Chandan Sapkota's blog

What caused the global financial crisis?

noreply@blogger.com (Chandan Sapkota) — Fri, 27 Jan 2012 11:40:00 +0000

Justin Yifu Lin and Volker Treichel argue that it is not the global imbalances, but excess demand in the US that caused the global financial crisis. Here is an abstract of their recent paper:

The world is currently still struggling with the aftermath of the worst economic crisis since the Great Depression. Following a description of the eruption, evolution and consequences of the global crisis, this paper reviews alternative hypotheses for the causes of the global financial crisis as well as their empirical evidence. The paper refutes the frequently voiced view that the global crisis was caused by global imbalances that reflected economic policies of East Asian countries. Instead, it argues that global imbalances were the result of excess demand in the United States, resulting from both the public debt in the United States arising from the Afghanistan and Iraqi wars and tax cuts and the overconsumption by households supported by the wealth effect from the housing bubble in the United States. The housing bubble itself was the outcome of the Federal Reserve's low interest rate policy in the aftermath of the burst of the "dot-com" bubble in 2001, the lack of appropriate financial regulation, and housing policies aimed at expanding the mortgage market to low-income borrowers. It was possible to maintain the large trade deficits of the United States for such a long period of time because of the dollar's reserve currency status. When the housing bubble in the United States burst, the global crisis ensued. The paper also analyzes why China's trade surplus increased significantly in general and with the United States in particular in recent years, and argues that this increase was caused by both the relocation of the labor-intensive tradable sector of East Asian economies to China and high corporate saving rates in China as a result of its dual-track approach to reform.

What’s up with PM Bhattarai’s Immediate Action Plan?

noreply@blogger.com (Chandan Sapkota) — Fri, 27 Jan 2012 06:01:00 +0000

Each time a new government comes in, it has now become a fashion to introduce new programs for transforming Nepal. PM Baburam Bhattarai unveiled a long Immediate Action Plan (or see this) yesterday that outlines what he thinks should be done rather than what can be done in reality given the existing political, economic and social structures. It looks like a budget speech. Let me focus on the economy aspects here.

A majority of of the programs are already been floated by previous governments. There is no need to give a different name to the already floated programs and include them in a supposedly new agenda of the government. Frankly, it would be better to just implement the programs of the previous administrations. Giving new names to old programs and adding a few new programs without any clue of how to attract capital required for such programs is just ludicrous. Attracting US$1 billion FDI in the next six months is just unbelievable when the total FDI last year was just US$39 million. All I can say is: Good luck, PM!

The prime minister argues that his government will try to execute some of the programs using the same budget for this fiscal year (about six months left for the next fiscal year to start). This is simply not going to happen because the amount will not be sufficient to launch all the programs loftily outlined by the PM.

Investors are primarily concerned with political stability, law and order, security of their investment and returns from it, hospitable labor force and government bureaucracy, and less red tape. Consider the following points:

It is not worthwhile to list all the economic programs (for “big push”) outlined by the prime minister. Read it here. It is too long and he is trying to do way too many things like the finance minister when he outlines fiscal budget.
Political stability is a far cry. Prachanda is already trying to pull the plug of PM Bhattarai’s government. The uncertainty over longevity of this government means a disincentive (for fear of policy change) for investors to come here and invest. Solution: Let the bureaucrats decide on these policies and the politicians support them and may be tweak them a bit (to give breathing space for politicians, whom by nature are more self-interested than what Adam Smith imagined!). Evidence: See how Japanese and Thai economies are doing just fine even when government changes frequently.
In order to unite capital, entrepreneurs and ideas, there should be effective property, contract, and business laws so that when whimsical government tries to change agreed terms and conditions, investors can drag them to court. This is one of the most reliable ways to entice investors to invest in this country. It would be better to focus on disciplining the politically affiliated, militant trade unions, ensure property rights (think of how you are going to return back the illegally seized properties instead of legalizing them), control corruption (first by political parties and leaders and then in bureaucracy), and bring out business friendly laws.
The reasons why domestic investors are hesitant to invest in whatever capacity they can is because they lack easy access to capital and favorable investment climate. The money required for large infrastructure projects cannot be sourced domestically (it would take more than double the annual budget to construct a railway link from the East to the West of the country). The government could choose a handful of strong and able domestic firms that can execute such projects, guarantee and insure international loans taken by them (interest rate is low compared to domestic loans), give positively discriminatory licenses to competent firms only, strictly supervise them so that they achieve what they commit to do, control unruly labor unions and disruptive activities, and then see how it yields concrete result. Evidence: study how Park Chung-hee applied similar approach in South Korea after the coup in 1962 and transformed a struggling economy into a economic powerhouse in a generation. Also, read how the Japanese economy got transformed during the Meiji period.
Bringing new program and policies each time a new government comes in confuses bureaucrats. Spare them from political wrangling and its fallout. Just stick to a plan that all can agree upon. Let the bureaucrats decide what that plan be. The political parties can work on brining legislation on this regard, help in executing and supervising the program and policies. Or, even if politicians want to bring new programs, make sure they are in line with the existing ones and one that can easily pass through the bureaucratic weaving across so many agencies. This Bhattarai led government could at least do this. Or, can they?
It is sad to not see concrete programs for export promotion and industrial development. Where happened to the idea of Special Economic Zones? Here are some of the measure the government could look at to revive exports. And, what about addressing the myriad of supply-side constraints ailing the industrial sector? About diesel plant, how are we going to bring one in operation without putting further strain in NOC? Diesel plant is expensive and it will further put financial burden on NEA and NOC. It would be better to pour the alloted money in a mid-sized hydropower plant without any delay. Or guarantee that much of loan amount to private sector to execute such hydropower plant.
One of the reasons why food prices are high and productivity low is due to the rigging of markets by middlemen. How about clearing them out so that farmers get the right price for their produce and an incentive to produce more? Read this piece about how middlemen are distorting the food markets in Nepal.
That said, I am positive about the emphasis on infrastructure development. It is the binding constraint to economic activities. We have to tirelessly reiterate this point even if no progress happens right now. Hopefully, at some point, a right time will be created when investors, government, labor unions, and public wholeheartedly back the idea of infrastructure development, that too massively. I don’t expect the present government to create a right environment for this even if it wants to. Nor do I hope that it will create a foundation for that. It is too fractured to do anything substantive because these programs require consensus among all stakeholders (investors, political parties, labor unions, and public). The idea is good though. Here is a list of projects of national pride as outlined by the Bhattarai led government:
The projections related to growth stimulus and employment generation are just a wild guess. For employment generation, my suggestion is to focus on the idea of Employment Guarantee Scheme (EGS) recently floated by the National Planning Commission. This program has the potential to employ about 431,388 people of households living below the national poverty line at the cost of 2.14% of budget (fiscal year 2011-12). It comes to around 1.29% of 2010-11 real GDP in producers prices. It is better to replace the Youth Self Employment Fund (funds have been misused by successive governments) with this one. Why not back the idea of EGS? It has been successfully implemented in India and several other countries.
I like the idea of government sponsored think tanks. Here is my take on this issue. This one and some other programs are somewhat in line with the recommendations of the PM’s Economic Advisory Council. Good job!
Above all, here is a simple idea for the Bhattarai led government to stay effective and relevant: just implement previously floated programs and resolve policy implementation paralysis. Enough with the leftists lofty talks and promises!

Evaluation of REDD projects: Lessons for future policy design and implementation

noreply@blogger.com (Chandan Sapkota) — Fri, 27 Jan 2012 03:54:00 +0000

Here is the abstract of a recent research paper published in International Journal of Sustainable Development & World Ecology (authors: Hari Bansha Dulal, Kalim U. Shah & Chandan Sapkota).

Reducing emissions from deforestation and forest degradation (REDD) projects: lessons for future policy design and implementation

In response to the pressing global challenges of climate change, initiatives under the auspices of ‘reducing emissions from deforestation and forest degradation’ (REDD) have been implemented in over 30 developing and least-developed countries since 2005. The initiatives cover nearly every significant and vulnerable forest ecosystem worldwide. In this study we review six representative initiatives, two each from Africa, Asia and Latin America. Strength, weakness, opportunity and threat analysis is done to evaluate each initiative's policy framework, design, implementation and results thus far. The main policy and project implementation factors that appear to lead to effective and successful REDD project outcomes include having clearly formulated project design; governance, land tenure rights and capacity; equity and transparency; indigenous peoples' rights and knowledge; local–international coordination; and enhancing local and institutional capacities. Based on these findings, we provide recommendations for future REDD policy action and project implementation to make it work for the poor and achieve its intended goals.

Real estate, housing and banking crises postponed in Nepal

noreply@blogger.com (Chandan Sapkota) — Thu, 26 Jan 2012 05:26:00 +0000

[It was published in Republica, January 25, 2012, p.6]

Crisis postponed

The slowdown in real estate and housing sector, which was enjoying unnatural growth thanks to high remittance inflows and easy credit from bank and financial institutions (BFIs), is affecting pretty much every aspect ranging from land transaction to restaurant and dance bar business to political donations. The investors and BFIs are increasingly worried about the future of this sector and banking industry.

Nepal Rastra Bank (NRB) has been gradually rolling out a number of corrective policy initiatives aimed at defusing risks faced by BFIs and real estate and housing sector. Meanwhile, Ministry of Finance (MoF) recently introduced a ‘relief package’ to prop up this still overheated sector. The short-term, trigger happy measures of the MoF will not revitalize the realty sector and the BFIs will still be in troubled waters. Importantly, it won’t address the core problems.

The MoF extended the deadline for reducing real estate and housing lending to 25 percent of total credit until mid-July 2013 and raised personal home loan threshold to Rs 10 million. Fearing excessive risk to BFIs, the NRB last year directed them to bring down their exposure to realty sector to 25 percent, from about 30 percent, of total loan portfolio. It also restricted personal home loan at Rs 8 million.

But, the BFIs were not in a position to comply with these directives and hence the NRB extended compliance deadline for few more months. Still, the BFIs were unable to adjust their loan portfolio according to the directives of the NRB. The MoF, on recommendation of High Level Financial Sector Coordination Committee, stepped in to provide a short-term reprieve to the BFIs and real estate sector.

Another important decision was to allow developers to categorize regular apartments as service apartments. This will modify composition of loan portfolio of BFIs by allowing them to change loan headings of apartments from real estate to service sector. Moreover, the MoF has decided to offer housing loans at concessional rates to all civil servants and office bearers of constitutional bodies. It is also mulling over opening the apartment sub-sector to foreigners.

These measures have reduced regulatory compliance burden of BFIs, indirectly encouraged them to lend more money to real estate and housing sector, and ultimately might help prevent further downslide in prices. But, they do nothing to address the core problems—unhealthy competition among too many BFIs and correction of overly inflated real estate and housing prices.

