Rethinking macroeconomic policy: from a neoliberal framework to a development perspective

Iyanatul Islam

Yan-Islam-200x200Neoliberal macroeconomics emerged in the advanced economies in the 1970s. It grew out of a debate between Keynesian economists and their critics (‘new classical’ economists). These ideas were exported to the developing world through the conduit of major financial institutions (most notably IMF/WB). Developing economies hosted 958 structural adjustment programmes (SAPs) in the 1980s and 1990s. The SAPs played an important role in the restoration of macroeconomic stability but were less successful in fostering sustainable growth and structural transformation. The intellectual foundation of neoliberal macroeconomics rests on the view that the primary role of the government is to stabilize expectations about the future of forward-looking economic agents. This is best done by making a credible commitment to ‘nominal anchors’. These nominal anchors take the form of numerical targets pertaining to inflation, debts, deficits and external sustainability. The key proposition is that a credible commitment to these targets fosters macroeconomic stability which, in turn, is essential for growth and structural transformation. A key aspect of neoliberalism is that a fully flexible labour market ensures full employment and provides scope for macroeconomic policy instruments to play their due role. Hence, the implication is that one should aim to remove regulatory impediments to the labour market, such as minimum wages and employment protection legislation. Neoliberal macroeconomics favours independent central banks that make counter-cyclical adjustments to the interest rate in order to maintain the medium-term inflation target. This should be combined with either fully floating or fully fixed exchange rate regimes supplemented by an open capital account. Fiscal policy should be geared towards maintaining debts and deficits within numerical limits, with an independent fiscal council exercising an oversight role. However, confidence in neoliberal macroeconomic policy has been shaken by the global financial crisis of 2007 followed by the global recession of 2008-2009. The IMF has led the initiative to ‘rethink’ macroeconomic policy in the post-crisis era, but this literature reflects the concerns of advanced economies. The neoliberal policy framework should be modified to reflect developing country circumstances. While certain institutional innovations – such as independent, but democratically accountable, central banks and fiscal councils are useful – a rigid adherence to numerical targets pertaining to inflation, debts and deficits should be eschewed in light of evidence that such targets are not robust. One should aim for a range that can accommodate estimation errors and country-specific circumstances. Central bankers should look beyond inflation targets and find credible ways to support growth, employment creation and poverty reduction objectives. This is perhaps best achieved through the promotion of financial inclusion. The available evidence also suggests a case for prudent management of the exchange rate and the capital account in order to attenuate the incidence of macroeconomic volatility.

Fiscal policy should move beyond a focus on fiscal targets to harness resources from multiple sources to sustainably support investments in health, education, infrastructure and social protection and to respond proactively to smooth business cycles. Finally, the idea of a fully deregulated labour market should be modified to take account of evidence that what matters are well-designed and appropriately enforced regulations that strike the right balance between protecting the rights of workers and the interests of the business community.

Dr. Iyanatul Islam, Adjunct Professor, Griffith Asia Institute, Griffith University, Australia. Email: i.islam@griffith.edu.au

First Published in the Thinking Aloud, 1 February 2019

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Doing Business versus the real Business Environment in Indian States

Sabyasachi Kar_high resIMG_20181130_223250

Sabyasachi Kar and Spandan Roy

The World Bank’s Doing Business (DB) rankings for 2019 are out and India has again made a jump to 77th position from 100th in 2018, which too was 30 notches up from 130th in 2017. These rankings are based on the country’s performance in several areas, like starting a business, getting construction permits, getting electricity, contract enforcement, etc.—fields where India has traditionally done very poorly, resulting in its global rankings hovering around the 130s during the last decade. This had prompted the current government to initiate a slew of business-friendly institutional reforms including, “Make In India”, simplification of tax procedures, bankruptcy laws and so on. However, in reality, DB reports do not provide a dependable assessment of a country’s business environment, a point made by a study published in 2015 by Mary Hallward-Driemeier of the World Bank and Lant Pritchett of Harvard University. This study compares the DB reports, which are based on interviews and questionnaires administered to local domain experts, with the World Bank’s Enterprise Surveys (ES), which are based on a sample of firms in each country. It shows that the two reports have very different answers for similar questions on the business environment. For example, according to the DB report, it took about 180 days to get a construction permit in India in 2014, but the ES data shows that during that same year, some firms needed only one day while others needed up to 365 days to get the same permit, with the average being 33 days. This shows that the de jure rules of businesses that are captured by the DB reports and the de facto reality reflected by the ES reports differ significantly.

