challenging Cold War environment. Yet, it was possible for the Finnish decision makers—the government as well as various corporatist organizations—to forge a political compromise that was deemed politically legitimate and exploited the global economy to undertake a rapid economic transformation. This could be the positive message for any aspiring, less developed country in which initial conditions seem uninspiring.

Does aid aid growth?

noreply@blogger.com (Chandan Sapkota) — Wed, 28 Oct 2009 15:14:00 +0000

This Discussion Paper No. 2009/05 from UNU-WIDER says that aid has a positive and statistically significant effect on growth over the long run.

The micro-macro paradox has been revived. Despite broadly positive evaluations at the micro and meso-levels, recent literature has turned decidedly pessimistic with respect to the ability of foreign aid to foster economic growth. Policy implications, such as the complete cessation of aid to Africa, are being drawn on the basis of fragile evidence. This paper first assesses the aid-growth literature with a focus on recent contributions. The aid-growth literature is then framed, for the first time, in terms of the Rubin Causal Model, applied at the macroeconomic level. Our results show that aid has a positive and statistically significant causal effect on growth over the long run with point estimates at levels suggested by growth theory. We conclude that aid remains an important tool for enhancing the development prospects of poor nations.

Will Nepal gain from the new India-Nepal trade treaty?

noreply@blogger.com (Chandan Sapkota) — Wed, 28 Oct 2009 05:22:00 +0000

Commerce ministers of Nepal and India signed a new bilateral trade treaty, which would have a life of seven years, yesterday. This new treaty is particularly promising for Nepal because it scraps many non-tariff barriers and direct tariffs on majority of goods. It also sorts out certification problems related to sanitary and phyto-sanitary measures. These measures are expected to increase price competitiveness of Nepalese export items. Importantly, it might help decrease the towering, unsustainable trade deficit, which was over Rs 108 billion in FY2008/09. This treaty is highly significant for Nepal because over 60 percent of total trade takes place with India.The top five exports to Indian are textiles, zinc sheet, thread, polyester yarn and juice.

Progressive reforms on sanitary and phyto-sanitary measures are probably the most exciting stuff for some exporters (India’s quality requirements were bugging them for a long time).

The treaty also binds India to recognize Nepal’s standard certification. It also puts the responsibility of upgrading Nepal’s laboratory on India’s shoulder, a provision which officials said will ensure enforcement of standard accreditation provision. Once that happens, exporters of Nepali tea, cardamom, ginger and other agricultural produces will not need to produce quality certification from Indian laboratories in Kolkata or Patna for entering their produces to India. This will prevent traders from losses they incurred while waiting for a week for certification to come, and thus will boost the export of primary goods.

The new treaty has for the first time open bilateral trade via air route. For the purpose, Tribhuvan International Airport (TIA) will be used as the official port for exports and airports in Delhi, Mumbai, Kolkata, Bangalore and Chennai will be ports for imports. It has also added four new land routes, namely, Maheshpur/Thutibari (Nawalparasi), Sikta-Bhiswabazar (Parsa) Gulariya-Murtiya (Bardiya) and Laukahi-Thadi (Siraha), for bilateral trade.

However, there is a hook, which will not help lower extra costs incurred by Nepalese garment exporters. It is not surprising that the Indian government declined to clear all hooks in the garment sector. The Indian government does not want to take dampen its garment sector by importing cheap, similar garments from Nepal.

Despite expressing good gestures and promises of all possible support, Indian Commerce Minister on Tuesday indicated that Nepal’s readymade garment could continue to face countervailing duty (CVD) of 4 percent.

The CVD that India imposed a couple of months ago has brought exports of popular brands like John Players, Peter England and DJ & G to a grinding halt. Nepali exporters argue that the imposition of duty on a product, on which India has no excise duty, was against the spirit of ´National Treatment´ provisioned for Nepali exports.

"Worse still, India has been imposing duty on maximum retail price (MRP), self-assessing the export value as 60 percent of MRP tagged on the product. This is unfair and should be eliminated," said Prashant Pokharel, president of Garment Association Nepal.

Though, it is not a happy moment for the Nepalese garment sector, the agriculture sector (only some of them; differences still remain in sorting out full tariff reduction on some agricultural products), mining and related activities, and pharmaceutical sector should benefit from the new trade treaty. I expect increased trade volume, which is already $3 billion, with India and a decrease in existing negative balance of trade.