The rapid growth in the number of BFIs in the absence of proportional rise in depositor base and diversification of banking portfolios led to cutthroat competition in enticing depositors (institutional, government and individual) and borrowers. The BFIs competed unhealthily to attract depositors, who enjoy steady source of remittance inflows, by offering flamboyant and unsustainably high interest yielding deposit schemes. The little distinction in playing field for all categories of BFIs, which were allowed to swell to over 220 (including 31 commercial banks, 89 development banks, 79 finance companies, and 21 micro-credit institutions) by the NRB, amidst limited investment opportunities led to concentration of lending to one particular sector—real estate and housing.

To reap quick returns, the BFIs showed little prudence to appraise if the borrowers would be able to honor interest and principal payments on time. After all they have compulsion to lend (both short term and long term) more money in order to give returns on deposits to short term depositors, who are constantly in search of BFIs offering high interest.

Hence, money continued to flow to real estate and housing sector— estimated to be over Rs 120 billion—without much scrutiny, leading to multifold rise in their prices in matter of months. People took out loans to purchase inflated real estate and housing assets. Land transaction peaked at local land offices and investors and agents became millionaires overnight. But, it was just a bubble. It started to lose air when growth of remittance inflows slowed down in 2009 as a result of the global financial and economic crises. All of a sudden real estate and housing prices tumbled.

Half constructed buildings, unsold land plots, and ‘ghost apartments’ were apparent. The BFIs jacked up lending rates, further putting pressure on borrowers. They were unable to recoup interest and principal payments on time, leading to a liquidity crunch. Fortunately, with prudent interventions by the NRB, there is now liquidity surplus in the market.

Given this backdrop it is clear that the crises were engendered by unhealthy competition among BFIs and unnaturally high growth of real estate and housing prices. The postponement of deadline to meet the lending threshold to this sector will neither resolve the core problems nor avert a potential banking crisis. It will only delay the inevitable consolidation of BFIs and correction of real estate and housing prices. Furthermore, shifting headings of loans from commercial apartments to service apartments is a clever way to enable BFIs to comply with 25 percent loan threshold.

It makes no difference to borrowers’ ability to honor interest and principal payments on time and the BFIs’ ability to recoup them. The BFIs have already put up around 1000 units of land and housing for auction in the second quarter of this fiscal year. Even though the starting prices are below than what the BFIs would expect, they are still not finding buyers. The president of Nepal Finance Companies’ Association argues that as much as 75 percent of real estate sector borrowers are not honoring interest payments. At the end of the day, the loans might be stacked up in the non performing loans (NPLs) category of the BFIs. Note that high NPLs means unhealthy state of BFIs, which might require restructuring at the cost of taxpayer’s money or with donor’s assistance like it was done with the two largest state-owned commercial banks.

The plain fact is that there has to be consolidation of BFIs and correction of real estate and housing prices. The government has to offer adequate incentives for BFIs to go for merger and acquisition. When the entire future of banking industry is in line, we should not be quibbling over tax holidays, management positions, and overly high capital requirements.

Meantime, the banking industry should also diversify its loan portfolio, ensure sound corporate governance, introduce innovative packages and seek investment opportunities outside of the handful of traditional sectors. Taking stock of the paucity of investment opportunities for BFIs, the NRB recently outlined opportunities and made it mandatory by mid-July 2013 for them to lend at least 10 percent of total loan and investment portfolio to agriculture and energy sectors.

Regarding the real estate and housing sector, which contributes just over 8 percent to GDP, price correction is inevitable and the government has to let markets adjust to real price levels rather than trying to artificially prop it up. The political leaders and their financiers and supporters have substantial interest in this sector and without a rise in prices some of them will see their financial worth wipe off completely.

The MoF introduced ‘relief package’ not to correct markets, but to alleviate their hardship. There are even suggestions to prop up real estate and housing markets outside of the major cities. Other than pacifying party supporters and businessmen funding the political leaders, these measures will do very little to steer this sector in the right path. It is time to call off gambling in this sector and let markets determine the course this time.

[Published in Republica, January 25, 2012, p.6]

Bhutan, Mongolia and Nepal: Contribution of natural resources to growth

noreply@blogger.com (Chandan Sapkota) — Mon, 23 Jan 2012 05:46:00 +0000

Here is a highly recommended piece about Mongolia’s obsession with mining in the Gobi desert and its plan to reap benefits out of its sale. Mongolia is trying to exploit its natural resources and focus on something where it has comparative advantage on rather than getting bogged down on debate over resource rights and resource curse. It is doling out money to its citizen and is setting up a fund to channelize income from mining (just like Norway and Botswana are doing with earning from petro fuel and diamond respectively) to fund development activities.

While reading the article, I kept thinking about the sorry state of hydropower in Nepal, the victory of never-ending discussion and talks over actual construction and the apprehension of being dominated by big foreign investors (and the countries they represent). For someone who is always thinking of spurring growth, increasing exports, jacking up per capita income, and providing appropriate social protection to the needy people, all the objections and hindrances sound totally nonsense. Much has been written about Nepal’s hydropower potential. I won’t attempt to repeat them here—just Google it!

Let me give comparative stats and discussion (extracted from various sources) on Bhutan, Mongolia and Nepal—all are landlocked—and shed light on how the first two are successfully exploiting their natural resources on which they have comparative advantage and how the latter is lost in the never-ending debate, fear of domination by alien investors and smugness over the running waters.

Mongolia:

GDP size: $11.02 billion (PPP in 2010)
Per capita income: $3,600 (PPP in 2010)
Population: 3.133 million (July 2011 est.)
Real GDP growth: 6.1% in 2010
In the third quarter of 2011 Mongolia’s economy grew by 21% compared with the same period in 2010.
More than 80% of its exports are minerals, a proportion expected to rise in a few years to 95%.
Mongolia makes mining geologists salivate over its known riches and unexplored potential—for copper, coal, gold, silver, uranium, molybdenum, and on and on. Some 3,000 mining licences have been issued.
The IMF expects growth to average 14% a year between 2012 and 2016. In 2013, the year production is due to begin in earnest at OT (Oyu Tolgoi, or “Turquoise Hill”), it is forecast to reach 22.9%. Others think it will be at least twice that.
The project is a joint venture between the Mongolian government (34%) and Ivanhoe Mines of Canada (66%), which is in turn 49% owned by Rio Tinto, the mining giant that is managing OT and has put up most of the money.
This mine will produce 450,000 tonnes of copper a year, making it one of the world’s five biggest mines, as well as being a big gold producer. And it will have a life of at least 50 years.
From 2013 its sales will start adding an average of about five percentage points a year to the national growth rate up to 2020, when its impact on the economy will peak.
By November last year over $3 billion had already been spent on OT, a figure that will rise to $6 billion by 2013 and $10 billion by 2020. For Mongolia, a $6 billion economy, this is enormous.
Mongolian coal production is expected to increase from about 16m tonnes a year now to 40m by 2020 and 240m by 2040. Again China provides a ready market, but the mining boom has exacerbated Mongolian fears of a Chinese takeover by commercial stealth.
Economists fret about a “resource curse”, or “Dutch disease”. […]For economists, the resource curse is a risk Mongolia has little option but to take. […] its comparative advantage is in commodities and mining services. There is no point in trying to compete in manufacturing with “the biggest factory on the planet” next door in China.

Bhutan:

GDP size: $3.875 billion (PPP in 2010)
Per capita income: $5,500 (PPP in 2010)
Population: 708,427 (July 2011 est.)
Real GDP growth: 6.7% (2010)
Bhutan has the potential to develop a capacity of 23,760 MW, of which only 5% has been tapped so far. Under the current year plan, the installed hydropower generation capacity is projected to rise from 1,488 MW in 2007 to 1,602 MW in 2013, with the planned commissioning of the 114 MW Dagachu hydropower project.
The share of electricity (taxes plus dividends) in domestic revenue is expected to rise from about 43 percent in 2008/09 to over 53 percent by the end of the 10FYP. Hydropower exports constitute about two-fifths of total exports.
The power sector generates the highest revenue, followed by tourism and banking sector. Hydropower contributes to more than 40% of domestic revenue.
The first hydropower project (360 kW) in Bhutan was constructed on the Samteling Chhu in Thimphu. This mini-hydro electric plant was commissioned in 1967. During the 1970s, Bhutan and India began to look more closely into channeling the hydropower potential.
Bhutan is exporting 1,200 megawatts to India and Bangladesh is also seeking power import from Bhutan.
By 2020, the government plans increase generation capacity to 10,000 MW, about seven times the present level. To attain this goal, Bhutan and India have agreed to develop 10 hydropower projects together.

Nepal:

GDP size: $35.81 billion ((PPP in 2010)
Per capita income: $1,200 (PPP in 2010)
Population: 29.391 million (July 2011 est.)
Real GDP growth: 4.6% (2010)
Electricity demand-supply gap of around 400 MW
Over 16 hours of load-shedding during dry season
Power generation target has been revised to between 10000 MW to 20000 MW (in ten years time) depending on which political party is at the helm of power. These are just lofty talks with no concrete plan of action.
Read more on hydropower woes here

UPDATE (2012-01-26): Here is the PM’s economic adviser arguing that we should be thinking about generating hydropower first, not upstream-downstream benefits before the hydropower is developed. The benefit of providing enough electricity to the power hungry households and businesses is far greater than the constant drumbeating of upstream and downstream benefits by some NGOs whose sustainability depends on opposing such investments on the pretext of environment damage and upstream-downstream benefits. These should be looked upon at and are important issues. But, I don’t think these come before we generate hydropower in the first place. Highly recommended write up by Rameshwore Prasad Khanal.

The impact of the EU debt crisis and global economic downturn on Nepalese economy

noreply@blogger.com (Chandan Sapkota) — Thu, 19 Jan 2012 03:30:00 +0000

Here are some of the major points related to Nepal from a newly released Global Economic Prospects (GEP) 2012. The implications of the EU debt crisis and global economic downturn on the Nepalese economy is also discussed below. Here is an earlier post related to growth prospects of South Asia.

Nepal’s prospect:

Law and order problems, and persistent and extensive infrastructure bottlenecks (electrical shortages are reflected in widespread load-shedding and unreliable delivery), reduced real GDP growth to 3.5 percent in FY2010/2011 (ending June-2011) from 4.6 percent in FY2009/10.
GDP growth rate is forecasted to be the lowest in the region. In 2012 and 2013, GDP growth rate is forecasted to be 3.5% and 3.8% respectively. Considering fiscal year (July 16 through July 15), GDP growth rate is forecasted to be 3.6% and 4% in FY 2012/13 and 2013/14 respectively.