Several studies have been undertaken in India to throw more light on this issue, leading to more information on some of the broad trends in the country’s business environment. However, these studies fail to provide a deeper understanding of its causes due to the lack of a conceptual framework to analyze these trends. What should such a conceptual framework look like? In a recent book coauthored by one of us (The Political Economy of India’s Growth Episodes) we argue that the business environment in any developing country like India results from the nature of deals that are struck between the state and the business leaders.  Here, the state includes both the political and the bureaucratic class. These deals between the state and select business entities explain why, for example, it takes some firms in India only one day to get a construction permit while it takes other firms around one year. This framework should lead to two clear questions that any study on this issue should focus on: (i) what are the underlying social, economic or political characteristics of a state (be it the Central or the state government) that would encourage it to provide better deals to the bulk of the private sector firms and (ii) what are the strategies firms undertake in order to ensure that the political class offers them more business-friendly deals.

Under the international pressure of doing well in the DB reports, the Narendra Modi led-NDA government in India has attempted to clear up regulatory red-tape and putting in new policies and effective systems in place. However, policy decisions made in New Delhi are not necessarily implemented with the same zeal in the Indian states, where most of the implementation of policies take place. In a recent paper co-authored by one of us (Unmaking “Make in India”: Weak governance, good deals and their economic impact by Rajesh Raj S.N., Kunal Sen and Sabyasachi Kar), we show how de-facto norms determine the business environment in Indian states, rather than de-jure rules. In Bihar, “the 10th percentile set of firms reports obtaining an operating license in one day, while 90th percentile set of firms reports obtaining a license in 90 days”. This wide variance in firms’ within-state experiences makes it clear that a company’s regulatory experience is a product of its deal-making ability.

Most interestingly, this paper shows that firms in states with weaker capacity and poorer governance, are able to secure better deals. This clearly shows that for an average firm in India, good business environment is the outcome of regulatory failure rather than a more efficient regulatory process. Some would argue that this is fine since this is a form of corruption that enables higher growth. Unfortunately, the study finds that even that is not true as in most states, good deals go to the least productive firms. This jeopardizes the healthy growth in the Indian manufacturing scenario as the most unproductive firms are able to undercut and outcompete more productive firms by manipulating the regulatory environment. Moreover, such regulatory capture also creates structural disincentives for improving the governance capability of these state governments. This perpetuates a vicious cycle of poor governance in Indian states and unproductive growth in the Indian business sector.

Dr. Sabyasachi Kar is a Professor at the Institute of Economic Growth, University of Delhi, India, and Spandan Roy is Senior Field Investigator, Institute of Economic Growth. Email: skar_ieg@yahoo.com

Evaluation of Healthcare Development in Bangladesh

Muntasir Murshed

DSCF8979 01The conceptual framework of ‘a healthy nation being a wealthy one’ has received global recognition. In the past, economies strived in achieving development without much emphasis on improving its social indicators. However, as time progressed the concept of development had undergone multidimensional transitions whereby development was gradually perceived to be a socioeconomic variable with utmost preference to both economic and social improvements within the economy. The paramount significance of improving health indicators has also been acknowledged in SDG3 (Good health and well-being). Bangladesh, adhering to its remarkable performances in achieving the Millennium Development Goals (MDGs) way ahead of neighbouring countries, has also expressed its willingness to do the same with regard to achieving the SDGs as well. As part of the nation’s commitment in achieving the SDGs, the current government took the agenda of healthcare development with utmost importance and has adopted relevant policies to improve the national health indicators. Although the fiscal allocations to health have shrunk in recent times, the health sector indicators of Bangladesh have portrayed significant improvements as compared to its post-independence phase.

Bangladesh over the course of its post-independence period has come a long way in stimulating healthcare development within its economy. A country which once had a huge portion of its population being malnourished has somewhat reversed the scenario at present. The life expectancy at birth has surged by more than 53% over the last 45 years revealing remarkable development in healthcare facilities over time. According to the World Health Organization (WHO), Bangladesh is ahead of most of its neighbouring nations when it comes to its national life expectancy at birth. For instance, the life expectancy at birth in the country is 72 years on average where India and Pakistan have a life expectancy at birth figures of 68.5 years and 67 years respectively. Moreover, the country displayed impressive performance in safeguarding and improving maternal and infant lives. The maternal mortality rate in Bangladesh has also experienced a declining trend as the rate was curbed by more than 70% over the last 30 years. At present, maternal mortality rate in the country is estimated to be around 176 per 100,000 live births. According to the WHO, the maternal mortality ratio between 2000 and 2015 in Bangladesh dropped from 339 to 176 maternal deaths per 100,000 live births while the corresponding lifetime risk of maternal death declined from 1.49% to 0.421%. The country has also taken effective initiatives in ensuring praiseworthy infant and neonatal heath protection as reflected by sharp declines in the associated death rates. Infant mortality rate in the country has gone down by almost 75% over the last three decades or so. At present, infant mortality rate in Bangladesh hover around 31 deaths per 1000 live births as compared to India and Pakistan having corresponding rates of 38 and 66 per 1000 live births respectively. The current neonatal death rate in Bangladesh, according to UNICEF, is around 23 deaths per 1000 live births which is 50% and 17.86% less compared to that in Pakistan and India respectively. Furthermore, loss of lives due to communicable diseases and maternal, prenatal and nutrition conditions has also reduced in the country by more than 33% in between 2000 and 2012.

