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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.

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Reducing the Cost of Doing Business to Boost Private Investment and Economic Growth

Many economists of the 20th century spent their life working on theories of economic growth. They have explained their growth models in varying ways and from different angles. The technicalities in these theories might vary but if we carefully examine, we can find a common aspect in all of them. They agree to each other on the fact that higher level of economic growth cannot be attained without high level of investment. The growth in the level of investment increases the level of income and employment, directing the country towards the path of economic prosperity. Continue reading

Ashesh Shrestha

About Ashesh Shrestha

Ashesh Shrestha is an independent researcher. He has an Economics background and is interested in Monetary economics and Public finance.

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Discretion of “The Honorables”

Regulatory discretion is not something that is unheard in Nepal. The government of Nepal time and again has stepped in and has amended policies, although market disruptive, in its own discretion. These are the some examples-

  • Himalayan Java prices a bottle of water at Rs 130. They get prosecuted (fined Rs. 75,000) for charging high price, although no Act or policy stipulates measure for charging certain amount of fine in such cases.
  • After the crash of Air Kasthamandap’s single engine aircraft, without any further investigation, the government banned operations of single engine aircrafts across the country.
  • Government agencies confiscating Surya cigarettes, for not carrying health-warning message on 90 per cent of the packet, although the Act to Control and Monitor Tobacco stipulates that the warning sign should cover 75 per cent of the packet.
  • Futsal was banned without any notice or warning stating that it promoted drug use, distraction from studies, etc. Futsal was gaining popularity as more and more futsal courts with investments over Rs. 1 crore were being established.
  • In 2008, the government banned registration of private schools because it was growing like mushrooms. Although growing number of private schools are beneficial as it promoted standards and increased choices for students and parents.
  • In 2000, taxi registration was halted with the rationale that there were too many taxis plying on the road. But in reality, the passenger taxi ratio suggested that the number of taxi plying in Kathmandu was not enough.
  • DoTM gave a 15 – day ultimatum to register e-scooters, stating that e-scooty sellers were selling it with false information that no registration, driving license or helmet is necessary for using them. But in reality, there is no law or policy that stipulates that an electric scooter should be registered with DoTM, neither do e-scooter drivers need a driving license. The department has also stated that from now on, the roadworthiness of the scooters will be tested and would be allowed to use on fixed routes only.

These are the instances of regulatory discretion in my mind; I bet there are more than dozens of such cases. But it all boils down to this: the government is not working under any rule of law, but is forming policies in its discretion.

So what difference does it make if our benevolent government practices regulatory discretion? Well, as a consumer and an entrepreneur, it makes a lot of difference. For example, if I were a futsal entrepreneur, seeing that there were profit prospects in this market, I would take loan from a bank, and would establish a futsal court. If, on the day of inauguration of my business, the government bans futsal, how would I repay my loan?

Similarly, as for the consumers, futsal is a popular sport among people of all ages. It is a recreational activity that leads to good health. Well, had it been banned, all of those people would not have been able to exercise and maintain good health, specially in a city like Kathmandu where there aren’t much open spaces to exercise.

All in all, this sort of regulatory discretion does more harm than good. It is because of such unstable business environment the private sector has not been able to become the engine of growth. While politicians and bureaucrats tend to emphasize how private sector will be incentivized to boost our economy, their policies turn out to do the opposite thing. Lets just hope, these sort of regulatory discretion doesn’t happen in the future.

Abyaya Neopane

About Abyaya Neopane

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

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Why Nepal scores low in cross border trade

The way global economies operate today is— countries produce what they can at cheaper prices than other parts of the world, export them, and use the proceeds to import goods and services that other countries produce at cheaper prices. The world is now so significantly inter-connected that living a normal life and engaging in day-today economic activities is almost impossible without cross-border trade. What that implies to global economic actors is that the pace of this movement of goods and services across borders plays a substantial role not just in promoting economic growth but also in maintaining the economy. But trading across borders is where Nepal scores below par vis-à-vis a lot of other developing economies. Understanding some of the nuances of Nepal’s regulatory provisions relating to international trade and those of Nepal-India trade and transit provisions will thus shed light on some of the factors hindering Nepal’s economic growth, and there are some preposterous ones.

Begin introspectively

World Bank’s Doing Business Report 2016 shows that it takes processing of 10 documents and costs as much as 78 hours of time and USD 236 worth of monetary cost to import one container of goods into Nepal. Other land-locked countries get it done with just five documents, within 10 hours and around USD 150 worth of monetary cost. If trade through land is the only viable means of engaging in crossborder trade and we impose so much regulation on ourselves, when do we trade?

