Monday, April 30, 2012

Can storage help ensure food security?

Larson et al. argue that it can if the target is set high and reserves are adequate. Here is the abstract from their paper:


In times of highly volatile commodity markets, governments often try to protect their populations from rapidly-rising food prices, which can be particularly harsh for the poor. A potential solution for food-deficit countries is to hold strategic reserves, which can be called on when international prices spike. But how large should strategic stockpiles be? This paper develops a dynamic storage model for wheat in the Middle East and North Africa (MENA) region, where imported wheat dominates the average diet. The paper uses the model to analyze a strategy that sets aside wheat stockpiles, which can be used when needed to keep domestic prices below a targeted price. This paper shows that if the target is set high and reserves are adequate, the strategy can be effective and robust. Contrary to most interventions, strategic storage policies are counter-cyclical and, when the importing region is sufficiently large, a regional policy can smooth global prices. This paper shows that this is the case for the MENA region. Nevertheless, the policy is more costly than the pro-cyclical policy of a targeted intervention that directly offsets high prices with a subsidy similar to food stamps.


Meanwhile, Gouel and Sebastien recommend an activist policy to stabilize the impact of high food prices. They argue that the optimal trade policy for a single low-income country is to subsidize imports when domestic availability is low and tax exports when world prices are high, which will benefit consumers at the expense of producers, because it reduces the likelihood of high prices. Meanwhile, a pure storage policy might have an opposite effect: it raises the average domestic price because of the increased stock accumulation, and is detrimental to consumers. They argue that to protect consumers from food price volatility in an efficient way, storage policies need to be complemented by trade policies, which would provide some isolation from the world market.

Sunday, April 29, 2012

Evolution of industrial policy in India, China and Germany

The economies that liberalized early on with strategic support to boost capabilities and competitiveness of industries also achieved high growth rate and high prosperity. Germany liberalized in 1950s, China in 1978, and India in 1992. [Nepal is trailing far behind in comparison to these economies—even when compared to the Indian economy as it liberalized its economy in tandem with the liberalization drive in the Southern neighbor. Here and here are two articles related to industrial policy in Nepal.]


 



  

Chart source is WEF


This statement by Dani Rodrik is highly relevant here: “The right model for industrial policy is not that of an autonomous government applying Pigovian taxes or subsidies (i.e. lump sum taxes or subsidies), but of strategic collaboration between the private sector and the government with the aim of uncovering where the most significant obstacles to restructuring lie and what type of interventions are most likely to remove them.”

Thursday, April 26, 2012

Determinants of manufacturing competitiveness

Here is a nice chart that shows the determinants of manufacturing competitiveness. A combination of government action, manufacturing capabilities, market forces, and resources is needed for successful enhancement of manufacturing competitiveness. It is based largely on exports sophistication and complexity of products.


 Government forces

  • Education policies
  • Energy policies
  • Economic, trade, labor, financial and tax policies
  • Science and technology policies
  • Manufacturing and infrastructure policies

Capabilities

  • Innovation
  • Technology
  • Process
  • Infrastructure

Market forces

  • Demographic
  • Macroeconomic

Resources

  • Human
  • Materials
  • Energy
  • Financial

By the way, Nepal’s manufacturing sector is going downhill. If you look at the list of determinants of manufacturing competitiveness, almost all of them are either missing or inadequately supplied in Nepal. Here is an earlier discussion on the state of Nepali economy, industrial sector, and exports.

Wednesday, April 25, 2012

The use of recipient country systems by donors

Stephen Knack argue that donor's use of the recipient country's systems is positively related to:

  1. The donor's share of aid provided to the recipient (a proxy for the donor's reputational stake in the country's development)
  2. Perceptions of corruption in the recipient country (a proxy for the trustworthiness or quality of the country's systems)
  3. Public support for aid in the donor country (a proxy for the donor's risk tolerance).

In Nepal, though the use of country systems by donors is improving, it is still not up to the expected level. It has been reported that in 2008, only 59 percent of projects followed Nepal’s national procurement system and only 68 per cent of projects followed the national public financial management system. In 2008, 106 of some 376 aid-funded projects were implemented through parallel implementation units (PIUs).

This paper on the evaluation of effectiveness of Aid for Trade (AfT) in Nepal explores the issue in detail.


In Nepal, a hybrid system, combining both donors’ and the GoN’s systems, is generally in place, but donors’ use of their own systems is more prevalent in the case of procurement under grant and technical assistance. A cross section of stakeholders find fault with the national Procurement Act and call for its revision, pointing out that it is “construction-centred” and stipulates a time-consuming process, which may not be suitable for many AfT projects requiring prompt intervention. Also, donors’ use of parallel programme implementation units (PIUs) for AfT projects is rampant.


Tuesday, April 24, 2012

Latest on India’s largest poverty alleviation and rural employment generation program: MGNREGS is working

In a new working paper, Dutta, Murgai, Ravallion, and van de Walle argue that poorer families tend to have more demand for work on the scheme, and that (despite the un-met demand) the self-targeting mechanism allows it to reach relatively poor families and backward castes. The extent of the un-met demand is greater in the poorest states — ironically where the scheme is needed most. Labor-market responses to the scheme are likely to be weak. The scheme is attracting poor women into the workforce, although the local-level rationing processes favor men.


We do not find that the local-level processes determining who gets work amongst those who want it are generally skewed against the poor. There are sure to be places where this is happening (and qualitative field reports have provided examples). But it does not appear to stand up as a generalization. We do find evidence that the poor fare somewhat less well when it comes to the total number of days of work they manage to get on the scheme. However, despite the pervasive rationing we find, it is plain that the scheme is still reaching poor people and also reaching the scheduled tribes and backward castes.

