Econ-ity » Blog Archives

Tag Archives: competition

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 Coordinator of the Research Department at Samriddhi, The Prosperity Foundation where his focus areas are petroleum trade and public enterprises. He also writes newspaper articles, blogs and radio capsules, based on the findings of the studies conducted by The Foundation.

Published by:

Why ‘profit’ is not a bad word

Veetil, Vijayalakshmi and Bose present a case on how competition fostered through for-profit ventures can bolster efficiency in the Indian Education Sector. This article sourced from Center for Civil Society’s, Spontaneous Order was originally published in Hindustan Times on 26th March 2014. 

There are few areas where the difference between what Indians want for themselves and what the government of India wants for them is more alarming than in higher education. Six to eight hundred thousand Indians leave for foreign universities every year. Yet foreign universities are not allowed to set shop in India. In September 2013 the government announced that it may soon open doors to foreign varsities. However, foreign universities will not be allowed to repatriate profits. Behind this policy lies a deeply flawed view of the consequences of profitmotive. Continue reading

Published by:

Is the idea of state running large buses the solution to improve public transport experience?

Every one of us commuting in public vehicles in the city can recognize the awful experience in travelling by heavily crowded unmaintained buses while being squeezed up among commuters in most uncomfortable ways. The chronic victims are in fact the ones traveling to work on busy commuting hours when this recklessness is at its peak. For such commuters as we know, travelling between home and work has mostly been the area of tension besides work.

In recognizing the tragedy of the commuters, the central government has made a decision to urge the municipalities of Kathmandu Valley to jointly form a company to operate 50 large buses running around the city. And, given our common belief that state is somehow responsible for taking care of our fundamental necessities like proper public transport system, this decision can easily be perceived as virtuous effort. After all, this government commitment to provide better public commutation service to people seems as a move to rescue us from the daily bad commutation experience. However, this common logic doesn’t draw the complete picture for this matter. There are actually relatively unaddressed but severe realities that can lead us to come at more thoughtful conclusions.

In digging deeper down in search of the root cause of the terrible realities of our public transport service, one has to come across the existence of mafia-like transport syndicate. The transport syndicate being formed by influential associations of transport operators has enabled them to dominate the public transport sector in Nepal despite the horrible transportation service they are providing since decades. By preventing the entry of new transport entrepreneurs in the public transport sector by means of coercion and vandalism, the syndicate of public transport associations has heavily protected the limited number of below standard service providers from the mechanism of free competition that guarantees quality service. Meanwhile, their strong political connection and presence in regulatory committee (i.e., Transport Management Committee) that awards permits to new entrepreneurs in this sector has retained their impunity from law despite their illegal attempts to maintain monopoly.

The idea of government running its own bus fleets to put competitive pressure on the syndicate is understandable. But, it may not be the most sustainable solution to the benefit of public vehicle commuters and taxpayers at large. To clarify such contention, one can always refer to the misery of the state-run enterprises in having to hugely rely on state coffer financed by taxpayers to somehow run its inefficient and loss making operations producing below standard services. Though they carry the objective of running in a profit-model concept that expects them of surviving on their own revenue, the state-system instead offers them the facility to encroach on tax payer’s wealth indefinitely as they lose track of profits. And, given the upcoming transport company is to be functioning within the same system and incentive, we can logically expect same fate for this transport based public enterprise too. Alas, state could be only adding another avenue to leech taxpayer’s wealth in name of providing so-called “basic transport service” to the people without considering the financial burden it generates among the very people.

Having said this, utilizing regulatory tools to establish competitive market environment in the public transport sector can instead lead the state to create an effective solution that doesn’t require manipulating taxpayers’ wealth. By neutralizing the condition generated by the syndicate to keep new transport entrepreneurs away from the market, such measure will compel service providers to compete among each other to provide competitive service efficiently to survive in the market on profits. Most importantly, besides preventing taxpayer’s from the burden of financing transport service, it will enable commuters to travel more conveniently with impressive solutions that yield out of continuous innovation through sustained competition.

Prience Shrestha

About Prience Shrestha

Prience works in the research department at Samriddhi Foundation. And, he attempts to specialize in the field of Development Economics

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 Coordinator of the Research Department at Samriddhi, The Prosperity Foundation where his focus areas are petroleum trade and public enterprises. He also writes newspaper articles, blogs and radio capsules, based on the findings of the studies conducted by The Foundation.

Published by:

Modernisation of Agriculture – Evidences, Government Commitments and the Sorry State

I believe it will be worthwhile to repeat these numbers once again, before we begin. So currently, 66% of Nepal’s total workforce is engaged in agriculture. This two-thirds chunk contributes one-thirds to the GDP of Nepal. According to the World Bank, Nepal ranks among the lowests in terms of agricultural productivity in the whole of South Asia.  One of the major contributing factors to this is that 85% of the total workforce involved in agriculture is in it for subsistence. Furthermore, average land holding stands are mere 0.67 hectare (ha). These people lack access to improved technology. So much of the people involved in agriculture solely for subsistence, along with fragmentation of land at such a scale also means commercial agriculture is not feasible at present.