Exports to the EU and the US might slowdown. Exports to Europe (in particular textiles and clothing) are more sensitive to a decrease in consumer demand. It will further affect industrial output (mainly manufacturing ones).
Current account balance was estimated to be –2.9% of GDP in 2010, which is forecasted to decline to –2.7% of GDP and –2.3% of GDP in 2012 and 2013 respectively. The strong earning from tourism sector and remittance inflows is offset by widening trade deficit, partly tied to deterioration in terms of trade and domestic supply-side conditions. Terms of trade losses are estimated at about 4.3 percent of GDP for Nepal (1.9 percent of GDP for the region in aggregate)—(estimated January through September 2011 terms of trade impacts relative to 2010).

Remittance inflows might take a hit (a decline of around 0.5 to 1 percent of GDP in case of moderate and severe crisis respectively) depending on the economic condition in the Gulf, affecting current account and balance of payments, consumption expenditure and import of durables.
Inflationary pressure might continue.The upswing in prices reflects high international food and fuel prices, and imported inflation from India (as Nepal‟s local currency is pegged to the Indian rupee). Sustained elevated inflationary pressures have also led to a rise in inflation expectations.

Foreign assistance might get a hit if fiscal consolidation in high-income countries results in cuts to overseas development assistance.
Fiscal space has diminished when compared to 2007 level.
These on top of the domestic supply-side constraints will impede GDP growth, exports and industrial output.
The slowdown in global commodity prices (energy, metals, raw materials, minerals, fertilizers, and agriculture) might be a relief. But, with tensions rising in the Middle East, energy prices are going up North recently. Also, the continued depreciation of Nepalese rupee against major currencies (except the Indian rupee) will put further strain on retail prices (via the high import prices channel). Meanwhile, slowdown in demand for Nepalese exports in the EU and the US might mean a stunted exports sector, provided that it also fails to boost market pie in the Indian and regional markets.

Exposure (investment) to a sudden withdrawal of European bank assets is relatively small (almost without any risk or negligible).

Macroeconomic condition, 2008-2013
	2008	2009	2010	2011*	2012*	2013*
Real Expenditure Growth
1. GDP at market prices	4.8	5.3	4.5	4	3.5	3.8
2. Private consumption	3.9	3.9	4.9	4.9	4.1	4.1
3. Government consumption	6.9	13.1	17.8	13.5	10.1	9.3
4. Fixed investment	4	6	5.6	0.3	-0.2	3.2
5. Exports, GNFS	-1.4	17.5	34.4	22.1	9.4	5
6. Imports, GNFS	4.3	13.9	18.6	13.5	8.1	6
Contribution to GDP Growth
1. Private consumption	3	3	3.7	3.7	3.1	3.2
2. Government consumption	0.6	1.2	1.8	1.5	1.3	1.2
3. Fixed investment	0.8	1.2	1.2	0.1	0	0.6
4. Net exports	-0.3	3	6.6	5.4	2.7	1.5
Price Deflators
1. GDP at market prices	16.4	-6.2	17.8	5.3	4.1	6.1
2. Private consumption	14.8	-6.3	17.7	11.1	10.5	11.4
3. Exports, GNFS	17.4	-7.6	10.2	4.8	11.9	16.6
4. Imports, GNFS	19.6	-6.4	12.2	8.2	15.6	19.5
Share of GDP
1. Private consumption	76.6	75.5	75.8	80.5	85.6	90
2. Government consumption	10.3	11.2	12.1	13.7	15.5	17.2
3. Fixed investment	20.3	20.5	20.1	20.1	20.6	21.6
4. Change in stocks	9.2	9.5	8.1	7.3	6.7	6.2
5. Total investment	..	..	..	..	..	..
6. Exports, GNFS	16.1	17.7	21.3	24.8	28	31.1
7. Imports, GNFS	34.6	37.3	40.3	45.1	52.1	59.9
Memo
1. Nominal GDP (USD billions)	13	12.8	15.8	17.3	18.7	20.7
2. Population (millions)	28.8	29.3	29.9	30.4	31	31.5
3. GDP per capita, current USD	451.8	437.6	528.5	570	605.4	655.6
4. Real per capita GDP growth	4	2.4	2.6	1.7	1.8	2.4
5. USD Fx rate	64.9	76.6	74.6	75.4	75.4	73.7

Source: Global Economic Prospects 2012, World Bank; *Forecast for 2011, 2012, 2013

EU debt crisis and weak global demand will affect South Asia’s growth prospect in 2012 and 2013

noreply@blogger.com (Chandan Sapkota) — Wed, 18 Jan 2012 08:28:00 +0000

In its newly released Global Economic Prospects (GEP) 2012, the World Bank argues that GDP in South Asia slowed to an estimated 6.6 percent in 2011, from 9.1 percent in 2010, reflecting a sharp slowdown industrial production and trade in the second half of last year. The slowdown in the region is led by India, which accounts for 80 percent of South Asia’s GDP.

The report states that the regional deceleration in growth reflects internal and external headwinds. On the domestic front, more restrictive macroeconomic policy stances, aimed at reducing stubbornly high inflation and unsustainably large fiscal deficits, have contributed to weaker domestic demand. Higher borrowing costs, elevated inflation, moderating economic activity and some local factors (e.g. policy uncertainty, stalled reforms, and deteriorating political and security conditions) have contributed to a significant slowdown in investment growth.

Here are major points from the report (related to South Asia):

Exports are negatively affected by weaker foreign demand. Demand for the region’s exports of goods and services is projected to slow in calendar year 2012 and lead to a near halving of export growth to 11.6 percent in 2012, from 21 percent in 2011, due to stagnant GDP in the European Union and the projected global slowdown, including the influence of tighter monetary policy in China and fiscal consolidation in Europe.

The Euro Area represents about one-fourth of South Asia‟s merchandise export market, of which Germany and France account for 40 percent and 20 percent, respectively.
Terms of trade losses are estimated at about 1.9 percent of GDP for the region in aggregate, led by a 4.3 percent of GDP decline for Nepal, while Bangladesh and Sri Lanka saw a smaller negative impact of close to 1.5 percent of GDP, and India and Pakistan saw negative impacts of close to 1.8 percent of GDP (estimated January through September 2011 terms of trade impacts relative to 2010).

Remittances have grown only modestly.
The slowdown reflects moderation in domestic demand, given a deceleration in investment growth that has faced headwinds of rising borrowing costs, high input prices, slowing global growth and heightened uncertainty.
The region’s GDP growth is projected to ease further to 5.8 percent in 2012, before strengthening to 7.1 percent in 2013.
Regional growth is estimated to have exceeded the long-term average of 6 percent (1998-2007), reflecting above trend activity in Bangladesh, India and Sri Lanka.
High inflation and fiscal deficits remain concerns going forward.
Household spending has been curbed by persistently rising prices cutting into real incomes and higher borrowing costs.

South Asian governments have limited space with which to introduce fiscal stimulus measures, due to large fiscal deficits, and the possibility of monetary easing is constrained by sustained high inflationary pressures.

Forecast:

A deepening of the Euro Area crisis would lead to weaker export growth, worker remittances and capital inflows to South Asia.
Trade: The Euro Area represents about one-fourth of South Asia’s merchandise export market, with Bangladesh, the Maldives and Sri Lanka particularly exposed to a downturn in European demand for merchandise. Moreover, export financing from Europe, an important component of trade credit, is particularly vulnerable to drying up, as was the experience during the 2008 financial crisis.
Remittances: Worker remittances remain a critical source of foreign exchange in South Asia—equivalent to 20 percent of GDP, as of 2010, in Nepal, 9.6 percent in Bangladesh, 7 percent in Sri Lanka and 5 percent in Pakistan. If the global conditions were to deteriorate sharply, remittances growth could stall, resulting in weaker incomes, weaker foreign currency earnings and slower domestic demand growth within the region.
Finance: Financial sector impacts through heightened global risk aversion (reversal of capital inflows, higher international borrowing costs and slowing FDI) are likely to be felt strongest in India, which is the most integrated with global financial markets, along with the Maldives and Sri Lanka, where 2012 external financing needs (current account financing and external debt repayments) are projected to reach 9.8 percent, 18 percent and 7 percent of GDP, respectively. Countries heavily reliant on foreign assistance, such as Afghanistan, Nepal and Pakistan, could be hit hard if fiscal consolidation in high income countries were to result in cuts to overseas development assistance.
South Asia’s exposure (investment) to a sudden withdrawal of European banks is relatively small and limited to ‘core’ countries.

Recommended measures:

Given the lack of fiscal space in South Asia, inflationary pressures and consequent limited room for monetary policy easing, fiscal consolidation through greater revenue mobilization (particularly in Pakistan, Sri Lanka, Bangladesh, and Nepal) and expenditure rationalization (especially in India) could play a key role in helping to protect critical social programs.
Expanding the drivers of growth also holds potential. With markets in the United States and Europe expected to experience prolonged weakness, South Asian countries have the opportunity to re-think and pursue new sources of growth in both domestic and external markets. This may include focusing on export growth toward faster growing emerging markets, as well as internal market enhancements through structural and governance reforms. Such actions would help boost export demand, help raise investment, provide better jobs and generate an environment for more inclusive growth.

Global scenario:

Last year was characterized by the Tohoku quake in Japan, the European debt crisis and the downgrade of the US sovereign ratings, which affected financial markets around the world. Below is an estimation of the losses:

In a matter of five months, stock markets around the world recorded $6.5 trillion (or. 9.5 percent of global GDP) in wealth losses, with developing-country stock markets losing 8.5 percent of their value, from July-end 2011 and early January 2012.
Gross capital flows to developing countries to plunged to $170 billion in the second half of 2011, only 55 percent of the $309 billion received during the same period of 2010.
Yields on the sovereign debt of developing countries declined by an average of 117 basis points (between the end of July and early January), as did those of almost all Euro Area countries, including France (86 bps) and Germany (36 bps), as well as non-Euro Area countries such as the United Kingdom (18 bps).

Major points from the report:

The World Bank has lowered its growth forecast for 2012 to 5.4 percent for developing countries and 1.4 percent for high-income countries (-0.3 percent for the Euro Area), down from its June estimates of 6.2 and 2.7 percent (1.8 percent for the Euro Area), respectively.

Global growth is now projected at 2.5 and 3.1 percent for 2012 and 2013, respectively. Using purchasing power parity weights, global growth would be 3.4 and 4.0 percent for 2012 and 2013, respectively.

It argues that slower growth is already visible in weakening global trade and commodity prices. Global exports of goods and services expanded by an estimated 6.6 percent in 2011 (down from 12.4 percent in 2010), and are projected to rise by only 4.7 percent in 2012.

