Tuesday, August 28, 2007
Dwindling confidence sees US stocks end with heavy losses
MUMBAI: Lack of consumer confidence and signals that the US Federal Reserve is not likely to cut interest rates saw US indices drop over two per cent. Financials led declines followed by energy stocks. The New York-based Conference Board's index declined to 105 from 111.9 in July. Economists forecast the index would slip to 104 from an originally reported July reading of 112.6. Consumer confidence fell the most this month since Hurricane Katrina two years ago. Also, a report from S&P/Case-Shiller showed house prices fell 3.2 per cent in the second quarter compared with the same period last year. It was the worst decline in 20 years. To make matters worse, the release of minutes from the Federal Reserve's Aug.7 policy meeting showed central bankers put aside concerns about the rising cost of credit because they weren't convinced a slowdown in inflation would last. The transcript showed growing concern among Fed officials about the housing market and its effect on consumers even before credit market turmoil picked up speed. Merrill Lynch downgraded Bear Stearns, Lehman Brothers and Citigroup to ‘neutral’ from ‘buy’ and lowered estimates for the banks' earnings due to turbulence in the debt markets, slowing takeover activity and upheaval in the mortgage sector. Citigroup fell 3.5 per cent, Bear Stearns slid 3.4 per cent and Lehman Brothers shed 6 per cent. Home builders also slumped led by Centex, down 7 per cent, and Lennar down 4.7 per cent. Shares of State Street, the world's biggest institutional money manager, fell 4.3 per cent on worries about the company's $20 billion-plus in commitments to asset-backed commercial paper programs. Shares of Maxim Integrated Products fell 5.6 per cent after Banc of America downgraded the analog chip maker. Energy stocks dropped 2.5 per cent as a group after prices for crude oil fell below the $72 mark in New York. Exxon Mobil and Chevron ended sharply lower. The Dow Jones Industrial Average dropped 280 points or 2.10 per cent to 13,041.85. The Standard & Poor's 500 Index lost 34 points or 2.35 per cent to 1,432.36. The Nasdaq Composite Index tumbled 61 points or 2.37 per cent to 2,500.64.
Great News, Good News, Grand News
By Madhukar SJB Rana
China is to limit labour-intensive exports to US and Europe. This gives a golden opportunity and challenge for Nepal’s economic diplomacy.
The International Monetary Fund (IMF) has recently raised China’s economic growth forecast for 2007 to 11.2 percent; up 1.2 percentage points from its forecast in April. The growth in China for 2008 is expected to be 10.5 percent, 1.0 point higher from the earlier forecast, the IMF said in a revision of its World Economic Outlook (WEO). We can anticipate even better growth rates given its habitual, better-than-anticipated, past performance. And 2008 is the year of the Olympics Games when unprecedented number of visitors are expected to visit China. It is anticipated that the Chinese athletes make China the world’s greatest sporting nation by bagging more medals than the US.
“For some time China has been the largest contributor to the global growth measured in purchasing power parity,” Charles Collyns, the IMF deputy director of research, said at a news conference. “With the growth slowdown in the United States, China will be contributing the largest part to the increase in the global growth measured at market exchange rates as well as purchasing parity terms,” he noted.
China ’s record $112.5 billion trade surplus in the first half of this year has fanned tensions with the United States and the European Union, while flooding its economy with more than $1.3 trillion in foreign currency reserves. Hence, under severe pressure from IMF, US and Europe for China to let its currency float – effectively appreciating its value upwards— China has opted for another route to curtail its balance of trade surplus by
curbing its export of inexpensive, labor-intensive products to force manufacturers into making higher-quality goods.
The Chinese Ministry of Commerce will expand a catalogue of goods subject to mandatory export limits in the second half of 2007, following a recent move to increase a tax on exporters, said Wang Qinhua, the ministry’s industry director. “The new policy will add cost and affect the cash flow of exporters, especially those engaged in the labor-intensive part of the industry,” she said. Herein lies a grand opportunity and also a challenge to the economic diplomacy of Nepal’s Ministry of Foreign Affairs (MOFA) by being able to negotiate the relocation of these foot loose, labour-intensive industries into Nepal to kick start its industrialization process.
What could, nevertheless, be these products? Prominent ones will, undoubtedly, be textiles, garments, leather and leather products which have suffered from Chinese competition to cause acute loss of our overseas markets even with GSP and other manner of preferences for least developed countries (LDCs) given by Australia, Europe and Canada.
We should move to invite China to help with the proposed Garment and Textile Export Processing Zone (GT-EPZ) in Birgunj and also locate its garment and textiles ventures herein fully protected from the irrational labour, customs, excise and income tax laws and their implementation. They should also be allowed to import duty free petroleum products for their own manufacturing use.
We may examine whether it is not eminently advisable to set up Handicraft and Jewellery Export Villages in Kathmandu Valley, Pokhara Valley and Surkhet Valley to locate these Chinese business to not only use our labour, but also to engage in value adding joint ventures for product development and global marketing of our own indigenous handicrafts. Chinese investment in this industrial sub-sector will eradicate infrastructure constraints in respect of power, transportation, storage and design plaguing these industries in Nepal, which are still operating as cottage industries with all its limitations on scale and quality.
Nothing is more vital for the economic growth, employment and health of the rural households, especially in the Hills and Mountains, than the rapid development and modernization of the livestock sector, which will get an unprecedented backward linkage for multiplier development with the invitation to Chinese leather and leather product businesses to migrate to Nepal. As to where such EPZs will be situated needs to be studied keeping in view best possibilities for backward linkages. Will it be located in Biratnagar, Birgunj, Bhairahawa, Nepalgunj or in some other places? Here one has also to keep in mind the environmental hazards when locating these industries in cities and towns.
Finally, the above aims will not be realized if the labour unions do not get their act right and change behaviour from a protective ‘labour aristocracy’ that is incorrigibly rent-seeking to one that is proactively serving the national interest by helping to create—not restrict— jobs for the unemployed through higher private sector investment, higher productivity and greater labour benefits and welfare for all.
All this can be achieved with the promulgation of a new Industrial Relations (IR) Act that will, first and foremost, allow company employees to decide, by secret ballot, whether they wish to form unions or not?
If yes, do they wish to be organized as trade unions or as company? If trade unions, then lay down procedures for union rights, duties, financial contributions and election of union leaders in a manner that promotes accountability, transparency, competition and dissent within unions, including the right to resign from union membership.
The IR Act should seek to promote a national federation for each union. This would be a fitting social reflection to the demand for Nepal as a federal state since federalism is not simply about political structures but also cultural, social and economic too.
A well designed corporate-level grievance handling system is a must. It must not be open to external political influences as they lead the company away from its vision, mission, goals and core values. Organizations gain from legitimate functional conflicts but not from dysfunctional ones which, most often, are of the win-lose variety.
Last but not the least, very clear-cut rules and regulations must be spelled out for collective bargaining with management (to be defined); along with rules for declaring of lock-outs and strikes, including the minimum time for notification of such drastic measures; payment of salaries and wages during seizure of work; and methods of conflict resolution through such graded measures as facilitation, conciliation, mediation and arbitration. Minimization of access to the courts should be sought as in business time is of the essence in a globalized economy.
It goes without saying that the onus for good IR lies with management and each strike or lock out is an indication of its managerial ineffectiveness— provided the government do not put extraneous influences on behalf of any side and prevent political parties from undue encroachment on management rights and privileges.
The labour market should be allowed to function through such an institutional innovation as the IR Act, whose absence will retard the much needed industrialization in Nepal plagued by population explosion, acute land scarcity and loss of comparative advantages in staples like rice, wheat, paddy and maize.
We need a growth-oriented model of development for quick transformation of our rural economy for which foreign direct investment is needed. Taking advantage of this strategic opportunity from our northern neighbour, China, which is also a partner in SAARC, is a chance in a lifetime. It should be seriously studied and fully debated by government, FNCCI, CNI, Chambers of Commerce and product and professional associations, at the earliest, lest Chinese investors go elsewhere, especially to least developed African nations. Through such a national debate, the much sought after economic diplomacy policy, announced in 1996 by then Foreign Minister, Dr Prakash C. Lohani, can come to fruition as a strategic reality.
(Rana is a former Minister of Finance)
China is to limit labour-intensive exports to US and Europe. This gives a golden opportunity and challenge for Nepal’s economic diplomacy.
The International Monetary Fund (IMF) has recently raised China’s economic growth forecast for 2007 to 11.2 percent; up 1.2 percentage points from its forecast in April. The growth in China for 2008 is expected to be 10.5 percent, 1.0 point higher from the earlier forecast, the IMF said in a revision of its World Economic Outlook (WEO). We can anticipate even better growth rates given its habitual, better-than-anticipated, past performance. And 2008 is the year of the Olympics Games when unprecedented number of visitors are expected to visit China. It is anticipated that the Chinese athletes make China the world’s greatest sporting nation by bagging more medals than the US.
“For some time China has been the largest contributor to the global growth measured in purchasing power parity,” Charles Collyns, the IMF deputy director of research, said at a news conference. “With the growth slowdown in the United States, China will be contributing the largest part to the increase in the global growth measured at market exchange rates as well as purchasing parity terms,” he noted.
China ’s record $112.5 billion trade surplus in the first half of this year has fanned tensions with the United States and the European Union, while flooding its economy with more than $1.3 trillion in foreign currency reserves. Hence, under severe pressure from IMF, US and Europe for China to let its currency float – effectively appreciating its value upwards— China has opted for another route to curtail its balance of trade surplus by
curbing its export of inexpensive, labor-intensive products to force manufacturers into making higher-quality goods.
The Chinese Ministry of Commerce will expand a catalogue of goods subject to mandatory export limits in the second half of 2007, following a recent move to increase a tax on exporters, said Wang Qinhua, the ministry’s industry director. “The new policy will add cost and affect the cash flow of exporters, especially those engaged in the labor-intensive part of the industry,” she said. Herein lies a grand opportunity and also a challenge to the economic diplomacy of Nepal’s Ministry of Foreign Affairs (MOFA) by being able to negotiate the relocation of these foot loose, labour-intensive industries into Nepal to kick start its industrialization process.
What could, nevertheless, be these products? Prominent ones will, undoubtedly, be textiles, garments, leather and leather products which have suffered from Chinese competition to cause acute loss of our overseas markets even with GSP and other manner of preferences for least developed countries (LDCs) given by Australia, Europe and Canada.
We should move to invite China to help with the proposed Garment and Textile Export Processing Zone (GT-EPZ) in Birgunj and also locate its garment and textiles ventures herein fully protected from the irrational labour, customs, excise and income tax laws and their implementation. They should also be allowed to import duty free petroleum products for their own manufacturing use.
We may examine whether it is not eminently advisable to set up Handicraft and Jewellery Export Villages in Kathmandu Valley, Pokhara Valley and Surkhet Valley to locate these Chinese business to not only use our labour, but also to engage in value adding joint ventures for product development and global marketing of our own indigenous handicrafts. Chinese investment in this industrial sub-sector will eradicate infrastructure constraints in respect of power, transportation, storage and design plaguing these industries in Nepal, which are still operating as cottage industries with all its limitations on scale and quality.
Nothing is more vital for the economic growth, employment and health of the rural households, especially in the Hills and Mountains, than the rapid development and modernization of the livestock sector, which will get an unprecedented backward linkage for multiplier development with the invitation to Chinese leather and leather product businesses to migrate to Nepal. As to where such EPZs will be situated needs to be studied keeping in view best possibilities for backward linkages. Will it be located in Biratnagar, Birgunj, Bhairahawa, Nepalgunj or in some other places? Here one has also to keep in mind the environmental hazards when locating these industries in cities and towns.
Finally, the above aims will not be realized if the labour unions do not get their act right and change behaviour from a protective ‘labour aristocracy’ that is incorrigibly rent-seeking to one that is proactively serving the national interest by helping to create—not restrict— jobs for the unemployed through higher private sector investment, higher productivity and greater labour benefits and welfare for all.
All this can be achieved with the promulgation of a new Industrial Relations (IR) Act that will, first and foremost, allow company employees to decide, by secret ballot, whether they wish to form unions or not?
If yes, do they wish to be organized as trade unions or as company? If trade unions, then lay down procedures for union rights, duties, financial contributions and election of union leaders in a manner that promotes accountability, transparency, competition and dissent within unions, including the right to resign from union membership.
The IR Act should seek to promote a national federation for each union. This would be a fitting social reflection to the demand for Nepal as a federal state since federalism is not simply about political structures but also cultural, social and economic too.
A well designed corporate-level grievance handling system is a must. It must not be open to external political influences as they lead the company away from its vision, mission, goals and core values. Organizations gain from legitimate functional conflicts but not from dysfunctional ones which, most often, are of the win-lose variety.
Last but not the least, very clear-cut rules and regulations must be spelled out for collective bargaining with management (to be defined); along with rules for declaring of lock-outs and strikes, including the minimum time for notification of such drastic measures; payment of salaries and wages during seizure of work; and methods of conflict resolution through such graded measures as facilitation, conciliation, mediation and arbitration. Minimization of access to the courts should be sought as in business time is of the essence in a globalized economy.
It goes without saying that the onus for good IR lies with management and each strike or lock out is an indication of its managerial ineffectiveness— provided the government do not put extraneous influences on behalf of any side and prevent political parties from undue encroachment on management rights and privileges.
The labour market should be allowed to function through such an institutional innovation as the IR Act, whose absence will retard the much needed industrialization in Nepal plagued by population explosion, acute land scarcity and loss of comparative advantages in staples like rice, wheat, paddy and maize.
We need a growth-oriented model of development for quick transformation of our rural economy for which foreign direct investment is needed. Taking advantage of this strategic opportunity from our northern neighbour, China, which is also a partner in SAARC, is a chance in a lifetime. It should be seriously studied and fully debated by government, FNCCI, CNI, Chambers of Commerce and product and professional associations, at the earliest, lest Chinese investors go elsewhere, especially to least developed African nations. Through such a national debate, the much sought after economic diplomacy policy, announced in 1996 by then Foreign Minister, Dr Prakash C. Lohani, can come to fruition as a strategic reality.
(Rana is a former Minister of Finance)
Wide Reforms Proposed in Stock Exchange
Nepal Stock Exchange Ltd. (NEPSE) has unveiled an ambitious programme to bring about a number of reforms.
According to a press release from NEPSE, the transaction in the trading floor will be computerized beginning mid-August under a Local Area Network (LAN) technology and the same will be expanded this year to Wide Area Network (WAN). With this, it will be possible for transaction from the offices of the member brokers. That is to be followed by development of client support software needed for fully internet-based transaction. This will enable the investors to key in their sales or purchase orders from any location in the world.
In this connection, NEPSE has also announced a programme to develop the Central Depository System (CDS) needed for paperless transaction.
Moreover, NEPSE is going to calculate and publish new NEPSE index based on freely floating shares replacing the existing index which is based on the total number of scrips listed. The need for the new index was being felt for a long period as the existing index fails to measure the market momentum since almost 70 percent of the listed shares are owned by the promoters of the companies and they are not available for trade in the market.
In another important announcement, NEPSE has promised to start derivatives market this year beginning with trading on the ‘right’ to buy right shares issued by the companies. However, the NEPSE press release is silent about when trading on derivatives like futures and options are to start.
Similarly, NEPSE has also promised to start over-the-counter (OTC) market from this year itself for trading on the securities that are delisted from the stock exchange or are not eligible to be listed.
In another proposed reform, NEPSE is going to create necessary infrastructure to allow non-resident Nepalis and foreign institutional investors to invest in the secondary market.
Likewise, NEPSE is also going to recommend for increase in the number of licenced brokers as after the floor automation, there will be a space to accommodate 50 brokers. After the implementation of WAN technology, it will be possible to allow open entry and open exit to the brokers, says the press release.
According to a press release from NEPSE, the transaction in the trading floor will be computerized beginning mid-August under a Local Area Network (LAN) technology and the same will be expanded this year to Wide Area Network (WAN). With this, it will be possible for transaction from the offices of the member brokers. That is to be followed by development of client support software needed for fully internet-based transaction. This will enable the investors to key in their sales or purchase orders from any location in the world.
In this connection, NEPSE has also announced a programme to develop the Central Depository System (CDS) needed for paperless transaction.
Moreover, NEPSE is going to calculate and publish new NEPSE index based on freely floating shares replacing the existing index which is based on the total number of scrips listed. The need for the new index was being felt for a long period as the existing index fails to measure the market momentum since almost 70 percent of the listed shares are owned by the promoters of the companies and they are not available for trade in the market.
In another important announcement, NEPSE has promised to start derivatives market this year beginning with trading on the ‘right’ to buy right shares issued by the companies. However, the NEPSE press release is silent about when trading on derivatives like futures and options are to start.
Similarly, NEPSE has also promised to start over-the-counter (OTC) market from this year itself for trading on the securities that are delisted from the stock exchange or are not eligible to be listed.
In another proposed reform, NEPSE is going to create necessary infrastructure to allow non-resident Nepalis and foreign institutional investors to invest in the secondary market.
Likewise, NEPSE is also going to recommend for increase in the number of licenced brokers as after the floor automation, there will be a space to accommodate 50 brokers. After the implementation of WAN technology, it will be possible to allow open entry and open exit to the brokers, says the press release.