The full benefits of new trade concessions from the Indian side (don’t get me wrong, the Nepalese government has also reciprocated with similar tariff reduction, which should benefit Indian exporters even more) would depend on how much Nepal facilitates trade related activities (decrease transaction costs, smoothen supply activities by removing transport bottlenecks, disseminating relevant information to traders, extend credit and technology-related subsidies etc). As of now, trade facilitation in Nepal is dismal. The government has to improve on these complementary factors to reap full benefits from the new trade treaty.

Here are the major points:

No non-tariff barriers and extra-customs duty on Nepali exports
India to recognize Nepali standard certification
DRP, channeling agency on vegetable ghee exports to be annulled
Trade via air to be recognized
Five new trading routes to be opened up, including TIA
Treaty will last for seven years

Bishwamber Pyakuryal, a professor of economics at Tribhuvan University, weighs in:

Correcting imbalances should mean exploring cost-competitive products that are highly in demand in the Indian market. We still lack information about each other on import needs, economic opportunities, market and labor workforce, investment opportunities, export potentials and other inherent constraints. Besides the compilation of annual data, the system of maintaining information on updated country-specific trade data has not yet been developed. The government should integrate the country’s economic policy into foreign policy goals and strategies and develop a system to link national data with Nepali missions abroad to make economic diplomacy result-oriented.

The year 2008/09 looks better than FY 2007/08 with regards to exports to India. In 2008/09, exports went up by 13.5 percent in contrast to a nominal decline of 0.2 percent in the previous year. Exports to India rose by 6.2 percent in 2008/09 as against a decline of 7.6 percent in the previous year. Similarly, exports to other countries also expanded by 26.9 percent compared to an increase of 17.3 percent in the previous year. Therefore, as the trend is positive, with the signing of the revised treaty, one should expect Nepal’s trade deficit with India to gradually reduce.

"Brain drain" is a win-win situation for both exporters and importers

noreply@blogger.com (Chandan Sapkota) — Tue, 27 Oct 2009 19:54:00 +0000

Michael Clemens and David McKenzie argue so:

... common idea that skilled emigration amounts to "stealing" requires a cartoonish set of assumptions about developing countries. First, it requires us to assume that developing countries possess a finite stock of skilled workers, a stock depleted by one for every departure. In fact, people respond to the incentives created by migration: Enormous numbers of skilled workers from developing countries have been induced to acquire their skills by the opportunity of high earnings abroad. This is why the Philippines, which sends more nurses abroad than any other developing country, still has more nurses per capita at home than Britain does. Recent research has also shown that a sudden, large increase in skilled emigration from a developing country to a skill-selective destination can cause a corresponding sudden increase in skill acquisition in the source country.

Second, believing that skilled emigration amounts to theft from the poor requires us to assume that skilled workers themselves are not poor. In Zambia, a nurse has to get by on less than $1,500 per year -- measured at U.S. prices, not Zambian ones -- and a doctor must make ends meet with less than $5,500 per year, again at U.S. prices. If these were your annual wages, facing U.S. price levels, you would likely consider yourself destitute. Third, believing that a person's choice to emigrate constitutes "stealing" requires problematic assumptions about that person's rights. The United Nations Universal Declaration of Human Rights states that all people have an unqualified right to leave any country. Skilled migrants are not "owned" by their home countries, and should have the same rights to freedom of movement as professionals in rich countries.

new research reveals this to be simply unfounded. Skilled migrants also tend to earn much more than unskilled migrants, and on balance this means that a university-educated migrant from a developing country sends more money home than an otherwise identical migrant with less education. The survey of African physicians ... found that they typically send home much more money than it cost to train them, especially to the poorest countries. This means that for a typical African country as a whole, even if 100 percent of a physician's training was publicly funded, the emigration of that physician is still a net plus.

Rodrik on trade and protectionism

noreply@blogger.com (Chandan Sapkota) — Mon, 26 Oct 2009 14:36:00 +0000

Rodrik tries to debunk the overly hyped protectionism debate during the economic crisis:

What about the recent tariffs imposed by the United States on Chinese tires? President Barack Obama’s decision to introduce steep duties (set at 35% in the first year) in response to a US International Trade Commission ruling (sought by US labor unions) has been widely criticized as stoking the protectionist fires.