Meanwhile, global prices of energy, metals and minerals, and agricultural products are down 10, 25 and 19 percent respectively since peaks in early 2011. Declining commodity prices have contributed to an easing of headline inflation in most developing countries. Although international food prices eased in recent months, down 14 percent from their peak in February 2011, food security for the poorest, including in the Horn of Africa, remains a central concern.

Developing countries have less fiscal and monetary space for remedial measures than they did in 2008/09. As a result, their ability to respond may be constrained if international finance dries up and global conditions deteriorate sharply.

Existing global economic conditions (which is far weaker than last year):

Europe appears to have already entered recession.
Growth in several major developing countries (Brazil, India and, to a lesser extent, Russia, South Africa and Turkey) has slowed, mainly reflecting policy tightening initiated in late 2010 and early 2011 in order to combat rising inflationary pressures.
As a result, and despite relatively strong of activity in the United States and Japan, global industrial production and trade have slowed sharply.
Global trade volumes declined at an annualized pace of 8 percent during the three months ending October 2011, mainly reflecting a 17 percent annualized decline in European imports.

Infographics of the evolution of Nepal’s export destination

noreply@blogger.com (Chandan Sapkota) — Tue, 17 Jan 2012 09:56:00 +0000

Here is a series of infographics that shows the evolution of Nepal’s export destination. The data is sourced from WB data visualizer. It didn’t have such info for gross exports after 2003.

Top 10 export destination in 1990:

United States (US$ 60.73 million)
Germany (US$ 44.66 million)
India (US$ 21.87 million)
Switzerland (US$ 11.77 million)
United Kingdom (US$ 7.80 million)
China
Iraq
Italy
Bangladesh
Japan

Top 10 export destination in 1995:

Germany (US$ 131.24 million)
United States (US$ 103.03 million)
India (US$ 67.51 million)
Switzerland (US$ 9.30 million)
Italy (US$ 7.18 million)
United Kingdom
China
Austria
Iraq
Canada

Top export destination in 1998:

It was in 1998 when India became the top export destination of Nepal, thanks to the trade and transit treaty of 1996 (which eliminated value addition requirement for Nepalese exports to India. This provision was replaced with 30% VA in 2000 and Nepalese exports got a hit).

India (US$ 136.43 million)
United States (US$ 107.56 million)
Germany (US$ 103.14 million)
Bangladesh (US$ 9 million)
France (US$ 7.36 million)
Italy
Austria
United Kingdom
Sri Lanka
Iraq

Top 10 export destination in 2000:

India (US$ 317.79 million)
United States (US$ 192.16 million)
Germany (US$ 105.52 million)
United Kingdom (US$ 16.74 million)
Belgium (US$ 11.40 million)
France
Japan
Hong Kong, China
Switzerland
Spain

Top 10 export destination in 2003:

India (US$ 341.79 million)
United States (US$ 189.73 million)
China (US$ 22.43 million)
Germany (US$ 22.11 million)
United Kingdom (US$ 13.60 million)
Bangladesh
France
Japan
Italy
Portugal

Fast forward to 2011 (fiscal year 2010/11), the top exports destination were (total exports amounted to Rs 64.56 billion; data is sourced from TEPC trade data):

India (Rs 42.87 billion)
United States (Rs 4.39 billion)
Bangladesh (Rs 3.47 billion)
Germany (Rs 2.768 billion)
U.K (Rs 1.389 billion)
France
Turkey
Canada
Italy
China P.R

Overall, the number of countries Nepal sends goods to has increased but an increasing amount of volume (and revenue) is being concentrated to the Indian market. The phasing out of quotas and slashing of tariff rates in the European markets and the US have contributed to declining share of exports to these countries. At the end, Nepalese products could not compete with exports of similar nature from other countries. Here is a blog post on Nepal’s problems with exports.

Can aid tying work when there is pervasive corruption?

noreply@blogger.com (Chandan Sapkota) — Tue, 17 Jan 2012 05:43:00 +0000

It seems like it does. Knack and Smets argue that aid tying can be an efficient response by donors when losses from corruption may rival or exceed losses from tying aid. It might be the reason why technocrats prefer binding conditionality, which politicians cannot breach to harness their vested interests, against loans or grants.

This study tests two opposing hypotheses about the impact of aid fragmentation on the practice of aid tying. In one, when a small number of donors dominate the aid market in a country, they may exploit their monopoly power by tying more aid to purchases from contractors based in their own countries. Alternatively, when donors have a larger share of the aid market, they may have stronger incentives to maximize the development impact of their aid by tying less of it. Empirical tests strongly and consistently support the latter hypothesis. The key finding---that higher donor aid shares are associated with less aid tying---is robust to recipient controls, donor fixed effects and instrumental variables estimation. When recipient countries are grouped by their scores on corruption perception indexes, higher shares of aid are significantly related to lower aid tying only in the less-corrupt sub-sample. This finding is consistent with the argument that aid tying can be an efficient response by donors when losses from corruption may rival or exceed losses from tying aid. When aid tying is more costly, as proxied by donor country size and income, it is less prevalent. Aid tying is lower in the Least Developed Countries, consistent with the OECD Development Assistance Committee's recommendation to its members.

Government sponsored think tanks in Nepal

noreply@blogger.com (Chandan Sapkota) — Mon, 16 Jan 2012 07:24:00 +0000

PM Baburam Bhattarai feels that the country needs think tanks to give inputs to the government on matters related to foreign affairs and economic development. He is thinking of establishing Institute of Strategic and Foreign Affairs Studies and Institute of the Economic and Development Studies to be run with government grant.

A very positive initiative. The country needs a civilized clash of ideas and ideals with sounds analysis and policy research to distill the most apt economic policies and implications of proposed policies. The proposed think tanks should be given enough seed money to start independent policy analysis.

For too long, advocacy and debate on economic policies have been one-sided and project based (often guided by donor and private interests). The proposed think tanks should be run independently, without political, government and donor interference. The donors should not be asked to foot the bill for its establishment. Else, it will be no different than the several government sponsored media and policy analysis institutions. With regards to foreign policy, there already exists one (something like the Institute of Foreign Affairs).

It should have an independent board, which will hire staff and devise a plan to make the institutions self-sustaining in few years time. It will save the institutions from unnecessary political interference. The primary purpose should be to generate debate on new ideas and their implications. The government can get inputs from them in a strictly professional way. We already have National Planning Commission and the PM’s economic advisory council to deal with giving advise to the government on economic policies. The think tanks should be allowed to weigh in on those policies, facilitate informed debate and generate both alternative and supportive ideas.

A good initiative. It should be done in the right way.

Recommendations of Nepal’s PM’s Economic Advisory Council

noreply@blogger.com (Chandan Sapkota) — Fri, 13 Jan 2012 05:30:00 +0000

Main priorities as suggested by the PM’s Economic Advisory Council are as follow:

Tourism
Real estate outside Kathmandu
Agriculture
Infrastructure
Energy
Scientific and technical research

A total of 18 big projects under these sectors have been recommended by the council with targets of a double-digit growth rate and generation of 200,000 direct and indirect jobs. The private sector has been given high priority to launch the projects. Meanwhile, it has recommended the government to give tax holidays to private companies and encourage them invest in infrastructure.

Some of the recommendations:

Encourage private sector (those wholly owned by Nepalese or having investment of more than 49 percent in airline company) to bring in new wide body aircrafts (at least 4 of them). The council has estimated that it will not require additional energy, increase foreign reserves by Rs 6 billion annually, bring in additional 240,000 visitors, and generate Rs 12 billion annual revenue. Direct and indirect employment gains will be over 25,000 yearly.
Establish 100 room five start hotels in Bhaktapur, Janakpur and Lumbini. Encourage establishment of three start hotels in places other than Kathmandu, Lalitpur, Bhaktapur, and Pokhara.
Construction of cable cars and other tourism infrastructure.
Encourage real estate and housing spending in major cities outside of Kathmandu and Lalitpur.
Government, community and cooperatives to invest in agriculture and apple farming. Give training to farmers and encourage banks to give loans to agriculture sector.
Construct East West Highway and associated roads, Kathmandu Nijgadh fast track, international airport in Nijgadh, and regional airport in Pokhara.
Expedite construction of hydro projects with domestic investment. Give priority to projects that can generate electricity in the next two years.

A good list of projects and priority sectors. I am waiting for the full document to be available on the PMO’s website. Any big project that can be completed on time and that can have a positive impact on economic activities and employment generation should be promoted right now. But, we have to deal in a measured way so that the limited resources are used to tackle the most binding constraints in short term as well as long term.

I would like to see the sectors, projects, and incentives recommended by the council to be in line with the priorities to be set by Investment Board, and those outlined in Industrial Policy 2010 and Trade Policy 2009 (also Nepal Trade Integration Strategy 2010 and Three Year Interim Plan 2010/11-2012/13). Why so? Because it will create a consolidated effort to promote similar industries and offer coherent incentives by all government agencies. For too long projects are not implemented because of incompatible priorities and incentives offered by different government agencies to same group of sectors or investors.

Also, let us be very targeted in prioritizing and sanctioning new projects. For instance, let us first focus on constructing an international airport in Pokhara, where land is already acquired and soil testing is being done by the Chinese government. If tourism promotion is the most viable option right now given our infrastructure and supply constraints, then let us try to do things that will generate biggest bang for a buck. We already have a regional airport in Pokhara that is handling regional traffic flows pretty well.

The private sector does not have and cannot generate the required amount of money for investing in big projects that takes years to yield returns. The government has to foot most of the bill (may be provide subsidized credit to them instead of wasting it on NOC and NEA).

Real estate prices in major cities outside of the Valley is already too high. Further encouraging real estate and housing spending there is not a sensible step (apart from pacifying the disgruntled political activists who were reaping easy money from escalating real estate prices). It will be yet another episode of unproductive investment financed by remittances and facilitated by easy policies of the government. It is not going to work except for increasing revenue as a result of more land transaction and the usage of the excess liquidity in the banking sector to inflate prices outside of the Valley.

Emphasis on construction of hydro projects and road network is a good one. Even if no work happens in the foreseeable future, it has to be reiterated again and again. The inadequate supply of infrastructure is the most binding constraint to economic growth. Build more roads and hydro projects, connect more places with markets and production sites, and facilitate internal as well as external trade (and production).

Promotion of industrial activities should be coordinated with promotion of exports sector. It will not only generate more reserves but also increase employment and substantially contribute to growth. While doing so, we should also promote industries (by staying within the boundary of WTO commitments and the available policy space for us to maneuver industrial policy to promote industrialization) that can compete with imported goods.