Chinese Acquiring Nepali Hotels
While the arrival of Chinese tourists is growing in Nepal, a number of Chinese nationals have acquired more than a dozen of sick star-rated hotels in Kathmandu under lease, rent or management contract.
Confirming the news, Prakash Shrestha, the president of Hotel Association of Nepal, said the Association is studying the impact of Chinese entry in the country’s hotel business.
Among the hotels in the Chinese hands is Hotel Nepa International which is now named Hotel Beijing. The other hotels are Hotel Centre Point, Hotel New Gajur, Hotel Manang, Hotel Siddhartha, Hotel Pyramid, Hotel ‘Lai Lai, Hotel Star, Hotel Marshyangdi Mandala and Hotel Guangzhou.
Meanwhile, some Chinese nationals are reported to be trying to acquire hotels also in Pokhara and Lumbini.
In the year 2007 till July end, 7,342 Chinese tourists arrived in Nepal recording a 120 percent growth as compared to the same period previous year. Three years ago, the Chinese government had included Nepal in the list of favoured destinations for the Chinese nationals to go as tourists. Since last year, China Southern Airlines started flying to Nepal and now the Nepal government is reported to be preparing to revise the air traffic agreement with China.
Confirming the news, Prakash Shrestha, the president of Hotel Association of Nepal, said the Association is studying the impact of Chinese entry in the country’s hotel business.
Among the hotels in the Chinese hands is Hotel Nepa International which is now named Hotel Beijing. The other hotels are Hotel Centre Point, Hotel New Gajur, Hotel Manang, Hotel Siddhartha, Hotel Pyramid, Hotel ‘Lai Lai, Hotel Star, Hotel Marshyangdi Mandala and Hotel Guangzhou.
Meanwhile, some Chinese nationals are reported to be trying to acquire hotels also in Pokhara and Lumbini.
In the year 2007 till July end, 7,342 Chinese tourists arrived in Nepal recording a 120 percent growth as compared to the same period previous year. Three years ago, the Chinese government had included Nepal in the list of favoured destinations for the Chinese nationals to go as tourists. Since last year, China Southern Airlines started flying to Nepal and now the Nepal government is reported to be preparing to revise the air traffic agreement with China.
The view from New Delhi
The Indian establishment doesn’t try to hide anymore its irritation with the Nepali political parties trying to dodge elections and endanger the peace process that it helped broker and micromanage for the past two years.
In a series of interviews in New Delhi this week, Indian politicians and policy-makers said they would like to see the peace process come to its logical conclusion with elections in November.
“Remember we were the only ones pushing for June elections and the last few months have been proven right,” one diplomat here told us, “problems have only increased since then. Missing the November date can have extremely destabilising consequences.”
Delhi believes that the polls can lock the Maoists irreversibly into the mainstream, pave the way for stability, provide a platform to address other grievances and demands, and limit the role of the internationals, especially the UN.
South Block has been taking public positions on polls and sent strong messages privately to leaders. In Kathmandu, Ambassador Shiv Shankar Mukherjee has told Prime Minister Koirala that the government would face a severe legitimacy crisis if elections do not take place.
Former Indian intelligence officers met Maoist leader Pushpa Kamal Dahal recently in Siliguri passing on a similar message from New Delhi. External Affairs Minister Pranab Mukherjee is reported to have personally shot down the proposal by Koirala and Dahal idea of converting the present interim legislature into a constituent assembly and instead pushing for polls.
At the same time, New Delhi realises the limits of its leverage in Kathmandu. “We can push, we can threaten, we use different channels to communicate the message but it finally boils down to the political will of the major parties and whether they want polls,” an MEA source said.
What is new in foreign policy-making circles here in the past few months is a sense of pessimism, and a belief that the peace process has become shakier.
Delhi diplomats and analysts are satisfied with UNMIN’s performance so far, but they want it to pack up and go as soon as possible. Even so, irrespective of the polls they admit UNMIN may have to stay on in some form for another six months to complete arms management. Although India may accept a limited extension of tenure, officials say an extension of UNMIN’s mandate is out of the question. But what riles officials here is their belief that UNMIN is angling for a political role in the tarai, and even goading madhesi groups to ask for international mediation.
“This goes beyond what was decided when India let the UN in and Ian Martin should tell his officials to be restrained,” one influential Nepal analyst said. New Delhi also blames Koirala for delaying taking a personal lead to appease madhesi groups while the crisis was still manageable. They have tried to get the message across to the prime minister, but say when it comes to the tarai Koirala refuses to listen to them. Officials say they don’t want a further proliferation of madhesi groups and reportedly discouraged mainstream madhesi politicians, including NC and NSP dissidents, from forming a separate party. There have been allegations that India is supporting madhesi armed groups because Goit and Jwala Singh live in Bihar.
When asked about this, a former ambassador to Nepal testily posed his own questions: “Look, at who is accusing India of this? The Maoists. Where did they stay all along? Does it mean we were supporting them? Get your house in order instead of blaming and expecting us to come and clean the mess.”
Indian policymakers seem more sanguine about the Nepal Army’s intentions. As long as the government does not tamper with the army’s structure with security sector reforms, they feel the generals will play along. “There is no point messing with the army right now,” said a retired Indian Army general, “it remains the bulwark against the Maoists and is the only back-up if everything falls apart.”
There has been a change of guard at the Nepal desk of the MEA, and the new occupant has just returned from a fam tour of Kathmandu. Although India looms large in Kathmandu. Here, Nepal is overshadowed by some global crisis or other and this week it is the fallout from the India-US nuclear deal.
In a series of interviews in New Delhi this week, Indian politicians and policy-makers said they would like to see the peace process come to its logical conclusion with elections in November.
“Remember we were the only ones pushing for June elections and the last few months have been proven right,” one diplomat here told us, “problems have only increased since then. Missing the November date can have extremely destabilising consequences.”
Delhi believes that the polls can lock the Maoists irreversibly into the mainstream, pave the way for stability, provide a platform to address other grievances and demands, and limit the role of the internationals, especially the UN.
South Block has been taking public positions on polls and sent strong messages privately to leaders. In Kathmandu, Ambassador Shiv Shankar Mukherjee has told Prime Minister Koirala that the government would face a severe legitimacy crisis if elections do not take place.
Former Indian intelligence officers met Maoist leader Pushpa Kamal Dahal recently in Siliguri passing on a similar message from New Delhi. External Affairs Minister Pranab Mukherjee is reported to have personally shot down the proposal by Koirala and Dahal idea of converting the present interim legislature into a constituent assembly and instead pushing for polls.
At the same time, New Delhi realises the limits of its leverage in Kathmandu. “We can push, we can threaten, we use different channels to communicate the message but it finally boils down to the political will of the major parties and whether they want polls,” an MEA source said.
What is new in foreign policy-making circles here in the past few months is a sense of pessimism, and a belief that the peace process has become shakier.
Delhi diplomats and analysts are satisfied with UNMIN’s performance so far, but they want it to pack up and go as soon as possible. Even so, irrespective of the polls they admit UNMIN may have to stay on in some form for another six months to complete arms management. Although India may accept a limited extension of tenure, officials say an extension of UNMIN’s mandate is out of the question. But what riles officials here is their belief that UNMIN is angling for a political role in the tarai, and even goading madhesi groups to ask for international mediation.
“This goes beyond what was decided when India let the UN in and Ian Martin should tell his officials to be restrained,” one influential Nepal analyst said. New Delhi also blames Koirala for delaying taking a personal lead to appease madhesi groups while the crisis was still manageable. They have tried to get the message across to the prime minister, but say when it comes to the tarai Koirala refuses to listen to them. Officials say they don’t want a further proliferation of madhesi groups and reportedly discouraged mainstream madhesi politicians, including NC and NSP dissidents, from forming a separate party. There have been allegations that India is supporting madhesi armed groups because Goit and Jwala Singh live in Bihar.
When asked about this, a former ambassador to Nepal testily posed his own questions: “Look, at who is accusing India of this? The Maoists. Where did they stay all along? Does it mean we were supporting them? Get your house in order instead of blaming and expecting us to come and clean the mess.”
Indian policymakers seem more sanguine about the Nepal Army’s intentions. As long as the government does not tamper with the army’s structure with security sector reforms, they feel the generals will play along. “There is no point messing with the army right now,” said a retired Indian Army general, “it remains the bulwark against the Maoists and is the only back-up if everything falls apart.”
There has been a change of guard at the Nepal desk of the MEA, and the new occupant has just returned from a fam tour of Kathmandu. Although India looms large in Kathmandu. Here, Nepal is overshadowed by some global crisis or other and this week it is the fallout from the India-US nuclear deal.
Closed for business?
Tourism bookings for the autumn season have never been healthier. Airlines and hotels are booked solid till November. Trekking agencies report record reservations.
Yet, hotel and airline owners, trekking agents and those employed in the tourism industry are downcast. They see a dark cloud behind the silver lining because of threats from Maoist unions as well as the possibility of bandas smack at the start of the tourist season in September.
The Trekking Agents Association of Nepal (TAAN) has been trying to sort out demands laid down by a Maoist trade union before the season starts. “We are ready to do everything for the welfare of employees, but we are running out of time,” explains TAAN president Narendra BC.
After two months of talks, there has still been no agreement on two of the 13 demands of the Maoists: a Rs 600 increase in porter wages, better facilities, and permanent status to those working more than 240 days in a year.
TAAN says it has nothing against these demands but can’t fulfil them till the next season since the tariffs have been set. A local tourism entrepreneur says the Maoist demands are unrealistic, and will kill the industry, and the porters will lose even the jobs they have.
The government fixed the minimum wages of porters two years ago at Rs 350 per day for those going above 3,500m altitude and Rs 250 for those below that. But most of the porters who work for established companies make more than Rs 500 excluding tips. It is usually the porters associated with illegal unregistered companies who get exploited, and TAAN says it is trying to control these fly-by-nights.
But Maoist unions are threatening porters, and last week even sent back some porters who were not members of their union from Lukla. Enforcing the union’s demands on permanent staffing and benefits mean established trekking agencies can only hire half the number of porters they currently employ, says one trekking agent.
With the restoration of peace and positive foreign travel advisories, there was a lot of hope. But there is despondency again . Said one travel agent: “We have invested so much promoting this season, we will be ruined if there are strikes and cancellations.”
Which means the Nepalis who need these jobs the most won’t have any.
Yet, hotel and airline owners, trekking agents and those employed in the tourism industry are downcast. They see a dark cloud behind the silver lining because of threats from Maoist unions as well as the possibility of bandas smack at the start of the tourist season in September.
The Trekking Agents Association of Nepal (TAAN) has been trying to sort out demands laid down by a Maoist trade union before the season starts. “We are ready to do everything for the welfare of employees, but we are running out of time,” explains TAAN president Narendra BC.
After two months of talks, there has still been no agreement on two of the 13 demands of the Maoists: a Rs 600 increase in porter wages, better facilities, and permanent status to those working more than 240 days in a year.
TAAN says it has nothing against these demands but can’t fulfil them till the next season since the tariffs have been set. A local tourism entrepreneur says the Maoist demands are unrealistic, and will kill the industry, and the porters will lose even the jobs they have.
The government fixed the minimum wages of porters two years ago at Rs 350 per day for those going above 3,500m altitude and Rs 250 for those below that. But most of the porters who work for established companies make more than Rs 500 excluding tips. It is usually the porters associated with illegal unregistered companies who get exploited, and TAAN says it is trying to control these fly-by-nights.
But Maoist unions are threatening porters, and last week even sent back some porters who were not members of their union from Lukla. Enforcing the union’s demands on permanent staffing and benefits mean established trekking agencies can only hire half the number of porters they currently employ, says one trekking agent.
With the restoration of peace and positive foreign travel advisories, there was a lot of hope. But there is despondency again . Said one travel agent: “We have invested so much promoting this season, we will be ruined if there are strikes and cancellations.”
Which means the Nepalis who need these jobs the most won’t have any.
Monday, August 20, 2007
discussion with Emma Duncan, Deputy Editor of The Economist
To think about businesses as purely entities that maximise their shareholders' economic self-interest is to miss the point that businesses also are run by human beings, and that businessmen, like everybody else, want to be seen to be doing the right thing.”
click here
click here
Wednesday, August 15, 2007
Dabur Nepal factory reopens
BARA, Aug 15 - The Dabur Nepal factory situated in Rampur Tokai, Bara reopened Wednesday.The Maoist-aligned trade union workers had shut down the factory five days ago.
The factory was opened following extensive talks between representative of Birgung Chamber of Commerce Om Prakash Sharma and trade union workers yesterday evening.
Sharma has assured us that the factory management would address the workers’ demand by August 18, said member of the Federation of All Nepal Trade Unions Min Prasad Abagain, adding, the workers agreed to call off their strike following his assurance.
The trade union workers had called for an indefinite strike five days ago demanding permanent status for 65 loading-unloading workers, among others.
The factory was opened following extensive talks between representative of Birgung Chamber of Commerce Om Prakash Sharma and trade union workers yesterday evening.
Sharma has assured us that the factory management would address the workers’ demand by August 18, said member of the Federation of All Nepal Trade Unions Min Prasad Abagain, adding, the workers agreed to call off their strike following his assurance.
The trade union workers had called for an indefinite strike five days ago demanding permanent status for 65 loading-unloading workers, among others.
Domestic air fares to go up
KATHMANDU, Aug 8 - Domestic airlines have decided to slap an additional surcharge in the range of Rs 45 to Rs 215 from this Friday, citing a rise in aviation fuel, in a move that violates aviation regulations. This will make air fares costlier by Rs 45 for Simara, Rs 70 for Pokhara, Rs 110 for Bhadrapur, Rs 95 for Biratnagar, Rs 85 for Bhairahawa, Rs 115 for Nepalgunj, and Rs 215 for Dhangadhi. This is in addition to the surcharge that airlines have been charging for the last nine months.
Domestic air fares to go up
Nepal Oil Corporation recently increased price of aviation fuel to Rs 72 per liter, up from Rs 68, a measure imposed only on domestic airlines.Pradeep Shah, sales director of Yeti Airlines, said as NOC raised the price arbitrarily, they decided to impose an extra surcharge to offset heightened operating costs.
"Earlier, the government had agreed with the airlines to let them adjust surcharge whenever the air fuel price moves up and down. On the basis of this, we revised surcharge upward," said Rupesh Joshi, marketing director of Buddha Air.However, Yagya Gautam, director general of the Civil Aviation Authority of Nepal, said the airlines´ step clearly violates the rules, and they do not have any authority to fix fares or impose surcharges on their own. "It is the government which decides whether to impose or not, and the amount."
Domestic air fares to go up
Nepal Oil Corporation recently increased price of aviation fuel to Rs 72 per liter, up from Rs 68, a measure imposed only on domestic airlines.Pradeep Shah, sales director of Yeti Airlines, said as NOC raised the price arbitrarily, they decided to impose an extra surcharge to offset heightened operating costs.
"Earlier, the government had agreed with the airlines to let them adjust surcharge whenever the air fuel price moves up and down. On the basis of this, we revised surcharge upward," said Rupesh Joshi, marketing director of Buddha Air.However, Yagya Gautam, director general of the Civil Aviation Authority of Nepal, said the airlines´ step clearly violates the rules, and they do not have any authority to fix fares or impose surcharges on their own. "It is the government which decides whether to impose or not, and the amount."
From CHULO to STOVE
At the CSU laboratory, engineers study the combustion in massive engines that push gas through pipelines. The research helped students develop a much smaller combustion chamber that fuels an energy-efficient, clean-burning cookstove.
Mechanical engineering student Sachin Joshi knows firsthand that the stove is desperately needed in villages in his native Nepal. "As soon as you walk inside the kitchen, it just hits you," he says. "You can't stay there for even a minute, your eyes start watering. Noses start to burn. You start coughing. You just can't stay there. It's like walking into a forest when there is a fire." Joshi and other graduate engineering students teamed up with business majors to develop, finance and market the stove. It's an example of the type of projects that Hammerdorfer's Peace Corps MBA students will be pursuing in collaboration with other University departments and international organizations.
Bringing new light to the world
The stove was the brainchild of mechanical engineering doctoral student Dan Mastbergen, who developed it for his dissertation. "This is a stove, what we kind of, in the field, consider a clean cook stove," he explains, showing off the half-meter long metal box on legs. Sticks go into a ceramic clay tube (the combustion chamber) that burns the wood, providing clean, efficient heat for the stove. A chimney removes the smoke from the home, eliminating a major health problem.
Dan Mastbergen field tests his clean-burning cookstove in Nicaragua.
But what's novel about Mastbergen's stove is that villagers are able to cook up more than just dinner. Some of the heat is converted into electricity that's stored in a small battery. "We can make about 20 watts," he says. "Just to put that in perspective, the compact fluorescent lights that you can get at the store now are typically around 15 watts. Enough to power one of those bulbs."
Sachin Joshi observes, "For people that haven't had light for generations, for hundreds of years, something like this is a like a miracle in a sense." He explains that the light allows children to study in the evening and women to make items to sell in the market the next day. The students have traveled to Nepal, as well as Nicaragua and India to test the stoves, and Joshi says they are already making a difference. "They earn $3 a day, $2 dollars a day. Even if they can add a dollar more, $2 more, that's a huge thing."
