Friday, October 29, 2010

Trade and industrial production back to pre-crisis level?

The figure below shows that trade and industrial production have returned to pre-crisis level. Look carefully. The recovery relates to by volume measure. The growth rate of trade and industrial production is still down after months of incline.

The recovery, measured by growth rate, of trade and industrial production potentially looks like a W-shaped recovery (the level of troughs might differ depending on government activism!). When government intervention for aggregate demand management was high, both trade and industrial production growth rate was increasing. Now, since this is forgone because of austerity fetish in most of the countries, growth rate is beginning to come down as well. See the dent on output loss in developed countries. Andrew Burns argues that this might be permanent. Look at China’s output. Its surging upwards. The price of hands off approach by governments in developed countries is clearly seen in the figure.

By volume, global industrial production, the sector of activity most affected by the crisis—which fell by 10 percent between August 2008 and January 2009—regained pre-crisis activity levels by March 2010. Trade, which had declined by 19 percent in volume terms as of January 2009, has also regained pre-crisis levels, although somewhat later than industrial production.

For more see this piece by Andrew Burns.

Thursday, October 28, 2010

Experimentation and coordination as industrial policy

Industrial policy can be thought of as any type of selective government intervention or policy that attempts to alter the structure of production in favor of sectors that are expected to offer better prospects for economic growth in a way that would not occur in the absence of such intervention. Countries do not know ex ante if a select policy would be successful in successfully aiding a sector or production. So, there has to be trial and error to discover which sector is successful and which is not.

Gebreeyesus and Iizuka study floriculture and salmon industry in Ethiopia and Chile, respectively, and argue that experimentation and coordination also has to be a part of industrial policy. They look at (i) knowledge development and diffusion, (ii) entrepreneurial experimentation, (iii) influence of the direction of search, (iv) market formation, (v) legitimating, (vi) resource mobilization and  (vii) development of positive externalities.

“Even though these two cases are different in many aspects (for example, geography, type of activity, developmental stage, and even the guiding philosophy of the governments), we found various similarities that tie these two successful cases together. The triggering factors for the emergence of the new activities were a combination of different factors including natural endowment and favourable climate. The entrepreneurial experimentation by private entrepreneurs was, however, critical for 'discovery' of the sectors in both countries.

One characteristics of the early stage in new activities is the existence of large uncertainty in technology, marketing, and infrastructure. The governments' selective support at the initial stage was equally critical in reducing these uncertainties. In both cases, the government role changed through phases of development of the sectors. At the early stage governments played a developmental role by providing some inputs and sharing costs (for example, finance and technical support in the case of Chile, and finance, land, and transport co-ordination in the case of Ethiopia). These helped for the success of the pioneers and entry of many other investors, thus created conditions for take-off. In the growth stage other forms of engagement such as increasing regulatory role, formalization of the interactions, and strengthening of institutions start to take place.

Another important lesson from both cases is harmonization between the governments and private sector in the sector building. This was made possible by the presence of pathfinder institutions that consistently pursue the development of the sector and co-ordinate activities accordingly. In Ethiopia, the industry association played the pathfinder role. In Chile, FundacionChile was the key institution from start, even though in the later stage the Association of Salmon Industry was also instrumental. In both cases the pathfinders play important roles in consensus-building between government and the sector, standard-setting (self-regulation), collective market search, developing capacity of members, promotion and legitimation of their respective sectors.”

Here are two more stuff on industrial policy:

Nobel Prize in Economics for Unemployment

My latest piece is about the recently announced Nobel Prize in Economics. I briefly discuss some of the main points of MDP’s research and its implications in real life. For more discussion about the trio’s work, reaction from other economists, Diamond Paradox, and, following their work’s trail, the rationale for “aggregate demand management”, see this blog post.


Nobel for unemployment

The Nobel Prize in economics is probably one of the most eagerly awaited prizes. Officially known as Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, this year’s laureates are Peter Diamond, Dale Mortensen and Christopher Pissarides. They were given the prize for “their analysis of markets with search frictions.” It is basically a Nobel for unemployment! Apart from labor markets, their work is also used to analyze and fathom a variety of fascinating economic and social issues.

Given the tumultuous global economy and faltering recovery, many predicted that this year’s prize would go to some scholars who had done work related to recession and recovery. Economists like Alberto Alesina, Nobuhiro Kiyotaki, John Moore, and Kevin Murphy were high on the list of Thomson Retuers, which regularly predicts scholars who might win the Nobel Prize. Additionally, economics blogs were flooded with names of Robert Barro, Wiliam Nordhaus, Martin Weitzman, Robert Shiller, and Eugene Fama. However, like in the previous years, the Nobel committee surprised most of the economists and analysts by awarding the coveted prize to economists who had done seminal work not on the causes and making of recession, but on one of the outcomes of recession, i.e. unemployment.

The trio showed that an unregulated market does not clear by itself, as has been asserted by classical economists. The classical economists believe that markets always clear because prices are determined in such a way that demand matches supply (they assume perfect information and no transaction costs). In reality, it is not so. The trio’s work shows that even if there are jobs available in an economy, employers might not be able to find suitable workers, and vice versa.

In reality, buyers and sellers face costs in their attempts to locate each other (“search”) and meet pair-wise when they come into contact (“matching”). A small search cost could drastically change the outcome, which is not factored in the classical labor market models. Search cost moves equilibrium price away from competitive price. Aggregate welfare is not necessarily higher with more searches since searches itself are costly. Resource utilization could be either low or high as the search and matching process involves costs. There could be too little or too much searches.

Simply, buyers are unable to find perfect sellers, or vice versa, all the time. Even if they did, there might be disagreements in the prices. This means that both buyers and sellers will continue searching for deals until a settlement is reached for a cooperative transaction that satisfies both of their aspirations. This process of finding the desired outcome is not frictionless. Though this might sound intuitive, the trio clarified this feature of the labor market by using economic models and by applying that to real life. Their work helped economists and policymakers comprehend how unemployment works and persists in an economy and what can be done about it.

One important implication of their research is that an external agent could intervene in a market and provide lubrication to reduce friction that emerges in transaction between sellers and buyers. When unemployment is high despite the availability of jobs, the government can facilitate the process of matching workers and employers, thus reducing search costs incurred by both the agents. Furthermore, the government can roll out training programs to upgrade skills of workers so that their skills are compatible to requirements of employers. In the absence of such a lubricating force, the continuous search and matching environment can lead to macroeconomic unemployment problems as coordinating trade does not match one-to-one. This provides a rationale for “aggregate demand management” to steer the economy towards the best equilibrium by reducing coordination failures.

Their work has been used to analyze various issues in real life. For instance, it is used to examine the effect of policies concerning hiring and firing costs, minimum wage laws, taxes, and unemployment benefits on unemployment and economic welfare. It is also used to explain dating, marriage, fertility, and divorce behavior. It has been used to explain why women tend to prefer older men for marriage more in developing countries than in developed countries (Hint: Social norms matter and wages tend to increase with age!).

More relevant to this discussion is the following realistic situation: There are numerous men and women looking for partners in the marriage market. However, not everyone is successful, leading to gradual development of anxiety and frustration. The search, which involves cost, by agents willing to marry might not lead to a satisfactory equilibrium. The search costs of finding perfect match might increase with time. Had there been perfect information about everybody looking for a partner in the marriage market, there would have been equilibrium, i.e. everyone would find a suitable, or at least satisfactory, partner. However, we live in an imperfect world where there are information asymmetries and coordination failures. So, sometimes the search continues endlessly and frustratingly for extremely eligible bachelors.

What could be the solution? One idea coming out of the work of the Nobel laureates is to reduce search costs by facilitating the matching process. Since the agents searching for partners are unable individually to strike a cooperative deal, the market should be intervened or facilitated by external agents. This could come in different forms. For instance, relatives could intensify their search and lubricate friction in search process. Another increasingly popular idea could be facilitation of matching process online through matching portals. This helps to clear the marriage market to some extent by reducing search time and friction, and facilitating meaningful deliberations between willing agents in the marriage market.

This is one of the many applications of the work pioneered by Diamond, Mortensen and Pissarides. Their fundamental work had been in analyzing search frictions and its impact on unemployment. This year’s economics Nobel is a prize for unemployment!

[Published in Republica daily, October 26, 2010, pp.7]

Wednesday, October 27, 2010

Nokia making plywood?

So, since when did Nokia, a leading manufacturer of mobile devices and other internet and communication equipment, start manufacturing plywood? I saw this one in one of the offices in Nepal. It says “NOKIA plywood & blackboard…water resistant… borer resistant ….” Well, it is a mockery of trademarks and IPRs. It is not uncommon in developing countries! At least, developing countries’ people are using “branded” products that are not yet used by developed countries’ citizens!

I have seen communication and entertainment equipment, durables, and clothing with brand names similar (or nearly similar) to famous global brands, but not a Nokia-branded plywood!

Tuesday, October 26, 2010

Colonial Indian railroads and its benefits

“How large are the benefits of transportation infrastructure projects, and what explains these benefits? To shed new light on these questions, this paper uses archival data from colonial India to investigate the impact of India's vast railroad network. Guided by four predictions from a general equilibrium trade model, I find that railroads: (1) decreased trade costs and interregional price gaps; (2) increased interregional and international trade; (3) increased real income levels; and (4), that a sufficient statistic for the effect of railroads on welfare in the model (an effect that is purely due to newly exploited gains from trade) accounts for virtually all of the observed reduced-form impact of railroads on real income in the data. I find no spurious effects from over 40,000 km of lines that were approved but - for four different reasons - were never built.”

The paper by Dave Donaldson here. The figure below shows the evolution of railroads between 1860 and 1930 in India. The British built one of the prerequisites of growth in India! [It would be interesting to see the impact of roads built under NREGA on rural households.]

Monday, October 25, 2010

Why isn’t Mexico rich?

“Over the last three decades, Mexico has aggressively reformed its economy, opening to foreign trade and investment, achieving fiscal discipline, and privatizing state owned enterprises. Despite these efforts, the country’s economic growth has been lackluster, trailing that of many other developing nations. In this paper, I review arguments for why Mexico hasn’t sustained higher rates of economic growth. The most prominent suggest that some combination of poorly functioning credit markets, distortions in the supply of non-traded inputs, and perverse incentives for informality creates a drag on productivity growth. These are factors internal to Mexico. One possible external factor is that the country has the bad luck of exporting goods that China sells, rather than goods that China buys. I assess evidence from recent literature on these arguments and suggest directions for future research.”

That is the abstract of a paper written by Gordon Hanson. Read the full paper here. Hanson argues that “Mexico’s underperformance is overdetermined.” Though faulty provision of credit, persistence of informality, control of key input markets by elites, continued ineffectiveness of public education, and vulnerability to adverse external shocks each may have a role in explaining Mexico’s development trajectory, we don’t yet know the relative importance of these factors for the country’s growth record, he asserts.

Btw, in 2009, Mexico exported 0.3% of GDP to China and imported 4.1% of GDP from China. The US imports more from China than from Mexico. The manufacturing inputs exported to the US could be either substitute or near-substitute goods. So, China could be displacing Mexican exports to the US.

Sunday, October 24, 2010

In Pokhara: Unregulated Changrya Market!

Last week, I dropped by Pokhara while on my way to Syangja for Dashain festival. Here are some pics taken from my cellphone. While in Pokhara, I stayed in a village with my friend, Nirmal Adhikari.

In this combo pic, the first vertical two are of Mt. Machhaphuchhare as seen from Pokhara airport. The other half is of a local goat/changrya market. One of the interesting, and baffling, things about this market is that prices of changryas were pre-fixed without any standard benchmark. Changryas were stocked in slots separated by bamboos. Each slot had changryas of different height and weight. The seller used to lift them up and give price quote that was based purely on his whim and (biased) judgment. Also, transactions took place without any paper trail. No sales tax/VAT collected! One can only imagine how much tax rupees are leaked from this kind of unorganized markets. Depending on the arbitrary pricing methodology of the seller, the cost of one changrya was between NRs 8,000 and NRs 15,000. It was purely a monopoly (or duopoly) market and consumers were basically price-takers. No haggling. It seemed like there was strong barriers to entry. If they sold 550 changrays in a day, then tax leakage (assuming 13% VAT) would be around NRs 822,250. That’s from one such market. Suppose there are 25 such markets across the country. The estimated tax leakage would be NRs 20,556,250. Now, that’s more than enough to employ about 205,562 unemployed rural people for a day (assuming NRs 100 per day for unskilled labor to construct irrigation canal, dirt roads, afforestation, etc.) under rural employment program like in India. So…

This one is a combo of four pics: sunset and dusk (taken from my friend’s house); a biogas plant in my friend’s house (that’s sustainability practiced at individual level!); and a changrya before his last breath!

Finally, that’s what happens when you mix Sprite and Black Label! :)

Saturday, October 23, 2010

Extremely optimistic account of the Nepali economy

Have you ever thought of arguments (and justification of them) to optimistically look at the Nepali economy from investor’s point of view? Given the sorry state of the Nepali political economy, it is very hard to convince investors, both domestic and foreign, to invest in Nepal. I wrote a very positive account of the Nepali economy on request by a Nepali diplomat (name and designation withheld) so that the diplomat can convince foreign investors to feel comfortable investing in Nepal. Read the account below. It might sound wildly and unrealistically upbeat!

A bit lengthy, but still it gives a pretty good and optimistic account of what’s up with the current state of the Nepali economy, where it is heading, and why to invest here. Apologies if it infuriates the already frustrated minds, and if it excites (leading to nothing!) for the overly optimistic minds! Any suggestions to add more optimistic points welcome!!


Nepali Economic Outlook [Optimistic version 1.0]

After years of low economic growth, the Nepali economy is finally ratcheting up the growth path, thanks to relatively conducive political developments since 2006. Make no mistake by thinking that with the end of the Maoist insurgency, things are all calm and business environment has been like pre-1996 era. But, in post-2006 era, things are not as bad as it were during 1996-2005. This is at least an improvement.

The economy is gradually recuperating and is poised to take off once the new constitution is promulgated, weeding out a lot of lingering political and economic uncertainties. There are plenty of reasons to remain optimistic about the Nepali economy.