But it is easy to overstate the significance of this case, too. The tariff is fully consistent with a special arrangement negotiated at the time of China’s accession to the WTO, which allows the US to impose temporary protection when its markets are “disrupted” by Chinese exports. The tariffs that Obama imposed were considerably below what the USITC had recommended. And, in any case, the measure affects less than 0.3% of China’s exports to the US.

The reality is that the international trade regime has passed its greatest test since the Great Depression with flying colors. Trade economists who complain about minor instances of protectionism sound like a child whining about a damaged toy in the wake of an earthquake that killed thousands.

The welfare state is the flip side of the open economy. If the world has not fallen off the protectionist precipice during the crisis, as it did during the 1930’s, much of the credit must go the social programs that conservatives and market fundamentalists would like to see scrapped.

NDB fiasco II: Don’t prolong the death of NDB

noreply@blogger.com (Chandan Sapkota) — Sun, 25 Oct 2009 06:40:00 +0000

Few months ago, I wrote an op-ed arguing for a swift liquidation of Nepal Development Bank (NDB). Four months down the road, the whole issues looks as inconclusive as the political process in Nepal. In a new op-ed, I argue that the court should not stop the NRB from fully liquidating NDB. The unhealthy financial posture of NDB should not even be an issues of concern-- it is a moribund bank and should be put to rest without delay so that poor depositors can get their frozen savings back. Plus, this will help cleaning up of the Nepalese financial system.

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Don't Prolong Death Of NDB

Amidst senseless political bickering, it is easy to forget simple events whose fallout have a huge impact on the lives of general public. A sense of urgency felt by the public is not necessarily shared by the politicians, policymakers and judges. One of such events is the drama surrounding liquidation of Nepal Development Bank (NDB), the financially troubled bank whose liabilities are far more than its assets. The indecisive action from the court, though a lately decisive one from the central bank, has deprived many households of their savings.

Let us recall what happened four months ago. Sensing a deteriorating financial health of NDB, depositors started pulling money out of the bank. The loss of depositors’ confidence on the bank was unsurprising. It had bank deposits and cash worth Rs 196.2 million but its cumulative loss amounted to Rs 609.2 million. Nonperforming loans (NPL) comprised over 50 percent of loan portfolio. Its negative capital ratio of 48.31 percent was far less than 11 percent allowed by the central bank.

In a matter of a few days, it seemed that NDB was more contagious than was thought before, i.e. the panic triggered from a single near-dead bank was putting other healthy financial institutions at risk of bank runs. To contain the bubbling panic among anxious depositors, the central bank (NRB) guaranteed to be the savior of last resort. Meanwhile, it made the right decision to liquidate NDB. It froze transactions and took control of the bank. To fully liquidate the distressed bank, the central bank sought permission from Patan Appellate Court. On July 29, the court tasked chartered accountant Tirtha Raj Upadhaya to present a report explaining if it was necessary to liquidate NDB. While depositors are anxiously waiting to get their money back, the process of liquidation is progressing, if any, at a snail’s pace.

Limited and confusing information about the whole process has further worried depositors. The need to urgently take a final decision about the fate of NDB (which I personally think should be put to rest for good) is not shared by the judges of Appellate Court, further increasing confusion and anxiety among depositors. The situation is so confusion and so little information is channeled to the public that one of the worried elderly depositors emailed me asking when he will get back his hard-earned money, which he saved in NDB so that he could use it for his daughter’s marriage. He was so confounded and nervous that he requested me to “write something sympathetically.”

The court’s decision to deliberately prolong the crisis with complete disregard to the fate of poor depositors is the main constraint in putting to rest the moribund bank. It seems that the judges at the court do not trust technical and relatively specialized analysis from the central bank, which probably has the most relevant information about the financial sector than any other institution in the country. The decision to appoint a chartered accountant to reassess the health of an unhealthy bank and deliberately protract the liquidation process shows inefficiency and incompetency of the court in dealing with financial issues.