Despite such progresses made in the fields of health and nutrition in Bangladesh, the country is yet to match global standards which would have potentially aided the nation in leapfrogging into the elite list of upper middle income countries in near future. This can partly be attributed to the inefficiencies attached to the heal sector of the country and also to the reduction in fiscal allocations aimed at development of this sector.

Thus, in order to achieve the SDG3 and also to comply with the commitments of the current government for ensuring improved quality and access to healthcare facilities in the country, it is high time to get over the existing inefficiencies and irregularities engulfing the health care sector of Bangladesh. It is ideal for the government in leaving no stones unturned in ensuring greater access to safe drinking water, sanitation and nutritional commodities for betterment of public health in the country. Moreover, the disparity in the urban and rural health services on offer should also be mitigated in order to enhance the overall health standards.

Muntasir Murshed, MS in Economics, School of Business and Economics, North South University

Email: muntasir.murshed@northsouth.edu

 

 

 

Revisiting Active Labor Market Policies for Skills Development Programs in Bangladesh

Mohammad Nazmul Avi Hossain

edited - 26112408_1582568295122875_4002223214601812262_nHow often has human capital development been strongly termed as the driving factor of a nation? Surely, we cannot disapprove the evidences of human capital’s supremacy in making an economy robust. The macroeconomic confounding factors of a nation are “defacto” whereas human capital development acts as “dejure” to disentangle the differences in country’s prosperous transformation from developing to developed nation. The journey of Bangladesh towards a developing country will unsurprisingly rely on the utilization of its human capital optimally. Hence, labor market context is pivotal in terms of policy formulation and growth generation. In addition, the success of the nation in achieving SDGs will heavily rely on its status of the workforce, especially the youth in the labor force.

As per the latest labor force survey, the youth (aged 15-29 years) participation has reached to 20.1 million from 17.8 million recorded in 2005/06, where increased participation of female youth (7.0 million) played a crucial role. These stats are promising for a country that is riding on the airbus of consistent 6 plus GDP growth rate and entering into Rostow’s take off stage of economic development. However, the road to glory is illusive with only around 4.8 percent of youths obtaining university degrees, poor quality of education and disregarded Technical and Vocational Training and Education (TVET).

In the latest LFS, unemployment was recorded highest, 14.9 percent, among the population who completed higher secondary level of education followed by 11.2 percent who completed tertiary level. This is highly alarming in understanding the signals of education as a proxy of capabilities in the job market. Moreover, the skills development training programs led by Government, private and donor organizations are suffering from lack of vision in addressing the macroeconomic constraints such as “jobless growth” and “youth unemployment/underemployment”.

Active Labor Market Policies (ALMPs) are the universal sets consisting of the skills development training programs as sub-sets. In Bangladesh, several donors are working under bilateral and multilateral approaches in providing skills development training to poor and disadvantageous groups. Most of these skills development programs are focusing on capacity building of public-private partners and facilitating the poor to participate as trainees in training centers. Results are being obtained in generating increased employment among the target groups and enabling them to earn close to minimum wages. However, these results are far away from the asymptotical convergence towards employment generation and access to labor market in ensuring skilled jobs for a large population. Mostly, supply side factors are driving the existing training programs where private training service providers get support from a project/program to train poor with the help of aid. Two-fold question arises regarding the effectiveness of these kinds of typical TVET programs. First, how do these programs ensure the sustainability? Second, without involving employers and the demand side actors, to what extent these training programs are generating decent jobs for the trainees?  These questions do not have any straight forward answers though.

