Saturday, June 9, 2012
Wise Economics: Development in Nepal
My latest article in Republica, published with the title "Wise Economics" on June 9th, deals with the hiccups in the development process in Nepal. The direct link to Republica's article is here. The unedited version is below.
Wise Economics
Economic growth in Nepal has not been across the board. Agriculture has
been languishing for decades. The Maoist conflict and lack of electricity
caused a further decline of agriculture, as well as manufacturing. Luckily,
education, construction and the newly rejuvenated banking sector have provided
a sense of normalcy and stability. However, there are still three basic hiccups
in the administration of development activities in Nepal.
First, our planning capacity is weak. There are many able and competent
planners at the national level. However, people with significant and competent
planning and implementation skills are in short-supply at the decentralized
level. Second, our fund flows are irregular. The central government allocates
funds for development, but it reaches the destination only after a few months.
In addition, funds vary drastically from one year to another, which confuses
the people working at the ground level.
Third, the absorptive capacity of development funds is very low. When
funds are distributed, there is a pre-condition attached with the fund,
especially regarding how and where it can be used. In some cases, funds are insufficient,
while in other instances, the funds could be in excess. In case of excess funds, such funds cannot be
diverted to other important causes due to the binding pre-condition attached
with the funds. Therefore, if the personnel at the ground feel that funds from
one program should be diverted to another more immediate need, they are unable
to do so. This causes the funds to go unused or distributed via corrupt
schemes.
While Nepal has made significant progress in defining and enforcing the
concept of property rights on public goods and resources, as is evidenced from
the success of community forestry, there are many areas where property rights
for environmental resources have not been well defined and enforced. Unused
land exist under the domain of the Nepal government in areas where famine and
hunger risks are persistent—for example, the far-west region. These should be
used in manners similar to community forestry so that people can use it for
income generation and food security purposes. Once that is successfully
implemented, the government should improve the transport infrastructure to
reduce the transaction costs of their produce or products. Increase in economic
activities and productions serve no purpose if access to market is difficult.
Speaking of economic activities, it has to be ensured that every player
in the market has equal odds of succeeding. One group of producers should not
be able to dominate the market and dictate the rules. Economists use the
Hirschman-Herfindahl Index to observe if any single producer or a group of
producers is unfairly dictating the terms in the market. For the Nepali
airlines industry, the “Hub and Spoke” observation could help us learn if
Buddha Airways, the largest airline in Nepal, is charging the highest price
simply due to the fact that it is the largest domestic airline. If this is
true, it hurts the consumers and the development process. Then, the government
needs to intervene.
However, government interventions are going to be trickier once Nepal gets
federalized. Some development concepts like Horizontal
equity rationale will continue to be discussed. It has greater appeal than
vertical equity because it ensures equity across different regions. In theory,
it ensures that equals are treated equally. However, even if federal states of
Nepal are considered equal by the constitution or any other mandate, it is
inevitable that some states will end up with richer endowment of natural or
other resources essential for development. Horizontal equity in that situation
is impossible although it is a desirable outcome.
Government interventions have to consider the resource argument, especially
because economic development rests on the shoulders of available resources. Residents
of Manang are killing residents from neighboring Gorkha district who came to
“steal” their yarchagumba. So, we cannot guarantee that violence over the
rights to a particular resource will not flare up when Nepal gets federalized.
In fact, it is only going to escalate. Despite these fights over natural
resources, development practitioners know that capital is the most important
resource because absence of capital renders other resources almost unusable.
On one hand, according to law of diminishing marginal returns, if
capital is taken to capital-deficit areas, i.e. poorer areas, the marginal
productivity of that capital will be higher than if it were invested in an
already prosperous area. This argument suggests that capital should go where
labor is abundant. An example of this is the miraculous growth of China where
favorable policies created by the government ensured that investors brought
their money and established factories because there was no shortage of cheap
labor in China.
On the other hand, poorer regions have low marginal as well as average
productivity. Therefore, moving capital and spending it in areas with low
productivity is wasteful because that capital could instead be used for
accomplishing significant economic growth in areas with higher productivity.
This argument suggests that labor should go where capital is abundant. The
movement of people from all over Nepal to urban areas and cities for jobs and
opportunities is an example.