International experience over the last century shows that development of agriculture happens not by more people being involved in agriculture, but by modernization (video also available below) through newer technologies and commercialization of agriculture. In the process, a big chunk of the workforce involved in agriculture leaves this sector and shifts towards manufacturing and service industries. All the while, productivity of the sector increases and this, coupled with progress in other economic sectors of the country, leads to the growth of entire economy.

Identifying the need to increase the agricultural productivity and to diversify the sector such that it can lend inputs for the industrialization of the Nepal, Government of Nepal (GoN) has committed to (including in the budget for the FY 2016/17) modernization, diversification, commercialization and marketing of the agriculture sector. Scores of policies, plans and strategies have been laid out to “achieve” these. But, do they?

I was in Birgunj in May, 2016 (part of a longer visit to the districts in the Terai region) to meet entrepreneurs and local-level government agencies to learn the functions of regulatory agencies at such local level, and also test what kind of government services were available to the people. Unfortunately (but expectedly), I saw once again that government promises and practices do not resonate very frequently.

Lorik Prasad Yadav (with not much education, but very innovative), a resident of Sugauli, Birta -6 purchased a tractor with an initial investment of Rs. 1 million. He used it as a mobile mill to mill cereals like wheat and paddy. This was a huge service to the locals and made lives easier for everybody. Firstly, the women did not have to travel hours to the stationary mills anymore. Lorik would come to their doors. These women could now invest this time into some other economic activity.  His was a cheaper service, too. He charged only Rs. 1.5 per kilogram while the other stationary mills were charging Rs. 2.5. In other words, people were now able to save. He’d leave the chaff (bhoos) behind so the farmers could use it further. Since it operates on diesel, load shedding has no effect on it; so people could get service anytime.

Now, innovations and new technologies always threaten the status quo. The people running stationary mills were facing a massive competition. Either they had to upgrade their business and make lives easier for their customers as well in order to retain their customers and save their business. Or, they’d have to shut down. Of course, they chose a different alternative. They filed a complaint against Lorik at the Department of Cottage and Small Industries (DoCSI), Parsa.

The same government that has committed to modernisation of agriculture to enhance Nepal’s agriculture productivity came to their rescue. Citing reasons that there is no provision of registering mobile mill business in the Act, the DoCSI intervened and closed down Lorik’s business. Right across the border, in India, there are others like Lorik who are freely operating the same business.

On one hand, the GoN spends billions of rupees on agriculture subsidy for productivity enhancement, while on the other, the same government kills innovation that would in fact enhance productivity.

 

Akash Shrestha

About Akash Shrestha

Akash Shrestha is Coordinator of the Research Department at Samriddhi, The Prosperity Foundation where his focus areas are petroleum trade and public enterprises. He also writes newspaper articles, blogs and radio capsules, based on the findings of the studies conducted by The Foundation.

Published by:

Why transport syndicate is an ill system

Existence of public transport syndicate in Nepal is a common knowledge. Those who commute by bus, micros, and taxis, our stories might be somewhat similar. Clinging to the bus door, constantly struggling to grab a seat and getting stuck in the back end of the bus and not being able to get off on our stop because of the endless crowd inside it is an everyday bus trip.

While an ideal market would’ve had many public transport entrepreneurs, giving choices to the consumers, better quality service and competitive prices, it is not the case with this industry. The public transport syndicate is an ‘ill system’, as pointed out by the Supreme Court, which has in store a number of problems for commuters and prospective entrepreneurs alike.

1. Overcrowding

First of all, overcrowding makes our travel hectic. Passengers are asked to squeeze in so that the bus can carry as many passengers as possible. The incentive behind this – more passengers, more revenue. Altogether this makes the journey unpleasant.

There is another more serious problem at hand – insurance coverage. The Act governing the public transportation – Motor Vehicle and Transport Management Act, 1949 mandates insurance of the passengers of a public transport vehicle according to the number of seats. That means the ones who get a seat on the bus are insured, while the ones clinging to the door aren’t… Like hanging on to the bus door wasn’t risky enough.
gif1

2. Barrier To Entry

For an entrepreneurial individual, getting into this industry is very costly – from making sure that one is in the good graces of the syndicate, to spending tons of money for acquiring a license for the vehicle. The syndicate has put a huge price tag on getting a route permit, without which one can’t ply the roads. This cost has kept competition at bay. An existing association’s recommendation is practically mandatory for one to acquire a permit and make sure that he gets to run his business without any threat after he does. How the syndicate has been able to erect this barrier would make for a story for another day, but this has effectively put prospective entrepreneurs at check.
gif2

3. Limited Choices

gif3

So why don’t buses with vacant seats ever show up? Well, the answer is the aforementioned barrier to entry created by the syndicate. Limiting competition and taking away all the profit from the industry is what the syndicate stands for. And while it does that, the ones who suffer are the consumers. Consumers are compelled to board those overcrowded busses with worn out seats and poor services because the syndicate restrains supply.

Arduous, frustrating and hectic are probably the three words that best describe travelling in a public transport in Nepal. Breaking this syndicate would not only bring competitiveness into the industry, but also bring more choices and better services for the consumers. And yet (even after the Supreme Court’s order to deal with the syndicate) the law enforcement mechanism lays mere witness to the nuances of the syndicate.

Abyaya Neopane

About Abyaya Neopane

Abyaya Neopane is an independent researcher. He comes from an Economics background.

Published by: