Views of a Nepali Economist

On November 8, Narendra Modi suddenly banned the 500 and 1000 Indian Rupee notes, and thereafter popularized a word not many had heard before: demonetization.

Modi stated that this action was in response to the endemic corruption and black money in India. The logic is that black money in India is hidden under mattresses in 500 and 1000 Rupee notes. Modi thinks that banning the large denomination notes will render all that black money useless. However, 86 percent of India’s cash is in 500 and 1000 Rupee denominations. Also, much of India engages in cash transactions. So, it is not only the rich who have suffered from the ensuing chaos. Around 50 demonetization-related suicides have been documented in India so far. None of those 50 appear to be rich Indians.

So, how corrupt is India? For the year 2015, Transparency International’s “Corruption Perceptions Index” ranked India 80 in the world among the surveyed 168 countries. In South Asia, India fared better than Nepal (85), Sri Lanka (90), and Afghanistan (166), but worse than Bhutan (27) and Bangladesh (68). Maldives and Pakistan were not surveyed. So, India is in the middle of the pack in both the world ranking and the South Asian ranking.

While many Indians have lost their lives due to post-demonetization chaos, much more support and laud the action. To gauge the public’s reaction, Modi launched the NaMo app to collect the public’s vote on the issue. The results so far indicate that 93 percent of those that voted through that app approve of the Prime Minister’s action. However, only 500,000 people have voted so far, and chances are high that majority are BJP supporters who would blindly support any crazy idea that Modi can conjure.

Analysis and statistics will tell us in the future whether Modi’s demonetization action was a masterstroke or a dud. But, the policy is fraught with dangers.

There is a perception that corruption is ongoing in the name of ending corruption. Arvind Kejriwal—the Aam Aadmi Party leader—and others have accused Modi of informing his friends beforehand of the ban. While that is difficult to prove, what is easy to prove is that 1000 Indian Rupee notes were being bought by smart “entrepreneurs” for 600 in some parts of Nepal. If that is happening in Nepal, I can only imagine what is happening in India, mostly rural India where people have no access to banks. The opportunities have suddenly become rich due to Modi’s scheme.

Many people in other countries will suffer, too, as a result of this ban. There are millions of Indians all over the world who keep a certain amount of these large denomination notes with them. I have personally spoken to three of my Indian friends who live outside India, and they mention they each have around IRs 15,000-20,000 with them in 500 and 1000 denominations. That money comes in handy every time they visit India. How many billions worth of 500 and 1000 Rupee notes that Indians overseas have that are now suddenly worth nothing? Nobody knows.

This is a spectacular policy failure, especially because India wants to become a world economic power. It wants its currency to be traded worldwide, like the US dollar and the Euro. It even came up with a new symbol for the Indian Rupee with that purpose. However, Modi’s demonetization scheme just crushed that ambition. Can anyone ever imagine the United States suddenly deciding to ban all their 100 dollar bills? That would collapse the world economy. Thankfully, India is not the United States and the world economy is safe despite the demonetization folly. However, the demonetization action also means the Indian Rupee is nowhere close to becoming an internationally traded currency.

Even if the demonetization scheme achieves its purpose this time around, who is to say corruption in India will not continue in the future? What if the new 500 and 2000 Rupee notes do not curb corruption? Will India, then, issue 500 and 3000 Rupee notes?

The Indian government—in fact, all governments—need to understand that corruption exists because of other policy failures. For example, the Prevention of Corruption Act of 1988 considers both bribe-taker and bribe-payer in India equally guilty and both receive equal punishment under the law. That clearly goes against the intent of the Act to reduce corruption because a bribe would never be reported because both the sides stand to lose from the revelation. Other legislations, such as those that deal with bank and securities fraud, grant amnesty from prosecution to those who expose such frauds. However, the Indian law’s unclear language on amnesty and the onerous onus it places on the accusers has resulted in toothless action.

Kaushik Basu, the noted Indian economist, has been arguing for clear amnesty language for decades. He has proposed that the language of the law be amended to reflect that giving bribe is legal but taking it is not. In addition, if proven successfully that a bribe has taken place, the person receiving the bribe would not only have to suffer the legal consequences but also return the amount of the bribe to the briber payer. Basu argues that this would ensure the interests of the bribe payer and receiver are not aligned. Once the bribe is paid, the payer would have all the incentives to expose the bribe receiver.