Economic outlook:

The real GDP growth rate post-2006 has been better than it was in the first half of this decade. After a long time, the real GDP growth rate was 5.8 percent in fiscal year 2007/08. The average growth rate in the past years is close to 4 percent. As political uncertainties subside, investment in productive sectors is expected to increase. This is expected to boost growth rate above 5 percent. With the existing state of export capabilities and sophistication, Nepal is expected to grow at an average annual rate of 5.49-6.69 percent over the period 2010-2030.[1]

Ceteris paribus, the growth rate in 2011 and 2012 is expected to be 4 percent and 4.2 percent, respectively[2]. This projection is based on the existing political and economic trends. The Nepali economic situation is expected to improve as the political parties iron out thorniest issues soon. The resulting improvement in political situation will spur consumption and investment in sectors ranging from manufacturing to tourism to hydropower to real estate.

By 2012, Nepal’s economy is projected to be around US$ 18 billion, population of 31 million, and per capita GDP of over US$ 579. Encouragingly, Nepal’s current account balance is expected to be one of the bests in South Asia. It is projected that in 2012 Nepal will have current account balance of negative 0.1 percent of GDP. Compare this with negative 2.1 percent and negative 3.9 percent of respective GDPs of India and Pakistan.

The existing government budget deficit is 3.3 percent of GDP, which is close to the limit the EU members are required to maintain. The balance of payments (BOP) is slightly in the red, with Rs 2.62 billion deficit, thanks to the decline in growth of remittances following the global economic crisis. Due to import restrictions on certain luxury items and favorable trade credit liabilities, the BOP deficit is narrowing down. Nepal is having BOP deficit almost after three decades. It is expected to be in surplus by next year as remittances growth recover to the pre-crisis level because of strong growth prospects in India, Malaysia and the Gulf countries.[3]

In 2012, private consumption, government consumption, fixed investment, exports and imports are expected to register growth rates of 4.2, 4, 6, 6, 6.6, and 5.8 percentages, respectively. Except for government consumption and imports, the growth rates of all other variables that determine real growth rate will be higher than in preceding years. This is good news. The private sector will grow more than the government sector.

Due to sticky prices following the rise in global petroleum prices and food prices during 2007 and 2008, the inflation is slightly above 10 percent right now. It is expected to be single digit by 2011. The central bank of Nepal has already formulated monetary policies to tame inflation. It has tightened lending to sectors that have been pushing prices up and is loosening lending to productive sectors, where the inflow of investment will increase employment and output (aggregate supply), rather than just upping aggregate demand.

To achieve over 5 percent growth rate by 2013, the government came up with an investment plan in July 2010.[4] It aims to lower absolute poverty to below 21 percent, generate 200,000 jobs, and ensure private investment equaling about 64 percent of the estimated total investment needed to achieve over 5 percent growth rate by 2013.

Overall, medium and long run growth prospects look very encouraging.

Business environment:

As the political parties iron out political, social and economic differences and pave a way for the introduction of a new constitution under multi-party framework, business environment is expected to improve. It will clear uncertainties about the economic ideology that Nepali economy will adhere to. At present, government instability, corruption and political instability are identified as the three most problematic factors for doing business in Nepal.[5] Tax regulations and tax rates are the least problematic factors for doing business. So, the major constraints to growth of businesses will potentially be resolved by the end of 2010.

Sectoral contribution to GDP:

Agriculture: Due to unfavorable monsoon, the growth rate of agriculture sector came down to below 2 percent last year. It, however, was close to 6 percent in fiscal year 2007/08. With timely and favorable monsoon in the years ahead, this sector is expected to grow. Meanwhile, the government has prioritized seven agro-products as having high export potentials. It is accumulating and pumping in resources in production and marketing of these products. It will further boost investment and production, leading to a positive impact on the growth of the whole agriculture sector.[6]

  • High priority agro-products identified by NTIS 2010[7]: cardamom, ginger, honey, lentils, tea, noodles, and medicinal herbs/essential oils

Manufacturing: The manufacturing sector was hit hard by the decade-long insurgency. Nepal lost competitiveness on several fronts. However, post-2006 this sector is gradually recuperating. After years of below 2 percent growth, it registered 4.4 percent growth rate in 2006. It grew close to 4 percent this year. It is expected to pick up heat as soon as the political situation gets normal.

Recently, the government updated the industrial policy of 1992 and made it consistent with the existing structure of the Nepali economy.[8] The new industrial policy promises flexible labor policy, including the ‘no-pay-for-no-work’ principle. It allows easy exit from business for promoters, freeing them from long-term labor and other liabilities. Tax and income rebate incentives and easy credit are offered to export-oriented firms. It promises tax holidays for 10, 7, and 5 years to firms that invest respectively in highly underdeveloped (21 districts), undeveloped (15 districts) and less developed (24 districts) areas. It also aims to promote Special Economic Zones (SEZs) and institute ‘one-window’ policy for all industrial activities. It aims to promote value-added industries and facilitate supply and adoption of new technology to increase production and productivity. The government promises to purchase goods that are produced by domestic firms if there is 30 percent value-addition in the final product. Furthermore, it offers to establish a bunch of public institutions to promote trade. It aims to upgrade technical and skill-related aspects of the existing administrations related to the industrial sector.

  • Priority industrial products identified by NTIS 2010: handmade paper, silver jewelry, iron and steel, pashmina and wool products

Services: It is the most resilient and fastest growing sector in Nepal. Its average annual growth rate has been above 4 percent in the last decade. In the last three years, it has been growth at an average rate of above 6 percent.

The finance sector has seen tremendous growth, with around 27 commercial banks, 79 development banks, 79 finance companies, 18 micro finance institutions, and 25 insurance companies. A total of 22 new bank and financial institutions came into operation last fiscal year alone. Furthermore, branch expansion of commercial banks is also increasing, with a total of 966 branches, 214 more than in mid-July 2009, by mid-July 2010.

In the last five years, construction and real estate sectors grew at an average of 4.5 percent and 7 percent annually, respectively. In real estate, credit flow doubled from Rs 7.71 billion to Rs 14.92 billion in the past two fiscal years. Construction sector is one of the most booming sectors in the Nepali economy. The inflow of remittances, which account for almost 20 percent of GDP, is being channeled into construction and real estate sectors. It has tremendous growth prospect, especially in and around district headquarters as rural population gradually migrates to well-off areas. This sector is projected to register annual growth rates of at least 5 percent in the next five years.

Tourism is another sector that will see huge investment next year, thanks to intense campaign and progressive reforms targeting Nepal Tourism Year 2011.[9] The major political parties have promised to not resort to strikes, which severely crippled the tourism industry after 1999. The last time such a mega campaign was launched was in 1998 when around 464,000 tourists visited Nepal, earning US$24.8 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. The government plans to bring in a million visitors in 2011. The government is planning to attract 40 percent of the targeted visitors from India and China. This sector will see one of the highest growth rates in the next few years.