A consultant who assisted with projects a decade ago to evaluate Nepal’s financial institutions and who has interviewed the then head of NDB argues that the bank’s management was cooking up methods to swindle money away from the financial system to their personal treasure chests. He says: “It seemed to me then that the NDB’s main function was to shovel government rupees into private pockets ... the inability of the NDB staff to answer basic questions about their lending practices indicated that much was amiss at that institution ... I guess well-connected parties were able to delay recognition of the problem and enforcement of the directive so they could continue to misappropriate the people’s resources.” The unhealthy financial posture and practice of NDB was apparent a decade ago but the concerned authorities, mainly the NRB, stayed mute, downplayed the evolving superficial banking practices and basked on the performance of a few healthy commercial banks.

Now, a quick liquidation is in the interest of the whole banking industry, its poor depositors and the nation. The judges have to comprehend this and let NRB, despite its questionable record to prevent NDB-type banking practices in the past, handle the situation as appropriate. Else, it will foster a situation where banks will take excessive risk and willfully play with depositor’s money thinking that in case of failures, the central bank would come to their rescue. The court should help minimize moral hazard in the banking industry by ratifying NRB’s request to liquidate NDB.

Meanwhile, the central bank should not let the banks take excessive risk, channel huge amount of money to few creditless, politically-affiliated borrowers and engage in any activities that could put poor depositors’ money at excessive and irrecoverable risk. The NDB’s big defaulters should also be punished, although I am not convinced this will happen given the progress in indicting big defaulters in the past. Perhaps, what the consultant observed would be true: “I wonder whether any of NDB’s defaulting borrowers need to be concerned about facing punitive action, or at least public humiliation. Based on my experience in Nepal, I would guess not. At that time, the NRB had a “blacklist” of defaulters but it was highly classified and to the best of my knowledge was not available to commercial banks, except perhaps, on a case-by-case basis, through the NRB’s representative on the Board. So the same people could, at least in theory, keep pulling the same scam over and over.”

Two things warrant immediate attention. First, the judges should give a green signal to liquidate NDB as soon as possible so that poor citizen’s frozen money is freed up. The liquidation should be carried out even if few investors show half-hearted interest in reviving the bank. Second, the NRB should annually publish the list of all big willful defaults to promote transparency and accountability in the banking industry. This will stop big defaulters from exploiting depositor’s money. It will also break the exclusive availability of defaulters list to the board of directors of NRB, who, by the way, privately or publicly advise some of the commercial banks. This is the time for the court and NRB to improve upon their unqualified judgment of the past.

(Published in Republica, October 23, 3009)

Globalization, wages and the quality of jobs

noreply@blogger.com (Chandan Sapkota) — Sat, 24 Oct 2009 06:49:00 +0000

It is pretty much accepted that globalization has led to an increase in jobs in the export-based industries. But, what has been the impact of globalization on wages and quality of jobs? A new book (Globalization, Wages, and the Quality of Jobs) sheds light on these issues and digs answers for if globalization has increased wages and quality of jobs. In short: there is some evidence that globalization has increased wages and working conditions in the sectors that are exports based. However, there is no consensus on the effects (positive or negative) of globalization on wages and quality of jobs.

The authors look at five countries: Cambodia, Indonesia, Honduras, El Salvador, and Madagascar. They focus on apparel sector to gauge if globalization is improving working conditions and increasing wages.

The authors show three connections between globalization and inter-industry wage differentials (IIWDs):

FDI-intensive and export sectors paid wages significantly above the mean (Cambodia and Honduras)
Wage premium in FDI-intensive and export industries increased over time
Wage premium was positively correlated with exports and FDI

Few details about the five countries:

Cambodia:

-apparel made up 82 percent of total merchandise exports in 2003; nearly 2/3 destined for the US

-wage in garment sector is 35 percent higher than average wage

-wages and working conditions are positively correlated with trade

-first country to have quota access for exporting firms specifically tied to working conditions

Indonesia:

-exports oil, gas, electrical appliances, textiles, plywood

-went two periods of liberalization: mid-1980 to mid-1990 focused on textiles and apparel sectors and after mid-1990s it diversified to heavy industries (metal products and machinery and chemical industries)

-ILO contributed a lot to improving working condition and labor protection

-wage in apparel sector is 8.3 percent higher than average wage

Honduras:

-exports coffee, banana, textiles/apparel

-apparel exports made up 60 percent of total exports; 2/3 exported to the US

-more than 82 percent of all Honduran workers worked in foreign-owned factories

-wage in apparel sector is 21 percent higher than average wage

-the end of MFA has deteriorated wages and exports sector

El Salvador:

-exports coffee, sugar, offshore assembling, shrimp, textiles

-wages in apparel sector is 7.2 percent higher than normal wages

-wages positively related with working conditions

-end of MFA coincided with decline in FDI and wages

Madagascar:

-exports coffee, vanilla, shellfish, sugar, cotton, clothes

-wage of workers working in the exports industry is generally higher than normal wages but the end of MFA and the entry of China in the WTO has dampened wages and FDI

-end of MFA triggered an outflow of capital out of apparel sectors to lower-wage countries

Globalization has increased FDI in countries and improved export opportunities with the potential for rising wages and more employment. It has also changed the structure of economies, particularly in the developing countries. The authors argue that the influx of exports-focused FDI was positively correlated with wage premiums and working conditions, as employment in agriculture fell and apparel employment increased. Also, FDI that produces for the domestic market has different effects than FDI that produces for export. See the figure below:

The barometer for success of globalization should not just be increase in trade volume but also the number and quality of jobs created. This will have an impact on poverty reduction as well.While in developed countries, working conditions are generally better, it cannot be safely assumed the same in the developing countries. The authors argue that working conditions are positively related to wages.

It appears that labor markets in export-oriented sectors that attract FDI are characterized by "good" jobs with high wages and better working conditions. In contrast, the agricultural sector (or more generally, the informal sector in Madagascar) offers "bad" jobs with low wages and poor working conditions. Thus, the positive correlation between and working conditions is more consistent with theories of efficiency wages and rent-sharing than with compensating differentials.

The relationship between globalization and its implications for wages and working conditions in developing countries is not straight forward-- it depends on many factors. These factors include:

technology
worker preferences and bargaining power
the cross-sectoral integration of labor markets
the quality of governmental institutions
international trade policy
the transmission of knowledge through supply chains
the establishment and enforcement of international labor standards
the leverage exercised by consumers, stockholders, and reputation-sensitive international buyers
the stability of labor markets

Some observations:

-Governments may impose specific regulations on firms that benefit from trade liberalization. For instance, the commitment of Cambodia to ensure good working conditions in firms that operated under the MFA.

-The action of national interest groups can influence the impact of globalization. For instance, anti-sweatshop activists waging a campaign for better working conditions and fair wages. It is interesting to note that, in Indonesia, the factories that were forced to raise wages as a consequence of government action and anti-sweatshop agitation were able to do so without cutting employment or production.

-A set of labor market inefficiencies may be in place and be aggravated by increased globalization. For instance, the factors that undermine bargaining power of workers in relation to factory managers--young, female, poorly educated or illiterate workers; workers migrating to urban areas may not have experience beyond the barter economy; over supply of labors makers it harder to negotiate better wage and working conditions; frequent economic downturns might wipe out gains made during good economic times.

What happens when rate of increase of population exceeds food production?

noreply@blogger.com (Chandan Sapkota) — Thu, 22 Oct 2009 01:32:00 +0000

Well, when the rate of increase of population outstrips rate of increase of food production, then there is a production paradox-- despite increase in food production in all regions, the number of hungry stomaches still increase! From NYT:

Scientists and development experts across the globe are racing to increase food production by 50 percent over the next two decades to feed the world’s growing population, yet many doubt their chances despite a broad consensus that enough land, water and expertise exist.
The number of hungry people in the world rose to 1.02 billion this year, or nearly one in seven people, according to the United Nations Food and Agriculture Organization, despite a 12-year concentrated effort to cut the number.
The global financial recession added at least 100 million people by depriving them of the means to buy enough food, but the numbers were inching up even before the crisis, the United Nations noted in a report last week.
Agronomists and development experts who gathered in Rome last week generally agreed that the resources and technical knowledge were available to increase food production by 50 percent in 2030 and by 70 percent in 2050 — the amounts needed to feed a population expected to grow to 9.1 billion in 40 years.

