Saturday, May 16, 2009

Property rights protection in Nepal

This a part of a series of analysis on growth diagnostics of the Nepalese economy. For discussion of a set of constraints on economic activity in Nepal see this post. Also, see this column and this blog post.


Nepal’s standing on protection of property rights and rule of law index are satisfactory but they are still not up to the standard to clear doubts and uncertainty from potential investors and entrepreneurs. The CPIA property rights and rules based governance rating for Nepal is not that encouraging for an economy that is aspiring to grow at a double-digit growth rate, which never happened in the past five decades. Frequent encroachment on business property and establishment of extralegal camps on industrial complex by politically affiliated youth wings and unions have scared investors.

Figure 1

Its rating on property rights and rules based governance is 3, which is the median score. Based on this index, Nepal compares favorably with other countries that have similar per capita income. Though protection of property rights might not necessarily be a strong constraint at present, a lack of improvement in this front might scare away potential investors who do not what to assume too much risk. To attract more FDI and encourage domestic entrepreneurs, Nepal has to have a score well above 4.

In the rule of law front, Nepal’s standing is discouraging. In terms of enforcing rule of law, 71% of the countries rate better than Nepal. Only 29% of the countries have worse rule and law situation than Nepal.

Figure 2

Source: World Governance Indicators 1996-2007

The rule of law in Nepal deteriorated since 1996, the year when the Maoists started an armed rebellion. After a decade of civil war and finally an end to rebellion in 2006, there was a slight improvement in the rule of law. However, the complication generated by youth wings and trade unions and eruption of fresh violence in the Terai region led to deterioration of the rule of law. Though this seems to be a concerning factor, it still is not the binding constraint.

Since it is not strong enough yet to deter investment and dampen entrepreneurial activity, property rights cannot be the binding constraint on economic activity.