  • Priority services sectors identified by NTIS 2010: tourism, labor, IT and BOP, health, education, engineering, and hydro-electricity

FDI situation: With the existing reforms in place, foreign direct investment (FDI) is expected to increase in the coming years. Last fiscal year, FDI commitment of reached Rs 9.1 billion (171 joint venture projects approved by Department of Industries as against 230 projects with Rs 6.3 billion approved last year). Last fiscal year, sector-wise new joint ventures include 50 in tourism, 72 in services, 37 in manufacturing, 1 in construction, 2 in agriculture, 5 in energy, and 4 in mining. It is expected to provide over 7848 jobs. Investment commitment from India is highest, followed by Mauritius, Canada, and China. A total of 34 countries are given approval for foreign investment in fiscal year 2009/10.

  • Potential sectors for FDI: infrastructure (road transport), tourism, hydropower, health services, education, hotel, manufacturing and agriculture projects identified by Nepal Trade Integration Strategy (NTIS) 2010, consultancy services
  • High priority industries according to IP 2010: IT, cement, hydropower, vehicle and motor parts, chemical fertilizer, bio-technology and adventure tourism
  • Priority industries according to IP 2010: Agriculture, forest-based Ayurvedic and homeopathic medicine, manufacturing, minerals and handicrafts

Trade: Imports have always been higher than exports. The readymade garment sector has been severely affected by the end of MFA in 2005 as it failed to compete with exporters from other countries. However, exports of other items are picking up. Last fiscal year, trade deficit was Rs 313.67 billion. It is expected to narrow down due to slowdown in imports and surge in exports.

Note that almost 60 percent of trade happens with India, with whom Nepal has free trade agreement. China has offered zero-tariff facility to 4721 exportable items to LDCs, including Nepal, and the Middle East and North Africa (MENA) is emerging as a potential export destination for Nepali goods and services. The US and the EU have been very important markets for Nepali items. Hence, Nepali exports sector could experience rosy years ahead. One of the main reasons to remain optimistic about Nepali exports sector is because of its fairly good sophistication of exports basket.

In terms of export sophistication, Nepal ranks 33 among 96 non-high income countries.[10] It is the second best standing in South Asia (the first one is India). Latest studies show good future of Nepal’s export industry and the overall economy’s potential to undergo structural transformation. For a country with this level of income per capita, Nepal’s export sophistication is pretty good. In terms of exports diversification, Nepal’s ranking is second best in South Asia.  Between 2001 and 2007, Nepal exported, on average, around 100 products with comparative advantage. China and India exported 257 and 246 products, respectively with comparative advantage. In terms of uniqueness of exported products, which determine the sustainability of exports sector and the potential to undergo structural transformation, Nepal’s standing is better than countries with similar income level.[11]

Why invest in Nepal?

  • · High rate of return in hydropower sector (high demand but low supply at present). After fulfilling domestic demand, surplus hydroelectricity can be exported to neighboring Indian states that are facing power deficit.
  • · High potential in tourism sector as Nepal is consistently identified as one of the leading tourist destinations in the world. Trips can be made to Tibet via Nepal. Visiting Nepal is less costly if it is included in trip plans to visit two of the largest and fastest growing economies in the world. Furthermore, as Nepal’s neighbors get wealthier, they would be visiting more and new places like the citizens of G20 countries do right now. Due to geographic proximity and cultural similarities, wealthier Indian and Chinese tourists might increase their frequency of visit to Nepal. This opens up a huge market in the tourism and hotel industries for investment right now.
  • · Growing middle class population with increasing purchasing power is entering into the market. They will demand high class education, health services, insurance, clothing, means of transportation, and timely leisure. It opens up largely untapped markets worth millions of dollars.
  • · An increasing number of educated youths and manpower, especially in the IT sector.
  • · Consistently expanding urban markets due to rural to urban migration internally.
  • · Rising growth of remittances as the major destinations for Nepali labor are expected to register strong growth in the coming years. New ventures can flourish if they are aimed at drawing in remittances for productive investment.
  • · Business-friendly environment expected after the political parties iron out differences and write a new constitution.
  • · The rapidly growing emerging giants neighboring Nepal are projected to be the first and the third largest economies by 2040. China has already replaced Japan as the second largest economy. As these economies continue to grow and people have high per capita income, they present a huge market for Nepali companies to cater to. Nepal can itself be a transit nation for trade between India and China. Due to its geographic (and cultural with India) proximity to China and India, transportation and transaction costs will be lower if goods and services are produced, supplied and traded from Nepal. Nepal could potentially become a Singapore for trade between India and China!
  • · There are over 350 million potential customers in the bordering Indian states that Nepali exporters could cater to, provided that they produce goods based on taste, preferences and purchasing power of the Indian customers. Furthermore, Nepal could piggyback on the success of over $15 billion software service exports industry in India, if it could work on enhancing human capital and incubating business units based on the needs of the software industry.
  • · As wages in China and India continue to increase and their population gets wealthier, Nepal can produce the same kinds of goods and services produced by India and China right now for exports. Nepal can export it to them.

[1] http://www.levyinstitute.org/publications/?docid=1290

[2] http://sapkotac.blogspot.com/2010/09/south-asia-and-nepal-in-2012.html

[3] http://sapkotac.blogspot.com/2010/04/remittances-in-nepal-after-during.html

[4] http://sapkotac.blogspot.com/2010/04/three-year-national-plan-for-nepal.html

[5] http://sapkotac.blogspot.com/2010/09/nepal-declining-competitiveness.html

[6] http://sapkotac.blogspot.com/2010/07/ntis-2010-strategy-without-comparative.html

[7] NTIS 2010 stands for Nepal Trade and Integration Strategy 2010. It is one of the crucial reports published by Ministry of Commerce and Supplies this year. It identifies 19 sectors that have “high export potentials”.

[8] http://sapkotac.blogspot.com/2010/05/nepals-industrial-policy-2010-good-but.html

[9] http://sapkotac.blogspot.com/2010/03/constraints-on-nepal-tourism-year-nty.html

[10] http://sapkotac.blogspot.com/2010/08/future-of-nepals-exports.html

[11] http://sapkotac.blogspot.com/2010/08/exports-sophistication-of-nepal_18.html

Thursday, October 21, 2010

Economic policy for South Asia after the crisis

In a new book published by the WB, Dipak Dasgupta, Ejaz Ghani, and Ernesto May have a chapter on economic policy challenges for South Asia. The authors have the following recommendations for South Asia:

  • Create fiscal space to improve macroeconomic stability, avoid crowding-out the private sector, and permit financing of infrastructure and social safety nets.
  • Manage inflationary pressures, particularly food prices, with renewed attention to agricultural productivity growth.
  • Revisit South Asia's trade and investment integration strategy to take advantage of the global rebalancing underway, including supporting faster manufacturing growth.
Attention has to be focused on governance, conflict, demographic transition, and urbanization and spatial transformation. Also, tax revenue needs to be increased as the ratio of tax revenue to GDP is very low in South Asian countries.
 
Also, South Asia needs to invest in infrastructures, a key binding constraint to economic growth in the region. It also needs to have effective social safety nets, control inflation and food prices, revitalize agricultural sector to increase production, seek quick integration into East Asia, and support faster manufacturing growth as East Asia is transitioning to more skill-intensive manufacturing.
 
Conflict has severely impacted growth in South Asia. Given its income level, Nepal had the most fatalities between 1998 and 2004 as a result of conflict. Note that conflict-affected countries had lower GDP growth rate and trade.
 