And with that money, they can pay for the $100 stove. That's key, according to CSU Business instructor Paul Hudnut. The locals have to want the item or frequent the business that MBA students have helped create. He says charity isn't the answer. "The evidence is in that while people like to be given things, that doesn't necessarily result in products that are designed for their needs." He also points out that often, the organization that gives those products away isn't sustainable. "And so it isn't there three years later when they need to replace a part."
Confidence in 'doing it right'
Colorado State University officials are convinced that their MBA graduates will learn to do it right.
Carl Hammerdorfer says many non-profits and non-governmental organizations recognize the importance of hands-on solutions, and are eager to develop ethical businesses with a so-called triple bottom line. That's a focus on not only profits but also on the environment and society. "There's no question in my mind that business is the best vehicle, I think, for development," he says.
Classes begin in August for students in the new MBA program. In a few years, one of them may be helping villagers in Mali set up a dried mango empire.
Mechanical engineering student Sachin Joshi knows firsthand that the stove is desperately needed in villages in his native Nepal. "As soon as you walk inside the kitchen, it just hits you," he says. "You can't stay there for even a minute, your eyes start watering. Noses start to burn. You start coughing. You just can't stay there. It's like walking into a forest when there is a fire." Joshi and other graduate engineering students teamed up with business majors to develop, finance and market the stove. It's an example of the type of projects that Hammerdorfer's Peace Corps MBA students will be pursuing in collaboration with other University departments and international organizations.
Bringing new light to the world
The stove was the brainchild of mechanical engineering doctoral student Dan Mastbergen, who developed it for his dissertation. "This is a stove, what we kind of, in the field, consider a clean cook stove," he explains, showing off the half-meter long metal box on legs. Sticks go into a ceramic clay tube (the combustion chamber) that burns the wood, providing clean, efficient heat for the stove. A chimney removes the smoke from the home, eliminating a major health problem.
Dan Mastbergen field tests his clean-burning cookstove in Nicaragua.
But what's novel about Mastbergen's stove is that villagers are able to cook up more than just dinner. Some of the heat is converted into electricity that's stored in a small battery. "We can make about 20 watts," he says. "Just to put that in perspective, the compact fluorescent lights that you can get at the store now are typically around 15 watts. Enough to power one of those bulbs."
Sachin Joshi observes, "For people that haven't had light for generations, for hundreds of years, something like this is a like a miracle in a sense." He explains that the light allows children to study in the evening and women to make items to sell in the market the next day. The students have traveled to Nepal, as well as Nicaragua and India to test the stoves, and Joshi says they are already making a difference. "They earn $3 a day, $2 dollars a day. Even if they can add a dollar more, $2 more, that's a huge thing."
And with that money, they can pay for the $100 stove. That's key, according to CSU Business instructor Paul Hudnut. The locals have to want the item or frequent the business that MBA students have helped create. He says charity isn't the answer. "The evidence is in that while people like to be given things, that doesn't necessarily result in products that are designed for their needs." He also points out that often, the organization that gives those products away isn't sustainable. "And so it isn't there three years later when they need to replace a part."
Confidence in 'doing it right'
Colorado State University officials are convinced that their MBA graduates will learn to do it right.
Carl Hammerdorfer says many non-profits and non-governmental organizations recognize the importance of hands-on solutions, and are eager to develop ethical businesses with a so-called triple bottom line. That's a focus on not only profits but also on the environment and society. "There's no question in my mind that business is the best vehicle, I think, for development," he says.
Classes begin in August for students in the new MBA program. In a few years, one of them may be helping villagers in Mali set up a dried mango empire.
Friday, August 10, 2007
ONE $$
JAI JAI NEPAL
Help Nepal Network (www.helpnepal.net)— the first global charity run by Nepalese—has made fresh appeals to expatriate Nepalese and friends of Nepal to come forward in support of victims of floods that have ravaged various districts of terai in Nepal over the last few weeks.
Help Nepal Network (HeNN) has already raised over £5,000 pounds within the first week of its appeal to help the flood victims, the organisation said.
Director of HealthCare Nepal Jack Starmer.
In response to its appeal to initially raise 5,000 pounds, Jack Starmer of HealthCare Nepal—a USA-based charity—announced that he would make a donation of five thousand pounds to HeNN to support the flood disaster relief work in terai. "I have been impressed with how your Kathmandu staff has gotten the most out of a rupee/dollar and trust their judgment in how best to use the funds," he said in a mail to HeNN. "Thanks for taking the initiative to raise these funds. I'd been wondering how we might help and you gave us a way."
Mr. Starmer has been a long-time supporter of HeNN and has donated thousands of dollars to HeNN's various projects through HealthCare Nepal. He has also supported several other projects in Nepal.
HeNN has thanked Jack for his generous support and has called upon the Non-Resident Nepalese and friends of Nepal to come forward with a notion of help and compassion towards tens of thousands of flood victims. In a fresh appeal, chairman of HeNN USA Shailesh Gongol said, " No matter how busy we are and how tough our jobs, we have it much easier and comfortable than those who are wet, hungry, and sick. In addition to asking others to contribute, please make a donation yourself however small, because no matter how high your rents or mortgages or credit card bills are, you are not homeless," the appeal said.
Online contribution to Flood Relief Fund set up by the HeNN can be made by visiting the weblink: http://www.helpnepal.net/about/donate.htm
The HeNN has now revised its estimates to raise over 10,000 pounds and has called upon all the expatriate Nepalis and friends of Nepal to come forward and help generously to their fellow countrymen in this hour of need.
Set up in 1999 and run on fully voluntary basis, Help Nepal Network now has its chapters in one dozen countries around the world. It has been contributing towards improvement of health and education facilities in remote parts of Nepal.
Based on the philosophy of Nepalis for Nepal, the charity administers "One Pound/One Dollar a month Fund for Nepal," and has been in the forefront of mobilizing the goodwill and support of Nepalis around the world for charitable causes back home.
Officials say over 90 people have lost their lives due to this year's flood and nearly 300,000 people have been displaced. Loss of livelihood and damage to infrastructure in a poor, developing country could amount to millions of dollars. The Nepal government has already made appeal to international community to extend their support in its relief and rehabilitation works for flood victims.
Help Nepal Network (www.helpnepal.net)— the first global charity run by Nepalese—has made fresh appeals to expatriate Nepalese and friends of Nepal to come forward in support of victims of floods that have ravaged various districts of terai in Nepal over the last few weeks.
Help Nepal Network (HeNN) has already raised over £5,000 pounds within the first week of its appeal to help the flood victims, the organisation said.
Director of HealthCare Nepal Jack Starmer.
In response to its appeal to initially raise 5,000 pounds, Jack Starmer of HealthCare Nepal—a USA-based charity—announced that he would make a donation of five thousand pounds to HeNN to support the flood disaster relief work in terai. "I have been impressed with how your Kathmandu staff has gotten the most out of a rupee/dollar and trust their judgment in how best to use the funds," he said in a mail to HeNN. "Thanks for taking the initiative to raise these funds. I'd been wondering how we might help and you gave us a way."
Mr. Starmer has been a long-time supporter of HeNN and has donated thousands of dollars to HeNN's various projects through HealthCare Nepal. He has also supported several other projects in Nepal.
HeNN has thanked Jack for his generous support and has called upon the Non-Resident Nepalese and friends of Nepal to come forward with a notion of help and compassion towards tens of thousands of flood victims. In a fresh appeal, chairman of HeNN USA Shailesh Gongol said, " No matter how busy we are and how tough our jobs, we have it much easier and comfortable than those who are wet, hungry, and sick. In addition to asking others to contribute, please make a donation yourself however small, because no matter how high your rents or mortgages or credit card bills are, you are not homeless," the appeal said.
Online contribution to Flood Relief Fund set up by the HeNN can be made by visiting the weblink: http://www.helpnepal.net/about/donate.htm
The HeNN has now revised its estimates to raise over 10,000 pounds and has called upon all the expatriate Nepalis and friends of Nepal to come forward and help generously to their fellow countrymen in this hour of need.
Set up in 1999 and run on fully voluntary basis, Help Nepal Network now has its chapters in one dozen countries around the world. It has been contributing towards improvement of health and education facilities in remote parts of Nepal.
Based on the philosophy of Nepalis for Nepal, the charity administers "One Pound/One Dollar a month Fund for Nepal," and has been in the forefront of mobilizing the goodwill and support of Nepalis around the world for charitable causes back home.
Officials say over 90 people have lost their lives due to this year's flood and nearly 300,000 people have been displaced. Loss of livelihood and damage to infrastructure in a poor, developing country could amount to millions of dollars. The Nepal government has already made appeal to international community to extend their support in its relief and rehabilitation works for flood victims.
What is sub-prime lending?
Sub-prime lending usually refers to the practice of giving loans to those who do not qualify for regular loans at market interest rates because of their poor credit history. Due to the increased risk associated with the takers, sub-prime loans are offered at a rate higher than market rates. These loans are risky for both, those who are giving and those who are taking, because these combine high interest rates, bad credit history, and often, murky financial situations of the takers. The current sub-prime mortgage meltdown in US refers to the rash of sub-prime housing loan defaults that began in late 2006 and has continued into 2007. The sharp rise in foreclosures has caused several major sub-prime mortgage lenders to shut down or file for bankruptcy, leading to the collapse of stock prices for many in the subprime mortgage industry. About 21% of all mortgages between 2004 and 2006 were sub-prime, up from 9% during the previous eight years. By 2006, sub-prime mortgages totalled $600 billion, accounting for about 20% of US home loan market.
Wednesday, August 8, 2007
Malnutrition takes toll on GDP, IQ
KATHMANDU, Aug 9 - .Seven years after Nepal committed itself to the task of halving malnutrition by the year 2015 - one of the Millennium Development Goals - general malnutrition remains a serious problem. Over the past 25 years, general malnutrition levels have decreased at a miniscule rate. This obviously means the status of malnutrition as a public health problem will remain for decades to come.
According to the World Bank, decreased productivity and IQ levels resulting from malnutrition are causing a loss of up to 3 percent in GDP, which amounts to around Rs 18 billion annually.
At present, Nepal has one of the highest levels of malnutrition in South Asia. A study conducted by the Ministry of Health and Population (MHP) in 2006 shows that 49 percent of children under the age of 5 are stunted - an indicator which compares height to age and reflects chronic malnutrition.
Despite its pervasiveness, malnutrition, however, generally goes unnoticed. In Nepal, it is difficult to explain to mothers that their children are not short because short is the norm here. Surrounded by small door jambs, low ceilings, and a 50 percent stunted population, tall members of the population stick out, and the erroneous myth that Nepali people are inherently short perpetuates itself unnoticed.
In a sense, being short is not the problem. It is the process and consequences of becoming short that keep developing nations on their knees. In response to adverse conditions created by malnutrition, children become less active and less responsive to stimulus, which causes sub-optimal mental and physical development.
During the first two years of life, 80 percent of the brain develops. Studies however show, that those years are frequently marked by insufficient nourishment, disease, and subsequently, malnutrition and stunting. "Between the ages of six months and three years, the percentage of stunted children in Nepal rises from 11.6 to nearly 60 percent," according to the 2006 survey of MPH.
While malnutrition indices peak during early childhood and either level off or begin to decline slowly after age three, there is reason to believe that the damage done is irreversible. "There is actually a very, very tight window of opportunity between conception through the first two years of life," says Meera Shekar from the World Bank, "If we miss this window, we miss a whole generation."
The consequences of early malnutrition ripple through society. A recent World Bank report shows that one percent decrease in adult height due to childhood stunting correlates with 1.4 percent loss of productivity, and that stunting in general is associated with as much as 11-point decrease in IQ. The result is that schools can be built and jobs created, but without proper nutrition Nepal's economic and social development will continue to be held back.
When searching for a solution to malnutrition in Nepal, the most common misconception is that it stems entirely from lack of food security and cannot be reduced unless general poverty is addressed first. World Bank studies, however, make it clear that extreme poverty and insufficient food are part of the problem, but are far from being the entire problem.
In fact, according to the UN Common Country Assessment (UNCCA) for Nepal, two major causes of malnutrition are poor feeding practices and inadequate child care. At the age of six months, breast milk is no longer a sufficient source of nourishment for a child. Most mothers then supplement their milk with rice porridge. Often, rice porridge is bulky and energy deficient, and children, who have small stomachs, cannot eat enough porridge to fulfill their dietary needs unless they are fed five or six times a day. Unfortunately, Nepal Family Health Survey shows that mothers with heavy workloads and limited control over their use of time have difficulty feeding their children so often.
Furthermore, when children begin eating supplementary foods and start to explore their surroundings with greater ease, non-sterilized foods and sub-standard sanitary conditions increase the child's risk of infection drastically. According to the 2006 MHP survey, prevalence of illness peaks between 6 months and two years. Illness, in turn, causes decrease in appetite, and mothers usually feed sick children less when, in fact, they require extra energy to combat their illness and continue to develop and grow.
Recently, a number of initiatives have successfully reduced malnutrition in parts of Nepal. Amongst others, Save the Children's Positive Deviance Program, United Mission to Nepal's nutrition project, and the Ministry of Local Development's Decen0tralized Action for Children and Women program have yielded positive results by addressing malnutrition through holistic, community based reform.
As Meera Shekar says, "Nutrition is an investment issue. It is something that can drive economic growth rather than ride on the coat-tails of economic growth, because children who are well-nourished have been shown to have much higher income potential as adults."
According to the World Bank, decreased productivity and IQ levels resulting from malnutrition are causing a loss of up to 3 percent in GDP, which amounts to around Rs 18 billion annually.
At present, Nepal has one of the highest levels of malnutrition in South Asia. A study conducted by the Ministry of Health and Population (MHP) in 2006 shows that 49 percent of children under the age of 5 are stunted - an indicator which compares height to age and reflects chronic malnutrition.
Despite its pervasiveness, malnutrition, however, generally goes unnoticed. In Nepal, it is difficult to explain to mothers that their children are not short because short is the norm here. Surrounded by small door jambs, low ceilings, and a 50 percent stunted population, tall members of the population stick out, and the erroneous myth that Nepali people are inherently short perpetuates itself unnoticed.
In a sense, being short is not the problem. It is the process and consequences of becoming short that keep developing nations on their knees. In response to adverse conditions created by malnutrition, children become less active and less responsive to stimulus, which causes sub-optimal mental and physical development.
During the first two years of life, 80 percent of the brain develops. Studies however show, that those years are frequently marked by insufficient nourishment, disease, and subsequently, malnutrition and stunting. "Between the ages of six months and three years, the percentage of stunted children in Nepal rises from 11.6 to nearly 60 percent," according to the 2006 survey of MPH.
While malnutrition indices peak during early childhood and either level off or begin to decline slowly after age three, there is reason to believe that the damage done is irreversible. "There is actually a very, very tight window of opportunity between conception through the first two years of life," says Meera Shekar from the World Bank, "If we miss this window, we miss a whole generation."
The consequences of early malnutrition ripple through society. A recent World Bank report shows that one percent decrease in adult height due to childhood stunting correlates with 1.4 percent loss of productivity, and that stunting in general is associated with as much as 11-point decrease in IQ. The result is that schools can be built and jobs created, but without proper nutrition Nepal's economic and social development will continue to be held back.
When searching for a solution to malnutrition in Nepal, the most common misconception is that it stems entirely from lack of food security and cannot be reduced unless general poverty is addressed first. World Bank studies, however, make it clear that extreme poverty and insufficient food are part of the problem, but are far from being the entire problem.
In fact, according to the UN Common Country Assessment (UNCCA) for Nepal, two major causes of malnutrition are poor feeding practices and inadequate child care. At the age of six months, breast milk is no longer a sufficient source of nourishment for a child. Most mothers then supplement their milk with rice porridge. Often, rice porridge is bulky and energy deficient, and children, who have small stomachs, cannot eat enough porridge to fulfill their dietary needs unless they are fed five or six times a day. Unfortunately, Nepal Family Health Survey shows that mothers with heavy workloads and limited control over their use of time have difficulty feeding their children so often.
Furthermore, when children begin eating supplementary foods and start to explore their surroundings with greater ease, non-sterilized foods and sub-standard sanitary conditions increase the child's risk of infection drastically. According to the 2006 MHP survey, prevalence of illness peaks between 6 months and two years. Illness, in turn, causes decrease in appetite, and mothers usually feed sick children less when, in fact, they require extra energy to combat their illness and continue to develop and grow.
Recently, a number of initiatives have successfully reduced malnutrition in parts of Nepal. Amongst others, Save the Children's Positive Deviance Program, United Mission to Nepal's nutrition project, and the Ministry of Local Development's Decen0tralized Action for Children and Women program have yielded positive results by addressing malnutrition through holistic, community based reform.
As Meera Shekar says, "Nutrition is an investment issue. It is something that can drive economic growth rather than ride on the coat-tails of economic growth, because children who are well-nourished have been shown to have much higher income potential as adults."
Tuesday, August 7, 2007
Access to Financial Services in Nepal
Over the past 20 years Nepal’s financial sector has become deeper and the number and type of financial intermediaries have grown rapidly. In addition, recent reforms have made banks more stable. Still, access to financial services remains limited for many people in many parts of Nepal and in recent years has been declining. This report examines the country’s supply of and demand for financial services and the constraints to increasing access to them, and offers recommendations for making the financial sector work for all of Nepal’s people, especially the poor.The Supply of Financial ServicesFor much of the past 50 years Nepal’s government has tried to increase access to formal financial services for small businesses and low-income households. (This report defines low-income households as those in the three bottom spending quintiles.) The government has introduced directed lending programs for small businesses and low-income households, required banks to open branches outside the Kathmandu valley, created specialized wholesale and retail institutions, and lowered market entry requirements to foster the development of different types of financial institutions.Despite government efforts, access to formal financial services is declining. Financial intermediation is stagnating, the numbers of bank deposit and loan accounts per inhabitant is falling, and lending targets for low-income households have generated excess liquidity among microfinance institutions without significantly increasing their outreach. And despite 40 years of government mandates to lend to small businesses, banks have been withdrawing from this segment as these requirements have been lowered. Access to bank infrastructure has also decreased. Moreover, as a result of the governments’ efforts to increase access, the central bank (Nepal Rastra Bank) now has to supervise 180 institute.Even the large foreign remittances received by Nepalese households-mostly from migrant workers-seem to be a missed opportunity for increasing access to formal financial services. Despite the entrance of money transfer operators and the growth in formal remittance flows they have generated, the bulk of remittances enter the country informally.The Demand for Financial ServicesThe findings of the 2006 Access to Financial Services Survey-conducted by the World Bank and Total Management Services in cooperation with Solutions Consultant as background for this report- confirm that use of banks is limited, financial NGOs and cooperatives play a large role in providing both deposit accounts and loans, and informal borrowing far exceeds formal borrowing.Only 26 percent of Nepalese households have a bank accounts, and banks’ procedures are perceived as being the most cumbersome among institutions. Accordingly, clients prefer not to save in them. Banks dominated in urban areas and among the wealthiest.Financial NGOs and cooperatives run a close second as largest provider of deposit accounts, serving 18 percent of households. These institutions are the preferred provider for low-income households, but are close to banks even for wealthier households. Microfinance and regional rural development banks are a distant third provider of deposit accounts, serving only 4 percent of households-mainly poor, rural ones. About 38 percent of Nepalese households have an outstanding loan exclusively from the informal sector, 16 percent from both the informal and formal sector, and 15 percent from only the formal sector (that is, a bank, finance company, financial NGO or cooperative, or microfinance or rural regional development bank). Family and friends are by far the largest informal providers of loans to households and, contrary to common belief, family and friends often charge interest. Most households who borrow from informal providers do not bother trying to borrow from financial institutions, mainly because formal institutions cannot meet their financial needs on time. Informal providers also require less physical collateral. Even among the wealthiest households, half of those with a bank account prefer informal lenders because of their rapid delivery. Similarly, informal lenders are the preferred providers of working capital for small businesses, again because they are faster at sanctioning loans than are formal financial institutions.Of households that borrow from the formal sector, financial NGOs and cooperatives are the largest provider of loans (except for the wealthiest households.). They dominate the market for loans under NRs 50,000, even for households with a bank account. Banks are the second largest provider mainly in urban areas and for loans larger than NRs 50,000. Microfinance and regional rural development banks are the third largest providers,, serving mainly in rural areas and in the Terai. Finance companies are the least preferred formal lenders, and operate mainly in the Kathmandu valley.Nepal's payment system is virtually unused for retail domestic transactions and little used for international ones. An estimated 69 percent of foreign remittances come through informal channels usually family and friends even among households with a bank account. Just 6 percent of remittances are saved in financial institutions. The bulk of foreign remittances are used for consumption and to repay loans-loans most likely incurred by workers to migrate to other countries.In sum, both supply and demand indicators show that, despite government efforts, formal financial institutions do not serve the needs of most of the Nepalese population. And while access to and use of formal financial services are limited in general, the problem is more acute for small businesses and low-income households. Indeed, both access and use are closely correlated with business loan size and household income.Why Have Government Efforts to Increase Access Failed?Government efforts to increase access to formal financial services have not achieved their goals because they have focused on the symptoms of limited access not the root causes. For example, the priority sector lending program, requiring banks to make loans to small businesses, has not addressed the sustainability of such lending. Similarly, the deprived sector lending program for low- income households has not addressed the microfinance sector’s capacity to extend large volumes of loans.Increasing financial access for small businesses and low-income households requires that financial institutions be able to serve these segments in a financially sustainable manner. Lending profitably to small businesses requires a high level of efficiency, while operating microfinance institutions with large outreach requires high levels of professionalism and technical skills. Nepal’s’ financial institutions have struggled to meet these requirements.Why Don’t Banks Scale up Lending to Small Businesses?Small businesses have very different features from large corporations the traditional clients of Nepalese banks. To serve small businesses profitably, banks need to minimize transaction costs and generate large numbers of high-quality loans. But for many reasons, Nepal’s banks find it difficult to serve small businesses profitably: Bank procedures for small business loans are too complex, making such lending unnecessarily long and expensive for both the businesses and the banks. The most popular bank product, overdrafts (lines of credit), is inappropriate for many small businesses, which do not deposit their revenues in banks. The interest rates that banks charge on loans to small businesses do not adequately reflect the costs of serving them. Banks require high levels of immovable collateral, while small businesses tend to have only movable assets Although Nepalese banks have sophisticated management informationSystems, they generally do not use them to measure staff and loan performance -which is crucial for profitable small business lending.Although the legal and regulatory framework is not a binding constraint on bank lending to small businesses, it could be improved to facilitate such loans. Obstacles include: The absence of a registry to record lines on movable assets, which makes such assets almost unusable as collateral. The credit bureau only covers loans larger than NRs 1 million, and does not provide accurate and timely information. Loan loss provisioning rules especially for short –term loans are too lax and do not provide the right incentives for stringent monitoring of small business loans. At the same time, provisioning requirements for loans secured only with unregistered movable collateral and personal guarantees are too stringent, discriminating against small businesses that cannot offer immovable assets as collateral. The method used to calculate fines for not meeting priority and deprived lending targets discourages banks from charging appropriate interest rates for small business loans. (Fines are calculated by multiplying the shortfall amount against the highest interest rate that the bank charges its clients.)Why Haven’t Microfinance Institutions Provided More Services to Low-income Households?Nepal's formal microfinance institutions could play a key role in delivering financial services to low-income households. Yet many potential clients of microfinance institutions prefer to save with and borrow from informal clients of microfinance institutions prefer to save with and borrow from informal sources. The microfinance sector's limited ability to serve low-income households is reflected in its narrow outreach, sluggish growth, high liquidity, and low profitability.Several factors explain the disappointing state of Nepal's microfinance sector, including: A complicated geo-political environment. Weak technical capacity in key areas, such as accounting and auditing, strategic planning, financial analysis, and human resource management. Lack of commercial orientation and slow profession mainly because microfinance is often considered a charitable activity. Distortions arising from the government's deprived sector lending program that generate high liquidity among many microfinance institutions, as these institutions are encouraged to borrow beyond their needs and invest these low-cost funds in other financial institutions.Although often cited as an obstacle, Nepal's legal and regulatory framework is not a binding constraint on the growth of the microfinance sector. Still, the framework for microfinance is convoluted and confusing. Although this framework is not hampering microfinance growth per se, supervision of the sector is problematic. Small institutions that pose no systemic risk are supervised, while larger ones are not and supervisory capacity is weak. As a result microfinance consumers can be misled, and supervisors cannot ensure the sector's stability.Why Do Informal Channels Dominate the Remittance Market?Since 2001, when money transfer operators were allowed to enter Nepal's remittance market, formal remittance payments have increased and improved considerably with formal remittances being delivered in a day or two at relatively low cost, even in remote areas. Thus it seems that the widespread use of informal channels is due to limited familiarity with the formal financial sector and a perception that family and friends are a safer delivery mechanism, rather than to a lack of alternatives. Moreover, India is the largest source of migrant remittances and, given its proximity and ease of entry, migrants tend to move quite often between it and Nepal. Finally, there appear to be legal and regulatory constraints in the India-Nepal corridor for money transfer operators.How Can the Government Increase Access for Small Business and Low-income Households?Although there is little theoretical knowledge of what expands access, several approaches have worked in practice, based on two principles. First, government should not require financial institutions to lend to specific sectors or open branches in specific areas. Rather, it should support financial institutions with potential to increase access sustainable, by helping providers profitably reach their desired market segments. Second, government must develop an enabling environment for example, by promoting institutions that reduce information asymmetries between borrowers and lenders. To help banks increase small business lending, the government could undertake two initiatives:Initiative 1:Create a technical assistance fund to help banks with potential develop appropriate products and procedures for profitable lending to small businesses.Initiative 2:Develop an enabling environment that makes small business lending safer, cheaper, and faster. Efforts should include: Creating a registry for secured transactions. Increasing loan loss provisioning requirements overall while reducing them for small loans without registered movable collateral. Strengthening Nepal's' credit bureau.To help microfinance institutions serve a large number of low-income households, the government could undertake two initiatives:Initiative 3:Promote the microfinance industry by upgrading technical skills, reenergizing the sector, and reforming state-owned providers. Efforts should include: Articulating a vision for the sector. Encouraging professionalization of the sector by supporting a technical assistance fund to upgrade capacity in key technical areas. Attracting a demonstration institution that is, a commercially oriented microfinance player to expedite change. Restructuring state-owned microfinance providers and apex institutions.Initiative 4:Create a legal and regulatory environment that protects microfinance consumers and promotes stability. Efforts should include: Reviewing the legal and regulatory framework for microfinance, with a view to simplifying it. Determining which institutions should be supervised, to target only those that could threaten the microfinance sector's stability. Developing a business plan for a stronger microfinance supervisor. Drafting new legislation or amending existing legislation.To make remittances more effective, the government could undertake two initiatives:Initiative 5:Enhance the financial literacy of migrants and tackle legal and regulatory obstacles in the India-Nepal corridor to increase formal remittances.Initiative: 6:Promote a viable loan scheme for migrants one that reduces the share of remittances used to repay loans.
economic integration
An economically integrated Southasia that is at the same time open to the rest of the world would not only respond to the aspirations of its peoples for prosperity and peace, but could also be a major anchor for global economic stability.
By Sultan Hafeez Rahman
Over the past decade, globalisation and Asia’s impressive economic performance, driven mainly by strong GDP growth in China and India, have created an unprecedented environment for the growth of intra-regional trade. Pakistan and Bangladesh have also registered impressively high growth rates, accompanied by significant reduction in poverty levels in both countries. All countries of Southasia have attempted – and, in some cases, succeeded – in concluding free trade agreements (FTAs) with each other. Significantly, the Southasian Free Trade Agreement (SAFTA) also took effect last year. Southasia is the world’s fastest-growing region; over the past decade, its GDP growth has exceeded 7.5 percent. The political environment for regional cooperation and integration has improved markedly, and is reflected in SAARC’s Islamabad and Dhaka Summit declarations. In addition, political pronouncements by Southasian leaders, coupled particularly with events of the past year, have raised expectations that the region could finally, to borrow a term from cricket, ‘go for a six’.
While such are the expectations based on realistic appreciation of economic and political trends, there is no doubt that for the moment the economic advance does not touch all, nor is the trade scenario very rosy. While Southasia accounts for 23 percent of the world’s population, its share of global GDP is only around two percent. In 2005, Southasia’s share in world trade was only 1.5 percent, one quarter of Southeast Asia’s share. Exports of goods and services accounted for only 19 percent of the region’s GDP in 2005. Of this, only 6.7 percent was due to services, while the services sector as a whole accounted for more than half of Southasia’s GDP. Foreign direct investment (FDI), meanwhile, is still only one percent of region-wide GDP.
Trade and investment flows have played a crucial role in the economic integration of other regions of the world, and they have the potential to do the same in Southasia. The realities on the ground with respect to trade among the region’s neighbours are, however, still sobering; left to themselves, they could continue to deter regional economic integration. In terms of intra-regional trade and investment in goods and services, Southasia lags far behind other regions. Intra-regional trade here amounts to only 4.9 percent of total trade, compared to almost 24 percent in Southeast Asia. The ratification of SAFTA on 1 January 2006 did mark an important milestone for the SAARC organisation, and it stipulates that SAARC will reduce customs tariffs on goods to 0-5 percent by 2016. However, that the trajectory tariff concessions would take could not be agreed upon ahead of the upcoming 14th Summit in Delhi on 3-4 April has had a dampening effect on the cheerleaders for SAFTA, and on the new ‘spirit’. Notably, even after SAFTA takes full effect, a complex web of obstacles to trade in the form of non-tariff barriers will remain.
There have been several studies on the economic gains that would accrue from SAFTA. Most indicate significant advantages to both India and ‘smaller’ countries, particularly Bangladesh and Pakistan. However, there is much variation across studies in the magnitude predicted for these advantages. Furthermore, these SAFTA gains are not large in either absolute or relative (to total exports) terms, because most models used in the free-trade policy simulations are constrained by the existing parameters – the current small volume of trade among these countries. As such, any computation of the response of trade to rapid GDP growth and liberalisation based on these volumes would not do justice to the potential impact from SAFTA.
The empirical results of such studies are therefore moot. Any serious investigation would consider the long-term, dynamic impacts of trade liberalisation. The evidence from existing regional trading arrangements in different parts of the world, not least within the ASEAN countries of Southeast Asia, clearly demonstrate that strengthening economic integration via freer trade is not a zero-sum game in the long run. A freely trading Southasia, supported by a liberal investment regime, would permit both restructuring of the existing production structures and specialisation along lines of comparative and competitive advantages, and yield significant benefits to most of the region’s countries. In the early phases of implementing such an arrangement, some of the smaller and narrowly based economies, as well as certain economic activities and socioeconomic groups, will need protection. In other words, not only may revenue losses due to tariff drawdown be required, but so too would social protection due to job losses. However, investment flows into those countries could be counted upon to spark growth and employment-creation in the longer term.
Deepening SAFTA
As the first step towards the grand vision of a Southasian Economic Union, not only will the present impasse in SAFTA have to be overcome, but much bolder action will need to be taken on a broader front to create a Southasian free trade area. Deeper integration in trade and investment in goods requires, most immediately, an accelerated phasing out of non-tariff barriers, other than quantitative restrictions such as import restraints, technical requirements, inconsistent and lengthy customs procedures, and complicated documentation requirements – all of which currently prevent the easy flow of goods and services across the frontiers of Southasia. At the moment, trade documentation can take up to 20 days; import or export of goods can take up to 60 days to see fruition; an inordinate proportion of goods shipped in Southasia are inspected, against a world standard of 5-15 percent; and cumbersome procedures alone can cost 15 percent of the traded goods. Little wonder, then, that here in Southasia, trade-transaction costs, a key determinant of economic efficiency, are the highest in the world, barring a handful of regions such as Africa. High transaction costs distort economic incentives for trade in Southasia, and lower productivity.
The issue of non-tariff barriers is well known; indeed, SAARC’s 2005 Dhaka Declaration emphasises that “parallel initiatives for dismantling of non-tariff and para-tariff barriers” are necessary, and calls for “expeditious action on conclusion of agreements on mutual recognition of standards, testing and measurements with a view to facilitating intra-regional trade.”
The benefits of removing non-trade barriers can be substantial. Preliminary research indicates that the trade benefits of improving port efficiency and the customs environment in Southasia are several times greater than the trade effects from reducing tariff barriers. Improvements in trade-facilitation measures, such as harmonisation of customs procedures and systems, can yield benefits similar in magnitude to those of non-tariff barriers. According to official statistics, while improving port efficiency would increase bilateral trade significantly between, for instance, Bangladesh and both India and Sri Lanka, it would increase by a lesser degree between India and Sri Lanka. This is because the initial port efficiency level of Bangladesh is much lower, and hence the improvement is greater; since the port efficiency levels of India and Sri Lanka are much closer to the world’s average, the improvements are smaller. Similar patterns are seen for improvements in customs environments – increases in trade are greater for countries that initially had lower levels of efficiency. Clearly, therefore, a significant advance can be achieved by simply improving procedures, before even getting into the lowering of tariffs and the removal of non-tariff barriers.
Southasia has a strong comparative advantage in its services sector, which accounts for a substantial and growing share in the region’s total output – 53.3 percent in 2005. However, due to the lack of research on services trade policy and the limited availability of data on international trade in services, policymakers have limited knowledge on how liberalisation in trade in services and investment should proceed. Liberalisation of trade in services is in many ways different from that of trade in goods. Barriers that restrict the crossborder movement of goods are rarely similar to the restrictions on crossborder mobility of services. For instance, many services transactions require physical proximity, and therefore physical mobility of providers and users is essential. Barriers to trade in services are often more complicated than tariffs, and may take the form of regulations, standards, capital and labour restrictions, as well as other policy measures that are difficult to quantify.
Broadening the current SAFTA agreement beyond trade to include investment is equally important. Evidence from other regional groupings shows that investment flows play at least as significant a role as trade in promoting integration of economies. To recall, investments from Japan had a crucial impact on the economic interdependence and integration of ASEAN. Allowing freer flows of investment within Southasia will foster country-specific economies of scale, which can be exploited on a regional scale. As a result, more fundamental structural change of the region’s economies will take place. While free trade alone will yield gains, these are unlikely to be great. However, dynamic long-term effects can be significant, particularly if combined with aggressive trade-facilitation measures, removal of non-tariff barriers and, in particular, liberalisation of the investment regime. The full realisation of the gains of freer trade and investment would also require continuous and massive investment in physical infrastructure to connect the region more efficiently. (Though related to trade, physical connectivity through air, rail and road routes is a subject in its own right, and outside of the scope of this article.)