Participation rates on the scheme are higher for poor people than others. This holds at the official poverty line, but the scheme is also reaching many families just above the official line. It is only at relatively high consumption levels that participation drops off sharply. This should not be interpreted as indicating that well-off families in rural India are turning to MGREGS. There may well be shocks that are not evident in the household consumption aggregates. And there may be individual needs for help that are not evident in those aggregates.

Targeting performance varies across states. Some of those living above the official poverty line in better-off states will no doubt be relatively poor, and need help from the scheme. The overall participation rate seems to be an important factor in accounting for these inter-state differences in targeting performance, with the scheme being more pro-poor and reaching scheduled tribes and backward castes more effectively in states with higher overall participation rates.

While the allocation of work through the local-level rationing process is not working against the poor, there are clearly many poor people who are not getting help because the employment guarantee is not in operation almost anywhere (Himachal Pradesh, Rajasthan and Tamil Nadu could be counted as the exceptions, where 80% or more of those who want work got it). And other potential benefits of the scheme to poor people are almost certainly undermined by the extensive rationing, notably the empowerment gains and the insurance benefits. The first-order problem for MGNREGS is the level of un-met demand.

While the scheme is clearly popular with women—who have a participation rate that is double their participation rate in the casual labor market—the rationing process does not appear to be favoring them. We also find evidence of a strong effect of relative wages on women‘s participation—both wages on the scheme relative to the market wage and the male-female differential in market wages. As one would expect, poor families often choose whether it is the man or the woman who goes to the scheme according to relative wages.

It has been claimed by some observers that the scheme is driving up wages for other work, such as in agriculture; some observers see this as a good thing, others not. For India as a whole, we find that the scheme‘s average wage rate was roughly in line with the casual labor market in 2009/10. This might look like a competitive labor market equilibrium, but that view is hard to reconcile with the extensive rationing we find. Interestingly, we do find a significant negative correlation between the extent of rationing and the wage rate in the casual labor market relative to the wage rate on the scheme. Although this is suggestive, on closer inspection we are more inclined to think that other economic factors are at work. Indeed, the correlation largely vanishes when we control for the level of poverty. Poorer states tend to see both more rationing of work on the scheme and lower casual wages—possibly due to a greater supply of labor given the extent of rural landlessness.



NREGA is a flagship rural employment generation and livelihood program of the UPA government in India. This social welfare program guarantees one hundred days of employment per year at the prevailing minimum wage rate for unskilled labor.

The Act came into force on February 2, 2006 with an aim to “directly touch lives of the poor and promote inclusive growth.” Along with the objectives of boosting rural economy and enhancing overall (inclusive) economic growth, this public works program was also designed to prop up purchasing power of poor people; stabilize their household income; assure livelihood security to the most marginalized groups; accelerate the pace of meeting the MDGs; and strengthen natural resource management through works that address causes of chronic poverty like drought, deforestation and soil erosion. One of the objectives of the program is to make the process of employment generation sustainable.

It started with a pilot project in the state of Maharashtra in 1965 with an aim to provide relief to poor farmers during famine and drought. An Employment Guarantee Scheme (EGS) Act was passed in 1979 by the state legislature, widening the reach of the pilot program to the entire state. The federal government picked upon the success of the program and implemented (under Phase I) it in 200 of the most backward districts on February 2, 2006. It was expanded to cover an additional 130 districts in 2007/2008 (under Phase II) and the remaining (under Phase III) 285 districts (in total 615 rural districts) on April 1, 2008. In 34 states, a total of 45,019,215 households (as of September 2, 2009) were provided employment in 2008/09.

For more on NREGA, see this. It looks like cost of Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), the largest employment guarantee public works program in the world, is coming down. Its cost as a share of GDP, total expenditure and revenue receipts is decreasing and is expected to be 0.45 percent, 3.19 percent, and 5.08 percent respectively in fiscal year 2011-2012. Here is more on MGNREGA.

NREGA budget (Rs Crore)
2006-07 2007-08 2008-09** 2009-10** 2010-2011* 2011-2012*
GDP, current prices# 4,293,672 4,986,426 5,582,623 6,550,271 7,877,947 8,980,860
Total expenditure 583,387 712,671 900,953 1,020,838 1,108,749 1,257,729
Revenue receipts 434,387 541,864 562,173 614,497 682212 789892
NREGA allocated budget 11,300 12,000 30,000 39,100 40,100 40,100
NREGA/GDP 0.26 0.24 0.54 0.60 0.51 0.45
NREGA/Exp 1.94 1.68 3.33 3.83 3.62 3.19
NREGA/Rev 2.60 2.21 5.34 6.36 5.88 5.08

Source: Calculation based on data from Union Budgets; *estimate; **revised estimate'; # Economic Survey 2010-11

In FY 2010-2011, 5.49 crore households were provided employment (100 days employment  on demand to each household during lean season). The total persondays of employment created was 257.15 persondays (crore). Of this, the share of SCs, STs, and women accounted for 30.63%, 20.85%, and 47.73% respectively.

Monday, April 23, 2012

Trade and Development Reports, 1981-2011 [The defense of UNCTAD]

UNCTAD has released a report looking back at the series of Trade and Development Reports it has been publishing annually since 1981. It boasts that UNCTAD foresaw the mounting influence of globalization on the economies of developing countries, warned of the dangers of unregulated financial flows and volatile exchange rates, and consistently argued – against the free-market orthodoxy of the 1980s and 1990s – that governments have important roles to play in helping national economies achieve steady, long-term progress.The report is being launched during the ongoing UNCTAD XIII in Doha, Qatar.


