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
Friday, April 20, 2012
Links for April 20, 2012
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
Thursday, March 1, 2012
Africa's Amazing Rise and What it Can Teach the World
The Atlantic has an interesting piece on African economic growth. The direct link to The Atlantic is here.
Excerpts:
Excerpts:
The old approach was about how to prevent Africa from getting poorer.[...] The new thinking on development is to share Africa's wealth more equitably. That's right: Africa's wealth.
[...] In the ten years from 2000 to 2010, six of the world's ten fastest-growing countries were in sub-Saharan Africa: Angola, Nigeria, Ethiopia, Chad, Mozambique, and Rwanda. In eight of the past ten years, sub-Saharan Africa has grown faster than Asia, according to The Economist. In 2012, the International Monetary Fund expects Africa to grow at a rate of 6%, about the same as Asia.
Thursday, January 5, 2012
Challenges of the Nepali economy in the next few years
The following was published in an online news portal www.hamrakura.com. The direct link to the web article is here.
Challenges of the Nepali economy in the next few years
Nepali economy has had a rough ride in the past few years. The
escalating Maoist conflict sent the economy into doldrums during 2006/07. The
economy went into a further fragile state due to the worldwide financial crisis
in 2007/08, the domestic liquidity crisis since 2009/10, and the real estate
crisis since 2008/09. Although the economy has recovered substantially, growth
has been poor when compared to neighbors, inflation has not stopped its goliath
run, and jobs are hard to come by for un-skilled or semi-skilled youths. Now
that the year 2011 is well behind us, let us look at some problems that the
Nepali economy will have to face in the coming year and beyond.
Urbanization
Urbanization is a boon and a curse. On one hand, urbanization is an
indicator of economic growth. On the other hand, it creates a crisis in terms
of delivery of public service goods and services because of increasing demand
for said goods and services that, in turn, constrain resources and create
crisis in delivery.
The escalating war between the Maoists and the Nepali state resulted in
a rapid internal migration of Nepalese citizens from rural areas to urban
centers. One of the
major problems that arose out of this internal displacement was the classic urban giantism problem in the
Kathmandu Valley. Unlike cities in China or India, the urban giantism problem
of Kathmandu and a few other cities was not because they provided more jobs and business opportunities, but because of safety and security that they provided to people’s lives and
properties. Despite the end
of the decade-long Maoist rebellion, that started this rapid urbanization
phenomenon, the urbanization trend has not stopped. It is on the rise.
Like many
other Least Developed Countries
(LDCs), urban
centers of Nepal receive disproportionately larger budget in terms of
development than rural areas. They have more
hospitals and schools. As a result, the rural-urban migration has resulted in the creation of slums and
makeshift communities in Kathmandu and other urban centers in Nepal. This has
made the
poverty situation worse. In
addition, the weak
economy implies that the poor and the hungry that arrive in today’s urban
centers and cities remain poor and hungry because the government cannot take care of their basic needs.
Urbanization
is happening, and is unavoidable. But, proper mechanisms can be put in
place through anticipation or progressive efforts. Basic amenities and services
should be provided all over the country so that people do not flock to urban
centers to receive such services and amenities. There aren’t enough roads
connecting different places in Nepal. Rural areas need roads to stay connected
with the rest of the country. Unless an inclusive approach is taken, Nepali cities will keep
experiencing rapid urbanization and crowding.
The Remittance
Economy
When the Maoist rebellion was at its throes in 2006, the state of
Nepali economy was in a mess, and was on the verge of collapse. The one thing
that saved the economy was remittance money flowing in from overseas. Thanks to
remittance, the consumption did not wane, and the economy stayed its course.
However, that does not mean remittance is always good.
The latest NLSS reported that 53 percent of Nepali households have at
least one member working away from home, out of which 32 percent work in
foreign countries. The reason why so many Nepalis go overseas for work is
because our state cannot provide them with jobs. However, that is not the worst
news to come out of NLSS-III. It is this: 79 percent of the total remittance
received by Nepali households is spent on consumption, and only 2.4 percent is
spent on capital formation activities.