However, this second economic thought overlooks the fact that urban
areas get larger and larger every passing year due to rural-urban migration to
capital rich areas. This phenomenon creates “urban giants” that often suffer
from stretched public service delivery scenarios where delivery of even
essential services becomes logistically a nightmare. Kathmandu has been suffering
from urban giantism for some time now. This approach to development is not
desirable.
Economies of agglomeration are useful in the sense that cities foster
economic growth due to proximity to jobs, labor, capital and infrastructure.
However, Nepali cities and urban areas are getting stretched to their
functioning limits. The right approach to development in Nepal is to take
capital to the rural and poorer areas where resources essential for economic
growth like land and labor are cheap and abundant.
Labels: development, economics, economy, federalism, urban giant
Tuesday, August 30, 2011
Economics of Federalism.
.
The following opinion piece was published in Republica on August 30, 2011. I wrote it in collaboration with Mr Nanda Kaji Budhathoki, a fellow Economist at IIDS. The direct Republica link is here.
In recent years, we have seen unprecedented changes in our political and social landscapes. We overthrew the monarchy, and became the only country in world history to elect the Maoists by a majority. Overthrowing the monarchy was only a matter of time as the discontent with the monarchial system had been brewing ever since the first democracy in 2007 B.S. However, the overthrowing of the two hundred year old monarchial system has thrown us headfirst into previously unchartered waters of “federalism”. The problem is, we as people still do not agree on what it means, how it should be set up, and what direction it should be headed towards.
Under a federal system, power is divided between the central and the state governments. The idea for this division of power arises from the understanding that the center and states have separate functions. Therefore, they must have separate powers, including the economic power of spending and taxing. In addition, longstanding practices of caste and ethnic discrimination, greater power privileges in the hands of the social upper castes, centralization of authority in the capital city, uneven development and persistence of mass poverty in remote geographical regions are some of the key reasons why the demand for federalism in Nepal has gathered momentum in the last few years.
Mass internal migration occurred during the years of the Maoist insurgency where people moved from rural and insurgency affected areas to urban centers. Also, centralization of all economic and political powers has resulted in the Kathmandu valley becoming an urban giant that gets difficult to manage and control each passing year. Our largest city receives disproportionately large share of public and private investments, as well as incentives for investments when compared to the country’s second largest or other large cities. In development economics, this is called the first city bias, and it is a massive hindrance to the development of the rest of the country.
Kathmandu district alone generates 42 percent of the total revenue in Nepal. Top 12 revenue generating districts in Nepal generate 94 percent of total revenue. The remaining 63 districts generate only 6 percent of total national revenue. These numbers clearly suggest that something is terribly wrong in Nepal in terms of distribution of economic powers. The Eastern, Central and a few parts of Western regions are economic powerhouses whereas the Mid-western and Far-western regions languish in poverty and zero opportunities.
All the opportunities in Nepal, today, seem to be concentrated only in the Kathmandu valley and a handful of other urban centers. Given this, the discontent among the Nepalese populace for the central government is understandable. Most see this as a failure of the central government system. Therefore, a federal structure is more preferable.
The manifesto of the three major political parties—Nepali Congress, UML and Maoist—show that they, pretty much, agree on how the powers should be divided, and how jurisdictions should be assigned. Also, there is a consensus that foreign policy, currency, national security, international trade, monetary policy, central bank, large hydropower projects, mega projects, railways, airways, national highways, customs duty and other issues of national interest should be controlled by the central government. Issues like water, land, forest resources, education and health should be under the control of provincial or state governments.
However, discussions on the economics of federalism have been lacking in Nepal today. We do not seem to be seriously analyzing the economic ramifications of a federal republic structure. We have to ensure that the federalism that we design preserves the market structure while providing more incentives for economic growth and development, and not less. Economically, state governments under a federal structure have to work frugally and on the margin due to their inability to print money and borrow limitlessly. So, the federal structure that we create should help and augment the capability of the states to govern and run themselves without engaging in free-riding.