Every corrupt country has to start somewhere to tackle the problem. India—as well as its poorly ranked neighbors—would be wise to give Basu’s ideas a chance. It is a more sensible policy, it won’t crash the world economy, and it will not make the poor commit suicides.

Labels: black money, corruption, demonetization

China's economic development has a potential demography problem

Over the past 30 years, China’s total fertility rate....has fallen from 2.6, well above the rate needed to hold a population steady, to 1.56, well below that rate...... Because very low fertility can become self-reinforcing, with children of one-child families wanting only one child themselves, China now probably faces a long period of ultra-low fertility, regardless of what happens to its one-child policy.......Shanghai reported fertility of just 0.6 in 2010—probably the lowest level anywhere in the world. According to the UN’s population division, the nationwide fertility rate will continue to decline, reaching 1.51 in 2015-20........

Scotland is voting for independence from the UK in 2014. Is it a good idea?

The political and cultural issues around independence are hotly debated. Yet fittingly, in the birthplace of Adam Smith economic arguments seem to weigh heaviest. Opinion polls suggest that they will determine whether or not Scots go for independence. One poll found that just 21% of Scots would favour independence if it would leave them £500 ($795) a year worse off, and only 24% would vote to stay in the union even if they would be less well off sticking with Britain. Almost everyone else would vote for independence if it brought in roughly enough money to buy a new iPad, and against it if not.

Massive corruption in the Chinese military

...."Certain individuals exchange public money, public goods, public office and public affairs for personal gain, flouting the law and party codes of conduct, even resorting to verbal abuse and threats, clandestine plots and set ups," he said. "They physically attack loyal and upstanding officials, kidnap and blackmail party leaders, and drag in their superiors to act as human shields. They deploy all of the tricks of the mafia trade within the army itself." The way Liu describes it, the web of military cliques, factions, and internal knots of organized crime sounds more like the workings of warlord armies before the communist revolution than the rapidly modernizing force that is currently rattling China's neighbors.

Open border between India and Nepal is a cause of concern: Akhilesh Yadav, the newly elected Chief Minister of Uttar Pradesh

....the newly-elected UP CM said the 550km-long border with the state requires special policing arrangement to put a check on any possible anti-national activity....

Labels: border, china, corruption, economy, India, scotland

Here's the news report. Here is another news report about the Nepal data. Here are some highlights:

• 40 percent had paid backhanders over the last 12 months to public servants, with police being the largest recipients
• 62 percent of south Asians believed corruption had got worse over the past three years, with Indians and Pakistanis the most pessimistic.
• More than 80 percent, however, said they were willing to take action to end corruption.
• the country most plagued by bribery is Bangladesh, where 66 percent report paying bribes to public institutions, mostly just to gain access to services to which they are already entitled.
• In India, where the figure was 54 percent, a majority thought their government wasn't doing enough to fight corruption that permeates all levels of society -- requiring bribes for anything from getting a birth certificate to tenders for infrastructure projects
• In Nepal, Pakistan, India and Sri Lanka, bribes were mostly paid to speed up unwieldy bureaucracy, highlighting how corruption can be a barrier to business expansion
• In Sri Lanka, significantly more people paid bribes to tax authorities than other services 
• in Nepal and the Maldives, customs officers reportedly received the most bribes.
• Over 53.7 percent of respondents surveyed in Nepal perceived the political parties as the most corrupt institutions, followed by the legislature and the police as the second and the third corrupt institutions respectively. 
• highest amounts of bribe (exceeding Rs 3,500 per year) was paid by 2.2 percent of Nepali households
• 18.8 percent households paid approximately Rs 2,485 to Rs 35,429.
• 32.2 percent had to pay approximately less than Rs 2,000 in a year

Labels: corruption, south asia, TI, transparency international

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I found an excellent piece in The Economist about Aid and how it has fostered and encouraged corruption in Nepal. The direct link to the article is here. Some excerpts below:

The most visible abuses are in local government. Each year municipalities receive funds designated for development which are equal to about 10% of the government total budget. A group of 14 foreign donors, chaired by the Asian Development Bank and Britain’s Department for International Development (DFID), is contributing $200m over four years under a scheme called the Local Government and Community Development Programme (LGCDP).