Cars and textiles
To undertake external sector reforms at a more realistic pace, and to make these more politically feasible, it may be prudent initially to focus on exploring the potentials of priority industries, where more-immediate and specific interventions, such as removal of non-tariff measures, can be implemented more easily. Priority sectors could be selected on the basis of an analysis of comparative advantage and strong potential for long-term economic growth and structural change. Focusing reforms on a limited number of priority sectors could increase the chances of success, permitting the positive results to be used to demonstrate the significant economic benefits of trade and investment liberalisation among Southasian countries. This would be a ‘showing by doing’ approach, and would help to build mutual confidence and trust.
The Southasian textile sector, for example, has strong potential for developing a regional value and production chain. Given that most Southasian countries are large exporters of intermediate and finished clothing and textile goods, the region as a whole could gain greatly if the countries were to cooperate strategically to enhance efficiency, improve product quality and thereby increase value. As India shares borders with most Southasian countries, has proven capability in marketing, and has economic linkages with the major apparel-importing countries, it could become a hub for spurring the growth of intra-industry trade in the region. With its central location and size, India could also serve as an assembly and exit point of high-value Southasian goods (as well as services) for both domestic and international markets. Intra-industry trade could also be boosted by greater crossborder foreign direct investment. For lower-value and specialised textile products, Bangladesh, Pakistan or any of the other smaller countries could become the hub.
The automotive sector also has the potential to develop as a regional priority sector. Several crucial ingredients are already in place for this to happen. Automotive manufacturing is a complex, multi-tiered production process that involves assembly of a large number of components. The assembly complexity spans the entire range, from simple mechanical components to complex electronic parts. Hence, a degree of specialisation for each of the countries is feasible without entering into debilitating direct competition. Furthermore, advances in production technology allow for the geographical spread of assembly of parts and components to locations where economies of scale can be used optimally. Unlike in earlier production technologies, it is no longer necessary to geographically concentrate the entire assembly activity in one geographical location. The current and potential size of the market for automotive products makes it more worthwhile for manufacturers to optimally exploit economies of scale and comparative advantages for each of the countries. Incidentally, in order to fully benefit from scale economies and sub-regional specialisation, it may also be appropriate for Southasian car manufacturers – in the wake of Chinese competition – to broaden the market from the sub-regional to the wider Asian or even global level.
As other successful regional cooperation and integration initiatives have demonstrated, regional cooperation in trade and investment benefits all countries. Focusing on and recognising the longer-term and dynamic benefits of regional integration helps to eliminate the anxiety that Nepal’s gain, for example, would be offset by India’s loss – ie, that there is not much to be gained from such cooperative economic arrangements, or that only the small neighbours would gain. The long-term approach acknowledges that benefits will accrue to all members of the regional group, irrespective of their size. While static benefits for the larger countries in trading with the smaller countries may seem limited, the longer-term dynamic effects from integrating with smaller neighbouring countries are substantial. For smaller economies, exploiting their comparative advantages in specific phases of the regional production chain will yield significant benefits while boosting intra-regional trade, investment and integration with the neighbouring country. Some analysts have also pointed out that regional economic integration, driven by more free trade and investment, could have substantial gains for India’s borders states, some of which are among the poorest in the country.
The peace dividends of a more economically integrated Southasia, as exemplified by the European experience, could be enormous. Peace and stability in the region would spur the ‘neighbourhood effect’ in foreign direct investment; after all, the rest of the world views Southasia as a region, and events in India’s neighbourhood are likely to influence FDI decisions. An economically integrated Southasia that is at the same time open to the rest of the world would not only respond to the aspirations of its peoples for prosperity and peace, but could also be a major anchor for global economic stability. Globalisation is an inexorable process, and the smart thing for Southasia would be to deal with it collectively, as a region.
----------------------------------------------------------------------------------------------------------------
The author is Deputy Director General of South Asia Development of Asian Development Bank
Courtesy: Himal South Asian
By Sultan Hafeez Rahman
Over the past decade, globalisation and Asia’s impressive economic performance, driven mainly by strong GDP growth in China and India, have created an unprecedented environment for the growth of intra-regional trade. Pakistan and Bangladesh have also registered impressively high growth rates, accompanied by significant reduction in poverty levels in both countries. All countries of Southasia have attempted – and, in some cases, succeeded – in concluding free trade agreements (FTAs) with each other. Significantly, the Southasian Free Trade Agreement (SAFTA) also took effect last year. Southasia is the world’s fastest-growing region; over the past decade, its GDP growth has exceeded 7.5 percent. The political environment for regional cooperation and integration has improved markedly, and is reflected in SAARC’s Islamabad and Dhaka Summit declarations. In addition, political pronouncements by Southasian leaders, coupled particularly with events of the past year, have raised expectations that the region could finally, to borrow a term from cricket, ‘go for a six’.
While such are the expectations based on realistic appreciation of economic and political trends, there is no doubt that for the moment the economic advance does not touch all, nor is the trade scenario very rosy. While Southasia accounts for 23 percent of the world’s population, its share of global GDP is only around two percent. In 2005, Southasia’s share in world trade was only 1.5 percent, one quarter of Southeast Asia’s share. Exports of goods and services accounted for only 19 percent of the region’s GDP in 2005. Of this, only 6.7 percent was due to services, while the services sector as a whole accounted for more than half of Southasia’s GDP. Foreign direct investment (FDI), meanwhile, is still only one percent of region-wide GDP.
Trade and investment flows have played a crucial role in the economic integration of other regions of the world, and they have the potential to do the same in Southasia. The realities on the ground with respect to trade among the region’s neighbours are, however, still sobering; left to themselves, they could continue to deter regional economic integration. In terms of intra-regional trade and investment in goods and services, Southasia lags far behind other regions. Intra-regional trade here amounts to only 4.9 percent of total trade, compared to almost 24 percent in Southeast Asia. The ratification of SAFTA on 1 January 2006 did mark an important milestone for the SAARC organisation, and it stipulates that SAARC will reduce customs tariffs on goods to 0-5 percent by 2016. However, that the trajectory tariff concessions would take could not be agreed upon ahead of the upcoming 14th Summit in Delhi on 3-4 April has had a dampening effect on the cheerleaders for SAFTA, and on the new ‘spirit’. Notably, even after SAFTA takes full effect, a complex web of obstacles to trade in the form of non-tariff barriers will remain.
There have been several studies on the economic gains that would accrue from SAFTA. Most indicate significant advantages to both India and ‘smaller’ countries, particularly Bangladesh and Pakistan. However, there is much variation across studies in the magnitude predicted for these advantages. Furthermore, these SAFTA gains are not large in either absolute or relative (to total exports) terms, because most models used in the free-trade policy simulations are constrained by the existing parameters – the current small volume of trade among these countries. As such, any computation of the response of trade to rapid GDP growth and liberalisation based on these volumes would not do justice to the potential impact from SAFTA.
The empirical results of such studies are therefore moot. Any serious investigation would consider the long-term, dynamic impacts of trade liberalisation. The evidence from existing regional trading arrangements in different parts of the world, not least within the ASEAN countries of Southeast Asia, clearly demonstrate that strengthening economic integration via freer trade is not a zero-sum game in the long run. A freely trading Southasia, supported by a liberal investment regime, would permit both restructuring of the existing production structures and specialisation along lines of comparative and competitive advantages, and yield significant benefits to most of the region’s countries. In the early phases of implementing such an arrangement, some of the smaller and narrowly based economies, as well as certain economic activities and socioeconomic groups, will need protection. In other words, not only may revenue losses due to tariff drawdown be required, but so too would social protection due to job losses. However, investment flows into those countries could be counted upon to spark growth and employment-creation in the longer term.
Deepening SAFTA
As the first step towards the grand vision of a Southasian Economic Union, not only will the present impasse in SAFTA have to be overcome, but much bolder action will need to be taken on a broader front to create a Southasian free trade area. Deeper integration in trade and investment in goods requires, most immediately, an accelerated phasing out of non-tariff barriers, other than quantitative restrictions such as import restraints, technical requirements, inconsistent and lengthy customs procedures, and complicated documentation requirements – all of which currently prevent the easy flow of goods and services across the frontiers of Southasia. At the moment, trade documentation can take up to 20 days; import or export of goods can take up to 60 days to see fruition; an inordinate proportion of goods shipped in Southasia are inspected, against a world standard of 5-15 percent; and cumbersome procedures alone can cost 15 percent of the traded goods. Little wonder, then, that here in Southasia, trade-transaction costs, a key determinant of economic efficiency, are the highest in the world, barring a handful of regions such as Africa. High transaction costs distort economic incentives for trade in Southasia, and lower productivity.
The issue of non-tariff barriers is well known; indeed, SAARC’s 2005 Dhaka Declaration emphasises that “parallel initiatives for dismantling of non-tariff and para-tariff barriers” are necessary, and calls for “expeditious action on conclusion of agreements on mutual recognition of standards, testing and measurements with a view to facilitating intra-regional trade.”
The benefits of removing non-trade barriers can be substantial. Preliminary research indicates that the trade benefits of improving port efficiency and the customs environment in Southasia are several times greater than the trade effects from reducing tariff barriers. Improvements in trade-facilitation measures, such as harmonisation of customs procedures and systems, can yield benefits similar in magnitude to those of non-tariff barriers. According to official statistics, while improving port efficiency would increase bilateral trade significantly between, for instance, Bangladesh and both India and Sri Lanka, it would increase by a lesser degree between India and Sri Lanka. This is because the initial port efficiency level of Bangladesh is much lower, and hence the improvement is greater; since the port efficiency levels of India and Sri Lanka are much closer to the world’s average, the improvements are smaller. Similar patterns are seen for improvements in customs environments – increases in trade are greater for countries that initially had lower levels of efficiency. Clearly, therefore, a significant advance can be achieved by simply improving procedures, before even getting into the lowering of tariffs and the removal of non-tariff barriers.
Southasia has a strong comparative advantage in its services sector, which accounts for a substantial and growing share in the region’s total output – 53.3 percent in 2005. However, due to the lack of research on services trade policy and the limited availability of data on international trade in services, policymakers have limited knowledge on how liberalisation in trade in services and investment should proceed. Liberalisation of trade in services is in many ways different from that of trade in goods. Barriers that restrict the crossborder movement of goods are rarely similar to the restrictions on crossborder mobility of services. For instance, many services transactions require physical proximity, and therefore physical mobility of providers and users is essential. Barriers to trade in services are often more complicated than tariffs, and may take the form of regulations, standards, capital and labour restrictions, as well as other policy measures that are difficult to quantify.
Broadening the current SAFTA agreement beyond trade to include investment is equally important. Evidence from other regional groupings shows that investment flows play at least as significant a role as trade in promoting integration of economies. To recall, investments from Japan had a crucial impact on the economic interdependence and integration of ASEAN. Allowing freer flows of investment within Southasia will foster country-specific economies of scale, which can be exploited on a regional scale. As a result, more fundamental structural change of the region’s economies will take place. While free trade alone will yield gains, these are unlikely to be great. However, dynamic long-term effects can be significant, particularly if combined with aggressive trade-facilitation measures, removal of non-tariff barriers and, in particular, liberalisation of the investment regime. The full realisation of the gains of freer trade and investment would also require continuous and massive investment in physical infrastructure to connect the region more efficiently. (Though related to trade, physical connectivity through air, rail and road routes is a subject in its own right, and outside of the scope of this article.)
Cars and textiles
To undertake external sector reforms at a more realistic pace, and to make these more politically feasible, it may be prudent initially to focus on exploring the potentials of priority industries, where more-immediate and specific interventions, such as removal of non-tariff measures, can be implemented more easily. Priority sectors could be selected on the basis of an analysis of comparative advantage and strong potential for long-term economic growth and structural change. Focusing reforms on a limited number of priority sectors could increase the chances of success, permitting the positive results to be used to demonstrate the significant economic benefits of trade and investment liberalisation among Southasian countries. This would be a ‘showing by doing’ approach, and would help to build mutual confidence and trust.
The Southasian textile sector, for example, has strong potential for developing a regional value and production chain. Given that most Southasian countries are large exporters of intermediate and finished clothing and textile goods, the region as a whole could gain greatly if the countries were to cooperate strategically to enhance efficiency, improve product quality and thereby increase value. As India shares borders with most Southasian countries, has proven capability in marketing, and has economic linkages with the major apparel-importing countries, it could become a hub for spurring the growth of intra-industry trade in the region. With its central location and size, India could also serve as an assembly and exit point of high-value Southasian goods (as well as services) for both domestic and international markets. Intra-industry trade could also be boosted by greater crossborder foreign direct investment. For lower-value and specialised textile products, Bangladesh, Pakistan or any of the other smaller countries could become the hub.
The automotive sector also has the potential to develop as a regional priority sector. Several crucial ingredients are already in place for this to happen. Automotive manufacturing is a complex, multi-tiered production process that involves assembly of a large number of components. The assembly complexity spans the entire range, from simple mechanical components to complex electronic parts. Hence, a degree of specialisation for each of the countries is feasible without entering into debilitating direct competition. Furthermore, advances in production technology allow for the geographical spread of assembly of parts and components to locations where economies of scale can be used optimally. Unlike in earlier production technologies, it is no longer necessary to geographically concentrate the entire assembly activity in one geographical location. The current and potential size of the market for automotive products makes it more worthwhile for manufacturers to optimally exploit economies of scale and comparative advantages for each of the countries. Incidentally, in order to fully benefit from scale economies and sub-regional specialisation, it may also be appropriate for Southasian car manufacturers – in the wake of Chinese competition – to broaden the market from the sub-regional to the wider Asian or even global level.
As other successful regional cooperation and integration initiatives have demonstrated, regional cooperation in trade and investment benefits all countries. Focusing on and recognising the longer-term and dynamic benefits of regional integration helps to eliminate the anxiety that Nepal’s gain, for example, would be offset by India’s loss – ie, that there is not much to be gained from such cooperative economic arrangements, or that only the small neighbours would gain. The long-term approach acknowledges that benefits will accrue to all members of the regional group, irrespective of their size. While static benefits for the larger countries in trading with the smaller countries may seem limited, the longer-term dynamic effects from integrating with smaller neighbouring countries are substantial. For smaller economies, exploiting their comparative advantages in specific phases of the regional production chain will yield significant benefits while boosting intra-regional trade, investment and integration with the neighbouring country. Some analysts have also pointed out that regional economic integration, driven by more free trade and investment, could have substantial gains for India’s borders states, some of which are among the poorest in the country.
The peace dividends of a more economically integrated Southasia, as exemplified by the European experience, could be enormous. Peace and stability in the region would spur the ‘neighbourhood effect’ in foreign direct investment; after all, the rest of the world views Southasia as a region, and events in India’s neighbourhood are likely to influence FDI decisions. An economically integrated Southasia that is at the same time open to the rest of the world would not only respond to the aspirations of its peoples for prosperity and peace, but could also be a major anchor for global economic stability. Globalisation is an inexorable process, and the smart thing for Southasia would be to deal with it collectively, as a region.
----------------------------------------------------------------------------------------------------------------
The author is Deputy Director General of South Asia Development of Asian Development Bank
Courtesy: Himal South Asian
water water every where ..not a bite to eat
By Mark Dummett BBC News, Janakpur, Nepal
Many roads and bridges have been washed away by the floods
The road heading south to India has been washed away.
Soldiers now ferry families wanting to reach the border over a river which was not here last week.
Men hold bicycles above their heads as they wade through water which reaches up to their armpits. They then push them over a beach of wet sand.
Villagers say that there also used to be houses here, but they too have disappeared.
Dulari Kapar sells snacks from under the tattered awning of a tiny shelter. Her deep fried pakoras are popular with the frustrated and wet travellers, but her business does not compensate for what she has lost.
"This is my house now, nothing is left," she says. "The flood swept away everything else."
Devastating
The waters are receding fast across the Terai, a strip of paddy fields and fruit groves in southern Nepal.
In their wake they are leaving a landscape of damaged buildings, collapsed embankments, destroyed bridges and waterlogged fields.
What is the monsoon?
Dozens of heavily-populated districts were affected - struck first by the heaviest monsoon rains many people can remember, then by swollen rivers gushing down from the Himalayas.
These burst their banks in devastating fashion, first across the Terai, and then in the neighbouring Indian states of Bihar and Uttar Pradesh.
Politicians in the Indian states complain that Nepal should have done more to prevent the floods, but it is not clear how anyone could have controlled such a huge and unexpected amount of water.
"It was midnight when the flood entered our village," says Indrasingh Devi, an elderly woman who lives near the border town of Jaleswor.
"We had a good house with a tiled roof and a happy family of 13 members. But there is now nothing left. Who is left to even offer me a glass of water?"
But the destruction has been selective. The brick houses of the relatively well-off and those of people living in towns have mostly survived.
The worst affected have been the thatch and mud homes of poor people living on the edges of villages, close to the paddies and rivers.
No help
Pula Devi and her family of five are now living in a school. They have nowhere else to stay, because their house is now in ruins.