Jurisdiction over the environment and welfare responsibilities should be federal responsibilities. Ramifications of water and air pollution from one state could be borne by another. Therefore, assigning environmental responsibilities to the states is probably a bad idea. Similarly, if the states are given the welfare responsibility, some states will lure the rich and wealthy with unfair practices like lower taxes. As a result, poorer states will not be able to fulfill their welfare obligations like education and healthcare.
Also, the decentralization theorem of federalism suggests that if consumption of public goods depends on geography, states are more efficient in providing such goods. Since much of public service delivery in Nepal is adversely affected by our rough geographical terrain, devolving the delivery of public goods to the state level is better.
While designing the federal structure, more focus should be given to disadvantaged areas in the Mid-western and Far-western regions. These areas lack developmental infrastructures and opportunities. So, creating a federal structure and asking these areas to run themselves via their own revenue generation is undesirable and dishonest. The imbalance between states in these regions and rest of the country should be corrected through intergovernmental transfer from the central to state governments.
The concept of such transfers, as well as from richer to poorer state governments, is common among federal nations. In the United States, taxpayers in New York and Connecticut help out those in Louisiana and Alabama. Similarly, in China, taxpayers in Shanghai help out those in the poorer western and central provinces. So, in principle, taxpayers in Kathmandu and Morang have an obligation to help out those in Dolpa and Rukum until these regions experience economic growth sufficient enough to make them self-sustaining. The magnitude and duration of such transfers will start decreasing as these states start growing economically.
Federalism discussions in Nepal have been hijacked by political parties and their interests. Each party has brought its own bias and greed into the table while proposing the design of the new federal states. What we need today is to rise above the petty politics of it all. The new federal states should be designed such that they are politically stable, socially harmonious, and, above all, economically sustainable.
The following opinion piece was published in Republica on August 30, 2011. I wrote it in collaboration with Mr Nanda Kaji Budhathoki, a fellow Economist at IIDS. The direct Republica link is here.
In recent years, we have seen unprecedented changes in our political and social landscapes. We overthrew the monarchy, and became the only country in world history to elect the Maoists by a majority. Overthrowing the monarchy was only a matter of time as the discontent with the monarchial system had been brewing ever since the first democracy in 2007 B.S. However, the overthrowing of the two hundred year old monarchial system has thrown us headfirst into previously unchartered waters of “federalism”. The problem is, we as people still do not agree on what it means, how it should be set up, and what direction it should be headed towards.
Under a federal system, power is divided between the central and the state governments. The idea for this division of power arises from the understanding that the center and states have separate functions. Therefore, they must have separate powers, including the economic power of spending and taxing. In addition, longstanding practices of caste and ethnic discrimination, greater power privileges in the hands of the social upper castes, centralization of authority in the capital city, uneven development and persistence of mass poverty in remote geographical regions are some of the key reasons why the demand for federalism in Nepal has gathered momentum in the last few years.
Mass internal migration occurred during the years of the Maoist insurgency where people moved from rural and insurgency affected areas to urban centers. Also, centralization of all economic and political powers has resulted in the Kathmandu valley becoming an urban giant that gets difficult to manage and control each passing year. Our largest city receives disproportionately large share of public and private investments, as well as incentives for investments when compared to the country’s second largest or other large cities. In development economics, this is called the first city bias, and it is a massive hindrance to the development of the rest of the country.
Kathmandu district alone generates 42 percent of the total revenue in Nepal. Top 12 revenue generating districts in Nepal generate 94 percent of total revenue. The remaining 63 districts generate only 6 percent of total national revenue. These numbers clearly suggest that something is terribly wrong in Nepal in terms of distribution of economic powers. The Eastern, Central and a few parts of Western regions are economic powerhouses whereas the Mid-western and Far-western regions languish in poverty and zero opportunities.
All the opportunities in Nepal, today, seem to be concentrated only in the Kathmandu valley and a handful of other urban centers. Given this, the discontent among the Nepalese populace for the central government is understandable. Most see this as a failure of the central government system. Therefore, a federal structure is more preferable.
The manifesto of the three major political parties—Nepali Congress, UML and Maoist—show that they, pretty much, agree on how the powers should be divided, and how jurisdictions should be assigned. Also, there is a consensus that foreign policy, currency, national security, international trade, monetary policy, central bank, large hydropower projects, mega projects, railways, airways, national highways, customs duty and other issues of national interest should be controlled by the central government. Issues like water, land, forest resources, education and health should be under the control of provincial or state governments.