However, as per Brown, A. J., & Koettl, J. (2015) skills development programs should consider few major aspects in tuning the labor market’s functionality through training programs in order to improve the macroeconomic impacts of ALMPs. First, programs must bear in mind that “the indirect deadweight effect” lowers the cost-effectiveness of ALMPs. It refers to the resources of the policy that go to beneficiaries who would have achieved the objective of the policy even in its absence. Second, the effectiveness of ALMPs can be further undermined by the cream-skimming effect, by which only workers with high employment probabilities are selected into the program which may end up providing biased results. Third, the so-called locking-in effect (also called retention effect) refers to the lower probability of finding a job of ALMP participants compared to the unemployed who are not in ALMPs. Fourth, bringing unemployed workers back into work via ALMPs will increase their employment probabilities by the transition effect. This effect is the strongest for long-term unemployed workers, who during their unemployment suffer from skill attrition and loss of work routine. Fifth, the so-called competition effects highlight ALMPs’ role in strengthening outsiders’ position in the job market relative to insiders. According to the insider-outsider theory, labor turnover costs, firing costs as well as hiring and training costs for new employees give insiders market power, which they use to their own advantage, for example, to push up their own wages. Finally, it is the country context and overall macroeconomic enduring environment that discrepant the success of a skills development program. Need based industry driven training programs will benefit the labor market more. In addition, engagement of the private sector, employers and money generating business models of training service providers can comprehensively enhance the sustainable impact of skills development program. Integration of technology and digitization in skill development programs will open the new avenues for labor market.

More specifically, government policies intended to affect publicly-provided education and training will, in effect, determine the process of growth of the whole economy, promoting increasing returns to scale for Bangladesh.

Mohammad Nazmul Avi Hossain, Manager – Private Sector Engagement (Training and Employment), B-SkillFUL, Swisscontact 

Email: nazmulavi@gmail.com 

 

Political Economy of Special Economic Zones: China vs India

Towhid Iqram Mahmood

IMG-3084According to the World Bank in 2008, a modern day Special Economic Zone (SEZ) typically includes a “geographically limited area, usually physically secured (fenced-in); single management/administration; eligibility for benefits based upon physical location within the zone; separate customs area (duty-free benefits) and streamlined procedures”. For that, practices related to business and trade differ from rest of the country and therefore, all units therein get special privileges. SEZs can generate both static and dynamic benefits. Static benefits include employment creation, export growth and rise in government revenues; whereas dynamic benefits include economic diversification, innovation and transfer of technology through Foreign Direct Investment (FDI) and skills upgrading. However, good governance, proper political and investment conditions for business and timely order of work is quintessential for a successful SEZ. The successes of SEZs in China made other South Asian countries like India to succumb to the Chinese SEZ model. The notwithstanding principles of this model resulted in a poor performance of India’s SEZs though.

In 2016, Chinese SEZs have contributed 22% of China’s GDP, 45% of total national FDI and 60% of exports. These SEZs have also increased the income of participating farmers by 30% and accelerated industrialization, agricultural modernization and urbanization. Whereas for India, SEZs contributed only 3.72% of GDP and 20% of exports. The most astounding fact is that only 223 are operational out of 420 approved SEZs. Furthermore, only 40% of the total lands acquired for SEZs are in use. Most of these lands were deliberately taken out from agricultural production to apt with quicker economic growth.

Chinese experience with SEZs has indicated a number of factors that contribute to their success and effective operation. For example, SEZs need to be linked to economic opening and capitalize on innovation, political stability, promote industrial expansion, building brands, incubating local ideas by integrating learning, bringing together resources and expertise from government, industry and research institutions to move into more advanced value chains etc.

The ease of doing business index by the World Bank shows fundamental differences in incubating businesses between China and India. One can argue that India started economic reforms and initiated SEZs much later than China. Although that is a very small fraction of caveat that India faces if not minimal. A few of the major reasons for slow growth of Indian SEZs are lack of diversification of products, unstable fiscal incentives due to changing regimes and their belligerence towards policies from previous regime, poor infrastructure, political patronage and delay in environmental clearance and approval by state governments.

However, the low performance of Indian SEZs can be looked at from a political economy perspective.  With better than ever infrastructure and geographically ideal position, China offers something more than that India could offer to the international market. We know that China is a one-party political system whereas India is a multiparty democracy. From the viewpoint of an investor, Chinese market is way more lucrative than India in terms of political stability and investment environment. Of course, it is not always true that an authoritarian system can incubate better economic system (take Idi Amin’s Uganda for example). However, China’s performance has assured investors to rely on its economic system ever since it has opened its door to a market economy. Thus, political stability along with better business environment helped China to attract the flood of foreign investment unanimously. In case of India, SEZ rules have been amended at least seven times since its initiation in 2010. These changes are concomitant with the caveats of regime changes that, in turn, changes most of the policies and acts because of internal rivalries between political parties. On top of it, as mentioned, bureaucratic complexity has made it more difficult for investors to easily start a business in India. Unjust land acquisition without feasibility studies raises questions. Perhaps, some of these are answered when some lands acquired for SEZs are sold at a higher-than-market rate by political activists.