Ramananda Mandal says many do not have enough to eat"We haven't received any help from the government or anyone else. We have only been able to buy food after borrowing money from a shopkeeper," she says.
The relief effort is being directed by the home ministry and the Nepalese Red Cross, assisted by the UN and other NGOs, but they are struggling to get aid to everyone.
The roads have been cut in so many places that supplies cannot be transported easily, and aid workers admit they have little idea of what the situation is like in far-flung communities.
"We are trying, but there is a big problem with the roads. There are some places we still haven't reached," Ashok Manpandey of the Red Cross in Janakpur says.
'Big problem'
The situation is complicated because the Nepalese government is barely functioning in many parts of the Terai plains. There have been months of violent protests against the authorities.
Relief agencies are finding it difficult to transport suppliesSome people of the Terai, known as Madheshis, are demanding a greater say in the running of the country and an end to what they describe as centuries of discrimination at the hands of highland Nepalis.
According to recent press reports, 700 civil servants have fled the Terai this year and moved back to the mountains.
The result is that even in villages close to Janakpur - an important administrative and religious town - people complain that they have received little help.
"Most of the people are poor and they don't have food to eat," says Ramananda Mandal of Basbitti village told me.
"They only gave us 2kg of beaten rice and a little sugar, which we have already eaten. People like us have a big problem."
On the whole though, the villagers of the Terai are not starving - this is a food producing region, and traders, unlike the relief agencies, have not been put off by the logistical challenges of moving supplies.
But people need help and it will take some time for this region to recover.
Many roads and bridges have been washed away by the floods
The road heading south to India has been washed away.
Soldiers now ferry families wanting to reach the border over a river which was not here last week.
Men hold bicycles above their heads as they wade through water which reaches up to their armpits. They then push them over a beach of wet sand.
Villagers say that there also used to be houses here, but they too have disappeared.
Dulari Kapar sells snacks from under the tattered awning of a tiny shelter. Her deep fried pakoras are popular with the frustrated and wet travellers, but her business does not compensate for what she has lost.
"This is my house now, nothing is left," she says. "The flood swept away everything else."
Devastating
The waters are receding fast across the Terai, a strip of paddy fields and fruit groves in southern Nepal.
In their wake they are leaving a landscape of damaged buildings, collapsed embankments, destroyed bridges and waterlogged fields.
What is the monsoon?
Dozens of heavily-populated districts were affected - struck first by the heaviest monsoon rains many people can remember, then by swollen rivers gushing down from the Himalayas.
These burst their banks in devastating fashion, first across the Terai, and then in the neighbouring Indian states of Bihar and Uttar Pradesh.
Politicians in the Indian states complain that Nepal should have done more to prevent the floods, but it is not clear how anyone could have controlled such a huge and unexpected amount of water.
"It was midnight when the flood entered our village," says Indrasingh Devi, an elderly woman who lives near the border town of Jaleswor.
"We had a good house with a tiled roof and a happy family of 13 members. But there is now nothing left. Who is left to even offer me a glass of water?"
But the destruction has been selective. The brick houses of the relatively well-off and those of people living in towns have mostly survived.
The worst affected have been the thatch and mud homes of poor people living on the edges of villages, close to the paddies and rivers.
No help
Pula Devi and her family of five are now living in a school. They have nowhere else to stay, because their house is now in ruins.
Ramananda Mandal says many do not have enough to eat"We haven't received any help from the government or anyone else. We have only been able to buy food after borrowing money from a shopkeeper," she says.
The relief effort is being directed by the home ministry and the Nepalese Red Cross, assisted by the UN and other NGOs, but they are struggling to get aid to everyone.
The roads have been cut in so many places that supplies cannot be transported easily, and aid workers admit they have little idea of what the situation is like in far-flung communities.
"We are trying, but there is a big problem with the roads. There are some places we still haven't reached," Ashok Manpandey of the Red Cross in Janakpur says.
'Big problem'
The situation is complicated because the Nepalese government is barely functioning in many parts of the Terai plains. There have been months of violent protests against the authorities.
Relief agencies are finding it difficult to transport suppliesSome people of the Terai, known as Madheshis, are demanding a greater say in the running of the country and an end to what they describe as centuries of discrimination at the hands of highland Nepalis.
According to recent press reports, 700 civil servants have fled the Terai this year and moved back to the mountains.
The result is that even in villages close to Janakpur - an important administrative and religious town - people complain that they have received little help.
"Most of the people are poor and they don't have food to eat," says Ramananda Mandal of Basbitti village told me.
"They only gave us 2kg of beaten rice and a little sugar, which we have already eaten. People like us have a big problem."
On the whole though, the villagers of the Terai are not starving - this is a food producing region, and traders, unlike the relief agencies, have not been put off by the logistical challenges of moving supplies.
But people need help and it will take some time for this region to recover.
Monday, August 6, 2007
Nepse makes history again; crosses 700 mark
Kathmandu, Aug 05: The Nepal Stock Exchange (Nepse) index made another history in its 13-year-long existence after crossing the 700 mark for the first time on Sunday. Trade analysts attributed the rise to a continuous rise in share prices of commercial banks led by Standard Chartered, Nabil and Himalayan Banks.
The Nepse closed at 707.73 points, a growth by 9.50 points from last week´s closing, with shares of commercial banks and hydropower companies gaining.
According to the reports, the stock market had cooled down significantly during last week´s trading, but it bounced back on Sunday, again proving wrong the analysis that it is an ´unjustified rise´ given the country´s economic performance and actual financial health of the listed companies nepalnews.com ag Aug 06 07
The Nepse closed at 707.73 points, a growth by 9.50 points from last week´s closing, with shares of commercial banks and hydropower companies gaining.
According to the reports, the stock market had cooled down significantly during last week´s trading, but it bounced back on Sunday, again proving wrong the analysis that it is an ´unjustified rise´ given the country´s economic performance and actual financial health of the listed companies nepalnews.com ag Aug 06 07
Saturday, August 4, 2007
interview with young MPs of INDIA
As India races towards superpower states, there are still some 40 million that are still mired in poverty. What are its leaders doing to narrow the gap between those that have benefited from the economic rise and those that have been left behind
Three young and dynamic MPs speak about their optimism on overcoming problems of poverty and ethnic strife that still beset India, and how it is reaching out to nations in Southeast Asia to expand its trade, specifically in the areas of energy to supply its rapidly growing industries click here for the video
Three young and dynamic MPs speak about their optimism on overcoming problems of poverty and ethnic strife that still beset India, and how it is reaching out to nations in Southeast Asia to expand its trade, specifically in the areas of energy to supply its rapidly growing industries click here for the video
Friday, August 3, 2007
India's VLCC sets up shop in Nepal
Kathmandu : Indian wellness guru Vandana Luthra's clinic VLCC has arrived in Nepal as the growing demand for trendy clothes, cosmetics and fitness centres creates an attractive market for Indian companies.
Sanjay Agarwal, a 44-year-old businessman whose Heritage Fashion is one of the top garment exporters in Nepal, has signed a deal with VLCC to become its first overseas franchisee.
"I used to enrol at VLCC during my visits to India," he said at a press conference here Friday. "I was very impressed by their services and thought why not ask them to open a franchise in Nepal."
The first VLCC centre, being inaugurated in Kathmandu Friday in the presence of Miss Nepal 2006 Sugarika KC, targets the middle and upper middle class clientele, especially the elite Rana families.
Agarwal says he plans to open another centre in the capital after six months following which there would be VLCC centres in the outer districts as well, starting with Pokhara city in central Nepal and Biratnagar, near the Indian border.
This is the first overseas franchise by VLCC, which has its own centres in India and the United Arab Emirates (UAE).
Agarwal dismisses reports about Nepal being one of the poorest countries in the world. "People here are very conscious of their looks and fitness," he says, "and they have the capacity to spend money on that. Besides, we are not very expensive."
VLCC is charging Rs.1,200 for a per kg weight loss.
Agarwal is also unfazed by growing reports of union trouble in Nepal and demands for donation by various groups, including Maoists.
"There are 800 people in my garments factory," he says. "I know how to keep my employees happy."
Nepal is fast shaking off its image of being one of the least developed nations, with the demand for branded clothes, trendy cosmetics and fitness attracting Indian companies.
Shehnaz Hussain franchises her herbal cosmetic products in Nepal. Hairstylist Sylvie flies into Kathmandu for quick workshops while Habib has two hair studios in Kathmandu and its neighbouring Lalitpur district
Sanjay Agarwal, a 44-year-old businessman whose Heritage Fashion is one of the top garment exporters in Nepal, has signed a deal with VLCC to become its first overseas franchisee.
"I used to enrol at VLCC during my visits to India," he said at a press conference here Friday. "I was very impressed by their services and thought why not ask them to open a franchise in Nepal."
The first VLCC centre, being inaugurated in Kathmandu Friday in the presence of Miss Nepal 2006 Sugarika KC, targets the middle and upper middle class clientele, especially the elite Rana families.
Agarwal says he plans to open another centre in the capital after six months following which there would be VLCC centres in the outer districts as well, starting with Pokhara city in central Nepal and Biratnagar, near the Indian border.
This is the first overseas franchise by VLCC, which has its own centres in India and the United Arab Emirates (UAE).
Agarwal dismisses reports about Nepal being one of the poorest countries in the world. "People here are very conscious of their looks and fitness," he says, "and they have the capacity to spend money on that. Besides, we are not very expensive."
VLCC is charging Rs.1,200 for a per kg weight loss.
Agarwal is also unfazed by growing reports of union trouble in Nepal and demands for donation by various groups, including Maoists.
"There are 800 people in my garments factory," he says. "I know how to keep my employees happy."
Nepal is fast shaking off its image of being one of the least developed nations, with the demand for branded clothes, trendy cosmetics and fitness attracting Indian companies.
Shehnaz Hussain franchises her herbal cosmetic products in Nepal. Hairstylist Sylvie flies into Kathmandu for quick workshops while Habib has two hair studios in Kathmandu and its neighbouring Lalitpur district
IPHONE watch out........ its Google
Google Inc has invested hundreds of millions of dollars in its cell phone project and is courting US and European mobile operators, The Wall Street Journal reported on Thursday. Anian, a Reuters company that tracks industry trends for institutional investors, reported last month that Google had engaged Taiwan's High Tech Computer Corp to design a Linux software-based phone for launch in the first quarter of 2008. The Anian report cited industry sources as saying T-Mobile, owned by Deutsche Telekom, would likely be Google's US partner with France Telecom's Orange selling the phones in other markets. The Journal said that Google had also approached the two biggest US wireless services, AT&T Inc and Verizon Wireless, in recent months to ask them to sell phones with Google service. It cited a Verizon Wireless executive saying the company had decided not to integrate Google's Web search tightly into its phones because of Google's advertising revenue-sharing demands. The newspaper said the executive had not commented on a Google phone. A person familiar with the situation told Reuters that talks between Verizon Wireless, owned by Verizon Communications Inc and Vodafone Group Plc, and Google have ended without resulting in an agreement. Representatives for Verizon Wireless, T-Mobile and AT&T declined to comment. T-Mobile and Vodafone already incorporate Google search in their mobile Web service in Europe, while AT&T offers it as one of several Web search options.
We talk to a lot of different companies and we're not going to comment on our discussions with any of them," said Mark Siegel, an AT&T spokesman. Google said in an e-mailed response that it is "partnering with carriers, manufacturers, and content providers around the world," without giving further details It has said wireless was an increasingly important market but it has not announced plans to build a phone. It said last week that Sprint Nextel Corp would feature Google services on devices for a new wireless network the # three US mobile service is building. Google has also developed prototype phones and talked over technical specifications with manufacturers including LG Electronics, The Wall Street Journal said. Mobile advertising is still a relatively small market but advertisers and wireless experts expect this to change. Yankee Group has forecast the mobile ad market will more than quadruple to $275 million in 2007 and eventually grow to $2.2 billion in 2010, up from an estimated $60 million in 2006. Some experts are forecasting an even bigger market.
We talk to a lot of different companies and we're not going to comment on our discussions with any of them," said Mark Siegel, an AT&T spokesman. Google said in an e-mailed response that it is "partnering with carriers, manufacturers, and content providers around the world," without giving further details It has said wireless was an increasingly important market but it has not announced plans to build a phone. It said last week that Sprint Nextel Corp would feature Google services on devices for a new wireless network the # three US mobile service is building. Google has also developed prototype phones and talked over technical specifications with manufacturers including LG Electronics, The Wall Street Journal said. Mobile advertising is still a relatively small market but advertisers and wireless experts expect this to change. Yankee Group has forecast the mobile ad market will more than quadruple to $275 million in 2007 and eventually grow to $2.2 billion in 2010, up from an estimated $60 million in 2006. Some experts are forecasting an even bigger market.
Selling to the GARIB
By Allen L. Hammond, C.K. Prahalad May/June 2004
Recently Professor C. K. Prahalad earned the third spot on Suntop Media's 2005 "Thinkers 50" list, behind Harvard strategy specialist, Michael Porter, and Microsoft founder, Bill Gates.
When the Indian industrial and technology conglomerate ITC started building a network of Internetconnected computers called “eChoupals” in farming villages in India's rural state of Madhya Pradesh in 2001, soy farmers were suddenly able to check fair market prices for their crops. Some farmers began tracking soy futures on the Chicago Board of Trade, and soon most of them were bypassing local auction markets and selling their crops directly to ITC for about $6 more per ton than they previously received. The same ITC network enables farmers to buy seeds, fertilizers, and other materials directly, at considerable savings, as well as to purchase formerly unavailable soiltesting services. Today, the growing eChoupal network reaches 1.8 million farmers, and ITC is receiving demands from rural farmers for new products and services—the beginnings of consumer market power at the poorest level of Indian society.
The ITC network is one example of how access to information can increase productivity and raise incomes. It also reveals what happens when large businesses stop regarding the world's 4 billion poor people as victims and start eyeing them as consumers. For decades, corporate executives at the world's largest companies—and their counterparts running wealthy governments—have thought of poor people as powerless and desperately in need of handouts. But turning the poor into customers and consumers is a far more effective way of reducing poverty.
Why hasn't the business world caught on? The explanations are well known: Infrastructure in the developing world is often poor or nonexistent, creating the need for substantial upfront investment. Illiteracy tends to be high, requiring nontraditional marketing approaches. Tribal, racial, and religious tensions, as well as rampant crime, complicate hiring and...
click here for the paper
Recently Professor C. K. Prahalad earned the third spot on Suntop Media's 2005 "Thinkers 50" list, behind Harvard strategy specialist, Michael Porter, and Microsoft founder, Bill Gates.
When the Indian industrial and technology conglomerate ITC started building a network of Internetconnected computers called “eChoupals” in farming villages in India's rural state of Madhya Pradesh in 2001, soy farmers were suddenly able to check fair market prices for their crops. Some farmers began tracking soy futures on the Chicago Board of Trade, and soon most of them were bypassing local auction markets and selling their crops directly to ITC for about $6 more per ton than they previously received. The same ITC network enables farmers to buy seeds, fertilizers, and other materials directly, at considerable savings, as well as to purchase formerly unavailable soiltesting services. Today, the growing eChoupal network reaches 1.8 million farmers, and ITC is receiving demands from rural farmers for new products and services—the beginnings of consumer market power at the poorest level of Indian society.
The ITC network is one example of how access to information can increase productivity and raise incomes. It also reveals what happens when large businesses stop regarding the world's 4 billion poor people as victims and start eyeing them as consumers. For decades, corporate executives at the world's largest companies—and their counterparts running wealthy governments—have thought of poor people as powerless and desperately in need of handouts. But turning the poor into customers and consumers is a far more effective way of reducing poverty.
Why hasn't the business world caught on? The explanations are well known: Infrastructure in the developing world is often poor or nonexistent, creating the need for substantial upfront investment. Illiteracy tends to be high, requiring nontraditional marketing approaches. Tribal, racial, and religious tensions, as well as rampant crime, complicate hiring and...
click here for the paper
Thursday, August 2, 2007
Microfinance Misses Its Mark
BY-Aneel Karnani
Microcredit is the newest silver bullet for alleviating poverty. Wealthy philanthropists such as financier George Soros and eBay co-founder Pierre Omidyar are pledging hundreds of millions of dollars to the microcredit movement. Global commercial banks, such as Citigroup Inc. and Deutsche Bank AG, are establishing microfinance funds. Even people with just a few dollars to spare are going to microcredit Web sites and, with a click of the mouse, lending money to rice farmers in Ecuador and auto mechanics in Togo.
Wealthy philanthropists, banks, and online donors aren’t the only ones fascinated with microcredit. The United Nations designated 2005 as the International Year of Microcredit, explaining on its Web site that microentrepreneurs can use their small loans to “grow thriving business and, in turn, provide for their families, leading to strong and flourishing local economies.” The Nobel Committee awarded the 2006 Nobel Peace Prize to Muhammad Yunus and Grameen Bank, declaring that microcredit is “an ever more important instrument in the fight against poverty.”