That is, the remittance income that our country receives each year
finances our consumption, and only a small fraction is actually invested in a
useful manner.
Another fact: over 65 percent of those that go to work overseas are
between the ages 15 and 29 while the rest are between the ages 30 and 44. This
does not bode well for our own economic development. How can our economy foster
if the best and the ablest of our labor force goes overseas to build some other
country’s economy? And, it does not look like we are going to see an improvement
in this regard. The Youth Charter designed by our very own National Planning
Commission has 6 bullet-points to help the youths of this country. One of those
bullet points says something to the effect of “to train and provide our youths
with skills that will enable them to land jobs overseas”.
The Youth Charter designed by the NPC explicitly says that one of the
best things it can do for our youths and our economy is to train and educate
our youths just enough so that they can land overseas jobs as laborers. If that
is the best our country can do for our youths, we have no hope. How about
mentioning something like “to create jobs at home for our youths so they don’t
have to toil as menial workers in lands with no laws”?
And, then, there’s something called the spoil effect that we have
to deal with. A study in Kosovo has shown that remittance money sent by family
members from overseas made the youths reluctant towards seeking higher
education. It also reduced their incentives to work. Similar results have been
observed in studies done in remittance heavy economies like the Philippines,
Egypt and Somalia. The spoil effect, essentially, suggests that an easy
availability of remittance money sent from abroad by family members distorts
the work efficiency and working mentality of the recipient young family
members. What good is our remittance economy if we risk losing an entire
generation of our youths to poor education and poor skills due to the spoil
effect?
Nepali
Agricultural Decline
The share of agriculture in national GDP has been on a perpetual
decline. Agriculture contributed 72 percent to the Gross Domestic Product (GDP)
in 1975. Today, it contributes only about 30 percent to the GDP. The situation
is dire due to the fact that we still lag behind in the adoption and use of
technology in our agricultural practices. Agriculture in Nepal cannot compete with highly subsidized and
technologically superior large producers like China and India.
This decline would not be worrisome in itself. But, the reason why
agriculture’s decline is much more worrisome in our case is because 65 percent
of our labor force is still engaged in agriculture. This
is not going to change soon because this labor force does not have the skills
and education to get hired by other sectors. Nepali agricultural labor
force is mostly uneducated/under-educated and unskilled/low-skilled. Most of
this labor force lives in rural areas, and therefore, lacks basic education,
training and healthcare.
Our
liberalization policies and free trade agreements will push a large chunk of
the agricultural labor force into poverty. Although globalization benefits the
world, the fact remains that underdeveloped and developing countries, like
Nepal, have been unable to use it to their benefit. Lack of infrastructure to
transport goods to the market and vulnerability to risks posed by
liberalization make it harder for Nepal to benefit from it when compared to
countries that are already developed.
Agriculture can no longer remain our
leading economic sector. Sooner or later, as in all other nations that have
developed before us, other sectors are bound to surpass agriculture as Nepal’s
leading contributor to its GDP. However, instead of giving up on agriculture
altogether, the government should train and educate the agricultural labor
force in a way that the transition from agriculture vis-à-vis services and
industry should be a smooth flow instead of a painful process.
Liquidity
Crisis Will Return
As the NLSS-III showed, most Nepalis spent the remittance income on
consumption and spent only a small fraction in capital formation activities.
The same is true of any type of income, and not just remittance. So, one of the
reasons why the Nepali financial system went through a liquidity crisis since
late 2009 until late 2011 is because of the Nepali public’s reluctance in
saving their money in banks and financial institutions (BFIs). However, the
main culprits of the recent liquidity crisis are the banks themselves who used
to have surplus money in their vaults, but gave it away recklessly to whoever
came asking for it. And, those that came asking for it were the housing and the plotting people.
Nepal Rastra Bank (NRB) did its best to mitigate the crisis. It
suggested bank mergers hoping that the merger would create a larger institution
that would experience lower costs due to economies of scope and scale, increase
in market power, diversification, and reduced operational expenses. The belief
was that the newly created larger bank would free up vital cash and other
resources to infuse more liquidity into the market while ensuring lower costs,
maximum efficiency and stability. However, no conclusive evidence exists of
such perceived gains occurring in real life.