The first part of the 30-year review publication shows that the originality of the TDR has been rooted in the discussion of national policies and strategies in relation to the performance of the global economy and its institutions. Taking a novel approach to the prevailing discussion on development challenges and policies, the TDR abandoned the dichotomy between short-term macroeconomic issues and long-term development issues that was shaping "development economics" at the time. From the start, the TDR emphasized the importance of the external environment for development. In a way, it anticipated the notion of globalization.

The hallmark "holistic" view of the TDR on policies related to employment, trade, debt, and monetary, finance, and payment balances has been reflected in its analyses on the debt crisis of the 1980s, in its view of the problems created by conditionalities attached to structural-adjustment programmes of the international financial institutions, and in its warnings on the dangers for developing countries of opening to unregulated capital flows and increased exchange-rate instability. More recently, in examining the build up to -- and the macroeconomic impacts of -- the global economic and financial crisis, the report called attention to the weaknesses of international monetary and financial governance and to the deep inconsistencies among global trade, financial, and monetary policies.

The TDR has called for a balance between multilateral rules and actions and national policy autonomy, or "policy space" in economic matters -- a term coined by UNCTAD´s economists. This point of view has enlivened economic debate in recent years. In defending the need to address specific local needs and challenges, the report has been strongly critical of the "one-size-fits-all" approach to development policies often taken by international institutions.

The discussion of the role of the State in economic development, particularly in promoting capital formation for the diversification of economies, has been a recurrent aspect of the TDR. While taking a prudent attitude towards the merits of free markets -- distinct from that of other organizations -- the TDR has never intended to serve as an agent in favour of an "anti-market" ideology. Rather, the 30-year review publication claims, the TDR’s aim has been to promote a well-targeted pragmatism in policy-making. The concern is not "State vs. market" but effective policy vs. what it calls "market fundamentalism." Accordingly, the TDR has tried to help developing countries create what is sometimes called a "developmental State".


Earlier, UNCTAD released a statement strongly defending the role of “developmental state”. It batted for the balanced role of the State and market considerations, where the State designs policies and institutions with a view to achieving sustainable and inclusive economic growth as well as creates an appropriate enabling stable, transparent, and rules-based economic environment for the effective functioning of markets.

The UNCTAD has been under pressure from developed nations for criticizing the finance-driven globalization (FDG) model and calling for an overhaul of the system to move to development-led globalization (DLG). The report, titled "Development-led Globalization: Towards Sustainable and Inclusive Development Paths," suggests that FDG has led to uneven, unstable and unfair outcomes. It outlines an agenda for DLG based on three pillars: enabling developing countries to mobilize domestic resources, strengthen productive capacities and share the gains in an equitable manner; creating more robust multilateral structures for collective responses to upcoming challenges, such as taming finance and promoting investment-led responses to climate change; and strengthening regional ties, including through South–South cooperation, to enhance stability and open new growth opportunities.


Also here is a link to the inaugural Commodities and Development Report (UCDR) 2012.


The report says mounting financial speculation in commodities and the increasing diversion of agricultural land to biofuel crops has changed the forces underpinning commodity prices, pushing them through a sustained period of increase.

What should be a boon for poor nations, especially the globe’s 48 least developed countries (LDCs) -- whose economies often depend heavily on commodity exports – is on balance a negative development because many of these countries are net importers of oil and staple foods, the study says. Since the food crisis of 2008, prices for basic nourishment have been both volatile and high, the report says – and poor families are acutely vulnerable, as they typically spend 50 per cent or more of their incomes on food.

One driving force of the change is the massive influx of financial capital that has flowed into commodity futures markets since 2003, the report says. Financial investors differ from producers or traders in that they are not concerned with the physical delivery of products, but rather in buying delivery contracts and later selling them for higher prices, thus repeating speculative profits. As these financial investors have pulled their money out of troubled bond and equity markets, the number of commodity futures contracts traded worldwide has exploded, climbing from approximately 500 million in 2003 to more than 2.5 billion in 2011. Similarly, the worldwide value of commodity derivatives, including both futures and options, rose from just over US$1 trillion in 2003, to more than $8 trillion in 2007, before subsiding to $3 trillion in 2009 and 2010.

UNCTAD contends that this “financialization” of commodities futures has fundamentally changed the conduct and outcomes of commodities markets in general, for example by changing a producer’s price expectations and reducing his ability to hedge against risk.

The report downplays the impact on climbing commodities prices of growing Chinese demand. […] UNCTAD finds that Chinese demand has indeed dominated the markets for metals such as copper, nickel, and in particular iron ore, for which it accounted for 63 per cent of world imports. But China’s share of world imports of oil (7 per cent) and food commodities (all less than 2 per cent), although significant, is not so high as to drive price movements. UNCTAD identifies biofuels as a third new twist in the current commodities boom. In the 2003-2004 harvest year, world maize farmers devoted 5 per cent of their crops to producing ethanol, which is marketed as an alternative to fossil fuels and mixed with gasoline. By the 2010-2011 harvest year, the proportion of world maize production converted to ethanol had tripled to 15%. Generous subsidy programmes in the USA, Europe, and Brazil played a role in convincing farmers to use maize and sugar crops to produce biofuels instead of food. UNCTAD estimates that competition from biofuels contributed an estimated 15 to 20 per cent to cereal export prices. More fundamentally, biofuels link cereal markets with energy markets, weakening the influence of demand and supply signals on cereal prices.