However, discussions on the economics of federalism have been lacking in Nepal today. We do not seem to be seriously analyzing the economic ramifications of a federal republic structure. We have to ensure that the federalism that we design preserves the market structure while providing more incentives for economic growth and development, and not less. Economically, state governments under a federal structure have to work frugally and on the margin due to their inability to print money and borrow limitlessly. So, the federal structure that we create should help and augment the capability of the states to govern and run themselves without engaging in free-riding.
Jurisdiction over the environment and welfare responsibilities should be federal responsibilities. Ramifications of water and air pollution from one state could be borne by another. Therefore, assigning environmental responsibilities to the states is probably a bad idea. Similarly, if the states are given the welfare responsibility, some states will lure the rich and wealthy with unfair practices like lower taxes. As a result, poorer states will not be able to fulfill their welfare obligations like education and healthcare.
Also, the decentralization theorem of federalism suggests that if consumption of public goods depends on geography, states are more efficient in providing such goods. Since much of public service delivery in Nepal is adversely affected by our rough geographical terrain, devolving the delivery of public goods to the state level is better.
While designing the federal structure, more focus should be given to disadvantaged areas in the Mid-western and Far-western regions. These areas lack developmental infrastructures and opportunities. So, creating a federal structure and asking these areas to run themselves via their own revenue generation is undesirable and dishonest. The imbalance between states in these regions and rest of the country should be corrected through intergovernmental transfer from the central to state governments.
The concept of such transfers, as well as from richer to poorer state governments, is common among federal nations. In the United States, taxpayers in New York and Connecticut help out those in Louisiana and Alabama. Similarly, in China, taxpayers in Shanghai help out those in the poorer western and central provinces. So, in principle, taxpayers in Kathmandu and Morang have an obligation to help out those in Dolpa and Rukum until these regions experience economic growth sufficient enough to make them self-sustaining. The magnitude and duration of such transfers will start decreasing as these states start growing economically.
Federalism discussions in Nepal have been hijacked by political parties and their interests. Each party has brought its own bias and greed into the table while proposing the design of the new federal states. What we need today is to rise above the petty politics of it all. The new federal states should be designed such that they are politically stable, socially harmonious, and, above all, economically sustainable.
Labels: economics, federalism
Friday, July 8, 2011
INSTITUTE FOR INTEGRATED DEVELOPMENT STUDIES SCHOLARSHIP ANNOUNCEMENT
INSTITUTE FOR INTEGRATED DEVELOPMENT STUDIES
SCHOLARSHIP ANNOUNCEMENT
Building and strengthening the roles of women in the process of integrated development of Nepal has been a challenge in recent times. In times of such challenges, it becomes necessary not only to increase the number of women with higher level education but encourage and provide them with more opportunities to pursue further education and research. With this objective, the Institute for Integrated Development Studies (IIDS) announces a scholarship for women scholars.
Criteria for application
· The applicant has to be a female scholar pursuing a Master’s, MPhil or PhD degree
· The applicant’s research should be in an Economics related topic
· The applicant should be a Nepali citizen
· The applicant should be enrolled in a university in Nepal
Documents to be submitted
· University enrollment certificate
· A copy of the research proposal
· A letter from the research advisor/supervisor
· Two recommendation letters from ex- or current professors
· Copy of all the transcripts from SLC level
· Copy of the citizenship certificate
· Updated curriculum vitae (CV)
· Two passport size color photograph
Any contact for acceptance/rejection information will not be entertained. The applicants will be informed of their acceptance/rejection by the IIDS personnel.
Women from minority groups are encouraged to apply.
The deadline for the application is July 15, 2011
Institute for Integrated Development Studies (IIDS)
Mandikhatar, Kathmandu.
On the web: www.iids.org.np
Phone: 4371006
Email: info@iids.org.np
For further information about the scholarship, contact:
Dr Aruna Palikhe, Senior Economist
apalikhe@iids.org.np
Mr Mukesh Khanal, Economist
mkhanal@iids.org.np
Labels: economics, scholarship, women
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