The Emerging- Market Growth Engine

The key role of emerging and developing countries – including India, China, and Brazil – in sustaining world economic growth was brought into sharp focus during the recent global crisis, and has been well documented. This trend is likely to continue in 2011 and beyond.
Indeed, the IMF expects that emerging and developing economies will grow by 6% in 2010 and 6.3% in 2011. Emerging-market economies have not only cushioned the global impact of the recent crisis, but have also helped industrialized countries reverse the recessionary trend of 2008-2009. But recovery remains fragile in the developed world, with unemployment remaining at crisis levels.
But, while emerging economies are proving to be drivers of global demand, the right mix of government initiatives and policies is still required to ensure that they continue to provide the impetus for faster world economic recovery in the short term and be the engines of sustainable growth in the medium and long term. There is also a strong need for supporting long-term capital flows to emerging economies to stimulate investment further, particularly in their infrastructure sectors, thereby injecting much-needed additional demand into the global economy.
In this regard, another important development is the increasing number of emerging-market middle-class consumers, their growing purchasing power, and thus their potential impact on global demand. According to one estimate, middle-class consumers in a dozen emerging economies today wield annual purchasing power totaling approximately $6.9 trillion.
Indeed, projections from McKinsey & Company suggest that the purchasing power of this rising middle class in emerging markets may rise to $20 trillion over the next decade – twice the current level of consumption in the United States. The four biggest emerging economies – Brazil, Russia, India, and China (the BRICs) – are large producers and consumers of goods and services, and will also be important in shaping the pace, direction, and sustainability of global economic growth.
Let me turn to India specifically. In the five years preceding the 2008-2009 crisis, the Indian economy grew at an average rate of nearly 9% annually. During the crisis, annual growth slowed, but only to 6.7%, reflecting the economy’s inherent resilience. The growth rate subsequently recovered to 7.4% in 2009-2010, and we expect 9% growth by 2011-12.
The strength of the Indian economy is underpinned by a high saving rate and robust investment. The government’s prompt action to counter the crisis – fiscal stimulus, growth packages, and monetary easing – proved effective. A sound financial and banking system with limited exposure to global markets, together with the importance of domestic consumption in sustaining demand, has also helped. But what distinguishes India from other emerging economies, in particular China and the Southeast Asian countries, is that domestic demand, rather than exports, is the primary driver of growth.
A return to high growth rates globally will require a broader revival of demand. Needless to say, this will occur only gradually, particularly in the developed countries. Thus, India’s high growth rates will have to remain dependent on strong domestic demand. In order to meet this challenge, we are focusing on investments in infrastructure sectors such as power, telecommunications, roads, ports, and airports.
While the public sector will continue to play an important role, given the massive investment required, substantial private investment – including foreign investment – would be needed to address India’s huge “infrastructure deficit” and the financing gap that accompanies it. A strategy of private-public partnership has been adopted to address the infrastructure challenge. At the same time, we need to invest in our human capital, supporting the development and upgrading of the workforce’s skills and capacity for innovation.
At its summit in Seoul in November, the G-20 firmly placed development at the core of its agenda. Indian Prime Minister Manmohan Singh, underlining the importance of infrastructure investment, made the following proposal, which several leaders endorsed: “Recycling surplus savings into investment in developing countries will not only address the immediate demand imbalance, it will also help to address developmental imbalances. In other words, we should leverage imbalances of one kind to redress imbalances of the other kind.”
As we head into the second decade of the century, innovative ideas like using global savings or surpluses to finance infrastructure in emerging and developing countries should be pursued seriously. Doing so would not only sustain the growth momentum of these economies, but would contribute to global recovery by generating much-needed additional demand in the developed countries.
While the emerging economies’ global role will inevitably grow in the coming years, this shift will need to be anchored in a cooperative partnership with the developed world. As for India, our resilient democratic values, ability to manage diversity, and strong economic fundamentals underpin our country’s current global posture.
By Nirupama Rao (Courtesy: Project Syndicate)