Recommendations of UCDR 2012:

  • Steps should be taken to invest in national and regional food reserves to help food-insecure countries.
  • The recent shift to “finance-driven globalization,” as it applies to commodities, should be reconsidered, especially in comparison to the standard development model in which profits from commodities exports are used to increase domestic investment that can help diversify and expand the capacities of developing-country economies.
  • That fiscal and taxation policies be adjusted so that they help developing countries reap stable, long-term economic benefits from commodities exports.
  • That measures be taken nationally and internationally to improve the situations of small farmers and other small commodity producers in poor countries.

Elite capture of fuel subsidies

There is a long running debate over elite capture of blanket, across-the-board subsidies in developing countries. Subsidies are primarily meant for people who cannot afford basic necessities or are targeted to those who are below the poverty line. However, there is a danger of elite capture as is seen in fuel subsidies, relief program for rural households, payment for employment schemes, etc. Almost all developing countries subsidize fuel costs to stabilize prices and to help poor households cope with fuel price volatility. However, fuel subsidy is not targeted and widespread leakage is common. Even though the targeted group get subsidized fuel in the market, a large proportion of it is consumed by the elite (because their consumption demand is higher—so will be subsidy). It puts strain on fiscal deficit and trade deficit.

A recent study in seven African countries shows that on average the richest 20% receive over six times more in subsidy benefits than the poorest 20%.


Expenditure data for seven African countries show that the distribution of these subsidies is disproportionately concentrated in the hands of the rich.  Richer households spend a larger amount on fuel products, and, consequently, benefit more than poorer households from any universal subsidy on these products. On average the richest 20% receive over six times more in subsidy benefits than the poorest 20%.

 

More here.


The high share of income spent by poor households on fuel relative to well off households means that if fuel subsidies are taken off, then it would hurt poor the most. The poor’s demand for fuel is more price inelastic than rich’s demand for fuel.


Results of simulating the short-term (assuming no substitution away from fuel) direct impact of a 20 percent increase in energy prices (using SHIP data) show that both rich and poor households would see a substantial negative impact on consumption: a decline of nearly 1 percent for the top quintile and of 0.5 percent for the bottom quintile. Other studies estimate that the total impact—direct and indirect—of higher fuel prices as a percent of consumption is about the same across income quintiles

For nine African countries the average short term direct and indirect welfare impact of a $0.25 per liter increase in fuel price is estimated to be 2 percent and 3.8 percent of per capita consumption respectively. Unlike the rich, the poor have very limited capacity to offset the effects of the price shock on overall consumption by borrowing or drawing on savings.


The figure below shows size of fuel price subsidy (% of GDP) in select SSA countries.

What is the solution to this? Well, there is no easy fix:


Removing subsidies and raising prices needs to be well managed. For one thing, social assistance programs need to be strengthened so as to help poor and vulnerable households weather the price shock. Another is to increase public understanding and support for subsidy reform by having a transparent and evidence-based discussion and scrutiny of subsidies: the full cost of the subsidy, the distribution of the subsidy and who is benefiting from the subsidy, and the implications for public spending on priority areas.


Sunday, April 22, 2012

Market manipulation by syndicates and cartels in Nepal

[Published in Republica, April 21, 2012, p.6]


Syndicated distortion

There are syndicates and cartels in pretty much all lucrative sectors. The most outrageous of all is the transport syndicate. The number of vehicles that ply on highways, and inter and intra district roads are dictated by syndicates, which in the veil of transport associations try to impose monopoly power over transport fares, quality and frequency of service. Following repeated requests from the private sector and realizing the cost of anticompetitive practices and distortions created by syndicates/cartels, the government officially banned them several years ago. Additionally, the Competition Promotion & Market Protection Act 2006 also barred syndicates, route monopoly and anti-competitive practices of all forms. The urgency to correct market distortions engendered by syndicates was such that various finance ministers even made a high pitch about its illegality in budget speeches. However, as with many other government’s decrees, the ban on syndicates was not fully implemented. Creative creation and creative destruction based on service delivery and consumer demand never applied in this sector. Consequently, consumers are compelled to pay high prices for substandard services, leading to limited choices and erosion of competitiveness of our industries.

Recently, Prithivi Highway Bus Entrepreneurs Committee (PHEBC), a syndicate of transporters operating in the Prithivi Highway, barred tourist coach services from operating between Pokhara and Chitwan. Given the increasing number of passengers and revenue, Pokhara-Chitwan route is becoming as lucrative a transportation route as Kathmandu-Pokhara. The tourism entrepreneurs want to tap that expanding market segment by operating a direct luxury bus service. However, the syndicates argue that adding luxury buses along the Pokhara-Chitwan route would divert the flow of domestic passengers from the existing bus services. This is a totally rubbish. First, if domestic passengers are willing and able to pay for the services enjoyed by tourists in Nepal, then nobody should bar them from legally enjoying the services. The syndicates do not have the right to dictate what services domestic passengers can avail and what they cannot in the market. Second, if the syndicates are so worried about diversion of domestic passengers to tourist coaches, then why can’t they offer services that match the ones offered in the latter one? [By the way, relenting to widespread pressure and after stinging reprimand, the PHEBC has finally agreed to operate tourist coaches along Pokhara-Chitwan route by itself.] Fundamentally, there is nothing wrong on the part of domestic travelers to opt for a luxury bus service if safety and comfort is guaranteed at comparable prices. By forcefully barring addition of new vehicles or bus services that could provide better facilities for the same amount of money to domestic passengers, the syndicates are violating not only the law, but also depriving passengers of the services they deserve and demand.