Despite an increase in technology and food production techniques, why is there still increasing hunger? Are we approaching Malthusian nightmare? Here is Greg Clark:

Thomas Malthus warned in 1798 that population pressures would forever keep food and energy scarce and incomes low. In the 200 years since, world population has grown sevenfold, to 6.7 billion. Yet food and energy have become cheaper and more abundant. Malthus's dystopia, it seemed, belonged in history's junkyard. But, suddenly, rapid growth in China and India and the consequent scramble for increasingly scarce resources has revived the Malthusian specter. By 2050, 9 billion people in a world where all have U.S. consumption standards would need eight times as much oil and five times as much food than the planet current uses. Is the future a world of $10-a-gallon gas and $20 Big Macs?

Ostrom and Nepal

noreply@blogger.com (Chandan Sapkota) — Tue, 20 Oct 2009 15:42:00 +0000

2009 Nobel laureate in economics Ostrom's on CPR (via David Warsh)

"total crop yield in Nepal is frequently higher around small primitive dams built from stone, mud and trees and managed locally, than near large concrete and steel dams where irrigation users have little incentive to concern themselves with necessary dam maintenance."

It would be very interesting to read Ostrom's forthcoming book about her research in Nepal.

Two emerging giants battle: Nepal benefits

noreply@blogger.com (Chandan Sapkota) — Mon, 19 Oct 2009 04:08:00 +0000

The battle between China and India for regional influence will potentially benefit Nepal. A positive externality (for Nepal) from competing economic policies for regional influence by two emerging giants.

Indian Railways has chalked out a comprehensive plan to build rail links with Nepal and Bhutan in an apparent bid to counter the recent Chinese move to build rail links in South Asia. China is building a 1,956-kilometer rail route connecting Qinghai province and Tibet with Kathmandu across the Tibetan plateau.

China is also planning to build an internal railway network in Nepal linking it to Pakistan via the Karakoram Highway and Bangladesh via Myanmar. Indian Railways proposes to build six rail links with Nepal and three with Bhutan on a priority basis. Recently, the railways has mooted a proposal to link India directly with Nepal to achieve its all-round development and enhance connectivity between the two neighboring countries.

Free articles from 2009 Nobel Prize in economics winners

noreply@blogger.com (Chandan Sapkota) — Sun, 18 Oct 2009 15:43:00 +0000

Some of the papers (for free!) by Elinor Ostrom and Oliver E. Williamson here.

Here is an interesting one:

The contested role of heterogeneity in collective action: Some evidence from community forestry in Nepal

2009 Nobel prize in economics

noreply@blogger.com (Chandan Sapkota) — Tue, 13 Oct 2009 06:22:00 +0000

This year’s Nobel Prize in economics went to Elinor Ostrom (the first woman to win the prize in economics) and Oliver Williamson for their work in economic governance.

Economic transactions take place not only in markets, but also within firms, associations, households, and agencies. Whereas economic theory has comprehensively illuminated the virtues and limitations of markets, it has traditionally paid less attention to other institutional arrangements. The research of Elinor Ostrom and Oliver Williamson demonstrates that economic analysis can shed light on most forms of social organization.

Elinor Ostrom has challenged the conventional wisdom that common property is poorly managed and should be either regulated by central authorities or privatized. Based on numerous studies of user-managed fish stocks, pastures, woods, lakes, and groundwater basins, Ostrom concludes that the outcomes are, more often than not, better than predicted by standard theories. She observes that resource users frequently develop sophisticated mechanisms for decision-making and rule enforcement to handle conflicts of interest, and she characterizes the rules that promote successful outcomes.

Oliver Williamson has argued that markets and hierarchical organizations, such as firms, represent alternative governance structures which differ in their approaches to resolving conflicts of interest. The drawback of markets is that they often entail haggling and disagreement. The drawback of firms is that authority, which mitigates contention, can be abused. Competitive markets work relatively well because buyers and sellers can turn to other trading partners in case of dissent. But when market competition is limited, firms are better suited for conflict resolution than markets. A key prediction of Williamson's theory, which has also been supported empirically, is therefore that the propensity of economic agents to conduct their transactions inside the boundaries of a firm increases along with the relationship-specific features of their assets.

Economists react:

Paul Romer

Paul Krugman says its “an institutional economics prize”

also, here

Chicago bound!

noreply@blogger.com (Chandan Sapkota) — Sat, 10 Oct 2009 04:50:00 +0000

I am going to visit Chicago this weekend. No posts for few days. I will post some pictures when I have access to internet. Looking for interesting places and stuff to do while in Chicago for three days.