On how corruption is occurring, the article gives an example:

...buildings paid for but never built, or simply repainted and passed off as new. The same roads were supposedly rebuilt—as if from scratch—every year. A commonly reported trick is to record as one item the construction of a road from A to B and then again, on a separate line, the road from B to A.

Local NGOs applying for grants are said to pay “commissions” of up to 50%. Gross irregularities are alleged everywhere in tendering processes, which sometimes involve violence between rival party cadres. Local governments often pass most of their annual budgets in the last two weeks of the financial year, the better to avoid scrutiny.

There are some genuine officials who wish to curb and even prevent corruption, but their efforts are overshadowed or even circumvented by higher powers to be. For example:

In the southern plains, an area called the Terai, even senior officials estimate that as much as 60 to 90% of all funds are misused. “If I take action against corruption,” said the chief government officer in one Terai district, “there will be a mob outside and inside my office.”

In hill districts informants estimate that between 25 and 50% of all development funds are misused. Here the Maoist former rebels, who back the new government, are the strongest single faction. The misappropriations help pay for a constant cycle of political rallies as well as the upkeep of their paramilitary organisation, the Young Communist League.

The Aid and Corruption scenario in Nepal has become so bad that even foreign donors and I/NGOs are embroiled in it. For example, here's what they claim:

Officials at the United Nations Development Programme and DFID argue that accounts of widespread malpractice are merely anecdotal and unsupported by data. On the contrary, they say, their project is a relative success.

Now, I'm not very aware of how DFID or UNDP do things in Nepal. But, as a researchers who reads the "Request for Proposals" that get published by such organisations in our national dailies, I have noticed some patterns that suggest corruption within such organisations.

Every time an RFP is published by foreign donors like UNDP and SNV, you can basically conclude that they have already decided on who is going to get the project. How? Because the RFP gets published today, and the deadline for submitting the proposal is a week from today. It asks for at least 5 or 6 individuals who have experiences of around 5 to 7 years on the relevant fields.

An organization that wishes to write and submit the proposal requires more than a week's time to gather such experienced consultants and write the proposal and submit it. This practice is most noticeable in the RFP's issued by the UNDP. Usually, their RFPs have too many requirements and formalities that cannot be well serviced in a week's time.

Similarly, SNV has an RFP out in the newspaper this week for a baseline and value chain analysis of some agricultural products. The proposal is due in a week. This means it is safe to assume that SNV has already chosen who to award the project to. It's simply fulfilling the institutional formalities by issuing the RFP in Nepalese national dailies.

These kind of practices among the donors themselves suggest that even they have become corrupt. Therefore, the moral high ground that they sit on, while demanding the Nepalese officials, bureaucrats and governments to be corruption free, is no longer there. They've got mud on their shirts, too.

And, here's more on that:

There is a well-recognised annual bonanza in Kathmandu, as agencies scramble to spend what remains of their budgets before the end of each year. Despite their profligate reputation most say they almost never detect malpractice in the projects they fund. Senior donor officials present their dilemma differently. They say working in such countries always involves the risk of further fraud and they claim it would be ineffective to push anti-corruption measures on the government harder than they already do. And for them to withdraw from a difficult working environment would betray the poor people who depend upon their support.

As a researcher who has observed how these INGOs do business in Nepal for over a year now, I refuse to believe that last sentence. It is a lie. I believe that the INGOs operate in Nepal like a business. Yes, they serve people, but they serve their own interests as well.

Labels: corruption, foreign aid, INGOs, SNV, UNDP

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1. The world's current credit rating. As the picture shows, Nepal is not rated.


2. How do you sell your country's centuries of history? Well, learn it from the corrupt Nepalese politicians and bureaucrats.

3. More Nepalese are traveling outside Nepal as tourists.

























4. Nepalese government to guarantee jobs to the poor.

5. Phillips Curve shows the relationship between the inflation and unemployment rate in a country. It suggests that these two macroeconomic variables have an inverse relationship i.e. when inflation is low, unemployment is high, and vice versa. The graph showing this relationship is below:


Does this mean Phillips Curve fails in the Nepalese context? Because we are suffering from "high inflation" and "high unemployment" at the same time. I don't know. Maybe some other factors are at play.

Labels: corruption, credit rating, jobs, tourism, unemployment