At the core of it the syndicates are no different than a tyrant who rules by suppressing any move—no matter how well-intentioned and welfare enhancing— that threatens his existence. They are extracting undeserved privileges by providing low-grade services at high prices. It is because of the syndicates—who argue that the main rationale for imposing monopoly is to check fall in profits due to excess supply of vehicles and to regulate the market—that passengers have no choice of road transport services. Furthermore, new enterprises willing to provide better services at the prevailing fares are not allowed to enter the market. For instance, though the cost of traveling along Kathmandu-Pokhara route is the same in both normal buses and tourist coaches, the services offered by the former is incomparable to the ones offered by the latter. The normal buses (including microbuses) ferry passengers in excess of the available number of seats. If you take microbus along Kathmandu-Pokhara route, then three passengers are forced to squeeze in a seat for two passengers (in the front row adjacent to the driver). Worse, a smooth ride with minimal stopover is a daydream. They stop at multiple locations in the highway and stack in more passengers than recommended. It has two disadvantages to passengers. First, they never reach destination in time and get substandard services despite high fares. Second, safety of passengers is compromised when more people are ferried in a bus than recommended by manufacturers and engineers. Scores of people have lost lives and are injured because of passenger overload. These abuses do not normally happen in tourist coaches.

The recent row between tourism entrepreneurs and bus syndicate in Pokhara is not a new phenomenon. Such incidents happen along all highways and intra and inter districts roads. Without the consent of syndicates, no one is allowed to add new vehicles in any route. This is happening even if entrepreneurs legally pay all the required fees to the government. At times, entrepreneurs have to cough up money equal to the cost of vehicle itself to add a new one in a particular route. Just imagine why new vehicles are not plying on the roads of Kathmandu for several years. The outdated, thick black smoke spewing Nepal Yatayat and micro and mini buses are ruling the roads, especially after Sajha Yatayat stopped operations. The lack of competition is fostering disincentives to enhance services delivery. Even when consumers are willing to pay for better managed buses and services, they do not have a choice, thanks to the syndicates.

Furthermore, syndicates are contributing to making our industrial sector uncompetitive. Without the consent of around 24 truck syndicates, no new trucks are allowed to ferry containers or goods to and from border areas and industrial corridors. The predetermined transport fares are astronomically high even for short routes (Kodari-Kathmandu or Birgunj-Kathmandu). Traders have complained that the cost of ferrying a container from Kolkata to Kathmandu is roughly two times higher than the cost of ferrying the same container from Singapore to Kolkata. Of course, sea transport is cheaper than road transport, but nothing justifies the huge cost differential. Similarly, the monopoly in truck business at the Inland Container Depot (ICD) in Sirsiya, Birgunj is increasing trading costs by a wide margin. Rough estimates show that the benefit of doing away with syndicates outweighs losses to transport operators by a factor ranging from 6 to 7.6. The cost of these anticompetitive practices is reflected in the final price of goods and services paid by consumers here and aboard. The price of imported goods would have been a bit cheaper if there were competition in trucking business. Importantly, our exports would have been a bit price competitive if syndicates/cartels were not allowed to charge high transportation fees and collect unrecorded charges.

Now, you might be wondering why these practices are happening openly even when they are illegal? Well, political party associates and affiliates control most of the syndicates. Some influential politicians or their relatives have major share in a number of bus services operating along the lucrative routes, including inside Kathmandu Valley. Though there is no solid evidence yet, it is beyond doubt that these syndicates are also one of the funding machines of the political parties. They are extractive institutions illegally existing under the protection of political leaders. Unless they are rooted out, passengers will always have to bear injustice and pay hefty amount for substandard services. Importantly, no new transport enterprises will be allowed to justly serve passengers and provide them with the services they deserve based on the prices they are willing to pay. Syndicates will never allow consumers to be kings in the market and will always stifle innovation and competition.


Saturday, April 21, 2012

Challenges to investment in South Asia

[It was published in Trade Insight, Vol.8, No.1, 2012, pp.30-32.]


Challenges to investment in South Asia

Due to economic slowdown, high employment, and sovereign debt risks in developed economies after the financial crisis, investment is gradually flowing to rapidly growing emerging and developing economies. South Asia has drawn the attention of investors as a result of the impressive growth rates, investment reforms, expanding domestic markets and good macroeconomic balance. Boosting domestic as well as foreign direct investment (FDI) has remained one of the main agendas of policymakers in the region because of its positive impact on growth, employment, poverty reduction, industrial expansion and exports. However, despite the increasing level of investment, several investment climate constraints, which are not entirely common to all countries, are still restraining potential investment. While acknowledging that a sound macroeconomic balance (low inflation, low fiscal deficit, low current account deficit, high savings rate and healthy forex reserves among others) is crucial for increasing investment, this article will mainly focus on country-specific firm level challenges to investment.

Investment in South Asia

In South Asia, latest available data shows that Bhutan has the highest gross fixed capital formation (GFCF)1 as a share of GDP (41.33 percent). It is followed by Maldives, India, Sri Lanka, Bangladesh, Nepal, Afghanistan and Pakistan. Foreign direct investment (FDI) as a share of GDP is highest in Maldives (8.58 percent), followed by India, Pakistan, Sri Lanka, Bangladesh, Bhutan, Afghanistan and Nepal (See Figure 1).