Since 150 million people are entering the labor force in the next decade, without appropriate provision of providing them decent paying jobs, they could be a liability instead of providing demographic dividends. Workers are trapped in low-wage, low-productivity jobs. More jobs have to be created in the industrial sector. Skill enhancement and addressing high informality are also necessary.

[Here is a general summary of the book which argues that developing countries will come to the rescue of the world economy in the post-crisis period. Here is a summary of a chapter on economic crisis, migration and remittances/ )

Wednesday, October 20, 2010

D.I.Y. Foreign Aid

“It’s all about what might be called Do-It-Yourself Foreign Aid, because it starts with the proposition that it’s not only presidents and United Nations officials who chip away at global challenges. Passionate individuals with great ideas can do the same, especially in the age of the Internet and social media.”

Read more here by Nick Kristof. Encouraging to see a project run by Maggie Doyne in Nepal featured in his piece! Kristof’s blog on the same issue here, where he discusses what and how you can do to help people in need. Btw, it would be interesting to read Easterly’s views on “D.I.Y. Foreign Aid”.

Marx vs. Hicks: Technical change in India

“We use the real wage–profit rate schedule to examine the direction of technical change in India’s organized manufacturing sector during 1980–2007. We find that technical change was Marx biased (i.e., declining capital productivity with increasing labor productivity) through the 1980s and 1990s; and Hicks neutral (increasing both capital and labor productivity) post-2000. The historical experience suggests that Hicks-neutral technical change may only be a passing phase before we see a return to the long-term trend of Marx-biased technical change. We also find that the real profit rate has increased from about 30 percent to a very high 45 percent, that the real wage rate increased marginally, and that the share of capital in value added doubled. Overall, technical change in India’s organized manufacturing sector during 1980–2007 favored capital.”

More in this paper. Does this mean India will have increasing labor productivity and decreasing capital productivity in the long run? If so then, India might have low growth rate as in the “Marx biased” period. Now, what’s up with the growth projections that India will be the third largest economy by the next three decades?

Tuesday, October 19, 2010

Holding a nation hostage using seeds!

“In June of this year some 10,000 peasant farmers took part in a protest march in Haiti’s central plateau. At the end they symbolically burnt several bags of seed, part of a 60-tonne donation made by the giant US-based biotech company, Monsanto. After an earthquake in January killed 230,000 people and forced half a million to move back to the countryside, Haiti is painfully trying to rebuild its economy. Seeds, in particular, are in short supply, because peasant families were forced to use seeds saved for next year’s planting to feed the unexpected arrivals from Port-au-Prince. Why on earth would farmers want to destroy a gift so precious?

This was a question I put to Chavannes Jean-Baptiste, who heads Haiti’s largest and oldest peasant organization and has been at the forefront of Haiti’s peasant struggles for 35 years. I wasn’t surprised to find he had been one of the organizers of the march. He was predictably clear in his response: ‘It was, of course, a symbolic gesture. It was a way of saying a very firm “no” to Monsanto and to the government. Monsanto is trying to use the reconstruction effort to make us dependent on their seeds. We can save our native seeds – creole seeds, as we call them – from one year to the other. But you can’t do that with Monsanto’s seeds. You have to buy new ones each year. But it’s worse than that. They are not right for our land. Monsanto’s “gift” is, in fact, a strong attack on our farmers, our biodiversity and what is left of our environment.’

[…]

It all began back in the 1920s with the development of hybrids, when plant breeders found that, by crossing two varieties, they could improve yields. Breeders could have improved yields in other ways, such as selective breeding. But even then they were quick to grasp the commercial advantages of hybrids: they lose vigour from one year to the next, so farmers have to buy them afresh each year, making huge profits for the merchants. Pioneer Hi-bred, the first company to market hybrid corn (maize), became the world’s largest seed company. Hybrids were developed for cotton, sunflower, sorghum, sugar beet and many vegetables.

After the Second World War, the same chemical processes that had been involved in the production of explosives and nerve gases were used to create synthetic fertilizers and pesticides. The combination of hybrids and chemical inputs led to a huge increase in yields: the so-called ‘Green Revolution’. There was, of course, a downside: runoff from synthetic fertilizers polluted rivers and groundwater; pesticides poisoned and killed wildlife; the soil itself died and became more prone to erosion; and the plants grown in monoculture presented an easy target for pests.”

Read the full story here.

Saturday, October 16, 2010

Wednesday, October 13, 2010

The state of hunger in Nepal

It is no better even after two decades, according to latest Global Hunger Index 2010. Nepal’s ranking is 56. The hunger level in Nepal is ALARMING. But, Nepal fares better than India and Bangladesh in ranking. Sri Lanka is relatively better than all other South Asian countries.

The hunger situation in Nepal is still the same. Now, I wonder whats up with all the aid money in battling hunger and increasing agriculture production? What has it done to address their own primary objectives? We need some accountability here. Is our strategy to fight against hunger fundamentally wrong? Are we just wasting resources and giving band-aid solutions that require structural changes in the way we do farming and respond to emergencies? We seriously need to think. That said, lets not wholly blame the aid agencies working at the frontlines to combat hunger. But, how about questioning their strategy in combating hunger? Is it time to change that now? Now, lets see how much difference USAID’s “Feed the Future” initiative will make?

GHI is calculated based on three equally weighted indicators: (i) The proportion of undernourished as a percentage of the population; (ii) the prevalence of underweight in children under the age of five; (iii) and the mortality rate of children under the age of five. As a group, there has been a decrease in hunger in both South Asia and Sub-Saharan Africa. Globally, the countries that have made the most progress in the fight against hunger since 1990 are Kuwait, Malaysia, Turkey, Mexico, Tunisia, Nicaragua, Ghana, Iran, Saudi Arabia, and Peru. The losers are Congo DR, Comoros, Burundi, North Korea, Swaziland, Zimbabwe, Guinea Bissau, Liberia, The Gambia.

Monday, October 11, 2010

2010 Nobel prize in economics for unemployment!

This year’s Nobel prize craze finally ended with the announcement of the prize in economics to Peter Diamond, Dale Mortensen and Christopher Pissarides for “their analysis of markets with search frictions”. It is a prize for (structural) unemployment! I have heard and read some of Diamond’s stuff but not other’s. Here is an interview with Peter Diamond.

This blog post is largely derived from an extended note by the prize committee. Just to help me understand what’s up with the DMP model. It is pretty fascinating. Even though the main conclusion of their work looks obvious, they modeled it and systematically applied it in the real world. Their work has a Keynesian twist and slaps the classicists notion that markets clear itself. Tyler Cowen thinks of Pissarides “as the least Keynesian of the trio.” Here is Cowen on Diamond and Mortensen. Krugman is happy that the trio won the prize.

Diamond, Mortensen and Pissarides showed that an unregulated market does not clear by itself, as has been asserted by classical economics. The classical economists believe that markets always clear because prices are determined in such a way that demand matches supply as there are no transaction costs and there is perfect information. In reality, it ain’t so. Buyers and sellers face costs in their attempts to locate each other (“search”) and meet pairwise when they come into contact (“matching”). They explored how price formation works in a market with search frictions. How much price dispersion-- if the law of one price should be expected to hold in markets with frictions-- will be observed and how large are the deviations from competitive pricing?

