Friday, November 28, 2014

Highlights of the 18th SAARC Summit Declaration

The 18th SAARC Summit was held in Kathmandu on 26-27 November 2014. The most prominent regional feature was the agreement on the framework on energy cooperation. Motor vehicles and regional railways agreements are to be finalized within three months.

Excerpts from the declaration:
  • Commitment to achieve South Asian Economic Union (SAEU) in a phased and planned manner through a Free Trade Area, a Customs Union, a Common Market, and a Common Economic and Monetary Union
  • Effectively implement the existing preferential facilities under SAFTA and SATIS (especially for Least Developed and Landlocked Member States)
  • Accelerate free trade in goods and services in the region putting into operation simplified and transparent rules of origin; implementation of trade facilitation measures; harmonization of standards relating to Technical Barriers to Trade (TBT) and sanitary and phyto-sanitary measures; harmonized, streamlined and simplified customs procedures; elimination of non-tariff and para-tariff barriers; and smooth and efficient transit and transport facilities
  • Signing of the SAARC Framework Agreement for Energy Cooperation (Electricity)
  • Identify regional and sub-regional projects in the area of power generation, transmission and power trade, including hydropower, natural gas, solar, wind and bio-fuel, and implement them with high priority with a view to meeting the increasing demand for power in the region
  • Initiate an Inter-Governmental process to appropriately contextualize the Sustainable Development Goals (SDGs) at the regional level
  • Eliminate the threshold criteria from the SAARC Food Bank Agreement so as to enable the Member States to avail food grains, during both emergency and normal time food difficulty
  • Collaborate and cooperate on safe, orderly and responsible management of labour migration from South Asia to ensure safety, security and wellbeing of their migrant workers in the destination countries outside the region
  • India to develop and launch a satellite dedicated to SAARC Countries
  • Collaboration and engagement among public authorities and private stakeholders in the Member States to lower telephone tariff rates for facilitating greater contacts among the people of the region and called for rationalization of the tariff structures
  • Effectively implement SAARC Action Plan on Tourism (2006) particularly through initiating appropriate public-private collaboration
  • Hold henceforth the meetings of the SAARC Summit every two years or earlier
Meanwhile, Nepal and India signed 12 agreements/MoUs on the sidelines of the summit. These include:
  • MoUs on tourism, traditional medicines and youth exchange
  • Motor Vehicle Agreement
  • MoU on PDA for Arun III
  • Twin City Agreements between Ayodhya-Janakpur, Kathmandu-Varanasi, and Lumbini-Bodh Gaya

Friday, November 14, 2014

Historical path and growth forecast: Regression to the mean

Lant Pritchett and Lawrence Summers argue that growth forecasters should taken into account the potential of a slowdown in China and India, especially their growth averaging towards the mean based on both internal (institutions) and external conditions (commodity prices, climate change, geopolitics, etc).

Excerpts from the paper:

Regression to the mean is the single most robust finding of the growth literature, and the typical degrees of regression to the mean imply substantial slowdowns in China and India. relative even to the currently more cautious and less bullish forecasts.

India and, even more so, China are experiencing historically unprecedented episodes of growth. China’s super-rapid growth has already lasted three times longer than a typical episode and is the longest ever recorded. The ends of episodes tend to see full regression to the mean, abruptly.

It is impossible to argue that either China or India has the quality institutions that have been associated with the steady dynamic of growth in the currently high productivity countries. The risks of sudden stops are much higher with weak institutions and organizations for policy implementation. China and India have very different modalities of this risk, but both have tricky paths to continued prosperity.

We suggest several implications of these conclusions. First, there will be a strong tendency to assume that, if growth slows substantially in China or India, it will represent an important policy failure. This is not right. Regression to the mean in a decade or so is the rule, not the exception. What would require much more explanation would be continued rapid growth, which would be very much outside the general run of experience. Second, those making global projections should allow a very wide confidence interval with respect to growth for countries whose current growth rates are far from the mean. Given the sensitivity of commodity demands in particular to growth rates in Asia, this suggests substantial uncertainty about the medium-term path of commodity prices. In the same way, forecasts of global energy use and climate change impacts should also recognize the possibility of discontinuities in Asia. Third, much geopolitical analysis has focused on the implications of a rising China, and certainly Chinese international relations theorists have extensively studied past rising powers. Contingency planning should also embrace scenarios in which Chinese growth slows dramatically, presumably bringing with it a range of domestic and international political implications.

Saturday, November 8, 2014

Minimum wage and productivity in Nepal and South Asia (plus China)

Here is an update on the minimum wage and labor productivity in South Asia (plus China). In 2012, in a series of blog posts (here and here— also, here and here), I indicated that the minimum wage in manufacturing sector in Nepal is the highest in South Asia. The latest updated data (sourced from DB2015) shows India’ and Pakistan’s minimum wages above Nepal’s.

At US$95 per month in 2014, the minimum wage in Nepal was the third highest in South Asia. The minimum wage in India and Pakistan was $142 per month and $110 per month, respectively. In 2012, Nepal had the highest minimum wage in South Asia. Minimum wage in Nepal has drastically increased from $32.3 in 2007— a 194% growth over 2007-2014.

Relative to Nepal’s level (=100 in the chart below), minimum wages in China, India, and Pakistan are higher. Sri Lanka had higher minimum wage than Nepal in 2013.

However, productivity has not kept pace with the increase in minimum wage. Compared to 2007, labor productivity (measured by the ratio of minimum wage to value added per worker – not a perfect indicator, but its okay for indicative purpose!) in Nepal decreased by 18%. In fact, India and Pakistan also saw a decline in labor productivity over the same period. Sri Lanka and China saw increase in labor productivity. The ratio of minimum wage to value added per worker in 2007 was 0.8, which increased to 0.9 in 2014 (a higher value indicates lower labor productivity). Note that value added per worker is also affected by quantity and quality of other inputs, particularly raw materials and physical and social infrastructures (electricity, transport, educated workforce, healthcare, etc). The average value added per worker is the ratio of an economy’s GNI per capita to the working-age population as a percentage of the total population.

Nepal’s labor productivity is the lowest in South Asia. The chart below shows South Asia’s (plus China’s) labor productivity relative to Nepal’s in 2013 and 2014. All of them have better productivity than Nepal’s. India’s and Nepal’s labor productivity seems to be converging lately. This opens up an opportunity to relocate manufacturing firms to Nepal as wages are lower here and productivity is pretty much similar. IF the other inputs listed above are reasonably supplied in Nepal (plus reasonable degree of political stability), there is no reason to doubt that an increasing number of firms may opt to base their manufacturing plants here.

Lower (competitive) wages and higher labor productivity attract domestic and foreign investment, which help to boost jobs creation and economic growth. Nepal’s formal sector labor market suffers from a high degree of unionism (often politically motivated and at times violent), which has resulted in the closure of many domestic as well as multinational firms. Overall, manufacturing sector has been weakening over the past several years. Its share of GDP declined to an estimated 5.6% in FY2014 from 8.2% of GDP in FY2002. The average growth rate has been a mere 3.2% in the last five years. Here is a related blog post on this issue.