Figure 1: GFCF and FDI (share of GDP), 2010

Source: World Development Indicators; GFCF data for Bhutan and Maldives refer to 2009 and 2005 respectively; FDI data for Nepal refer to 2009

The amount of FDI inflows to South Asia was increasing rapidly up until 2008, reaching US$50.28 billion from US$575 million in 1990.2 In 2010, it dropped to US$28.34 billion, which represented 2.28 percent of total world FDI inflows. The average FDI inflows over 1990-2000 was US$2.56 billion, which increased to US$21.5 billion over 2001-2010. The FDI inflows are not distributed evenly in South Asia. India’s share of total FDI inflows to South Asia was 41.18 percent in 1990, which reached 86.95 percent in 2010 (US$24.64 billion). It reflects investor’s confidence on the India economy, its reform process and the rapidly growing domestic market. Overall, FDI inflows to all countries except Nepal, which received US$38.56 million in 2008 when compared to US$1.01 million in 2007, decreased after 2008. It started recovering in countries like Bangladesh, Maldives, and Sri Lanka in 2010.

Obstacles to investment

Compared to the global investment level, the low share of FDI inflows and relatively low gross fixed capital formation indicate a range of obstacles faced by investors, discouraging them from scaling up investments in the region. Overall, the major constraints to investment, as perceived by firms in South Asia, are lack of adequate supply of electricity, access to finance, political instability, tax rates, corruption, access to land, security, informality, tax administration hassles, lack of human capital, rigid labor regulations and transportation among others (see Figure 2).

Figure 2: Perception of obstacles to better investment climate in South Asia3

Source: Enterprise Surveys

Country-specific constraints

The South Asian average of perception of challenges to investment climate masks country-specific obstacles to investment. While investors in Nepal feel that political instability is the biggest obstacle to better investment climate, Pakistani investors perceive electricity as the most significant problem. Similarly, while access to finance is the biggest obstacle for investors in Bhutan, the uneven playing field created by a large informal sector is the main obstacle for investors in Sri Lanka. Hence, a closer look at country-specific challenges to investment is warranted.

Afghanistan

Around 20 percent of firms in Afghanistan perceived that crime, theft and disorder were the biggest obstacles to investment. The other main obstacles were lack of adequate electricity supply (17.9 percent), access to finance (16.8 percent), political instability (16.4 percent), access to land (12.2 percent) and corruption (8.4 percent). The constraints such as tax rates, courts system, human capital and labor regulations were considered less worrisome than the ones mentioned earlier. Specifically, about 45 percent of firms paid extra for private security, which is increased cost by 2.8 percent of annual sales. The number of electrical outages in a typical month averaged 20 and it lasted for 11.5 hours, inflicting losses of about 6.5 percent of annual sales. Consequently, 71.1 percent of firms owned or shared a generator, which was used to supply about 74.9 percent of power demand by firms. It takes 46 days to get electrical connection upon submitting an application. Regarding access to finance, only 3.4 percent of firms had a bank loan and1.4 percent of them were using banks to finance investments. Furthermore, 79 percent of loans required collateral and its value amounted to almost 254 percent of the loan amount.

Bangladesh

Around 43 percent of firms in Bangladesh perceived lack of adequate supply of electricity as the main obstacle to investment. The other top constraints were access to finance (34.9 percent), political instability (11.4 percent), corruption (4.3 percent) and access to land (4.1 percent). Specifically, the number of power outages in a typical month averaged 101, which lasted for 1.1 hours and increased cost by 10.6 percent of annual sales. About 52 percent of firms owned or shared a generator, which supplied 23.6 percent of total electricity demand by firms. It takes approximately 50 days to obtain an electrical connection upon submitting application. Approximately 24.7 percent of firms used banks to finance investments and only 17.1 percent of total investment was financed by banks. Regarding corruption, 85 percent of firms reported that they expected to give gifts to public officials to ‘get things done’, especially to get an operating license, import license, construction permit, electrical connection and water connection. Meanwhile, 54.4 percent of firms expected to give gifts during meetings with tax officials and 18.4 percent of firms identified courts system as a challenge to better investment climate.

Bhutan

Around 22 percent of firms in Bhutan perceived access to finance as the main obstacle to better investment climate. The other top constraints were tax rates (12.6 percent), inadequately educated workforce (10.5 percent), labor regulations (9.7 percent) and transportation (9.1 percent). The access to land, courts system, electricity supply and political instability were perceived to be less problematic for investors. Approximately 64 percent of firms used banks to finance investments and almost all firms needed loans. Furthermore, 97 percent of loans required collateral, whose value was about 283 percent of loan. Investors felt that tax administration hassles and high tax rates (40.8 percent of profit4) were also discouraging investors. Regarding human capital, there were virtually no permanent skilled full-time workers in manufacturing sector and only 23.3 percent of firms were offering formal training. The cumbersome labor regulations and inadequately educated workforce were also problematic for investors. While real annual sales growth and annual employment growth were 17.9 percent and 13.1 percent respectively, annual labor productivity growth was just 5.7 percent.

India

Approximately 35 percent of firms identified electricity as the main obstacle to investment. The other main challenges were tax rates (16.8 percent), corruption (10.7 percent), tax administration hassles (8.5 percent), and access to finance (4.5 percent). Political instability, business licensing and permits, crime and theft, and courts system were not considered that big of a challenge to investors in India. The average duration of a typical electrical outage was 3.6 hours and the average loss was 6.6 percent of annual sales. Almost 41.4 percent of firms owned or shared a generator, which supplied 9.8 percent of demand for electricity by firms. Meanwhile, it takes 30 days to obtain an electrical connection upon submitting application. Regarding tax administration, 6.7 percent of senior management’s time was spent in dealing with the requirements of government regulation. The total tax rate is equal to 61.8 percent of profit.5 Additionally, only 46.6 percent of firms were using banks to finance investments and the proportion of investments financed by banks was just 27.9 percent. Around 74.3 percent of loans required collateral and the value of collateral needed was 126 percent of loan amount.