Going beyond borders

Once we move beyond Nepal’s borders and delve into Nepal-India transit provisions, we begin to see more reasons as to why Nepal has not been able to keep pace with other developing countries in terms of cross-border trade. Let’s look at, for example, the proposition by India (in 2013) to allow it to put a One Time Lock on Nepal-bound containers. It would mean that Nepali traders would have to pay an additional small sum (less than USD one) to get the lock, but in return, they would be able to release and transport their containers faster. The Ministry of Commerce and Supplies had agreed to the terms. But Nepal’s Ministry of Foreign Affairs took this proposal as a direct threat to Nepal’s sovereignty and stalled the process. The proposed changes in transit arrangements did not materialise. This sensitisation in the name of national sovereignty has deprived Nepal of other benefits that would otherwise accrue to the economy.

More than sovereignty at stake

One of these benefits that we never got to reap is the use of Vishakhapatnam port to transport Nepal-bound goods-in-transit. Currently, only the Kolkata port is in use, meaning, goods coming from all over the world enter Nepal via this port. Vishakhapatnam port would have given additional options to Nepal. Trading with the western world would be easier, cheaper and faster, if ports in western India could also be used by Nepali traders. India’s willingness to allow Nepal to use other ports is a manifestation of their own interest to ease trading across borders for Nepal. This case could be used to negotiate with India to allow Nepali traders to use other ports if it means trading gets easier, faster and cheaper. There are many privately-managed ports in India that are even more efficient than the Kolkata port. Presumably, these ports would not grace Nepali traders with the same benefits that the Kolkata port is allowing, but in return, Nepal would be able to take advantage of the competition among various ports. Like aforementioned, time is key. If goods can be transported faster, that means greater volume of trade and more economic activity.

Third country goods

Provisions worth discussing are aplenty. For instance, we cannot import third country goods from India. Now with India being liberalised, it may sometimes become faster and cheaper to import third country goods from India itself. Besides, our orders are sub-optimal in quantity. Yet, we go on insisting that we will not allow import of third country goods from India paying full duty. Similarly, getting multimodal bill of lading and allowing transhipment would mean that international shippers could bring goods up to the Nepal border. That would mean that the shippers would themselves bear the responsibility of transporting containers back to the port. Currently, Nepali traders have to bear this responsibility and failing to return the containers within two weeks renders them liable to pay demurrage. Transaction cost could be done away with using these provisions.

Back to the drawing board

Things are indeed easier said than done. However, given the role that trade plays in the economy today, it is absolutely imperative that Nepal gets serious about reviewing both the Nepal-India Transit provisions and the regulatory provisions we have put in place within our very borders for cross-border traders. At a time when the economic progress of an economic actor depends on how quickly one can identify demand in the market and respond, it should be unacceptable that Nepal cling to decades-old agreements with India and refuse any update in the name of false national integrity. Some reforms have already been agreed to in principle. Nepal should, at once, go back to the agreements made in the past at Nepal-India Inter-Governmental Committee meetings and expedite concurrence so that the agreed terms and conditions can be implemented. On other issues that have not been covered already, the more we shy away from reforms, the more we lose.

This article was originally published in The Himalayan Times on 14 February 2016.

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.

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Micro and Small enterprises in Nepal could do lot better in a more economically free environment

Press Release

Kathmandu, Oct 20, 2014: Micro and Small enterprises in Nepal could do lot better in a more economically free environment, shows the findings of a study conducted by Samriddhi Foundation on Kirana Pasals (small retail stores selling groceries and fast moving consumer goods whose services are used by a vast majority of Nepali people) in Kathmandu Valley. Samriddhi Foundation shared a first of its kind report on how Economic Freedom translates into the day to day lives of micro and small entrepreneurs in Nepal, taking the example of Kirana Pasals. The study (which was conducted from April – September 2013) focused on identifying some key hurdles in the growth of these independent businesses run by entrepreneurial and hardworking people.

Part of the research, two hundred and sixty eight Kirana Pasal  owners were interviewed to capture valuable information, insight and stories on the impediments they face to grow their enterprises. The report reveals that regulatory environment pertaining to registration, taxation and standardisation are immediate areas of concern. The report also highlights the fact that laws and regulations that are applicable to KiranaPasal s are scattered across several acts, regulations and rules; and are enforced through several government agencies, which makes it difficult for these entities to be operating in a fully legal manner.

The report shows that taxes are also something which further suppresses the growth of Kirana Pasals, especially those that are registered. Thus the report highlights the need to reform the tax code by reducing tax rates and simplifying it to widen the tax bracket. This would help Kirana Pasals operate legally and consequently access finances and other resources to grow.