At the end of the day, things will work only if there are enabling conditions for enterprises to foster. Some of these are good industry-labor relations, enough power to power up machinery, no strikes both on streets and in industries, comfortable fiscal space to finance incentives and concessionary packages, good governance, easy flow of credit at low interest to key sectors, and enveloping industrial sector from the fallout of nonsensical endless political bickering.

Landlocked countries’ comparative advantage and services trade

noreply@blogger.com (Chandan Sapkota) — Thu, 12 Jan 2012 06:58:00 +0000

In a new policy working paper, Borchert et al. argue that protection of services sector (telecommunications and air transport) by landlocked countries is not a smart policy because it is the one of the few sectors in which they have comparative advantage.

They find that even moderate liberalization in these sectors could lead to an increase of cellular subscriptions by 7 percentage points and a 20 percent increase in the number of flights. Specifically, liberalizing policies from the level of the median country (STRI = 50) to the level of first quartile (STRI = 25) would on average result in an increase of cellular subscriptions by 7 percentage points and an increase in mainlines by 4 percentage points. And, in the air transport sector, a reform of aviation policies with similar impact, such that the STRI score would fall from 50 to 25, is estimated to be associated with a 20 percent increase in the number of flights. Countries with highly restrictive aviation policies have on average 39 percent fewer flights per airline than liberal countries.

They argue that poor policies lead to more concentrated market structures and more limited access to services than landlocked countries would otherwise have. They suggest increasing the maximum foreign capital participation limit from a minority to a majority stake.

Two suggestions:

First, international assistance for transport and telecommunications infrastructure needs to be complemented by policy reform.
Second, in transport services, there is a strong case for multilateral negotiations because there are limits to what unilateral reform can achieve. We address each aspect in turn.

Here is the abstract of the paper:

A new cross-country database on services policy reveals a perverse pattern: many landlocked countries restrict trade in the very services that connect them with the rest of the world. On average, telecommunications and air-transport policies are significantly more restrictive in landlocked countries than elsewhere. The phenomenon is most starkly visible in Sub-Saharan Africa and is associated with lower levels of political accountability. This paper finds evidence that these policies lead to more concentrated market structures and more limited access to services than these countries would otherwise have, even after taking into account the influence of geography and incomes, and the possibility that policy is endogenous. Even moderate liberalization in these sectors could lead to an increase of cellular subscriptions by 7 percentage points and a 20 percent increase in the number of flights. Policies in other countries, industrial and developing alike, also limit competition in international transport services. Hence, "trade-facilitating" investments under various "aid-for-trade" initiatives are likely to earn a low return unless they are accompanied by meaningful reform in these services sectors.

They provide examples of Laos, Nepal and Zambia. In their analysis they control for the adverse influences of geography and low incomes, the two most likely determinants of poor performance. Also, they take policy to be endogenously determined because policies are influenced by lobbying for protection by interest groups or industries.

They argue that “aid for trade” to landlocked countries to improve their ports, airports and customs might not yield expected results in the absence of the liberalization of air transport services (or limited competition among service providers) that would greatly enhance the impact of AfT.

About Nepal, the report has the following info:

Nepal Airlines, plagued by poor management and political interference, has seen its financial situation weakened and its fleet shrunk to two Boeing 757s and four twin otters. By virtue of being the designated airline, it occupies crucial space in BASAs, which it is incapable of exploiting. One of the key hubs is Delhi, where the number of seats is limited to 6000 per week for each side, but Nepal Airlines uses only 1,300 seats of the Nepali quota. Japan has refused to grant fifth freedom rights on the Kathmandu-Shanghai-Osaka route, and China may be restricting flights on the Kathmandu-Lhasa route.
Nepal granted exclusive licenses in the fixed line segment until 2009 to United Telecommunications Limited (with majority Indian Government ownership) and in mobile to Spice Telecom (with majority Kazakh ownership), effectively creating duopolies in each segment between these firms and the state-owned firm. [Update is needed in the paper: Spice Telecom is Ncell now and there are other three telecom operators, which means it is not a duopoly. It is at best monopolistic competition.]

NTY 2011 reviewed: Year of half measures

noreply@blogger.com (Chandan Sapkota) — Wed, 11 Jan 2012 06:40:00 +0000

[It was published in Republica, January 10, 2012, p.6]

Year of half measures

Nepal Tourism Year (NTY) 2011 was launched with great fanfare last year. It was one of the rare moments when public, private sector, government and political parties came together for a common cause—to make NTY a success. One of the main targets was to attract one million visitors, of which 40 percent was targeted from India and China. The last time such a mega campaign was launched was in 1998 when around 464,000 tourists visited Nepal, earning US$248 million in revenue. The Nepali tourism industry has come a long way since 6,179 tourists visited Nepal in 1962, followed by introduction of Tourism Master Plan in 1972 and consolidated Tourism Policy in 1995.

As it stands now, though the target to attract a million visitors was not attained, investment and commercial activities did increase in this sector. The target was missed because of the incompetency of our government to launch supportive initiatives, political instability and the sector’s inability to float cost effective innovative packages. Meanwhile, commercial activities increased due to high expectation of increasing revenue, which were not fully met, of stakeholders.

When the NTY campaign was launched, many argued, including yours truly (see Constraints on NTY 2011, Republica, March 14, 2010), that the target was ambitious. It was argued that given the poor state of tourism infrastructure, fickle strikes and political instability, insecurity, uncompetitive products and lack of innovation, the target won’t be realized. Furthermore, the suggestion was to focus on making our tourism products competitive and increasing expenditure per visitor. After all, the purpose of NTY was, along with the high flow of tourists, to generate revenue, support more jobs and create investment opportunities. The worrisome fact is that even after completion of the campaign, these constraints remain unaddressed.

Before elaborating on these, let us look at the state of tourism sector in 2011.Though the total number of visitors via land is yet to be compiled, preliminary estimates show that it will be around 750,000, including 544,185 via air. In 2010, the total visitors (both via air and land) were around 603,000. It means approximately 24 percent growth of visitors—a significant achievement in itself. Though the goal to bring in 40 percent of total visitors from our neighbors was not attained, there nevertheless was an increase in the flow of tourists from these countries. About 145,338 Indian and 45,400 Chinese tourists visited Nepal via air last year. The visitors from almost all the traditional source countries, except Bangladesh, increased between 2011 and 2010. The largest growth in tourist inflows was from China (77.6 percent) and India (39.1 percent). The highest number of visitors via air was from India (26.7 percent of total visitors), followed by China (8.33 percent), USA, the UK, France, Japan and Germany.

The preliminary figures and tourism promotion initiatives carried out in 2011 reaffirm the point that along with the ambitious target, the priorities and strategies were misplaced, and necessary legwork for promotional strategies in major destinations were not carried out. Notably, the constraints that were restraining the tourism industry to realize its full potential are still not addressed, making our tourism industry uncompetitive. It affects both potential tourist inflows and revenue generation, which was around 2.4 percent of GDP in 2010 (a decline from 5.1 percent of GDP in 1998). Note that Nepal ranks 112 out of 139 economies in the latest Travel & Tourism Competitiveness Index (TTCI).

First, as always, the political parties failed to keep their promises to spare tourism from the fallout of their selfish and endless bickering, which often spilled over to this industry and on to the streets. Just days after the written commitment to let tourism industry function smoothly and to refrain from organizing strikes, the disgruntled political supporters of UCPN (M) took to the street and imposed banda. Though the frequency of banda is relatively low since then, it nevertheless is imposed intermittently, which is tarnishing the intended good image of Nepal as a secure tourist destination. The picture of tourists dragging their suitcases up to the airport gave a negative impression of a fluid political and security situation. In terms of safety and security in tourism industry, Nepal ranks 127 out of 139 economies.

Second, labor disputes and excessive unionism demoralized tourism entrepreneurs. The incessant demand for wage and compensation revision took a nasty turn when one after another union forced closure of several hotels and restaurants, vandalized assets, obstructed management from taking managerial decisions, and harassed investors. At times, guests were compelled to seek alternative arrangements for accommodation and food as a result of abrupt shut down of hotels and restaurants. It made visitors wary of their security and forced them to cut short planned stay, which also means less revenue.

Third, tourism infrastructure was hardly enhanced by the government. The private sector did its part by investing in construction of additional rooms, dining spaces and recreation activities. But, this was not matched by government initiatives. No new airport was constructed and there was hardly any improvement in the condition of and services in existing airports. Also, while many international airlines added new and more flights to Kathmandu, Nepal Airlines Corporation continued to incur losses and failed to add new aircrafts. In terms of tourism infrastructure (including hotel rooms) and ground transport, Nepal ranks 130 and 135, respectively, out of 139 economies in TTCI 2011.

The government did not even provide enough funds to regional tourism chapters to launch street festivals and promotional campaigns. The coordinator of NTY 2011 Coordination Committee—Western Nepal, Biplab Poudel, argues that it provided just 0.7 million of 16 million requested for such purposes in Pokhara. In fact, Restaurant and Bar Association of Nepal (REBAN), Pokhara chapter had to institutionally foot the bill of such activities.

Additionally, Nepal Tourism Board (NTB) started putting up hoarding boards and advertisement inside the country instead of adequately doing so abroad, mainly in India and China—our main source of visitors. It was only in November that the NTB began advertising NTY on CNN and BBC. Partly, the delay in launching time sensitive promotional schemes was caused by the requirement for the NTB to adhere to the government’s procurement act, which is unnecessarily cumbersome and lengthy. But, still some of its priorities and activities were misplaced. Tourism entrepreneurs wondered if the focus was on foreign visitors or domestic tourism. The Indian and Chinese economies are growing at impressive rates and so is per capita income of their citizens, who are increasingly traveling abroad for cultural as well as recreational purposes. We should be targeting them more than trying to attract budget tourists, who are highly sensitive to exchange rate and price fluctuations, from other countries. The Lakeside tourism entrepreneurs argue that more than Nepali vacationers, it is foreign tourists who bargain over room rate, food prices and services. For instance, Baibhav Poudel, executive director of Byanjan Grill, maintains that the biggest spenders in his restaurant are domestic tourists. This view is echoed by other tourism entrepreneurs, who also feel that the NTY’s priorities were misplaced and it failed to meet expectations.

Fourth, apart from investing more in rooms and redesigned restaurants, the tourism entrepreneurs failed to provide attractive and innovative packages to visitors. The accommodation, services and food are as expensive as in most of our competitors in the international market. They expected more out of NTY but failed to play their own part in making the industry attractive to foreigners.

Overall, it is an achievement that more tourists visited Nepal last year. But, the target was not met due to the inability of political parties to honor their commitments, the government’s half-hearted initiatives to promote this sector, and the private sector’s inability to offer cost competitive innovative packages. There was more noise about NTY, for which the government allocated 380 million, inside than outside of Nepal.