Nepal

Around 62 percent of firms identified political instability as the main challenge to investment. The other main obstacles as perceived by firms were electricity supply (26.5 percent), labor regulations (2.6 percent), access to finance (2.5 percent) and transportation (2.4 percent).The number of electrical outages in a typical month averaged 52 and the average duration was 6.5 hours, inflicting loss of about 27 percent of annual sales. Approximately 15.7 percent of firms owned or shared a generator, which satisfied 24.6 percent of electricity demand by firms. It takes 9 days to get an electrical connection upon submitting an application. Investor confidence is low due to losses arising from civil unrest (44 days a year on average) and power outages. The rigid labor regulation and the excessive unionism in the industrial sector have led to closure of domestic as well as multinational companies.6 Furthermore, only 17.5 percent of firms used banks to finance investments and the proportion of investments financed by banks was 12.4 percent. The proportion of loans that required collateral was 81 percent and the value of collateral needed was 260 percent of total loan amount. The lack of adequate infrastructure (road connectivity and electricity) is identified as the most binding constraint to economic activities in Nepal.

Pakistan

Around 67 percent of firms perceived electricity supply as the biggest obstacle to investment. The other main challenges were corruption (11.7 percent), crime, theft and disorder (5.5 percent), access to finance (3.9 percent), and tax rates (3.7 percent).The number of electrical outages in a typical month averaged 40 and the average duration was of 2.3 hours. The loss due to electrical outages amounted to 9.2 percent of annual sales. Almost 26.3 percent of firms owned or shared a generator, which satisfied 29.3 percent of demand for electricity by firms. It takes 106 days to obtain an electrical connection upon submitting an application. Regarding corruption, 48 percent of firms expected to give gifts to public officials to “get things done”. Additionally, 49 of firms paid for private security, inflicting extra cost of around 2.3 percent of annual sales. While almost all firms needed loans, only 9.7 percent of them used banks to finance investments and the banks financed just 8.4 percent of investments. The proportion of loans requiring collateral was 76 percent and the value of collateral needed was 68 percent of the loan amount. Total tax rate is equal to 35.3 percent of profit.7

Sri Lanka

Around 16 percent of firms perceived that a large informal sector was the biggest obstacle to investment. The other main challenges were access to finance (14.1 percent), tax rates (11.9 percent), electricity (11.4 percent) and access to land (9.8 percent). When compared to these constraints, firms were least bothered by security of investment, corruption, political instability and courts system. Approximately 47.4 percent of firms competed against unregistered or informal firms, leading to loss of markets and profits due to unfair competition. Regarding access to finance, 43.6 percent of firms used banks to finance investments and banks financed 35.4 percent of investments. The proportion of loans requiring collateral was 79.2 percent and the value of collateral needed was 194 percent of total loan amount. Total tax rate is equal to 105.2 percent of profit.8

Conclusion

Overall, the challenges to investment are country-specific. While investors in countries like Bhutan with adequate electricity supply do not think power outages as a challenge to investment, investors in other countries perceive it as a strong constraint. Similarly, while competing unfairly with informal sector is the main headache for firms in Sri Lanka, investment in other countries is crippled by insecurity, access to finance and poor infrastructure. Tackling them by enacting new reforms, earnestly implementing the already enacted ones, promoting and protecting investments while at the same time maintaining good macroeconomic balance might boost investment, which would spur jobs creation and growth.


1It is a proxy for the level of investment in an economy. Specifically, it measures the value of net additions to fixed assets.

2World Investment Report 2011, UNTCAD

3South Asian regional average of indicators is computed by taking a simple average of country-level point estimates. Unless otherwise noted, the figures and obstacles to investment climate are sourced from Enterprise Surveys (http://www.enterprisesurveys.org), The World Bank. The survey year for Afghanistan is 2008, Bangladesh 2007, Bhutan 2009, India 2006, Sri Lanka 2011, Nepal 2009 and Pakistan 2007.

4Doing Business 2012

5Doing Business 2012

6See Sapkota, Chandan (27 August, 2011). “Imprudent Unions & Weak Industries.” Republica. p.6

7Doing Business 2012

8Doing Business 2012

MDGs target to reduce mortality rates of children under five and mothers won’t be met


Here is what Global Monitoring Report (GMR) 2012 says about achievement of MDGs so far:


GMR 2012: Food Prices, Nutrition and the Millennium Development Goals reports good progress across some MDGs, with targets related to reducing extreme poverty and providing access to safe drinking water already achieved, several years ahead of the 2015 deadline to achieve the MDGs. Also, targets on education and ratio of girls to boys in schools are within reach. 

In contrast, the world is significantly off-track on the MDGs to reduce mortality rates of children under five and mothers. As a result, these goals will not be met in any developing region by 2015. Progress is slowest on maternal mortality, with only one-third of the targeted reduction achieved thus far. Progress on reducing infant and child mortality is similarly dismal, with only 50 per cent of the targeted decline achieved.

GMR 2012 details solutions for making countries and communities more resilient in the face of food price spikes. Countries should deploy agricultural policies to encourage farmers to increase production; use social safety nets to improve resilience; strengthen nutritional policies to improve early childhood development; and design trade policies that enhance access to food markets, reduce food price volatility and induce productivity gains. However, the challenges countries face in responding to high food prices have been made more difficult as a result of the global recession.


South Asia has reached the target on access to safe water and will most probably eliminate gender disparity in primary and secondary education by 2015. Progress has also been made with respect to primary completion and, to a lesser extent extreme poverty reduction. Faster progress is required in terms of reducing child and maternal mortality and improving access to sanitation facilities, if the region is to reach these goals by 2015 or soon after. Progress toward halving the proportion of people who suffer from hunger is significantly lagging. All countries for which data are available are off track or seriously off track. Most of them will not reach the hunger target by 2015.