All this enthusiasm for microcredit has attracted untold billions of dollars.1 Grameen Bank alone disbursed $4 billion in microloans over the last 10 years, and it now has 7 million borrowers in Bangladesh. In India, about 1,000 microcredit organizations and 300 commercial banks lent $1.3 billion to 17.5 million people in 2006, says Sanjay Sinha, managing director of Micro-Credit Ratings International in India.2 Worldwide, 3,133 microcredit institutions provided loans to 113.3 million clients, finds the State of the Microcredit Summit Campaign Report 2006.3
This fervor suggests that microcredit really must help the poor. And many have made grand claims to this effect, including Yunus, who said, “We will make Bangladesh free from poverty by 2030.”4 Somewhat less ambitiously, the State of the Microcredit Summit Campaign Report 2006 states that “microcredit is one of the most powerful tools to address global poverty.”
Yet my analysis of the macroeconomic data suggests that although microcredit yields some noneconomic benefits, it does not significantly alleviate poverty. Indeed, in some instances microcredit makes life at the bottom of the pyramid worse. Contrary to the hype about microcredit, the best way to eradicate poverty is to create jobs and to increase worker productivity.
To understand why creating jobs, not offering microcredit, is the better solution to alleviating poverty, consider these two alternative scenarios: (1) A microfinancier lends $200 to each of 500 women so that each can buy a sewing machine and set up her own sewing microenterprise, or (2) a traditional financier lends $100,000 to one savvy entrepreneur and helps her set up a garment manufacturing business that employs 500 people. In the first case, the women must make enough money to pay off their usually high-interest loans while competing with each other in exactly the same market niche. Meanwhile the garment manufacturing business can exploit economies of scale and use modern manufacturing processes and organizational techniques to enrich not only its owners, but also its workers.
As these scenarios illustrate, a surer way to ending poverty is to create jobs and to increase worker productivity, rather than investing in microfinance. But before going into detail about why it is better for an underdeveloped country to promote large enterprises, not microenterprises, let’s examine the theory behind microcredit.
Microcredit 101
The microfinance movement addresses a basic yet devastating glitch in the formal banking system: Poor households cannot get capital from traditional banks because they do not have collateral to secure loans, and traditional banks do not want to take on the risks and costs of making small, uncollateralized loans. Without this capital, impoverished people cannot rise above subsistence. For example, a seamstress cannot buy the sewing machine that would allow her to sew more clothes than she could by hand, and thereby pull herself out of poverty.
Microfinanciers use innovative contractual practices and organizational forms to reduce the risks and costs of making loans, such as lending to groups, rather than just to one person. Some microcredit organizations give their clients more than loans, offering education, training, healthcare, and other social services. Typically, these organizations are not-for-profit or are owned by customers or investors who are more concerned about the economic and social development of the poor than they are with profits. The largest of these social purpose microfinanciers include Opportunity International, Finca International, Accion International, Oikocredit, and Grameen Bank.
In contrast to nonprofit organizations, commercial banks that make microloans typically provide only financial services. Indonesia’s Bank Rakyat, Ecuador’s Bank Pichincha, and Brazil’s Unibanco all directly target poor customers. Some large commercial banks, such as the Indian bank ICICI, do not lend directly to individual microcredit clients, but instead work through small microfinance organizations.
Another innovation that many nonprofit microfinance organizations have adopted is targeting women. At Grameen Bank, for example, 97 percent of clients are women because “women have longer vision [and] want to change their lives much more intensively,” says Yunus.5 On the other hand, “men are more callous with money.”6 Evidence indeed suggests that when women retain control of microloans, they spend more on the health, security, and welfare of their families.7
A major selling point of microfinance is its alleged ability to empower women. Research shows that microcredit increases women’s bargaining power within the home, centrality to the community, awareness of social and political issues, and mobility. It also increases their self-esteem and self-worth.8 Yet microcredit alone cannot overcome ingrained patriarchal systems of control. In spite of having access to credit, some female microcredit clients do not have control over the loans contracted or the income generated by the microenterprises.9 Overall, microcredit does empower women, but only in noneconomic ways.
Failures of Microfinance
Despite the hoopla surrounding microcredit, few have studied its impact.10 One of the most comprehensive studies reaches a surprising conclusion: Microloans are more beneficial to borrowers living above the poverty line than to borrowers living below the poverty line.11 This is because clients with more income are willing to take the risks, such as investing in new technologies, that will most likely increase income flows. Poor borrowers, on the other hand, tend to take out conservative loans that protect their subsistence, and rarely invest in new technology, fixed capital, or the hiring of labor.
Microloans sometimes even reduce cash flow to the poorest of the poor, observes Vijay Mahajan, the chief executive of Basix, an Indian rural finance institution. He concludes that microcredit “seems to do more harm than good to the poorest.”12 One reason could be the high interest rates charged by microcredit organizations. Acleda, a Cambodian commercial bank specializing in microcredit, charges interest rates of about 2 percent to 4.5 percent each month. Some other microlenders charge more, pushing most annual rates to between 30 percent and 60 percent.13 Microcredit proponents argue that these rates, although high, are still well below those charged by informal moneylenders. But if poor clients cannot earn a greater return on their investment than the interest they must pay, they will become poorer as a result of microcredit, not wealthier.
Another problem with microcredit is the businesses it is intended to fund. A microcredit client is an entrepreneur in the literal sense: She raises the capital, manages the business, and takes home the earnings. But the “entrepreneurs” who have become heroes in the developed world are usually visionaries who convert new ideas into successful business models. Although some microcredit clients have created visionary businesses, the vast majority are caught in subsistence activities. They usually have no specialized skills, and so must compete with all the other self-employed poor people in entry-level trades.14 Most have no paid staff, own few assets, and operate at too small a scale to achieve efficiencies, and so make very meager earnings. In other words, most microenterprises are small and many fail – contrary to the United Nations’ hype that microentrepreneurs will grow thriving businesses that lead to flourishing economies.
This should not be too surprising. Most people do not have the skills, vision, creativity, and persistence to be entrepreneurial. Even in developed countries with high levels of education and access to financial services, about 90 percent of the labor force is employees, not entrepreneurs.15
The reality of microcredit is less attractive than the promise.16 Even a stalwart proponent of neoliberal policies like The Economist is beginning to conclude that “the few studies that have been done suggest that small loans are beneficial, but not dramatically so.”17
Jobs, Not Microcredit
Microcredit is certainly a noble idea and a genuine innovation that has provided some positive impact to its clients, particularly to women’s noneconomic empowerment. It also helps the poor during cyclical or unexpected crises, and thus reduces their vulnerability.18 But the critical issue is whether microcredit helps eradicate poverty. And on that front, it falls short.
China, Vietnam, and South Korea have significantly reduced poverty in recent years with little microfinance activity. On the other hand, Bangladesh, Bolivia, and Indonesia haven’t been as successful at reducing poverty despite the influx of microcredit.
The fact is, most microcredit clients are not microentrepreneurs by choice. They would gladly take a factory job at reasonable wages if it were available. We should not romanticize the idea of the “poor as entrepreneurs.” The International Labour Organization (ILO) uses a more appropriate term for these people: “own-account workers.”
Creating opportunities for steady employment at reasonable wages is the best way to take people out of poverty. “Nothing is more fundamental to poverty reduction than employment,” states the ILO. And the United Nations Development Programme agrees: “Employment is a key link between economic growth and poverty reduction. Productive and remunerative employment can help ensure that poor people share in the benefits of economic growth.”
Consider the patterns of poverty and employment over time in China, India, and Africa, whose populations make up about three-quarters of the world’s poor (see graphs on p. 39). Each region has pursued a different path to economic development, and the results so far have been markedly different.
In China, a large and growing percentage of the population is employed in a job. At the same time, the percentage of people living in poverty has declined significantly in recent decades. In Africa, a small and shrinking fraction of the population is employed, and the incidence of poverty has remained unchanged during the same period. India’s performance lies somewhere between the two: The number of people in jobs has grown some, and the number of people in poverty has shrunk a little.
Many people who have jobs in these regions are still stuck below the poverty line – the working poor. Whether an employee is “poor” depends on her wages, the size of her household, and the income of other household members. Increased productivity leads to higher wages, which in turn lead to employees earning enough to rise above poverty. That is why it is not enough to create jobs; regions must also increase labor productivity through the use of new technology, management techniques, specialization, and the like.
When it comes to increasing labor productivity, India’s performance is mediocre and the situation in Africa is dismal. One reason for India’s poor productivity growth is that its enterprises are often too small. The average firm size in India is less than one-tenth the size of comparable firms in other emerging economies.19 The emphasis on microcredit and the creation of microenterprises will only make this problem worse.20
It is possible for an economy to invest in both microenterprises and larger enterprises. But governments need to prioritize development approaches that have a higher payoff. As Amar Bhide and Carl Schramm wrote in The Wall Street Journal: “Governments in fragile states have only so much political capital and capacity. So it is crucial to proceed in a disciplined sequence.”21
The State’s Responsibilities
Poverty alleviation cannot be defined only in economic terms; it is also about addressing a much broader set of needs. Amartya Sen, the Nobel Prize-winning economist, eloquently argues that development can be seen as a “process of expanding the real freedoms that people enjoy.”22 Social, cultural, and political freedoms are desirable in and of themselves, and they also enable individual income growth. Services such as public safety, basic education, public health, and infrastructure nurture these freedoms and increase the productivity and employability of the poor, and thus their income and well-being.
The governments of all developing countries claim to accept responsibility for these functions. Yet they have failed dismally to deliver on their promises. Consider the case of India: The economy is growing rapidly, the stock market is at an all-time high, Indian companies are expanding abroad, and a large middle class is emerging. It is, for many, the best of times.
Contrast this image with that of another India, where 79 percent of the population still lives on less than $2 per day, 39 percent of adults are illiterate, 31 percent of rural households and 9 percent of urban households do not have safe drinking water, 81 percent of rural households and 19 percent of urban households do not have a toilet, 10 percent of boys and 25 percent of girls do not attend primary school, 49 percent of children are underweight, 9 percent of children die in the first five years of their lives, and 400,000 children die of diarrhea every year.
The boom in India’s private sector has been accompanied by an outright failure of the state, and the poor have borne the brunt of this failure. The rich can purchase services from private enterprises, and the middle class are the main beneficiaries of limited public services. But the poor have little or no access to public services and cannot pay the high prices for private services. For instance, children of the rich go to exclusive private schools, children of the middle class use a mix of private and public schools, and children of the poor often do not go to school at all or go to low-quality public schools.
Markets Aren’t Enough
India isn’t the only country whose government is failing to meet its responsibilities. Much of the developing world is likewise missing a vibrant public sector. In response to these shortcomings, a growing number of people believe that markets would do a better job of providing these same services. That is one of the reasons why microcredit has such widespread appeal: It’s a market-based approach to eliminating poverty.23
Even those who advocate a market-based approach to providing basic services don’t argue that the state can totally abdicate its responsibilities. The late economist Milton Friedman, who advocated a school voucher system, did not want the state to withdraw totally from the field of education. The state must provide basic education for the sake of intergenerational equity. The state must also be responsible for providing services when there is a market failure. Free markets do not work well when economies of scale are very large and there is a natural monopoly, as in the case of piped water, and when the commodity is a “common good,” as in the case of public health. In such cases, the market might be a partial complement to the state, but it cannot be a total substitute. For example, if a region has a private water supply, the government must still regulate rates and ensure that the poor have enough purchasing power to buy water.
The business guru C.K. Prahalad says, “If people have no sewage and drinking water, should we also deny them televisions and cell phones?”24 Writing about the slums of Mumbai, he argues that the poor accept that access to running water is not a “realistic option” and therefore spend their income on things that they can get now and that will improve the quality of their lives.25 This opens up a market, and he urges private companies to make significant profits by selling to the “bottom of the pyramid” (BOP).
Yet the BOP proposition glosses over the real issue: Why do poor people accept that they cannot expect running water? Even if they do accept this bleak view, why should we? Instead, we should emphasize the failure of government and attempt to correct it. Giving a voice to the poor is a central aspect of the development process.
The business community, bureaucrats, politicians, and the media are very busy congratulating themselves on the booming private sector in India. Sure, more Indians have cell phones. But what many remember about India is not all the people using cell phones. It’s all the people defecating in public because they do not have toilets. Even in Mumbai, the business capital of India, about 50 percent of the people defecate outside. The current celebration of private sector successes should be met, and perhaps chastened, with anger at the failure of the state to provide basic services.
Overall, governments, businesses, and civil society would be well advised to reallocate their resources and energies away from microfinance and into supporting larger enterprises in labor-intensive industries. This is what is alleviating poverty in China, Korea, Taiwan, and other developing countries. At the same time, they should also provide basic services that improve the employability and productivity of the poor. Otherwise, they will miss the mark of lifting people out of poverty.
1 Tom Easton, “Hidden Wealth of the Poor,” The Economist (Nov. 3, 2005).
2 Claire Cane Miller, “Microcredit: Why India Is Failing,” Forbes (Nov. 10, 2006).
3 Sam Daley-Harris, “State of the Microcredit Summit Campaign Report 2006.” Available at http://www.microcreditsummit.org/pubs/reports/socr/2006.htm.
4 “Bangladesh Will Send Poverty to Museum by 2030: Yunus,” Financial Express (Feb. 18, 2007).
5 George Negus, “Foreign Correspondent – Interview With Prof. Muhammad Yunus,” ABC Online (March 25, 1997).
6 Manfred Ertel and Padma Rao, “Women Are Better With Money,” Spiegel (Dec. 7, 2006).
7 Aminur Rahman, “Micro-credit Initiatives for Equitable and Sustainable Development: Who Pays?” World Development (1999); Naila Kabeer, “Money Can’t Buy Me Love? Re-evaluating Gender, Credit and Empowerment in Rural Bangladesh,” IDS Discussion Paper No. 363 (1998); Mark Pitt and Shahidur Khandker, “Household and Intrahousehold Impact of the Grameen Bank and Similar Credit Targeted Programs in Bangladesh” (Washington, D.C.: World Bank Publications, 1995).
8 Gita Sabharwal, “From the Margin to the Mainstream. Micro-Finance Programmes and Women’s Empowerment: The Bangladesh Experience,” University of Wales, Swansea (2000). Available at http://www.gdrc.org/icm/wind/geeta.pdf.
9 Jennefer Sebstad and Gregory Chen, “Overview of Studies on the Impact of Microenterprise Credit” (Washington, D.C.: USAID, 1996).
10 Aliya Khawari, “Microfinance: Does It Hold Its Promises?” Discussion Paper, Hamburg Institute of International Economics (2004).
11 David Hulme and Paul Mosley, Finance Against Poverty (London: Routledge, 1996).
12 Salil Tripathi, “Microcredit Won’t Make Poverty History,” Guardian Unlimited (Oct. 17, 2006).
13 Daniel Ten Kate and Van Rouen, “The Cycle of Debt – As Microcredit Institutions Grow, Some Question Their Effect on Poverty,” The Cambodia Daily (Feb. 21-22, 2004).
14 Abhijit V. Banerjee and Esther Duflo, “The Economic Lives of the Poor,” Journal of Economic Perspectives (2006).
15 LABORSTA Internet database, available at http://laborsta.ilo.org , International Labour Organization.
16 Thomas W. Dichter, “Hype and Hope: The Worrisome State of the Microcredit Movement” (2006). Available at http://www.microfinancegateway.org/content/article/detail/31747.
17 “Macro credit,” The Economist (Oct. 21, 2006).
18 Jonathan Morduch, “Does Microfinance Really Help the Poor? New Evidence From Flagship Programs in Bangladesh,” Harvard Institute for International Development and Hoover Institution, Stanford University (1998). Available at http://www.wws.princeton.edu/~rpds/downloads/morduch_microfinance_poor.pdf.
19 Kalpana Kochhar et al., “India’s Pattern of Development: What Happened, What Follows?” Journal of Monetary Economics (2006).
20 Milford Bateman and David Ellerman, “Micro-Finance: Poverty Reduction Breakthrough or Neoliberal Dead-End?” Paper presented at UNDP Bosnia and Herzegovina and the BiH Economic Policy Planning Unit (EPPU), “Poverty Roundtable: Achieving MDG 1 (sustainable poverty reduction) in BiH” (June 16-17, 2005).
21 Amar Bhide and Carl Schramm, “Phelps’s Prize,” The Wall Street Journal (Jan. 29, 2007).
22 Amartya Sen, Development as Freedom (New York: Anchor Books, 2000).
23 Bateman and Ellerman.
24 “Selling to the Poor,” Time (April 17, 2005).
25 C.K. Prahalad and Allen Hammond, “Serving the World’s Poor Profitably,” Harvard Business Review (2002)
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ANEEL KARNANI is an associate professor of strategy at the University of Michigan’s Ross School of Business. Karnani’s research focuses on competitive advantage, strategies for growth, global competition, and emerging economies. He works with several companies to design and deliver executive development programs, and he is also actively involved in consulting to businesses.
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Microcredit is the newest silver bullet for alleviating poverty. Wealthy philanthropists such as financier George Soros and eBay co-founder Pierre Omidyar are pledging hundreds of millions of dollars to the microcredit movement. Global commercial banks, such as Citigroup Inc. and Deutsche Bank AG, are establishing microfinance funds. Even people with just a few dollars to spare are going to microcredit Web sites and, with a click of the mouse, lending money to rice farmers in Ecuador and auto mechanics in Togo.