[Published in Republica, January 10, 2012, p.6]

Merchandise exports and imports by development region in Nepal

noreply@blogger.com (Chandan Sapkota) — Fri, 06 Jan 2012 10:59:00 +0000

Here is an interesting chart that shows share of total merchandise exports and imports by development region during fiscal year 2010/11. Total merchandise exports in 2010/11 was Rs 64.56 billion and total merchandise imports was Rs 397.54 billion.

The highest merchandise exports originated from Eastern Development Region, which accounted for 47.83% of total exports (about Rs 30.88 billion). It was followed by Central Development Region (Rs 28.87 billion) and Western Development Region (Rs 3.11 billion).

The highest merchandise imports was by Central Development Region,which accounted for 68.49% of total imports (about Rs 272.28 billion). It was followed by Western Development Region (Rs 13.86 billion) and Eastern Development Region (Rs 13.81 billion).

Interesting (but unsurprising) observation is that highest exports has occurred from regions with highest concentration of industries. And, highest imports is by regions with highest population (and population density)/consumption. These could affect incentives such as tax holidays, supply of infrastructures, and other facilities aimed at promoting industrialization in different parts of the country.

Evaluating Aid for Trade on the Ground: Lessons from Nepal

noreply@blogger.com (Chandan Sapkota) — Thu, 05 Jan 2012 05:32:00 +0000

Here is an abstract of a latest paper I co-authored.

The paper assesses the effectiveness of the AfT initiative in Nepal. It demonstrates that AfT has played a role in enhancing the country’s export performance. Notably, AfT-supported capacity building programmes have, in some cases, improved the competitiveness of Nepali exporters and promoted small-scale industries for products such as tea, cardamom and ginger. However, the potential effectiveness of AfT in Nepal is also hampered by various factors, such as low absorptive capacity; limited progress in making AfT projects financially and institutionally sustainable; and the need for more ownership by government agencies and the private sector. Finally, building on the study’s findings, the paper provides concrete recommendations to assist Nepal in making AfT programmes more effective in achieving their trade and development goals.

Read the full paper here (alternative link here).

8th WTO Ministerial: Where’s the “early harvest”?

noreply@blogger.com (Chandan Sapkota) — Thu, 05 Jan 2012 05:15:00 +0000

In his opening address during the 8th Ministerial Conference in Geneva on December 15, 2011, the WTO Director-General Pascal Lamy called on members to “stand up for the values of multilateralism” and for major players to “exercise leadership and to muster political courage to act together for greater trade opening and reform.” Furthermore, he urged them to place the interests and needs of developing countries and, in particular, those of the poorest, at its heart. However, the wishes of Lamy were not fully reflected in the final outcome of the conference.

To avert tension over format of text and agenda to be agreed upon, there was no Ministerial declaration on December 17. Members made their individual statements during the sessions and the Chairman of the conference presented his own statement at the end of the session. Meantime, as a LDC chair, Nepal underscored the need for full, effective and immediate implementation of the Istanbul Programme of Action on LDCs.

The formal and informal meetings during the conference were a disappointment on two fronts. First, they failed to agree on how to conclude the Doha talks launched in 2001. While all countries said they were committed to taking Doha agenda to a logical conclusion, the major players stated this with some reservations. For instance, the US wanted emerging developing countries to further open up their markets, but the latter were disinclined to agree to that. The major players with substantial interests on Doha agenda initially proposed talks to continue based on plurilateral basis, i.e. it would involve only those members that are willing. But, this ran counter to the WTO’s foundation of multilateralism and inclusiveness and was subsequently rejected by a vast majority of the developing countries. Another issue that was also raised by the LDCs was an “early harvest”, which meant that countries would agree on some of the already agreeable issues rather than wait for the full Doha package.

Unfortunately, though most of the countries were receptive of this idea, they failed to act on it and failed to agree on issues that could be “harvested early”. In it as well, the often argued proposal of duty free market access for LDC products and slashing down of cotton subsidies were rejected by the US. Meanwhile, the developed countries argued that they could agree on trade facilitation measures and make it an “early harvest” in 2012. But, the developing countries stated that any such “early harvest” should be related to agendas touching upon their development goals. These are a special LDC package, enhanced special and differential treatment, resolving problems arising from the implementation of WTO agreements and reduction of agricultural subsidies.

Second, it failed to agree upon the future course of the WTO given the changing global dynamics after fuel, food, financial and economic crises. The conference also failed to launch discussion on new issues such as climate change, energy security and food security. It was initially proposed by the developed countries but the developing countries argued that this would lead to digression from the development components of the Doha agenda.

Though the conference failed to agree on long discussed issues, the major highlight was the accession of Russia, Montenegro and two LDC Pacific Islands - Vanuatu and Samoa to the WTO, which now boasts 157 members. In the upcoming talks related to Doha agenda, all countries should focus on putting development concerns at the core and deliver on something concrete, which is agreeable to all members, to boost faith in the multilateral system. Moreover, the WTO should also focus on moving forward by incorporating the evolving challenges posed by global economic crises, resource scarcity, food insecurity and effective implementation of Aid for Trade agenda.

For more on the same issue, see this piece by ODI’s Yurendra Basnett and this one by Martin Khor at Triple Crisis blog.

Competitiveness of Nepalese Travel and Tourism Industry

noreply@blogger.com (Chandan Sapkota) — Wed, 04 Jan 2012 11:46:00 +0000

Nepal ranked 112 out of 139 economies in the Travel & Tourism Competitiveness Index (TTCI) 2011.

See my earlier post on Nepal Tourism Year 2011 here.

What’s in the 17th SAARC Summit declaration?

noreply@blogger.com (Chandan Sapkota) — Tue, 03 Jan 2012 08:50:00 +0000

I forgot to upload this post before. It is a bit dated but is still relevant.

The seventeenth summit of the South Asian Association for Regional Cooperation (SAARC) was held on 10-11 November, 2011 in Addu City, the Maldives. The head of the eight member states attended the summit, whose theme was "Building Bridges"-- both in terms of physical connectivity and figurative political dialogue.

Founded in 1985, the SAARC is an organization of eight South Asian nations, namely Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan, Sri Lanka and Afghanistan.

The summit saw signing of the SAARC Agreement on Rapid Response to Natural Disasters, the SAARC Seed Bank Agreement, the SAARC Agreement on Multilateral Arrangement on Recognition of Conformity Assessment and the SAARC Agreement on Implementation of Regional Standards.

Moreover, it also decided to set the timeline for finalizing a framework for rail and sea connectivity. Specifically, the attending heads of state decided to finalize a Regional Railways Agreement and complete the preparatory work on an Indian Ocean Cargo and Passenger Ferry Service by the end of this year. The declaration also decided on early demonstration run of a Bangladesh-India-Nepal container train. Furthermore, the member states committed to conclude the inter-governmental framework agreement for energy cooperation and the study on regional power exchange concept.

Regarding economic integration and trade, the emphasis was on effective implementation of South Asia Free Trade Agreement (SAFTA), pruning sensitive lists, eliminating non-tariff barriers (NTBs) and harmonizing standards and customs procedures. These barriers have been partly contributing to limiting intra-regional exports to five percent of total world exports by South Asian economies.

Still, the member countries are sitting on a lengthy list of sensitive products and imposing various forms of NTBs. A mere call for grater trade cooperation and reduction of number of products in sensitive lists will not suffice. There has to be concrete action and the leaders have to walk the talk to show that they are genuinely committed to greater economic integration and cooperation in South Asia.

As per trade liberalization program under SAFTA, the non Least Developed Countries (LDCs) would reduce their tariffs to 0-5 percent by 2013 and LDCs of SAARC would reduce their tariffs to 0-5 percent by 2016. That being said, cooperation is happening albeit at a gradual pace, which needs to be sped up in the coming days. On the eve of the summit, Pakistan announced most-favored-nation (MFN) treatment in trade and commerce to India. Additionally, Pakistan has committed to reduce its sensitive list by 20 percent and allow tariff concessions on further 233 items under South Asia Free Trade Agreement (SAFTA) in February 2012. During the summit, India reduced sensitive products’ list by 20 percent.

With respect to cooperation in combating the negative impacts of climate change, the summit was a disappointment. It just made a passing reference to this very important issue. The declaration states that the member countries are “conscious of the environmental degradation and particular vulnerabilities of the region to the threat of climate change” and hoped for timely implementation of the Thimphu Statement on Climate Change. Similar is the case with the commitment to alleviate poverty and reduce income inequalities within the societies: It reaffirmed the member’s resolve “to improve quality of life and well-being of people through people-centred sustainable development”, but made no specific actions, activities and commitments.

Regarding regional security, it mentions of their concerns about the continuing threat of terrorism in all its forms and manifestations, transnational organized crimes, especially illegal trafficking in narcotic drugs and psychotropic substances, trafficking in persons and small arms and increased incidents of maritime piracy in the region; and reiterating their resolve to fight all such menaces.

The leaders also agreed to hold 18th SAARC Summit in Nepal.

Nepal Tourism Year 2011 concludes short of target

noreply@blogger.com (Chandan Sapkota) — Mon, 02 Jan 2012 04:41:00 +0000

The much hyped Nepal Tourism Year (NTY) 2011 came to an end yesterday. When the campaign was launched in 2010, the target was to attract one million visitors, of which 40 percent were targeted to be from India and China.

So, how many visitors came to Nepal in 2010? Here are three different numbers from three different newspapers (Republica and TKP quoted the same source—TIA’s Immigration Office):

Republica: 730,000 visitors
- 544,985 tourists entered the country via air
- Chinese 45,400; 145,000 Indian tourists
- Share of Chinese tourists in total arrivals increased by 8.3 percent, second only to India that had market share of 26.7 percent.
The Kathmandu Post: 737,597 visitors
- Chinese 75,517 (45,400 by air and 30,117 overland); 145,338 (by air only)
The Himalayan Times: 719,547 visitors (till November 2011)
- 501,264 by air and 174,612 by land till November 2011
- In 2011, 544,985 arrivals by air, only 96,216 more than a year ago

I tried to get the figures from official sources but they are not yet uploaded on the websites.

Anyway, the last time such a mega campaign was launched was in 1998 when around 464,000 tourists visited Nepal, earning ~~US$24.8~~ US$248 million in revenue. The Nepali tourism industry has come a long way since 6,179 visitors visited Nepal in 1962. It increased to 509,752 (378,712 by air and 131,040 by land) in 2009. Here is a detailed report on 2010’s tourism activities.