Friday, April 20, 2012

Access to finance in Nepal

A latest WB report based on survey of about 150,000 people in 148 countries argues that 75 percent of adults earning less than US$2 a day do not have bank account because of poverty, cost, travel distance, and amount of paper work involved in opening one. Interestingly, the report argues that inequality also has got something to do with so many people being “unbanked” as the richest 20 percent of adults in developing countries are more than twice as likely to have a formal account as the poorest 20 percent.

Whats more? The “unbanked” 2.5 billion folks are forced to rely on money lenders who charge high fees and are also less likely to start their own business or insure themselves against unexpected events.

Interesting stats:

  • The relative gender gap in formal account ownership is highest in South Asia: 41 percent of men and 25 percent women have an account. 73% of savers in South Asia report saving for an expense in the future such as an education or a wedding. 33% of adults have an account at a formal financial institution in South Asia (24% in SSA, 18% in MENA, 39% in LAC, and 55% in EAP)
  • Only 37% of women in developing countries have an account, whereas 46% of men do. Women living below $2 a day are 28% less likely than men to have a bank account.
  • Worldwide, 22% of adults report having saved at a formal financial institution in the past 12 months.
  • Even among those who do have a formal bank account, only 43% of adults use their account to save. Yet 61% of account holders worldwide use their account to receive payments from an employer, the government or family members living elsewhere. About 7% and 3% adults use a formal account to receive payments from work/selling goods and from government respectively.
  • More than 11% of adults in developing countries have an outstanding loan for emergencies or health-care needs, but more than 80% of these adults use only informal sources of credit.
  • Of adults in developing countries working in farming, forestry or fishing, only 6% of them have crop, rainfall or livestock insurance.
  • Mobile banking, which allows account holders to pay bills, make deposits or conduct other transactions via text messaging, has expanded to16% of the market in Sub-Saharan Africa, where traditional banking has been hampered by transportation and other infrastructure problems. Kenya, where 68% of adults report using a mobile phone for money transactions, has seen particularly impressive growth in this market.
  • Nearly two-thirds of the unbanked cite poverty as the obstacle to financial access, but about a third also blame the cost of opening and maintaining an account or the banks being too far away, which means long bus rides for many.


NEPAL:

  • In Nepal, face-to-face interviews were taken with 1000 adults (15+) between May 21 and June 4, 2011.
  • About 25.3 percent of adults have an account at a formal financial institution. This is higher than in Afghanistan and Pakistan in the region, but lower than South Asian average. About 50.6 percent of adults living in urban areas have bank account.
  • Only 11.8 percent of adults with bank account use ATM as the main mode of withdrawal. It is lower than the South Asian and low income group average.
  • Only 5.7 percent of adults have debit card. It is again lower than South Asian average (7.2 percent) and low income group average (7.4 percent).
  • The use of formal account to receive payments from work or selling goods, payments from government is very low in Nepal compared to regional counterparts. Meanwhile, remittances payments via formal account is one of the highest in the region.
  • Only 0.3 percent of adults use mobile phone to pay bills, 0.4 percent use mobile phone to send money, and 0.3 percent use mobile phone to receive money. These numbers are far lower than the regional average.
  • For saving, credit and insurance, only 9.9 percent of adults used formal account. This is the third lowest in the region (Afghanistan 3 percent and Pakistan 1 percent).
  • The proportion of Nepalese adults with an outstanding mortgage is the second highest in the region (first one is Afghanistan with 8 percent).
Access to finance (%, age 15+) Nepal South
Asia
Low income
All adults (%, age 15+) 25.3 33 23.7
Adults living in a rural area  (%, age 15+) 22.3 30.8 22
Adults living in an urban area (%, age 15+) 50.6 39.2 35.8
ATM is the main mode  of withdrawal (% with an account) 11.8 18 23
Has debit card 3.7 7.2 7.4
Use an account  for business purposes 3 4 4.6
Use an account to receive wages 3.6 7.4 5.9
Use an account to receive government payments 1.2 3.5 2.5
Use an account to receive remittances 4.6 2 4.7
Use an account to send remittances 1.2 1.6 2.8
Use a mobile phone to pay bills 0.3 2 2.6
Saved any money in the past  year 18.4 21.3 29.9
Saved at a formal financial institution in the past  year 9.9 11.1 11.5
Loan from a formal financial institution in the past  year 10.8 8.7 11.4
Loan from family or friends in the past  year 33.2 19.5 30.2
Outstanding loan for home construction 13 4.4 6.3
Outstanding loan for health or emergencies 23.9 14.1 16.1
Outstanding loan for funerals or weddings 5.7 3.9 5.4


FYI, the NLSS III showed that 20 percent of households received loans from banks, 15.1 percent from money lenders and 51.1 percent from relatives. The table from NLSS III related to access to finance is below:
Nepal Living Standard Surveys
  NLSS I NLSS II NLSS III
Survey year 1995/96 2003/04 2010/11
Loans (% of total household)
Borrowing loans 61.3 68.8 65
Having standing loans 58.4 66.7 62.6
Loans from banks 16.2 15.1 20
Loans from money lenders 39.7 26 15.1
Loans from relatives 40.8 54.5 51.1
Loans from cooperatives, NGO, etc 3.3 4.4 13.8
Purpose of household loans  
Farm work 28.7 24.2 26.2
Consumption 49.4 46.5 30.7
Other personal uses 21.9 29.3 43.1
Loans with land/house as collateral 16.8 14.1 12.4
Loans with others as collateral 8.5 10.8 7.7
Loans without collateral 74.7 75.1 79.9