Buyers are not able to find sellers, or vice versa, all the time. Even if they did, there might be disagreements in price of the product in question. This means that both will continue searching for the perfect deal. This process of finding the desired outcome is not frictionless. The trio clarified this by both using economic models and applying that to real life. They analyzed how (frictional) unemployment works and persists in an economy. Agents in an economy always look for cooperative patterns in order to meet their desired goal. For instance, in order to reach a settlement, there is always a search for cooperative deal between a buyer and a seller of a product, between employers and prospective employees, and between firms and their suppliers. When a producer produces an item, it does not sell automatically, unless it is pre-ordered, which usually does not happen all the time. This means that the seller will have to wait until he finds the right customer willing to pay the right price, and vice versa.

In 1971, Peter Diamond examined how prices are formed on a market where buyers look for the best possible price and sellers simultaneously set their best price while taking buyers’ search behavior into account. A small search cost would drastically change the outcome, which is not factored into the classical labor market model. He showed that the mere presence of costly search and matching frictions does not suffice to generate equilibrium price dispersion. He found that even a small search cost moves the equilibrium price away from the competitive price (typically exists under perfect competition). The only equilibrium outcome is the monopoly price. This is dubbed the “Diamond paradox”. This means that a small search friction can have a large effect on price outcomes, and it would not lead to any price dispersion at all.

Mortensen and Pissarides extended Diamond’s model to this notion to labor markets. Their work sheds light on how economic policy and regulation can affect unemployment, job vacancies, and wages. It relates to figuring out unemployment insurance or hiring and firing rules. Their work shows that a more generous unemployment benefits give rise to higher unemployment and longer search times.

Their research showed that an unregulated search market does not give rise to an efficient outcome. Aggregate welfare is not necessarily higher with more search since search itself is costly. Resource utilization could be either low or high as the search and matching process involves costs. There are external effects that an agent does not know of. For instance, intense search for jobs by an agent means more difficulty for other job seekers to find employment because it will be easy for companies to find desired personnel, and vice versa. Additionally, unlike in the unregulated classical models, when search costs exist, there could be several optimal points, but only one superior optimal point. This is where the role of the government comes in. It can find ways to ensure that the search process results in a superior outcome when the final deal is sealed. Unutilized resources can be put to good use by intervention from an external agent.

The search and matching environment can lead to macroeconomic unemployment problems as coordinating trade does not match one-to-one. This provides a rationale for “aggregate demand management” to steer the economy towards the best equilibrium. Diamond’s work is viewed as “a careful analysis, using microeconomic foundations, to analyze some of the central themes of Keynes’s business-cycle theory.” Coordination problems feature on both of their writings. An appropriate intervention by the government can address coordination problems.

Their work on the determinants of unemployment (DMP model) can be used to explain the position of the Beveridge curve and the location of the economy on the curve. A Beveridge curve shows that the labor market fluctuates between situations of either high unemployment and few vacancies or low unemployment and many vacancies. If unemployment increases when vacancies go down, then it is related to the demand for labor and is related to business cycle. But, if vacancies go up and unemployment also increases, then the labor market is not performing well, signaling that there could be weaker matching efficiency resulting in long-term unemployment. Understanding why this happens is important to reducing unemployment.

The DMP model addresses the following questions:

    1. How workers and firms jointly decide whether to match or to keep searching
    2. In case of a continued match, how the benefits from the match are split into a wage for the worker and a profit for the firm
    3. Firm entry, i.e., firms’ decision to “create jobs”
    4. How the match of a worker and a firm might develop over time, possibly leading to agreed-upon separation.

The model is used to examine the effects of policies concerning hiring costs, firing costs, minimum wage laws, taxes, and unemployment benefits on unemployment and economic welfare.It also used to analyze how aggregate shocks are transmitted to the labor market and lead to cyclical fluctuations in unemployment, vacancies, and employment flows.


As a side note, here is an abstract from a paper that uses search theory in marriage where older men appear to be attractive in the marriage market for younger women!

It is commonly observed that across societies and time, women tend to marry older men. The traditional explanation for this phenomenon is that wages increase with age and hence older men are more attractive in the marriage market. The explanation holds even where differences in fertility between men and women are taken in account. This explanation, however, involves an implicit assumption about female specialization in home production - an assumption that does not generally hold, especially in modern times. This paper shows that a marriage market equilibrium where women marry earlier in life than men can be achieved without making any assumptions about the wage process or gender roles. The only driving force in this two sided search model is the asymmetry in fertility horizons between men and women. When the model is calibrated with Census Data, the average age at first marriage and the pattern of the sex ratio of single men to single women over different age groups mimics the patterns observed in developed countries during the last decade (e.g. France, the U.S. and Sweden). However, the fit is less accurate for developing countries and for earlier decades in developed countries. This result may indicate a more important role of social norms and wages in the determination of marriage pattern in those cases.

2010 Nobel prize in economics

Peter Diamond, Dale Mortensen and Christopher Pissarides share 2010 Nobel prize in economics for “their analysis of markets with search frictions”.


Why are so many people unemployed at the same time that there are a large number of job openings? How can economic policy affect unemployment? This year's Laureates have developed a theory which can be used to answer these questions. This theory is also applicable to markets other than the labor market.

On many markets, buyers and sellers do not always make contact with one another immediately. This concerns, for example, employers who are looking for employees and workers who are trying to find jobs. Since the search process requires time and resources, it creates frictions in the market. On such search markets, the demands of some buyers will not be met, while some sellers cannot sell as much as they would wish. Simultaneously, there are both job vacancies and unemployment on the labor market.

This year's three Laureates have formulated a theoretical framework for search markets. Peter Diamond has analyzed the foundations of search markets. Dale Mortensen and Christopher Pissarides have expanded the theory and have applied it to the labor market. The Laureates' models help us understand the ways in which unemployment, job vacancies, and wages are affected by regulation and economic policy. This may refer to benefit levels in unemployment insurance or rules in regard to hiring and firing. One conclusion is that more generous unemployment benefits give rise to higher unemployment and longer search times.

Search theory has been applied to many other areas in addition to the labor market. This includes, in particular, the housing market. The number of homes for sale varies over time, as does the time it takes for a house to find a buyer and the parties to agree on the price. Search theory has also been used to study questions related to monetary theory, public economics, financial economics, regional economics, and family economics.


Sunday, October 10, 2010

Oh, economic models…

How applicable, in terms of policymaking, are economic models? It is a question always wrested back-and-forth by economists and policymakers. Here is Laurence Meyer arguing that the new macro-econometric models do no good to advance policymaking realistically.

So I think we have two kinds of modeling traditions. First there is the classic tradition. I was educated at MIT. I was a research assistant to Franco Modigliani, Nobel laureate, and the director of the project on the large-scale model that was used at the time at the Federal Reserve Board. This is the beginning of modern macro-econometric model building. That’s the kind of models that I would use, the kind of models that folks at the Board use.

There’s also another tradition that began to build up in the late seventies to early eighties—the real business cycle or neoclassical models. It’s what’s taught in graduate schools. It’s the only kind of paper that can be published in journals. It is called “modern macroeconomics.”

The question is, what’s it good for? Well, it’s good for getting articles published in journals. It’s a good way to apply very sophisticated computational skills. But the question is, do those models have anything to do with reality? Models are always a caricature—but is this a caricature that’s so silly that you wouldn’t want to get close to it if you were a policymaker?

My views would be considered outrageous in the academic community, but I feel very strongly about them. Those models are a diversion. They haven’t been helpful at all at understanding anything that would be relevant to a monetary policymaker or fiscal policymaker. So we’d better come back to, and begin with as our base, these classic macro-econometric models. We don’t need a revolution. We know the basic stories of optimizing behavior and consumers and businesses that are embedded in these models. We need to go back to the founding fathers, appreciate how smart they were, and build on that.

Krugman responds:

My first reaction, on reading this, was to say that Meyer overstates the case — and he does, a bit. It has been possible to publish New Keynesian models in the journals, and these models do, I think, provide some useful guidance — if only as a consistency check on more ad hoc approaches.

But fundamentally Meyer is right. And it has been going on a long time. By the early 1980s it was already common knowledge among people I hung out with that the only way to get non-crazy macroeconomics published was to wrap sensible assumptions about output and employment in something else, something that involved rational expectations and intertemporal stuff and made the paper respectable. And yes, that was conscious knowledge, which shaped the kinds of papers we wrote. So you could do exchange rate models that actually had realistic assumptions about prices and employment, but put the focus on rational expectations in the currency market, so that people really didn’t notice. Or you could model optimal investment choices, with the underlying framework fairly Keynesian, but hidden in the background. And so on.

[…]So yes: something has gone terribly wrong in macro. And I’m sorry to say that the crisis has only made people dig deeper into their positions.

Saturday, October 9, 2010

Global economic crisis, migration & remittances

In a new book (here is a general summary of the book which argues that developing countries will come to the rescue of the world economy in the post-crisis period) published by the WB, Sanket Mohapatra and Dilip Ratha have a chapter on the impact of the global financial crisis on migration and remittances. They discuss recent trends in and the outlook for migration and remittance flows for 2010-11. Remittance to developing countries is estimated to decline by 6 percent in 2009. Remittances amounted to US$223 billion in 2008 (3x larger than ODA to developing countries). Remittances account for more than one-third of GDP in Lesotho, Moldova, Tajikistan, and Tonga.

Remittance inflows to South Asia is estimated to be US$82.8 billion in 2011 from  US$71.7 billion in 2008. Remittance inflow to developing countries is estimated to be US$359.1 billion in 2011.Total world remittance flows is estimated to be US$464.9 billion in 2011. East Asia and the Pacific is expected to see the highest growth of remittances in 2010 (9.8 percent) and 2011 (9.2 percent) following negative growth rate of 0.4 percent in 2009. Remittances is expected to amount US$102.7 billion in East Asia and Pacific in 2011.

The factors that affected migration and remittance flows in 2009 were:
  • effects of the economic crisis on migrant stock,
  • diversification of migration destinations,
  • currency effects, and
  • the link between barriers to labor mobility and the impact of economic cycles on remittances. If the barriers to labor mobility is low, then economy cycles and remittances are strongly related.

Existing migrants are unwilling to return back to their home countries, so remittances is expected to increase. Meanwhile, low demand for labor in the Gulf countries would reduce the stock of migrants from Nepal, Pakistan, India, and Bangladesh, among others.

The countries that have the most diverse migration destinations have better chances of remittances being more resilient. Additionally, the total value of remittance inflows to developing countries depends on the prevailing exchange rate, usually between US dollar and their domestic currency. The Indian rupee depreciated by almost 25 percent against the US dollar, leading to a surge in remittance flows and an increase in spending in housing sector, and in bank deposits and stocks.

Similar signs of investment-related remittance flows were seen in Nepal, Bangladesh, Pakistan, Tajikistan, Ethiopia, Moldova, and the Philippines.

One notable feature of remittances have been its impact on offsetting balance of trade deficit. It is particularly true in Nepal, the Philippines, Bangladesh, and Mexico.

Thursday, October 7, 2010

5 steps to prevent another food crisis

  1. Countries with large grain stocks should release some of their reserves to calm domestic and global prices.When distributing public food supplies, it is important to properly target poor people.
  2. Effective social safety nets are needed to protect the most vulnerable groups, including women and children.In the long term, these safety nets should be combined with other interventions that increase productive capacity and improve the nutrition and health of the poor.
  3. Smallholder productivity enhancing mechanisms are needed to sustainably reduce hunger and poverty.Investments should be scaled up to improve smallholder access to inputs such as seeds and fertilizer, as well as financial and extension services and crop insurance. New agricultural technologies suitable for smallholders in developing countries should also be strongly promoted, and rural infrastructure should be strengthened to increase access to markets.
  4. An international working group comprised of key institutions should come together to regularly monitor food production, stocks, prices and policies.Close attention should be paid to the policies of large food importers and exporters. In particular, governments should be encouraged to eliminate existing export bans and refrain from imposing new ones.
  5. New institutional arrangements should be created to decrease price volatility, including a global physical grain reserve and regional reserves for specific commodities.IFPRI proposes the establishment of a global, coordinated physical grain reserve, which could be managed by the WFP. Regional reserves for specific commodities could be set up first, then scaled up to the global level. In addition, a global market-analysis unit can be created to help forecast prices, identify price abnormalities, and trigger market intervention.

More from IFPRI director general Shenggen Fan here

Tuesday, October 5, 2010

Developing countries to the rescue...

So say the authors of a new book "The Day After Tomorrow: A Handbook on the Future of Economic Policy in the Developing World" published by the World Bank. The economic size of developing countries is projected to surpass the size of developed countries by 2015. The authors argue that developing countries are the "new locomotives of growth which will move global growth forward while high-income countries remain stagnant." This is somewhat in line with growth projections done by Goldman Sachs (2003), Carnegie Endowment (2010), and Pricewaterhousecoopers (2005). These projections look at either BRIC or the G20 economies.

According to the authors of the new book, growth in developing countries is estimated to reach 6.1 percent in 2010, 5.9 percent in 2011, and 6.1 percent in 2012, while corresponding figures are 2.3 percent, 2.4 percent, and 2.6 percent for high- income countries. These diverging growth prospects continue in the medium term. East Asia, Latin America and South Asia have the potential to turn into 'newly developed' nations.

Five factors account for it:

  • faster technological learning

  • larger middle- class population 

  • more South-South commercial integration

  • high commodity prices

  • healthier balance sheets that will allow borrowing for infrastructure investment
The study states that there will be recovery of remittances in the developing countries, an increase in South-South trade, rising investment by sovereign wealth funds, more conservative debt management, and progress by many governments in gaining public trust.



Reason-wise recommendation:

Sub-Saharan Africa, which saw an additional 7-10 million people thrown into poverty as a result of the global economic crisis, will have to address challenges of infrastructure, job creation, governance and shrinking aid in order to achieve faster growth.


MENA region, which will see around 2.6 million additional people fall into poverty by 2011, needs to "open the door for a new generation of private entrepreneurs and for women to fully join economic life." High oil prices and stable financial sector in the Gulf countries is helping in regional recovery.