New Year's Hope Against Hope

The time has come for New Year’s resolutions, a moment of reflection. When the last year hasn’t gone so well, it is a time for hope that the next year will be better.
For Europe and the United States, 2010 was a year of disappointment. It’s been three years since the bubble broke, and more than two since Lehman Brothers’ collapse. In 2009, we were pulled back from the brink of depression, and 2010 was supposed to be the year of transition: as the economy got back on its feet, stimulus spending could smoothly be brought down.
Growth, it was thought, might slow slightly in 2011, but it would be a minor bump on the way to robust recovery. We could then look back at the Great Recession as a bad dream; the market economy – supported by prudent government action – would have shown its resilience.
In fact, 2010 was a nightmare. The crises in Ireland and Greece called into question the euro’s viability and raised the prospect of a debt default. On both sides of the Atlantic, unemployment remained stubbornly high, at around 10%. Even though 10% of US households with mortgages had already lost their homes, the pace of foreclosures appeared to be increasing – or would have, were it not for legal snafus that raised doubts about America’s vaunted “rule of law.”
Unfortunately, the New Year’s resolutions made in Europe and America were the wrong ones. The response to the private-sector failures and profligacy that had caused the crisis was to demand public-sector austerity! The consequence will almost surely be a slower recovery and an even longer delay before unemployment falls to acceptable levels.
There will also be a decline in competitiveness. While China has kept its economy going by making investments in education, technology, and infrastructure, Europe and America have been cutting back.
It has become fashionable among politicians to preach the virtues of pain and suffering, no doubt because those bearing the brunt of it are those with little voice – the poor and future generations. To get the economy going, some people will, in fact, have to bear some pain, but the increasingly skewed income distribution gives clear guidance to whom this should be: Approximately a quarter of all income in the US now goes to the top 1%, while most Americans’ income is lower today than it was a dozen years ago. Simply put, most Americans didn’t share in what many called the Great Moderation, but was really the Mother of All Bubbles. So, should innocent victims and those who gained nothing from fake prosperity really be made to pay even more?
Europe and America have the same talented people, the same resources, and the same capital that they had before the recession. They may have overvalued some of these assets; but the assets are, by and large, still there. Private financial markets misallocated capital on a massive scale in the years before the crisis, and the waste resulting from underutilization of resources has been even greater since the crisis began. The question is, how do we get these resources back to work?
Debt restructuring – writing down the debts of homeowners and, in some cases, governments – will be key. It will eventually happen. But delay is very costly – and largely unnecessary.
Banks never wanted to admit to their bad loans, and now they don’t want to recognize the losses, at least not until they can adequately recapitalize themselves through their trading profits and the large spread between their high lending rates and rock-bottom borrowing costs. The financial sector will press governments to ensure full repayment, even when it leads to massive social waste, huge unemployment, and high social distress – and even when it is a consequence of their own mistakes in lending. 
But, as we know from experience, there is life after debt restructuring. No one would wish the trauma that Argentina went through in 1999-2002 on any other country. But the country also suffered in the years before the crisis – years of IMF bailouts and austerity –from high unemployment and poverty rates and low and negative growth.
Since the debt restructuring and currency devaluation, Argentina has had years of extraordinarily rapid GDP growth, with the annual rate averaging nearly 9%from 2003 to 2007. By 2009, national income was twice what it was at the nadir of the crisis, in 2002, and more than 75% above its pre-crisis peak.
Likewise, Argentina’s poverty rate has fallen by some three-quarters from its crisis peak, and the country weathered the global financial crisis far better than the US did –unemployment is high, but still only around 8%. We could only conjecture what would have happened if it had not postponed the day of reckoning for so long – or if it had tried to put it off further.
So this is my hope for the New Year: we stop paying attention to the so-called financial wizards who got us into this mess – and who are now calling for austerity and delayed restructuring – and start using a little common sense. If there is pain to be borne, the brunt of it should be felt by those responsible for the crisis, and those who benefited most from the bubble that preceded it.

Joseph E. Stiglitz is University Professor at Columbia University and a Nobel laureate in Economics. His latest book, Freefall: Free Markets and the Sinking of the Global Economy, is available in French, German, Japanese, and Spanish.

Copyright: Project Syndicate, 2011.
www.project-syndicate.org

Deep Hole Economics

If there’s one piece of economic wisdom I hope people will grasp this year, it’s this: Even though we may finally have stopped digging, we’re still near the bottom of a very deep hole.
Why do I need to point this out? Because I’ve noticed many people overreacting to recent good economic news. What particularly concerns me is the risk of self-denying optimism — that is, I worry that policy makers will look at a few favorable economic indicators, decide that they no longer need to promote recovery, and take steps that send us sliding right back to the bottom.
So, about that good news: various economic indicators, ranging from relatively good holiday sales to new claims for unemployment insurance (which have finally fallen below 400,000 a week), suggest that the great post-bubble retrenchment may finally be ending.
We’re not talking Morning in America here. Construction shows no sign of returning to bubble-era levels, nor are there any indications that debt-burdened families are going back to their old habits of spending all they earned. But all we needed for a modest economic rebound was for construction to stop falling and saving to stop rising — and that seems to be happening. Forecasters have been marking up their predictions; growth as high as 4 percent this year now looks possible.
Hooray! But then again, not so much. Jobs, not G.D.P. numbers, are what matter to American families. And when you start from an unemployment rate of almost 10 percent, the arithmetic of job creation — the amount of growth you need to get back to a tolerable jobs picture — is daunting.
First of all, we have to grow around 2.5 percent a year just to keep up with rising productivity and population, and hence keep unemployment from rising. That’s why the past year and a half was technically a recovery but felt like a recession: G.D.P. was growing, but not fast enough to bring unemployment down.
Growth at a rate above 2.5 percent will bring unemployment down over time. But the gains aren’t one for one: for a variety of reasons, it has historically taken about two extra points of growth over the course of a year to shave one point off the unemployment rate.
Now do the math. Suppose that the U.S. economy were to grow at 4 percent a year, starting now and continuing for the next several years. Most people would regard this as excellent performance, even as an economic boom; it’s certainly higher than almost all the forecasts I’ve seen.
Yet the math says that even with that kind of growth the unemployment rate would be close to 9 percent at the end of this year, and still above 8 percent at the end of 2012. We wouldn’t get to anything resembling full employment until late in Sarah Palin’s first presidential term.
Seriously, what we’re looking at over the next few years, even with pretty good growth, are unemployment rates that not long ago would have been considered catastrophic — because they are. Behind those dry statistics lies a vast landscape of suffering and broken dreams. And the arithmetic says that the suffering will continue as far as the eye can see.
So what can be done to accelerate this all-too-slow process of healing? A rational political system would long since have created a 21st-century version of the Works Progress Administration — we’d be putting the unemployed to work doing what needs to be done, repairing and improving our fraying infrastructure. In the political system we have, however, Senator-elect Kelly Ayotte, delivering the Republican weekly address on New Year’s Day, declared that “Job one is to stop wasteful Washington spending.”
Realistically, the best we can hope for from fiscal policy is that Washington doesn’t actively undermine the recovery. Beware, in particular, the Ides of March: by then, the federal government will probably have hit its debt limit and the G.O.P. will try to force President Obama into economically harmful spending cuts.
I’m also worried about monetary policy. Two months ago, the Federal Reserve announced a new plan to promote job growth by buying long-term bonds; at the time, many observers believed that the initial $600 billion purchase was only the beginning of the story. But now it looks like the end, partly because Republicans are trying to bully the Fed into pulling back, but also because a run of slightly better economic news provides an excuse to do nothing.
There’s even a significant chance that the Fed will raise interest rates later this year — or at least that’s what the futures market seems to think. Doing so in the face of high unemployment and minimal inflation would be crazy, but that doesn’t mean it won’t happen.
So back to my original point: whatever the recent economic news, we’re still near the bottom of a very deep hole. We can only hope that enough policy makers understand that point.

