Econ-ity » Blog Archives

Author Archives: Akash Shrestha

Akash Shrestha

About Akash Shrestha

Akash Shrestha is a researcher at Samriddhi Foundation where his focus areas are investment laws, public enterprises and education.

The Misleading Lockdown

This blog was originally published in Setopati on May 2, 2020.

Flatten the curve via lockdown; then what? As long as the health infrastructure does not see an unprecedented scale of enhancement, and at similar rate, then we’re pretty much shifting the burden of Covid-19 to the future. The burden comes in (at least) two ways – public health (assuming the virus is as lethal as many are believing) and economy.

Continue reading
Akash Shrestha

About Akash Shrestha

Akash Shrestha is a researcher at Samriddhi Foundation where his focus areas are investment laws, public enterprises and education.

Published by:

Pandemic is testing the government today; policy will, tomorrow

Well it goes without saying that the Covid-19 crisis has put the current government through its biggest test thus far. At a time when countries who are much more advanced than us in medical as well as general economic terms are barely holding up against the pandemic, underdeveloped countries like ours with limited fiscal and administrative capacities were bound to struggle – big time. How well we’ve responded as a country under the given context, I’ll let you be the judge.  Continue reading

Akash Shrestha

About Akash Shrestha

Akash Shrestha is a researcher at Samriddhi Foundation where his focus areas are investment laws, public enterprises and education.

Published by:

The Economics of Minimum Wage

(This article was first published in the HImalayan Times on the 22nd of July, 2018.)

Sometimes, the most noble of intentions might yet produce severe unintended and negative consequences. Nepal’s minimum wage law comes ominouslyclose to achieving this feat.

We, as a country, are setting out on a mission to achieve unprecedented levels of growth and create new economic opportunities. We need all the international and domestic investments we can secure in order to trigger that growth. Our policies, institutions and hard infrastructures will greatly determine how successful we become towards that end. But the minimum wage law seems to be incompatible with investment targets; it also appears to have overlooked domestic labour scene.

Scaring away investors

From foreign investment perspective, the new minimum wage (Rs. 13,450) which is a 38% growth from previous minimum wage makes Nepalese labour the most expensive in the region. Merge that with Nepal’s dismal performance in other global competitiveness indices like the Doing Business Index or Corruption Perception Index or Economic Freedom Index (just some among many), any prospective investor could quickly put off thoughts of bringing investments here. It already takes months to acquire a business visa to Nepal. According to the Doing Business Report, it takes 339 hours just to pay federal taxes and three years to enforce contracts.

No investor will research all small initiatives regarding foreign investment promotion in a new host country before making investment decision. They will look at these indicators and work out what country offers them the highest prospect of return. Towards that end, such dismal performance plus minimum wages that have grown 400% in the last decade while labour productivity has failed to keep pace will not help.

An ignorance of domestic reality

Cost of labour is an important factor from a domestic investment perspective as well. Formalisation of labour and organic wage growths are other couple of important aspects of labour.

If we look back at the last couple of years of Nepal’s economy, construction industry has grown at one of the fastest rates. Demand of construction workers is therefore high. Consequently, the wages of construction workers have skyrocketed. Today, one can hardly find a mason who will work for below Rs. 1500 a day. This is way above the government-set daily minimum wage. This simple example goes to show that if we create opportunities for investments to flourish and industries to grow, the government does not have to intervene and set workers’ wages in order to guarantee a decent income to them.

But then again, there is a great number of workers in the service and agro industry who have not seen their wages grow at similar rates. This might beg a question as to what we do about them. But even here, we have to be weary of the fact that a great many of these workers (who make the least income) in these sectors are informal workers in the first place. Therefore, a raise in minimum wage does not really enhance their economic positions. In fact, that brings us to another greater risk – the risk of lay-offs.

Risk of lay-off is real

Once again, for an investor (domestic or foreign) labour poroductivity matters. If the labour productivity increases in a similar rate as wages, then s/he can churn out greater profits from her/his business and everybody is happy. But when labour productivity does not increase at the same rate (which is what is happening in Nepal), then it is only a matter of time before the investor starts thinking of laying off workers and getting the same job done through fewer workers. Of course, s/he could offer some raise to those workers who are more productive and can take in some extra load. Such a raise will have come at the cost of the worker that is laid off. In the end, the law that was supposed to help the worker got her/him out of the job.