Wealthy philanthropists, banks, and online donors aren’t the only ones fascinated with microcredit. The United Nations designated 2005 as the International Year of Microcredit, explaining on its Web site that microentrepreneurs can use their small loans to “grow thriving business and, in turn, provide for their families, leading to strong and flourishing local economies.” The Nobel Committee awarded the 2006 Nobel Peace Prize to Muhammad Yunus and Grameen Bank, declaring that microcredit is “an ever more important instrument in the fight against poverty.”
All this enthusiasm for microcredit has attracted untold billions of dollars.1 Grameen Bank alone disbursed $4 billion in microloans over the last 10 years, and it now has 7 million borrowers in Bangladesh. In India, about 1,000 microcredit organizations and 300 commercial banks lent $1.3 billion to 17.5 million people in 2006, says Sanjay Sinha, managing director of Micro-Credit Ratings International in India.2 Worldwide, 3,133 microcredit institutions provided loans to 113.3 million clients, finds the State of the Microcredit Summit Campaign Report 2006.3
This fervor suggests that microcredit really must help the poor. And many have made grand claims to this effect, including Yunus, who said, “We will make Bangladesh free from poverty by 2030.”4 Somewhat less ambitiously, the State of the Microcredit Summit Campaign Report 2006 states that “microcredit is one of the most powerful tools to address global poverty.”
Yet my analysis of the macroeconomic data suggests that although microcredit yields some noneconomic benefits, it does not significantly alleviate poverty. Indeed, in some instances microcredit makes life at the bottom of the pyramid worse. Contrary to the hype about microcredit, the best way to eradicate poverty is to create jobs and to increase worker productivity.
To understand why creating jobs, not offering microcredit, is the better solution to alleviating poverty, consider these two alternative scenarios: (1) A microfinancier lends $200 to each of 500 women so that each can buy a sewing machine and set up her own sewing microenterprise, or (2) a traditional financier lends $100,000 to one savvy entrepreneur and helps her set up a garment manufacturing business that employs 500 people. In the first case, the women must make enough money to pay off their usually high-interest loans while competing with each other in exactly the same market niche. Meanwhile the garment manufacturing business can exploit economies of scale and use modern manufacturing processes and organizational techniques to enrich not only its owners, but also its workers.
As these scenarios illustrate, a surer way to ending poverty is to create jobs and to increase worker productivity, rather than investing in microfinance. But before going into detail about why it is better for an underdeveloped country to promote large enterprises, not microenterprises, let’s examine the theory behind microcredit.
Microcredit 101
The microfinance movement addresses a basic yet devastating glitch in the formal banking system: Poor households cannot get capital from traditional banks because they do not have collateral to secure loans, and traditional banks do not want to take on the risks and costs of making small, uncollateralized loans. Without this capital, impoverished people cannot rise above subsistence. For example, a seamstress cannot buy the sewing machine that would allow her to sew more clothes than she could by hand, and thereby pull herself out of poverty.
Microfinanciers use innovative contractual practices and organizational forms to reduce the risks and costs of making loans, such as lending to groups, rather than just to one person. Some microcredit organizations give their clients more than loans, offering education, training, healthcare, and other social services. Typically, these organizations are not-for-profit or are owned by customers or investors who are more concerned about the economic and social development of the poor than they are with profits. The largest of these social purpose microfinanciers include Opportunity International, Finca International, Accion International, Oikocredit, and Grameen Bank.
In contrast to nonprofit organizations, commercial banks that make microloans typically provide only financial services. Indonesia’s Bank Rakyat, Ecuador’s Bank Pichincha, and Brazil’s Unibanco all directly target poor customers. Some large commercial banks, such as the Indian bank ICICI, do not lend directly to individual microcredit clients, but instead work through small microfinance organizations.
Another innovation that many nonprofit microfinance organizations have adopted is targeting women. At Grameen Bank, for example, 97 percent of clients are women because “women have longer vision [and] want to change their lives much more intensively,” says Yunus.5 On the other hand, “men are more callous with money.”6 Evidence indeed suggests that when women retain control of microloans, they spend more on the health, security, and welfare of their families.7
A major selling point of microfinance is its alleged ability to empower women. Research shows that microcredit increases women’s bargaining power within the home, centrality to the community, awareness of social and political issues, and mobility. It also increases their self-esteem and self-worth.8 Yet microcredit alone cannot overcome ingrained patriarchal systems of control. In spite of having access to credit, some female microcredit clients do not have control over the loans contracted or the income generated by the microenterprises.9 Overall, microcredit does empower women, but only in noneconomic ways.
Failures of Microfinance
Despite the hoopla surrounding microcredit, few have studied its impact.10 One of the most comprehensive studies reaches a surprising conclusion: Microloans are more beneficial to borrowers living above the poverty line than to borrowers living below the poverty line.11 This is because clients with more income are willing to take the risks, such as investing in new technologies, that will most likely increase income flows. Poor borrowers, on the other hand, tend to take out conservative loans that protect their subsistence, and rarely invest in new technology, fixed capital, or the hiring of labor.
Microloans sometimes even reduce cash flow to the poorest of the poor, observes Vijay Mahajan, the chief executive of Basix, an Indian rural finance institution. He concludes that microcredit “seems to do more harm than good to the poorest.”12 One reason could be the high interest rates charged by microcredit organizations. Acleda, a Cambodian commercial bank specializing in microcredit, charges interest rates of about 2 percent to 4.5 percent each month. Some other microlenders charge more, pushing most annual rates to between 30 percent and 60 percent.13 Microcredit proponents argue that these rates, although high, are still well below those charged by informal moneylenders. But if poor clients cannot earn a greater return on their investment than the interest they must pay, they will become poorer as a result of microcredit, not wealthier.
Another problem with microcredit is the businesses it is intended to fund. A microcredit client is an entrepreneur in the literal sense: She raises the capital, manages the business, and takes home the earnings. But the “entrepreneurs” who have become heroes in the developed world are usually visionaries who convert new ideas into successful business models. Although some microcredit clients have created visionary businesses, the vast majority are caught in subsistence activities. They usually have no specialized skills, and so must compete with all the other self-employed poor people in entry-level trades.14 Most have no paid staff, own few assets, and operate at too small a scale to achieve efficiencies, and so make very meager earnings. In other words, most microenterprises are small and many fail – contrary to the United Nations’ hype that microentrepreneurs will grow thriving businesses that lead to flourishing economies.
This should not be too surprising. Most people do not have the skills, vision, creativity, and persistence to be entrepreneurial. Even in developed countries with high levels of education and access to financial services, about 90 percent of the labor force is employees, not entrepreneurs.15
The reality of microcredit is less attractive than the promise.16 Even a stalwart proponent of neoliberal policies like The Economist is beginning to conclude that “the few studies that have been done suggest that small loans are beneficial, but not dramatically so.”17
Jobs, Not Microcredit
Microcredit is certainly a noble idea and a genuine innovation that has provided some positive impact to its clients, particularly to women’s noneconomic empowerment. It also helps the poor during cyclical or unexpected crises, and thus reduces their vulnerability.18 But the critical issue is whether microcredit helps eradicate poverty. And on that front, it falls short.
China, Vietnam, and South Korea have significantly reduced poverty in recent years with little microfinance activity. On the other hand, Bangladesh, Bolivia, and Indonesia haven’t been as successful at reducing poverty despite the influx of microcredit.
The fact is, most microcredit clients are not microentrepreneurs by choice. They would gladly take a factory job at reasonable wages if it were available. We should not romanticize the idea of the “poor as entrepreneurs.” The International Labour Organization (ILO) uses a more appropriate term for these people: “own-account workers.”
Creating opportunities for steady employment at reasonable wages is the best way to take people out of poverty. “Nothing is more fundamental to poverty reduction than employment,” states the ILO. And the United Nations Development Programme agrees: “Employment is a key link between economic growth and poverty reduction. Productive and remunerative employment can help ensure that poor people share in the benefits of economic growth.”
Consider the patterns of poverty and employment over time in China, India, and Africa, whose populations make up about three-quarters of the world’s poor (see graphs on p. 39). Each region has pursued a different path to economic development, and the results so far have been markedly different.
In China, a large and growing percentage of the population is employed in a job. At the same time, the percentage of people living in poverty has declined significantly in recent decades. In Africa, a small and shrinking fraction of the population is employed, and the incidence of poverty has remained unchanged during the same period. India’s performance lies somewhere between the two: The number of people in jobs has grown some, and the number of people in poverty has shrunk a little.
Many people who have jobs in these regions are still stuck below the poverty line – the working poor. Whether an employee is “poor” depends on her wages, the size of her household, and the income of other household members. Increased productivity leads to higher wages, which in turn lead to employees earning enough to rise above poverty. That is why it is not enough to create jobs; regions must also increase labor productivity through the use of new technology, management techniques, specialization, and the like.
When it comes to increasing labor productivity, India’s performance is mediocre and the situation in Africa is dismal. One reason for India’s poor productivity growth is that its enterprises are often too small. The average firm size in India is less than one-tenth the size of comparable firms in other emerging economies.19 The emphasis on microcredit and the creation of microenterprises will only make this problem worse.20
It is possible for an economy to invest in both microenterprises and larger enterprises. But governments need to prioritize development approaches that have a higher payoff. As Amar Bhide and Carl Schramm wrote in The Wall Street Journal: “Governments in fragile states have only so much political capital and capacity. So it is crucial to proceed in a disciplined sequence.”21
The State’s Responsibilities
Poverty alleviation cannot be defined only in economic terms; it is also about addressing a much broader set of needs. Amartya Sen, the Nobel Prize-winning economist, eloquently argues that development can be seen as a “process of expanding the real freedoms that people enjoy.”22 Social, cultural, and political freedoms are desirable in and of themselves, and they also enable individual income growth. Services such as public safety, basic education, public health, and infrastructure nurture these freedoms and increase the productivity and employability of the poor, and thus their income and well-being.
The governments of all developing countries claim to accept responsibility for these functions. Yet they have failed dismally to deliver on their promises. Consider the case of India: The economy is growing rapidly, the stock market is at an all-time high, Indian companies are expanding abroad, and a large middle class is emerging. It is, for many, the best of times.
Contrast this image with that of another India, where 79 percent of the population still lives on less than $2 per day, 39 percent of adults are illiterate, 31 percent of rural households and 9 percent of urban households do not have safe drinking water, 81 percent of rural households and 19 percent of urban households do not have a toilet, 10 percent of boys and 25 percent of girls do not attend primary school, 49 percent of children are underweight, 9 percent of children die in the first five years of their lives, and 400,000 children die of diarrhea every year.
The boom in India’s private sector has been accompanied by an outright failure of the state, and the poor have borne the brunt of this failure. The rich can purchase services from private enterprises, and the middle class are the main beneficiaries of limited public services. But the poor have little or no access to public services and cannot pay the high prices for private services. For instance, children of the rich go to exclusive private schools, children of the middle class use a mix of private and public schools, and children of the poor often do not go to school at all or go to low-quality public schools.
Markets Aren’t Enough
India isn’t the only country whose government is failing to meet its responsibilities. Much of the developing world is likewise missing a vibrant public sector. In response to these shortcomings, a growing number of people believe that markets would do a better job of providing these same services. That is one of the reasons why microcredit has such widespread appeal: It’s a market-based approach to eliminating poverty.23
Even those who advocate a market-based approach to providing basic services don’t argue that the state can totally abdicate its responsibilities. The late economist Milton Friedman, who advocated a school voucher system, did not want the state to withdraw totally from the field of education. The state must provide basic education for the sake of intergenerational equity. The state must also be responsible for providing services when there is a market failure. Free markets do not work well when economies of scale are very large and there is a natural monopoly, as in the case of piped water, and when the commodity is a “common good,” as in the case of public health. In such cases, the market might be a partial complement to the state, but it cannot be a total substitute. For example, if a region has a private water supply, the government must still regulate rates and ensure that the poor have enough purchasing power to buy water.
The business guru C.K. Prahalad says, “If people have no sewage and drinking water, should we also deny them televisions and cell phones?”24 Writing about the slums of Mumbai, he argues that the poor accept that access to running water is not a “realistic option” and therefore spend their income on things that they can get now and that will improve the quality of their lives.25 This opens up a market, and he urges private companies to make significant profits by selling to the “bottom of the pyramid” (BOP).
Yet the BOP proposition glosses over the real issue: Why do poor people accept that they cannot expect running water? Even if they do accept this bleak view, why should we? Instead, we should emphasize the failure of government and attempt to correct it. Giving a voice to the poor is a central aspect of the development process.
The business community, bureaucrats, politicians, and the media are very busy congratulating themselves on the booming private sector in India. Sure, more Indians have cell phones. But what many remember about India is not all the people using cell phones. It’s all the people defecating in public because they do not have toilets. Even in Mumbai, the business capital of India, about 50 percent of the people defecate outside. The current celebration of private sector successes should be met, and perhaps chastened, with anger at the failure of the state to provide basic services.
Overall, governments, businesses, and civil society would be well advised to reallocate their resources and energies away from microfinance and into supporting larger enterprises in labor-intensive industries. This is what is alleviating poverty in China, Korea, Taiwan, and other developing countries. At the same time, they should also provide basic services that improve the employability and productivity of the poor. Otherwise, they will miss the mark of lifting people out of poverty.
1 Tom Easton, “Hidden Wealth of the Poor,” The Economist (Nov. 3, 2005).
2 Claire Cane Miller, “Microcredit: Why India Is Failing,” Forbes (Nov. 10, 2006).
3 Sam Daley-Harris, “State of the Microcredit Summit Campaign Report 2006.” Available at http://www.microcreditsummit.org/pubs/reports/socr/2006.htm.
4 “Bangladesh Will Send Poverty to Museum by 2030: Yunus,” Financial Express (Feb. 18, 2007).
5 George Negus, “Foreign Correspondent – Interview With Prof. Muhammad Yunus,” ABC Online (March 25, 1997).
6 Manfred Ertel and Padma Rao, “Women Are Better With Money,” Spiegel (Dec. 7, 2006).
7 Aminur Rahman, “Micro-credit Initiatives for Equitable and Sustainable Development: Who Pays?” World Development (1999); Naila Kabeer, “Money Can’t Buy Me Love? Re-evaluating Gender, Credit and Empowerment in Rural Bangladesh,” IDS Discussion Paper No. 363 (1998); Mark Pitt and Shahidur Khandker, “Household and Intrahousehold Impact of the Grameen Bank and Similar Credit Targeted Programs in Bangladesh” (Washington, D.C.: World Bank Publications, 1995).
8 Gita Sabharwal, “From the Margin to the Mainstream. Micro-Finance Programmes and Women’s Empowerment: The Bangladesh Experience,” University of Wales, Swansea (2000). Available at http://www.gdrc.org/icm/wind/geeta.pdf.
9 Jennefer Sebstad and Gregory Chen, “Overview of Studies on the Impact of Microenterprise Credit” (Washington, D.C.: USAID, 1996).
10 Aliya Khawari, “Microfinance: Does It Hold Its Promises?” Discussion Paper, Hamburg Institute of International Economics (2004).
11 David Hulme and Paul Mosley, Finance Against Poverty (London: Routledge, 1996).
12 Salil Tripathi, “Microcredit Won’t Make Poverty History,” Guardian Unlimited (Oct. 17, 2006).
13 Daniel Ten Kate and Van Rouen, “The Cycle of Debt – As Microcredit Institutions Grow, Some Question Their Effect on Poverty,” The Cambodia Daily (Feb. 21-22, 2004).
14 Abhijit V. Banerjee and Esther Duflo, “The Economic Lives of the Poor,” Journal of Economic Perspectives (2006).
15 LABORSTA Internet database, available at http://laborsta.ilo.org , International Labour Organization.
16 Thomas W. Dichter, “Hype and Hope: The Worrisome State of the Microcredit Movement” (2006). Available at http://www.microfinancegateway.org/content/article/detail/31747.
17 “Macro credit,” The Economist (Oct. 21, 2006).
18 Jonathan Morduch, “Does Microfinance Really Help the Poor? New Evidence From Flagship Programs in Bangladesh,” Harvard Institute for International Development and Hoover Institution, Stanford University (1998). Available at http://www.wws.princeton.edu/~rpds/downloads/morduch_microfinance_poor.pdf.
19 Kalpana Kochhar et al., “India’s Pattern of Development: What Happened, What Follows?” Journal of Monetary Economics (2006).
20 Milford Bateman and David Ellerman, “Micro-Finance: Poverty Reduction Breakthrough or Neoliberal Dead-End?” Paper presented at UNDP Bosnia and Herzegovina and the BiH Economic Policy Planning Unit (EPPU), “Poverty Roundtable: Achieving MDG 1 (sustainable poverty reduction) in BiH” (June 16-17, 2005).
21 Amar Bhide and Carl Schramm, “Phelps’s Prize,” The Wall Street Journal (Jan. 29, 2007).
22 Amartya Sen, Development as Freedom (New York: Anchor Books, 2000).
23 Bateman and Ellerman.
24 “Selling to the Poor,” Time (April 17, 2005).
25 C.K. Prahalad and Allen Hammond, “Serving the World’s Poor Profitably,” Harvard Business Review (2002)
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ANEEL KARNANI is an associate professor of strategy at the University of Michigan’s Ross School of Business. Karnani’s research focuses on competitive advantage, strategies for growth, global competition, and emerging economies. He works with several companies to design and deliver executive development programs, and he is also actively involved in consulting to businesses.
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