East Asia and the Pacific is leading the world out of the economic slump. It recommends China to do some "rebalancing" through scaling up of domestic consumption and expansion of service sector. Meanwhile, middle-income countries like Indonesia, Malaysia, the Philippines and Thailand have to move up into knowledge- and innovation-based markets. Trade facilitation is needed in low-income countries like Cambodia, Lao PDR, and Vietnam. Eastern Europe and Central Asia needs to improve its competitiveness and put its social service provision on a fiscally sustainable path.


Latin America had no economic or social meltdown, mainly due to the progress over the previous decade on macroeconomic management and social policy (the success of social workfare and welfare programs in Latin America is well-known and emulated in other parts of the world). The study projects that the region is well-positioned to enter a path of fast and sustained development, given that it fends off external shocks.


South Asia, which withstood the impact of the crisis reasonably well, needs to make recovery stronger, inclusive and sustainable. It still has around 600 million people below the US$1.25 a day poverty line. Fiscal space (for social programs and infrastructure) has to be created by reducing fiscal deficit and taming public debt accumulation. Trade integration within the region will also be critical in shaping the growth path of this region.

Stay tuned for summary of two of the chapters: one about remittances, and the other about economic policy in South Asia.

Monday, October 4, 2010

Past and present of the Doha Round

Pascal Lamy, Director-General of the World Trade Organization (WTO), explains:

Previous negotiations have also attempted to deal with a lengthening list of issues in a single “package” — with the aim of giving every Member an interest in its overall success.  That is why the Uruguay and Doha rounds have been “single undertakings” — where nothing is agreed until everything is agreed.  But this approach can also complicate negotiations — especially for poorer, capacity-constrained countries. And it can mean that progress on uncontroversial and solvable issues is held hostage to progress on more difficult and intractable ones.

Finally, in the past, transatlantic leadership was central to moving negotiations forward.  But trade power is shifting, and the days — last seen during the Uruguay Round — when the US and Europe could essentially strike a deal on behalf of the entire Membership are long gone.  It is not just that established powers need to accept to share the centre stage; emerging powers also need to recognize their responsibility for a system in which they now have a major (and growing) interest.  The old North-South divide seems increasingly outdated when so much of the future trade agenda will be played out among developing countries.

It is not just the composition of leadership that needs to evolve.  The WTO's impact now goes far beyond the traditional scope of trade policy touching on core national and international interests. Yet despite repeated statements of support and of engagement, world governments seem incapable of marshalling the policies and political will needed to move the multilateral agenda forward.  A worrying leadership vacuum has opened that has — so far — proved difficult to fill.   Let's hope that the G20 can help provide an answer.

[..]But the central priority remains concluding the Doha Round — and here too we need to be realistic about the magnitude both of the challenge and of what is at stake.  Early GATT rounds which focused on tariff cutting among a small group of countries, could be wrapped up in a matter of months.  But with expanding issues and participants, and more effective and active dispute settlement, trade rounds have inevitably become more difficult and drawn-out.  The Kennedy Round — which started grappling with development issues and involved 60 countries — took three years to complete.  The Tokyo Round — which addressed “non-tariff” barriers and involved 102 countries — lasted six years, twice as long.  And the Uruguay Round — which created the WTO and involved 133 countries — turned into a negotiating marathon lasting eight years.

With 153 Members now at the table and the most ambitious negotiating agenda yet, the only thing surprising about the length of the Doha Round is that anyone is really surprised.  Not without reason does the term “trade round” takes its inspiration from the boxing ring!

What is at stake is more than the economic benefits that would flow from a successful Doha deal.  The real issue is the relevance of the multilateral trading system itself.  With its global Membership, comprehensive rules, and “world trade court”, the WTO is more central than ever to international economic relations. But this also means that the costs of failure are higher — with ramifications that could be felt more widely. Bringing the Doha Round to a successful conclusion would send the strongest possible signal that the WTO is relevant to today's new world economy, that it remains the focal point for global trade negotiations, and that it will be a key forum for international economic cooperation into the future.  But if Doha stumbles, then doubts will grow, not just about the WTO, but about the future of multilateralism in trade.

In many ways,  the Doha Round marks a transition from the old governance of the old trade order to the new governance of a new trade order.  Covering classic trade issues such as the reduction of import tariffs and subsidies, as well as innovative new chapters on trade facilitation and fisheries subsidies, the Doha Round is a turning point for the system. 

The politics of this Round have had to adjust to the changes that happened since it was launched in 2001. And we all know we need to conclude it in order to address tomorrow's challenge.

Sunday, October 3, 2010

Is China’s growth export dependent?

Yes and No. A new Mckinsey note states that China’s export sector contributed 19 to 33 percent of total GDP growth between 2002 and 2008. That’s only about half of the export contribution indicated by traditional total-exports measures.

Using ‘DVAE analysis’-- which is what you get after subtracting from total exports only those imports used in the production of goods and services that are subsequently exported-- the authors of the note argue that exports have been an important driver of China’s growth, but not the dominant one, and that most common wisdom overestimates the role of exports while underestimating the role of domestic consumption for China’s growth.

The authors of the note estimated that imported goods accounted for 40 to 55 percent of the value of total exports from 2002 to 2008. This means that roughly half of China’s exports represent domestic value added. Concurrently, DVAE’s share of exports generally has risen over time, suggesting that China has become less of a pure assembler of imported goods—a publicly stated government policy goal.

Arguments over the true nature of China’s economic reliance on exports have been rooted in the difficulty of appropriately measuring the export sector. The traditional measure governments and most analysts use is the growth of total exports as a share of GDP growth. This measure indicates that export growth has accounted, on average, for almost 40 percent of the total growth in real GDP since 1990—rising to almost 60 percent since 2000.

Yet these numbers, portraying a dominant and growing role of exports, are at odds with the fact that China was one of the few countries that escaped the great 2008–09 global downturn without a major economic slowdown—suggesting that internal growth played an important role. That’s one reason other economists have used a very different measure: growth in net exports (total exports minus total imports) as a share of GDP growth. By that metric, exports contributed only between 10 and 20 percent of China’s annual 10 percent GDP growth in recent years.

We contend that both measures are misleading. Using total exports neglects the fact that many of China’s export shipments include a fair number of imported goods that are reassembled, combined with domestic content, or otherwise modified before being exported. Failing to remove these imports from the total export figure overstates how much value exports contribute to GDP. On the other hand, a strict net export measure (exports minus imports) underestimates the contribution of exports to GDP, because many imports aren’t used in assembly and exported but rather sold to Chinese consumers and businesses.

We calculated a measure we call domestic value-added exports (DVAE) to assess more accurately the role of exports in GDP growth. DVAE is what you get after subtracting from total exports only those imports used in the production of goods and services that are subsequently exported. In automobiles, for example, finished imports are not subtracted from our measure of exports. But engine parts imported to manufacture motor bikes for export would be.

Friday, October 1, 2010

The value of lobbyists

Once the politician for whom they [lobbyists] worked leaves office, their revenue falls 20%, or $177,000 per year, suggesting that lobbyists are paid more for “who they know” than “what they know”.

Very interesting finding. More here.