By Paul Krugman
(Courtesy: The New York Times)

Gender Equality Results Case Studies: Nepal

The Asian Development Bank has published a report on gender equality in Nepal with the case studies from here.
ADB says in its website, "this publication is part of the commitment of the South Asia Department of the Asian Development Bank (ADB) to gender equality results in its operations, selected among ADB sectors: urban development, rural infrastructure (including irrigation and other water infrastructure), and agriculture and natural resource management." The report has case studies provide an overview of gender issues in selected sectors, and gender design features and implementation arrangements that contributed to achieving gender-related targets in four ADB projects in Nepal. This report also comprises the recommendations for future actions for gender equality in Nepal. The PDF version of report is available here: http://www.adb.org/documents/reports/gender/case-studies-nep/gender-case-study-nep.pdf

It's Trade not a Game!

Nepal is facing the high trade deficit since last year. Basically, there are two reasons if we just look at the table for this terrible situation. Who dares to see under the table for the fundamental reasons causing the trade deficit?

The high level of import and the decrease of export in increasing rate are the apparent reasons for trade deficit. But why we are not being able to increase export? (Here, I won't be talking about the regulation on import because I don't believe in that. I believe that we should let the import since only then our domestic industries come to know how to compete with international companies' productions.) I will be talking about the ways of increasing export. The country's export level depends on its supply side capacity, manufacturing capacity of country's industrial sector and cost of transport. To increase the export level, first we have to think how our system is working in terms of production, supply and transport. Diagnosis is the first step to prescribe the medicine for any disease.     

Economist say that the country's economy is about to fall down but why can't they tell us what will prevent it to happen. They won't be telling us because the situation is not in anyone's hands rather than politicians. They know that politicians are not going to understand until it falls down. The power game is miraculous and it doesn't ask for hard work. That is why politicians don't understand how fundamentally the economy is different than politics. I do agree that politics and economy are interlinked and shrunk with each other. Still, politicians don't know how economy functions and economists never understand why politicians don't care what's happening in country's economy. Playing game and arranging each bricks to build the house are quite different thing in this planet! Stupid do the later one and smart one does the first one. Confused? No worries. I will explain.

The impacts of political disorders in economy are seen sometimes instantly and sometimes it takes the years. The decade long domestic conflict hit hard the economy after three years of its end. Nepal's economy was stagnating or having the quite slow pace during the insurgency period. But growth rate was started to stagnate and eventually the high trade deficit and decreased the Gross Domestic Production (GDP) growth rate after the end of so-called people's movement in Nepal. The economy should be let free and respected to flourish as like a person's growth and to keep alive the self-esteem. Nepali economy has never got this beauty of freeness and respect (tender touch while changing the orders of economy) in the history. If you dig deep inside the structure and contemplate on the problems it passing through is lack of free- fairness and bully of state on it.

I humbly want to put forward one example here to show the political bully on market. The heart of economy (manufacturing sector) is facing the labor problem. But we never try to solve it as a labor problem but a political issue. It becomes a political issue not only because of the politicians but the feeling of insecurity (for some) and wish for the political backup (for some) industrialists. The 'third world psychology' might be a good phrase to describe the situation of industrialists in Nepal. What they lack is skill and what they have is political backup to run the industry. How terrible!

If you separate the economic problems from politics then it is clear. But I know that sometimes it's hard and sometimes you don't want it to do. But, the truth is that until and unless we don't free the economy from state regulation, we are heading nowhere. The reasons we are told time and again, here and there for this trade deficit and gloomy economy are not the real one. We have to dig deep to diagnosis the disease.

  

Why do Firms Exist?