Drawing from the discussion, it can be stated that undoubtedly political stability and understanding between political parties to ensure economic success for a country is the primary incentive for an SEZ’s success. Learning from SEZs in India, a lineation of rivalry between political parties in a multiparty democratic system is a must if we want to parallelly increase economic stability with the help of SEZs. To bolster effective SEZs, well monitoring of the mechanisms with inclusive functioning cannot be negated.

Towhid Iqram Mahmood, Senior Research Associate, SANEM

E-mail: towhid.iqram@gmail.com

First published in the Thinking Aloud, 1 November 2018

 

 

 

Promoting Youth Employment through SDGs

Andilip Afroze

The 2030 Agenda for Sustainable Development Goals is in its third year of implementation. The agenda commits to leaving no one behind by recognizing youth as its “critical agents of change”. Young generation is defined by UN as individuals aged from 15 to 24 years. There are in total 169 targets under 17 goals in SDGs. More than one third of these targets refer implicitly or explicitly to young people.

Youth receives the highest priority in the 2030 Agenda as eventually they are the one to experience its success or failure after 15 years. Also, this generation of youth is the largest ever in human history. Global youth population stands at 1.1 billion in 2018 that is 18 percent of the world’s population. Among them Asia and the Pacific region alone contains 60 percent of youth. (Advocates for youth)

Despite being such an important part of the world demography, this generation is facing global challenges like poverty, health risks, lack of quality education, unemployment and lack of decent work higher than the adults. A major challenge is the youth unemployment. The Report ‘Global Employment Trends for Youth 2013’ identifies youth as a generation at risk. In the context of young people facing prolonged job crisis, temporary and informal employment, and discouragement, the report states that it is not easy to be young in the labour market today. To solve this global crisis, 2030 Agenda puts great emphasis on promoting employment for youth.

There are four youth employment specific targets under two key SDGs: Decent Work and Economic Growth (Goal 8) and Quality Education (Goal 4). Under goal 8 three relevant targets are: achieving full and productive employment, decent work and equal pay for work of equal value for young people by 2030 (8.5), reducing the proportion of youth not in employment, education or training (NEET) substantially by 2020 (8.6), and developing and operationalize a global strategy for youth employment and implement the Global Jobs Pact of the International Labour Organization by 2020 (8.b). Relevant target under goal 4 is to increase the number of youth who have relevant skills, including technical and vocational skills, for employment, decent jobs and entrepreneurship substantially by 2030 (4.4). (ILO)

Targets have been set. However, satisfactory progress towards achieving the related targets is yet to come. According to ILO reports, overall condition of youth employment today has either deteriorated or remained similar to the launching year 2015. From 12.9 percent in 2015, global youth unemployment rate has increased to 13 percent in 2017. The rate is three times higher than the adult unemployment rate (4.3%). In fact, the ratio of youth unemployment to adult unemployment has been consistently close to three since 1995. In 2017, the highest rate is in North Africa (almost 30%), followed by Arab states (25.6%), Europe and central Asia (18%), Latin America and Caribbean (18%), Asia and Pacific (10.4%) (World Bank data). Secondly, the incidence of informal employment among youth remains stuck at 76.7 percent in 2017. In the case of NEET, roughly 25% of youth were NEET in some 28 countries in 2015, whereas in 2017 globally 21.8% of youth are NEET. This target 8.6 should be fulfilled by 2020. However, there has not been any substantial change till now. NEET young people are mostly female with rate of 34.4% globally.

Therefore, a long way to go before achieving the SDG targets for youth employment. International organizations are working relentlessly in this regard. However, global initiatives at best can assist rather than achieve the ambitious goals. Rapid action at national level is required as the underlying causes and solutions for these global challenges are actually country specific. Focusing on overall unemployment alone will not solve the problem either. Because globally youth unemployment has increased while unemployment rate has decreased. Related issues such as school to work transition, decent work, skill mismatch, young entrepreneurship, entry level constraints should receive priority in policy making. Another notable issue is data is unavailable for a large number of countries. For measuring progress towards SDGs, all related indicators in each country should be traced. A strong national statistical system is inevitable to solve this issue. Also progress reports need to present status of all 169 targets to point out where we stand and where we need to proceed. Recently published Sustainable Development Goal Report 2018 does not cover this. Also, the report has not focused much on youth. Regarding Global Jobs Pact, there is no recent progress report on implementation status.

Andilip Afroze, Senior Research Associate, SANEM.

E-mail: andaleep.afroze@yahoo.com

First published in the Thinking Aloud, 1 October 2018