Minimum wage should not disincentivise

When we argue that minimum wage should cover at least the basic needs of an individual, we should be careful that a minimum wage does not put an individual in a position that s/he no longer needs to worry about being more productive or enhancing her/his economic position further. At best, it should be a support position while s/he starts out as an economic actor. It should be a position that everyone wants to grow out of. In that sense, it should incentivize an individual to be more productive, and not the stagnate.

Looking back at our minimum wage policy and the growth of minimum wages over the years, this will be another very important factor to look into two years from now when we sit to revise it again; if we continue to live with this policy until then, that is.

Akash Shrestha

About Akash Shrestha

Akash Shrestha is a researcher at Samriddhi Foundation where his focus areas are investment laws, public enterprises and education.

Published by:

Let It Die

-This article was originally published by Akash Shrestha in Republica on September 26, 2016.

After the 1990 political change, Nepal embarked on the path of economic liberalization. The private sector would from then on lead the economy, with the government offering growth-boosting policies and laws. In this context, between 1990 and 1996, the country grew by 5 percent a year,  hitting an all-time high of 8.2 percent in 1994. This showed that liberalization works in Nepal if we have liberal policies. So in its ninth five-year plan (1998-2002), the National Planning Commission recommended privatizing 30 state-owned enterprises (SOEs).

But economic liberalization has not been a smooth sailing for Nepal. We have gone through a decade-long civil war, another decade-long peace-building and constitution-drafting transition and various political movements. Meanwhile, economic policy reforms took a back seat.

Nepali Congress had led the first wave of economic policy reforms. Today, NC is the largest parliamentary party and controls the Ministry of Industries (MoI), the same ministry that was at the forefront of first wave of economic liberalization. It is therefore interesting that MoI itself is looking to revive some of these sick public enterprises (PEs) that were picked for privatization during the 1990s. The ministry, we are told, aims to revive at least three PEs within this fiscal, including the Nepal Drugs Limited (NDL).

Some arguments in favor of reviving NDL are: It will ensure availability of quality and affordable drugs to the general public; it will save the government money that would have been spent in procuring drugs from outside; it will send a positive signal to private investors; and that it will help create jobs. Let us look at these assumptions.

First, government running the NDL will not send a positive message to domestic and foreign investors. NDL is only one drug manufacturer in an industry that has more than 50 registered private enterprises. Most of them are making profits. So private investors are already interested in the drug industry, having spent around Rs 20 billion in it. Private drug-makers today meet half the market demand in Nepal. NDL will struggle to compete in this competitive market.

Nor will reviving it send a more positive signal to investors. Since NDL is a state-owned enterprise, the rules that apply to private companies do not apply to NDL. NDL neither has to depend on investors for its capital, nor on consumers for its revenue. Therefore, it will put NDL at an unfair advantage.

Second, it is not true that reviving NDL will save government billions of rupees and ensure quality drugs in the market. Yes, NDL could produce drugs that replace some foreign incumbents. But the impact will be minimal. The government distributes a total of 70 drugs (including antibiotics, medicines for diabetes, high blood pressure and heart diseases) for free, spending big money. Going by NDL’s past record, if it is to produce all these drugs, it will do so at a higher cost than the costs of the private companies. NDL has already accumulated over a billion rupees in losses and another half a billion in unfunded employee retirement liabilities. It owes another billion rupees to the government.

nepal-drugs-limited_profit_loss

*Source: SOE Information: Yellow Book, Ministry of Finance, 2002/03 – 2015/16
** Data for the year 2012/13 could not be accessed

As is the case with most other sick public enterprises, NDL was also beset by constant political intervention and mismanagement, before it shut down. Millions of rupees have been injected into it to resume its operations (Rs 50 million four years ago being the latest injection of cash). With that track record, there is little prospect for structural reforms in the NDL. Again, with so many successful private enterprises, do we even need NDL?

As regards quality, 37 private drug industries in Nepal have the World Health Organization’s Good Manufacturing Practice (GMP) certificates. But NDC is yet to acquire GMP certification.