My hasty comments on NTY 2011:

The target of one million tourists was way too high, especially given the past record, political instability, quality of infrastructure and resources.
Though number of tourists went up, tourism receipts of tourism enterprises did not go up as expected. We will have to wait to see the total tourism revenue earned in 2011. It could be that more restaurants, hotels, travel and trekking agencies were opened up expecting a surge in visitors. Surge did happen to some extent, but the increased total revenue was divided among these old and new enterprises. This might have caused low reported earnings (or less than expected) of tourism enterprises.
Commitments to spare tourism sector from strikes and disturbances were not kept. Few days after making such commitments by all parties, a nationwide strike was organized. Leaders failed to walk the talk. Also, the tourism sector was battered by labor strikes and vandalism.
The soring cost of production did not help to make our tourism sector competitive.

Does interest rate channel work? Evidence from Ghana

noreply@blogger.com (Chandan Sapkota) — Sat, 31 Dec 2011 04:56:00 +0000

In short, it won’t work as expected. Why? Because of information asymmetries and imperfect markets. Here is the abstract from a recent paper by Arto Kovanen.

This paper analyzes interest rate pass-through in Ghana. Time series and bank-specific data are utilized to highlight linkages between policy, wholesale market, and retail market interest rates. Our analysis shows that responses to changes in the policy interest rate are gradual in the wholesale market. Prolonged deviation in the interbank interest rate from the prime rate illustrate the challenges the Bank of Ghana faces when targeting a short-term money market interest rate. Asymmetries in the wholesale market adjustment possibly relate to monetary policy signaling, weak policy credibility, and liquidity management. In the retail market, pass-through to deposit and lending interest rates is protracted and incomplete.

Nepal’s problems with exports

noreply@blogger.com (Chandan Sapkota) — Fri, 30 Dec 2011 07:28:00 +0000

[It published in The Week, Republica, December 30, 2011, p.9]

Nepal’s problems with exports

Trade is one of the most vital components of our economy. Exports and imports have a strong bearing on macroeconomy, employment opportunities and the pace of structural transformation. We depend so much on foreign goods to satisfy increasing domestic demand and a shortfall in production that imports are six times higher than our exports. This has resulted in a huge trade deficit (value of imports minus exports), which has already reached unsustainable level. Fortunately, high remittance inflows are helping financing it for now.

To address this situation, since 1983, when the first trade policy was introduced, our government has been rolling out numerous exports promotion schemes and import substituting measures. Unfortunately, they have failed to boost exports and reduce trade deficit, thanks to a slew of domestic problems, including supply-side constraints.

Trade performance

Exports of goods and services have been declining since it reached approximately 26 percent of gross domestic product (GDP) in 1997. Last year, it dropped to 9.8 percent of GDP. In contrast, India’s and Bangladesh’s exports are increasing, mainly because of successful implementation of reforms, targeted promotion of exportable items, and timely management of supply-side constraints. Last year, exports (share of GDP) were 21.5 percent and 18.5 percent respectively in India and Bangladesh.

Meanwhile, imports are ever-increasing, resulting in trade deficit of around 22 percent of GDP. In 2010, while Nepal’s imports were equal to 37.4 percent of GDP, India’s was 24.8 percent of GDP and Bangladesh’s was 24.9 percent of GDP. No wonder, Bangladesh and India had average economic growth rate of over 5.8 percent over 2001-2010 while Nepal had just 4 percent. Over the same period, Nepal had a negative growth of exports, but Bangladesh and India had growth of over 8.5 percent.

Despite joining the WTO in April 2004 and being a member of two regional free trade blocs (SAFTA and BIMSTEC), Nepal’s trade composition and destination have not changed much. It is still heavily dependent on the Indian market for both exports and imports. About 67 percent of total exports go to India and 66 percent of total imports come from India. Last year, the revenue generated from total exports of goods was still Rs 10 billion short of total petroleum imports. Our ballooning imports are financed by remittances, which are estimated to be US$3.9 billion in 2011. This is about US$2 billion higher than the total export of goods and services.

In contrast, India’s and Bangladesh’s trade is pretty diversified. The top two export destinations of India are the US and the UAE, where it sends just 13 percent and 12 percent of total exports respectively. Bangladesh’s top two export destinations are the US and Germany, where it sends 22 percent and 11 percent of total exports respectively. As for imports, India’s top two destinations are China and the US (13 percent and 6 percent of total imports respectively) and Bangladesh’s China and India (22 percent and 12 percent of total imports respectively). Our high dependence on the Indian market means that a small fluctuations and policy changes there would have a substantial impact on our economy.

Regarding export and import composition, nothing much has changed though garment and textiles have lost their significance in the export basket. The demand for our exports is price elastic to consumers in destination markets, meaning that as retail costs of our exports increase due to exchange rate fluctuation and high cost of production, quantity demanded decreases. However, the demand for imported items is relatively price inelastic, implying that change in price does not affect much our demand for imported items. It is so because the import demand for petroleum products, low range durables and food items is increasing each year due to low domestic production and high remittance inflows.

Trade reform

The government has rolled out a number of export promotion schemes to boost exports and foreign currency reserves. While updating trade policy in 2009 and industrial policy in 2010, it made a slew of commitments to promote exports. Additionally, the government listed 19 products having export potential and outlined detailed time bound strategies for their promotion in Nepal Trade Integration Strategy (NTIS) 2010. In the latest Three Year Interim Plan 2010/11-2012/13 as well, there is a long list of programs aimed at implementing the recommendations of NTIS.

Despite the updated policies and high priority given to exports sector, why are they performing miserably at a time when our neighbors’ exports are increasing at an impressive? Well, it is not because we have bad policy documents, but rather the inability to implement the policies and strategies promised to boost exports. For instance, even after the construction of Special Economic Zone (SEZ) in Bhairahawa is near completion, the parliament is yet to pass the SEZ bill. The success of India’s and Bangladesh’s export sector owe much to the construction and effective operation of SEZs and the effective implementation of policies designed to address binding constraints.

Constraints

No number of export promotion schemes is going to work unless our politicians and policymakers put the house in order, i.e. address domestic supply-side constraints that are eroding competitiveness of our products.

First, the most binding constraint to economic activities in Nepal is the lack of adequate infrastructure. The supply of road network, electricity and irrigation facilities has not matched the growth in demand for them. There is still a demand-supply gap of around 450MW of electricity during dry season, leading to operation of industries below their capacity. Worse, investors are compelled to run their machines using imported diesel and petrol. For fear of protest and further rise in inflation rate, the government is subsidizing diesel, inflicting losses to the state-owned Nepal Oil Corporation. Additionally, many industries and production sites are not linked with good roads, leading to delay in delivery despite adequate production on time. In the agriculture sector, farmers are not supplied with adequate fertilizers and irrigation. These have led to increase in cost of production, wastages, and operation below capacity. Note that Nepal’s infrastructure ranking is the second worst out of the 142 economies in the latest Global Competitiveness Report (GCR).

Second, political strikes (bandas) are disrupting production, supply and distribution of goods and services. Just a few years back, big retailers such as Wal-Mart and Gap withdrew planned orders of garment due to our producers’ inability to supply goods on time, thanks to repeated strikes along the main trading routes and highways. This was/is further impacted by the violence and strikes during and after the Maoist insurgency, leading to a sharp rise in cost of production and loss of cost and quality competitiveness. These problems rarely affect the export-oriented sector in our neighbors.

Third, labor issues have been the thorniest since 2006. The UCPN (M)-affiliated trade unions have wreaked havoc on the industrial sector by incessantly demanding hike in wages and other services that at times are inconsistent with labor productivity. Investors are scared of the militant trade unions and their aggressive cadres. Even after multiple rounds of wages and compensation revision, the unions are still not satisfied. Several hotels, manufacturing plants, and factories with foreign investment are already closed due to labor problems. Note that labor cost in Nepal is already the highest in South Asia. These have hit exports the most and nearly wiped off of the garment and textiles sector.

Fourth, our exporters relied more on market concessions in destination markets than investing on research and development. A prime example of this is the near demise of garment industry after the end of Agreement of Textiles and Clothing (ATC), which eliminated quotas on the trade of textiles and clothing, in 2005. The end of ATC was known in 1990 itself and quota was phased out in successive four phases starting 1994. But, still neither our exporters heeded to it nor our government proactively worked to reorganize and restructure this sector to confront intense competition in the international market. Countries such as China, India, Cambodia, Bangladesh and Viet Nam that invested heavily to promote innovation in these sectors gained after 2005.

Fifth, our policymakers were inept to comprehend the ever-evolving force of globalization. While talking about structural transformation and high growth rate, they failed to implement reforms promised in voluminous documents and lofty speeches. New policies were introduced without looking at coherence with the already existing ones, leading to confusion and paralysis in implementing the already agreed ones. Innovation and self-discovery (i.e. learning by making mistakes and taking risk) were never promoted. There is a lack of coordination among government, investors and producers to foster innovation and competition.

Tackling constraints

Given the limited amount of resources at our disposal, we cannot address all the problems at the same time. The most binding constraints have to be addressed first. To bring down costs, the industries need good roads, uninterrupted supply of electricity and other facilities, security, network of firms producing similar range of products in the same space and attractive incentives. All of these cannot be provided to each firm scattered across the country. But, at the same time, without these facilities our firms cannot produce efficiently. The government could immediately pass SEZ bill, construct such zones in strategic locations like India and Bangladesh are doing, and then provide the required facilities to firms operating inside such zones. This positive discrimination is the most cost effective way to deal with our industrial and export woes at present.

Apart from this, what is really needed is serious implementation of the already committed reforms in trade and industrial policies. It will do a lot in boosting production and exports and in making our products competitive in the international market. Additionally, we need to successfully negotiate with neighbors to reduce trade barriers that are increasing production, transaction and transportation costs. Importantly, to boost production and exports, we need to make Nepal a better place to do business in and provide the necessary enabling conditions for smooth operation of firms and stimulation of entrepreneurial activities.

Companies pulling out of SEZ after incentives were scaled down in India

noreply@blogger.com (Chandan Sapkota) — Tue, 27 Dec 2011 09:01:00 +0000

Looks like companies are pulling out of SEZs after the Indian government pruned benefits given to companies locating and operating inside SEZ. Below is a story published in The Economic Times.

But this February, finance minister Pranab Mukherjee pruned some of those benefits to SEZs, leaving entrepreneurs like Sonthalia fretting. "Having already made a significant investment of Rs 200 crore, we couldn't have pulled out," says Sonthalia, vice-chairman & managing director, Sonthalia Group of Companies. Sonthalia represents India Inc's growing disenchantment with SEZs -- the previous government's big idea to drive exports and, in turn, employment and growth.

China was reaping the benefits of such a policy crafted in the eighties and UPA-I felt SEZs could redefine India's status as an exporter. It rolled out a 15-year SEZ plan in 2006. Land on a platter. Speedy approvals. No income tax for five years and concessions for another 10 years. No tax on inputs.