The NRB also lowered the Cash Reserve Ratio (CRR) from 5.5 to 5
percent, and claimed that this move would infuse Rs 3-4 billion liquidity into
the market in order to ease the liquidity crunch. However, the NRB's tactics of
lowering the CRR was undertaken to provide the bankers an accounting gimmick
that could free up some cash in order to show profit, however minimum, to their
shareholders. Any cash that opened up due to lower CRR would simply be invested
in acquiring government treasury bills to ensure that SLR remained at 15
percent. The move was a sham.
One move that could have mitigated the crisis was if the NRB had
lowered the interest rates to make it easier to borrow money. However, NRB
could not lower the interest rates without giving the impression of loosening
its anti-inflationary stance. If the rates were lowered so much that it came
close to being zero percent, it risked turning the liquidity crunch into a
“liquidity trap”. Also, a low interest rate would mean that people would hoard
cash in their homes instead of depositing in their banks since interest rates
signal the returns they would get on their deposits. That would make the crisis
even worse. In addition, a low interest rate would also cause capital flight
from Nepal to India where Indian banks provided higher interest rates. The
capital flight scenario was highly plausible given the constant pegging of NRs
with IRs, the high volume of traffic crossing the border between India and
Nepal, and the easiness of converting NRs into IRs.
The above reasons make the NRB’s monetary policies
ineffective in its fight against financial crises like the liquidity crisis. In
addition, economists, like Paul Krugman, believe that monetary policies should
be pursued only if a financial disturbance has the potential to affect
inflation or the real economy. It should not be pursued to solve a financial
distress. The liquidity crunch that we saw recently in Nepal had the tendency
to affect neither the inflation nor the real economy. Therefore, there is
serious doubt as to whether the NRB’s policies mitigated the recent liquidity
crunch or if it was just the market correcting itself. In either case, majority
of loans provided by our banks are still in the real estate sector. Until the
lending portfolio of our banks do not change, we will be going through another
round of liquidity crunch in the coming couple of years.
(Copyright) Mukesh Khanal
Labels: capital flight, central bank of nepal, crisis, CRR, economy, financial institutions, housing, IRs, jobs, liquidity crisis, monetary policy, NPC
Wednesday, December 21, 2011
African Economic Miracle
The Economist had this nice piece a few weeks ago titled "The sun shines bright" about the growing African Economic success.
From Ghana in the west to Mozambique in the south, Africa’s economies are consistently growing faster than those of almost any other region of the world. At least a dozen have expanded by more than 6% a year for six or more years. Ethiopia will grow by 7.5% this year, without a drop of oil to export. Once a byword for famine, it is now the world’s tenth-largest producer of livestock. Nor is its wealth monopolised by a well-connected clique. Embezzlement is still common but income distribution has improved in the past decade.
...According to Standard Bank, which operates throughout Africa, 60m African households have annual incomes greater than $3,000 at market exchange rates. By 2015, that number is expected to reach 100m—almost the same as in India now. These households belong to what might be called the consumer class. In total, 300m Africans earn more than $700 a year.
...Labour productivity has been rising. It is now growing by, on average, 2.7% a year. Trade between Africa and the rest of the world has increased by 200% since 2000. Inflation dropped from 22% in the 1990s to 8% in the past decade. Foreign debts declined by a quarter, budget deficits by two-thirds. In eight of the past ten years, according to the World Bank, sub-Saharan growth has been faster than East Asia’s (though that does include Japan).
...In financial centres such as London barely a week goes by without an Africa investor conference. Private-equity firms that a decade ago barely knew sub-Saharan Africa existed raised $1.5 billion for projects on the continent last year. In 2010 total foreign direct investment was more than $55 billion—five times what it was a decade earlier, and much more than Africa receives in aid (see chart 2).The article is long and goes into other details as well.
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