FOR philosophers the great existential question is: “Why is there something rather than nothing?” For management theorists the more mundane equivalent is: “Why do firms exist? Why isn’t everything done by the market?”
Today most people live in a market economy, and central planning is remembered as the greatest economic disaster of the 20th century. Yet most people also spend their working lives in centrally planned bureaucracies called firms. They stick with the same employer for years, rather than regularly returning to the jobs market. They labour to fulfil the “strategic plans” of their corporate commissars. John Jacob Astor’s American Fur Company made him the richest man in America in the 1840s. But it never consisted of more than a handful of people. Today Astor’s company would not register as a blip on the corporate horizon. Firms routinely employ thousands of workers and move billions of dollars-worth of goods and services within their borders.
Why have these “islands of conscious power” survived in the surrounding “ocean of unconscious co-operation”, to borrow a phrase from D.H. Robertson, an economist? Classical economics had little to say about this question. Adam Smith opened “The Wealth of Nations” with a wonderful description of the division of labour in a pin factory, but he said nothing about the bosses who hired the pin-makers or the managers who organised them. Smith’s successors said even less, either ignoring the pin factory entirely or treating it as a tedious black box. They preferred to focus on the sea rather than the islands.
Who knows the secret of the black box?
The man who restored the pin factory to its rightful place at the heart of economic theory celebrates his 100th birthday on December 29th. The economics profession was slow to recognise Ronald Coase’s genius. He first expounded his thinking about the firm in a lecture in Dundee in 1932, when he was just 21 years old. Nobody much listened. He published “The Nature of the Firm” five years later. It went largely unread.
But Mr Coase laboured on regardless: a second seminal article on “The Problem of Social Cost” laid the intellectual foundations of the deregulation revolution of the 1980s. Eventually, Mr Coase acquired an army of followers, such as Oliver Williamson, who fleshed out his ideas. In 1991, aged 80, he was awarded a Nobel prize. Far from resting on his laurels, Mr Coase will publish a new book in 2011, with Ning Wang of Arizona State University, on “How China Became Capitalist”.
His central insight was that firms exist because going to the market all the time can impose heavy transaction costs. You need to hire workers, negotiate prices and enforce contracts, to name but three time-consuming activities. A firm is essentially a device for creating long-term contracts when short-term contracts are too bothersome. But if markets are so inefficient, why don’t firms go on getting bigger for ever? Mr Coase also pointed out that these little planned societies impose transaction costs of their own, which tend to rise as they grow bigger. The proper balance between hierarchies and markets is constantly recalibrated by the forces of competition: entrepreneurs may choose to lower transaction costs by forming firms but giant firms eventually become sluggish and uncompetitive.
How much light does “The Nature of the Firm” throw on today’s corporate landscape? The young Mr Coase first grew interested in the workings of firms when he travelled around America’s industrial heartland on a scholarship in 1931-32. He abandoned his textbooks and asked businessmen why they did what they did. He has long chided his fellow economists for scrawling hieroglyphics on blackboards rather than looking at what it actually takes to run a business. So it seems reasonable to test his ideas by the same empirical standards.
Mr Coase’s theory continues to explain some of the most puzzling problems in modern business. Take the rise of vast and highly diversified business groups in the emerging world, such as India’s Tata group and Turkey’s Koc Holding. Many Western observers dismiss these as relics of a primitive form of capitalism. But they make perfect sense when you consider the transaction costs of going to the market. Where trust in established institutions is scarce, it makes sense for companies to stretch their brands over many industries. And where capital and labour markets are inefficient, it makes equal sense for companies to allocate their own capital and train their own loyalists.
But Mr Coase’s narrow focus on transaction costs nevertheless provides only a partial explanation of the power of firms. The rise of the neo-Coasian school of economists has led to a fierce backlash among management theorists who champion the “resource-based theory” of the firm. They argue that activities are conducted within firms not only because markets fail, but also because firms succeed: they can marshal a wide range of resources—particularly nebulous ones such as “corporate culture” and “collective knowledge”—that markets cannot access. Companies can organise production and create knowledge in unique ways. They can also make long-term bets on innovations that will redefine markets rather than merely satisfy demand. Mr Coase’s theory of “market failure” needs to be complemented by a theory of “organisational advantages”.
All this undoubtedly complicates “The Nature of the Firm”. But it also vindicates the twin decisions that Mr Coase made all those years ago as a young student at the London School of Economics: to look inside the black box rather than simply ignoring it, and to examine businesses, not just fiddle with theories. Is it too much to hope that other practitioners of the dismal science will follow his example and study the real world?

(Courtesy: The Economist, http://www.economist.com/node/17730360)