Except after two years, the promises started coming unstuck, like the one on income tax. "We don't know what the government might do next," says Sonthalia. Faced with a harsher business climate and a government that is wavering on SEZ laws, companies are unsure whether they can plan for 15 years. About one-third of companies that held the rights to build an SEZ -- 202 of 583 -- have raised their hands and walked away.

The pace of withdrawals is increasing, with 60 leaving in the past two years alone. These include companies that were looking to set up SEZs for captive purposes (Bata, Dr Reddy's and Essar) or to lease it out (DLF, Omaxe and Unitech). It's no different for tenants. "Most units are evaluating their tax arbitrage before deciding whether to go to an SEZ," says Anshuman Magazine, managing director, CB Richard Ellis, a real estate consultancy.

About one-third of India's exports come from SEZs. Impressive as that headline number is, it is boosted by some migrating exporters -- for example, IT companies moved from software technology parks to SEZs. Further, it hides the skew of just five states and five sectors account for 90% of exports from SEZs. It hides the fact that SEZs are anything but nonurban and manufacturing conclaves, as they were conceived to be.

Of the 583 SEZs the Indian government had approved till October 2011, only 143 were operational. The running SEZs are operating under capacity as well. The government recently changed land acquisition, incentives and taxation provisions. In 2008, the Indian government transferred the responsibility of land acquisition from government to developer itself. In 2009, the government changed the basis of incentives from profits to investments in the draft of the direct tax code (DTC). In 2011, the budget removed income tax exemption for 15-year period and slapped 18.5% minimum alternate tax and 15% dividend distribution tax. Investors argue that once the DTC is enacted, SEZs won't be an attractive option. Why did this happen? It is because of the tussle between two ministries for long-term plan (commerce) and short-term imperatives (finance).

The perils of having consumer groups in the absence of elected local bodies

noreply@blogger.com (Chandan Sapkota) — Tue, 27 Dec 2011 08:16:00 +0000

A latest study by United Nations Capital Development Fund (UNCDF), reported in Nagarik Daily, states that budget leakage in Mountain and Terai regions is as high as 80 percent. The figure for Hilly region is 25 percent. On average, the leakage of allocated budget by ministries and income of local authorities is close to 50 percent. Consumers committee in local authorities are misusing the money (by showing investment in local roads that are redone multiple times).

This raises doubt over the hypothesis that efficiency is enhanced if power is given to consumer committees to come up with priority projects and also allow discretionary power to them to spend budget allocated to local authorities. It raises question over the effectiveness of decentralization in the face of rampant corruption, vested interests of leaders, and illiterate committee members. The study states that without local elections and elected local representatives, real decentralization is unimaginable.

Here is an editorial on the same issue published in Republica:

The study has found that every year, over Rs 20 billion is being embezzled from state funds going into local development. According to the study, the money funneled down to the local level is misappropriated, right from the planning to the implementation stage of local projects. The problem is most acute in the Hill and Tarai regions with up to 80 percent of the allocated sums going missing.

[…]The latest revelations have also questioned a hallow principle among development experts in Nepal. Of late, a consensus has been building that local people are the best equipped to bring meaningful changes in the society. Thus, the local consumer groups have been given more and more say on how the money going into local bodies is spent. But the ground realities hint that things are not so straightforward. It was quite a stretch of imagination to assume that consumer groups that do not need license to operate, that do not pay taxes and most surprisingly, cannot be held accountable for their actions, would maintain self-discipline without any oversight. It is bizarre because no human being is immune to the base motives induced by a potentially endless source of money.

The need of fiscal tools for short run stabilization

noreply@blogger.com (Chandan Sapkota) — Mon, 26 Dec 2011 04:17:00 +0000

David Romer argues that fiscal tools are needed for short run stabilization, especially when the economy is in a liquidity trap (zero lower bound on nominal interest).

The first lesson is straightforward: we need fiscal tools for short-run stabilization. Before the crisis, there was broad agreement among macroeconomists and policymakers that short-run stabilization was almost exclusively the province of monetary policy. Monetary policy is more flexible; it is more easily insulated from political pressures; and it can more easily be put in the hands of independent experts. We thought that the zero lower bound would bind infrequently and not sharply; and that in the unlikely event that it did bind sharply, monetary policymakers had other tools they would use in place of reductions in the policy interest rate.

We now know that this view was wrong. We suffered shocks larger than what almost anyone thought was within the realm of reasonable possibility. The constraint imposed by the zero lower bound turned out to be huge (for example, Rudebusch, 2009). And central banks did not use tools other than the policy rate on a scale even remotely close to large enough to make up for the loss of stimulus caused by the zero lower bound.

Perhaps this lack of aggressiveness in using those tools reflects an understanding of the costs of using them that has eluded conventional analyses. But central bankers have yet to provide evidence of such costs. A more likely possibility, in my view, is that the culture of central banking makes it much easier to take unusual steps when the financial system is at risk than when the threat is “merely” one of years of exceptionally high unemployment. But regardless of the reason, monetary policy was not used aggressively enough to prevent very large demand shortfalls.

So, countries needed other tools. And the alternative to monetary tools is fiscal ones. For that reason, almost every major country adopted substantial discretionary fiscal stimulus in the crisis (U.S. Council of Economic Advisers, 2009). Given that we could face another major demand shortfall in the future, it follows that we need instruments of discretionary fiscal stimulus as part of the macroeconomic toolkit.

After reviewing available evidence on the effectiveness of fiscal policy, Romer argues that when monetary policy does not respond, conventional fiscal stimulus is effective. Also, when monetary policy is constrained, austerity measures do not lead to expansion. He also makes a point that to understand fiscal policy responses to the crisis, political economy considerations are central.

Defense versus foreign aid: Which one to cut during trying times?

noreply@blogger.com (Chandan Sapkota) — Thu, 22 Dec 2011 05:20:00 +0000

Here is an interesting article in The Economist that looks at why the public support slashing foreign aid but not defense spending during austerity era. The stimulating debate is over the spending on fighter jets to bomb dictators and free the repressed people and slashing spending on providing anti-Malaria bed nets to the same repressed people.

The author argues that with the drumbeating of ineffectiveness of aid in reducing poverty and spurring growth, the public is more willing agree to slash foreign aid that is supposedly not working than defense spending. And, the debate usually drags like the never-ending battle between Sachs and Easterly over aid’s effectiveness. It is ideological belief most the time. A belief that the government should concentrate more on defense and law enforcement (i.e. smaller government, not smarter!), and let the markets determine the rest. Read the full article.

Congress is slashing foreign aid to fight malaria in large part because the one category of government spending that the American public actually wants to slash, by a wide margin, is foreign aid. Meanwhile, the public opposes cuts to the defence budget (though they oppose cuts to education, Medicare and domestic anti-poverty programmes even more). So the fact that the political sphere is debating whether or not to bomb Muammar Qaddafi's tanks, rather than whether or not to raise spending on anti-malarial bed nets in Malawi, isn't really that surprising. But why does the public want to cut foreign aid, rather than defence? One reason is that for the past decade and more, both serious development experts like William Easterly and unserious politicians, mainly on the right, have been strenuously arguing that most foreign aid doesn't work. In fact, in Mr Easterly's case, one of the things he argued didn't work (in his excellent book "The White Man's Burden") was centrally planned efforts to distribute anti-malarial bed nets. He thought this was one of those things that would work better with a market solution: we should subsidise at most $8 of the cost of each $10 bed net, but let the rest of the distribution work itself out via market mechanisms.

Again, it's not surprising that the public doesn't want to spend more on foreign aid for anti-malarial bed nets, when people keep telling them such aid doesn't work. What makes the situation more piquante is that, as Jeffrey Sachs argued in a 2009 article in Scientific American, in the specific case of bed nets, the claim appears to be completely wrong. The reason anti-malarial bed nets hadn't been much of a success in Africa before 2005 or so was that donors and executing agencies hadn't spent enough money buying them, and hadn't yet figured out how to distribute them.
[…]Mr Easterly and Mr Sachs have a long-running and intense debate on this and other development issues. I usually agree with Mr Easterly more than Mr Sachs, but in the specific case of bed nets he's had to retreat; more recently he's been sensibly pointing out that even if free distribution works better, you have to figure out a reliable way of identifying organisations that will actually do the distribution for free (rather than selling them illicitly, failing to distribute, etc), and there's no obvious scalable way to do that. But this only raises a further problem for the "bomb Libya or fight malaria" paradigm: how can you even ask the question if spending more on anti-malaria campaigns may not have any effect, since it's about the quality of the agencies, not the amount of funding? If there's no fungible way to shift effort from bombing Libya to fighting malaria, how can there even be a trade-off here?
Still, let's stipulate that shifting spending from the government bombardment of Libya to government anti-malaria efforts in the developing world would work. Certainly, few public-health experts would dispute that many health problems can be most efficiently addressed by having the government undertake preventive measures and distribute them for free. But here's the thing: you will hear approximately no voices on the right-hand side of the political aisle making this case in the United States today. The strategic direction of conservative political thought over the past 30 to 50 years has been to minimise the consensus on the extent of public goods: to argue that there are almost no areas of the economy or society in which government has a constructive role to play,except for national defence, and a few other areas such as law enforcement. Certainly not health.
I would suggest that if we're wondering why the American public devotes so much of its political attention to wars, and so little to anti-malarial bed nets, we might want to consider the role played by consistent efforts over the past 30 years to convince the public that government has almost no legitimate or positive role to play in society apart from a few narrow categories, including law enforcement and national defence, and not including health care. People who believe that virtually all social and economic endeavours, apart from defence and law enforcement, are best addressed by leaving them up to market forces and private industry will not naturally see much else for political discussion to focus on apart from military activity and law enforcement. To put it another way: if we don't think peaceful humanitarian interventions (like anti-malaria campaigns in Malawi) work, then, yes, military humanitarian interventions (like bombing Libya) are the best possible use of American resources towards humanitarian ends. If we do think government humanitarian programmes like anti-malaria campaigns in Malawi work, then I would expect to see a rather different attitude towards foreign aid and public health-care spending than I have seen in American politics these last few years.
To put things in one last way: it simply isn't true that we aren't faced with calls for peaceful humanitarian interventions as often as we are faced with calls for military ones. We are faced with calls for peaceful humanitarian interventions all the time. People are asking for more money for USAID. People are asking for more money for UN peacekeepers. People are asking for more money for the United States Institute for Peace. They're asking for more money for the Global Fund to Fight AIDS, Tuberculosis and Malaria. If you want America, collectively, to be doing more of this sort of thing and less of the bombing sort of thing, then what you need to do is to argue that those sorts of activities are central missions of the United States government, because the most powerful political forces in America over the past couple of decades have been arguing that they aren't, and that's why we're not doing more of them.