The report also recommends rethinking the current standards applicable to Kirana Pasals and fixing practical and acceptable standards in consultation with the Kirana Store owners and consumer groups. Access to finance was another issue of concern for Kirana Pasals wanting to grow. According to the report, capital available from micro finance institutions (which most Kirana Pasals use) are limited and often more expensive than loans from commercial banks and other financial institutions. Since most owners/manager of Kirana Pasals have limited capital and little formal education in business, documents like business plans, balance sheets, rental contract, letter of approval from municipality, tax documents, asset valuation, etc.  are hard to produce.

Finally, barriers to exit were also considered as barriers to growth as when entrepreneurs fail, they have to have an opportunity to wipe the slate clean and start again. This is almost not an option for retailers such as Kirana Pasal  owners in Nepal as exiting formally is extremely difficult. The report makes recommendations to address the aforementioned impediments to the growth of Kirana Pasals and the recommendations together help increase Economic Freedom in Nepal.

Download the full report here
Download the summary of the report here
Sarita Sapkota

About Sarita Sapkota

Ms. Sapkota is the Coordinator of Communication and Development at Samriddhi Foundation and was previously engaged with the Foundation as a Research Associate for more than three years. She is a graduate of political science and also contributes articles for Samriddhi's column at The Himalayan Times' Perspectives supplement.

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Why I won’t spend my remittance on you

nepali migrant workersPoliticians and opinion leaders, often vociferously comment over the utilization of remittance in consumption and the fact of it not being channeled to productive sectors. Claims are, the country is facing decline of manufacturing and competitiveness, rising wage rates, shortage of labourers in the domestic markets, increasing imports, higher disposable income and conspicuous consumption – in short, signs of Dutch Disease. Living Standards Survey adds, 78.9% of this remittance goes into consumption while capital formation amounts to only 2.9%. The Economic Survey of Nepal 2013/14 reads, “… its utilization in productive sector has been a major concern.”

If we look at the ground realities, on the other hand, it can be clearly understood why things have been going the way they are. And what is more, it is perfectly rational on the consumers’ side that they are consuming and not contributing to capital formation.

Here are some of the reasons why:

– Lots of Nepalese people still face problems like hunger and lack of access to education, health, drinking water, entertainment and more. Irrespective of the poverty rates (which has been brought down by a considerable measure, thanks to remittance), a large chunk of Nepalese populace still has poor standards of living in addition to lack of access to opportunities that can lift them out of their kind of lifestyle (if not for foreign-employment). Therefore, many youngsters acquire loans from friends, family and other networks and head for the foreign land in search of job opportunities. When one has to worry about the fulfillment of his basic needs and repayment of loans he has acquired just to be able to go abroad, it does not require knowledge of rocket science to tell that the person will spend on his basic necessities and loan repayment and not worry about macro-economic indicators of the country.

– The next major sector where the remittance money is spent is on health and education. Although these are not direct forms of capital accumulation, one cannot simply discount the fact that current investment in good education will create an educated future generation that can contribute to the country’s economic growth in the long run. An investment in education today holds the key to prosperity in the future.

– After health and education, what follows is, what is commonly known as “conspicuous consumption” – spending in buying luxury items, cars and land. Considering the fact that saving in banks gives a negative real return in saving (due to higher inflation as compared to the interest rates offered by the banks), it makes more sense to spend the money today and realize its full value than to save money and see its worth decline day by day. Given that the land and vehicle prices generally go up in our country, such spending offers prospect of better returns in future than the returns from saving in financial institutions.

Therefore, if we look at things from an individual’s or a family’s perspective, it is sensible that the remittance money is goes on basic consumption and not on capital accumulation. Individuals have the best knowledge of what their necessities are – better than any opinion leader or any planner – and they make rational choices based on their needs.

Thus, if one expects that remittance money should be channeled to productive sector, instead of making investment in buying a car or a house or even land in one of the cities of the country for that matter, relevant changes need to be made in the policy environment of Nepal. There are no alternative avenues to save at the moment. Doing business is difficult thing in Nepal. Doing Business Report 2014 (World Bank) puts Nepal in 105th position out of 189 countries. If this were easy, people would enterprise in Nepal itself which would create job opportunities for many, leading to mobilization of the youth, creating wealth and reducing the income and social inequalities in Nepal.

Another possible mechanism to channel this money could be that the government issue lucrative bonds (meaning positive real returns) for specific infrastructure projects like hydropower or roads. There have been initiatives of this sort in the past but these have failed utterly in the absence of right marketing and penetration ability. Nepal receives remittance that equals the fiscal budget of the nation. This shows that if there is prospect of return, people have money that could be channeled to capital accumulation. But the current case in Nepal is one of lack of sufficient homework in the part of the state.

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.

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