Third, of course new enterprises create jobs. But the government is not a productive agent in itself. Rather it is a redistributive agent. And, historically, the government-run state enterprises in Nepal have not been known for their job-creation capabilities. The money that is going to be injected into the NDL is going to come from the national budget, which means from taxes, grants and loans.

In today’s context, every job that the government creates displaces the job that the private entrepreneurs could have created themselves. Government does not create new jobs, it shifts jobs from one industry to another, and puts the human resources to a less efficient use. If it is employment we are worried about, like Milton Friedman said, we could simply ban the use of machines and make everything manually. Voila! Employment all around.

Fourth, on balance of payment, we export what is of lesser value in the domestic market and import what is of higher value in the local market. If everybody is gaining in value through this trade, should we be imposing a constraint on economic actors? Alternately, if local producers were producing high-value commodities, we would not need to import them. But in our effort to revive the NDL, we are ignoring the contribution of profit-making enterprises and putting our bet on a loss-making, inefficient enterprise. If it is so much about balance of trade, let’s export all electricity to Bihar and import fashion from there.

Finally, the Ministry has not clarified if the old structure of the NDL will be retrained. And will it be privatized based on public-private partnership (PPP), management contracting, or cooperative model? Saying that NDL will be privatized is not enough.

Yes, there are flaws in Nepal’s private sector, which indulge in own anti-competitive practices that have often compromised the well-being of consumers. But it is also true that Nepal as a poor country has serious administrative and fiscal deficiencies. If a government with this scale of administrative and fiscal deficiency tries to do it all, it will result in nothing but failure. The government should rather be acting as a facilitator and a monitor guaranteeing that there is a conducive policy regime, no anti-competitive practices and businesses compete to deliver affordable products.

Akash Shrestha

About Akash Shrestha

Akash Shrestha is a researcher at Samriddhi Foundation where his focus areas are investment laws, public enterprises and education.

Published by:

Where the private investors are pawns

With the permission given to nine private companies to import and sell petroleum product, and thus break the monopoly of the state-owned Nepal Oil Corporation only on July 10 being scrapped on July 21, the Government of Nepal (GoN) has pulled a massive joke on the Nepalese private sector, and consecutively the Nepalese consumers. On a very serious note, this is an ominous level of policy instability and has sent all kinds of negative signals to the foreign investors that have (or had) been thinking about making investments in Nepal.

If nothing else, the recent trade blockade should have taught us a lesson. Nepal was compromised largely in terms of availability of goods and services that the government has monopolised, for example, petroleum products. Another observation here will be that government to government agreements can sometimes compromise the well-being of the citizens. Because India wanted to make a statement, IOC was forced to do as per the interest of the Indian government. And since IOC is the only supplier and NOC is the only importer, Nepalese people had no way out

Had there been private companies involved in the process, they would be guided by a completely different set of interests – profit, for example. Irrespective of the government’s interests and stance, they’d be looking to make as much profit as possible. This means that the movement of goods and services would continue. And in fact, we saw this happen, too. We saw that some private individuals managed to bring in petroleum products through informal channels. This is how more than three-fourths of Kathmandu’s demand was met. It was illegal, but only because the law barred them from getting involved in the process. But people needed fuel and they were willing to pay. Now imagine if private companies were legally allowed to engage in petroleum trade! The impact of such blockade on Nepal, and most importantly, on the lives of Nepalese people could have been much less.

But now, that’s a thing of the past; and we need to focus more on the future; and we have a lot on our plates already. We need to build infrastructures, we need to invest in education, health, agriculture … you name it. And for this, we need capital to invest. And people invest when there is some prospect of return. In order to see this prospect of return, there needs to be policy stability in place. What policy stability does to prospective investors is that it gives them a sense of predictability. Irrespective of the ideologies of the government, when investors can be secure that the policy environment is going to stay stable for a certain period of time, they can at least plan their investments factoring for other constraints within that time frame and work out possible returns. But when policies change in a matter of days, investors will not bother doing all that maths. What’s worse, if you are a poor nation and need to bring in foreign investors to solve your third-world problems, you’re frankly not even going to make it to the list of possible countries in which to make an investment.

Akash Shrestha

About Akash Shrestha

Akash Shrestha is a researcher at Samriddhi Foundation where his focus areas are investment laws, public enterprises and education.

Published by: