Thursday, January 8, 2009

Are unions and youth wings constraining industrial sector growth in Nepal?

There are questions about whether and how YCL's and unions' activities affect appropriability. The article in question is here. I am trying to flesh out more below:

YCL is the problem! Why?

  • It confiscated property and is threatening businesspersons of death threats (actually, it is alleged that it first tortured and then murdered at least two businessmen).
  • It has opened extralegal camps in major industrial districts. Why business a militant youth wing  has in an industrial district?  It is for the sole purpose of bullying businesspersons and to collect forced donations.
  • This means companies are having trouble retaining earned profits and property. This is  a case of poor appropriability, the chief cause not being absence of law but because of the YCL's activities, which are quietly and deliberately ignored by the governing party.

This  is a direct blow to smooth functioning of the private sector and economic activities in the economy. They have tried to destabilize private property- one of the crucial institutions for economic growth. See this paper by Acemoglu, Johnson, and Robinsion about how Botswana progressed simply because it had a very strong institutions of private property. See this article (Red tapes under the red flag) as well.

Maoist-affiliated trade unions are the problem! Why?

  • They have closed down many industries (jute industry, manufacturing plants, garment and textile sector, cement factory, paper factory to name a few).
  • They have even been in dispute over wage and hiring practices with multinational companies and joint ventures, the major source of FDI in the country. Remember what happened to Dabur Nepal and Colgate Palmolive recently!?!
  • They have been pressuring the private sector to hike wages and to hire staff permanently.

This is a direct blow to the contract enforcement process in an economy. If there are differences, corrective and judicial institutions take care of them. This is a constitutional process facilitating a rule of law. This helps existing investors and potential investors to make investment decisions with high degree of certainty and encourage them to invest with little doubts. However, the unions have scared them away as they have been trying to bypass the legal procedure and take matters on their own hand, often resorting to vandalism, threats to life and property, and closing down factories. This sends a signal of bad investment climate. Nepal ranks at the bottom of Doing Business rankings and the Global Enabling Trade rankings. See this article as well. Note that Nepal has the most cumbersome hiring and firing regulations in the World. This is a direct result of the activities of the YCL and unjustified diktats of trade unions.

It is not the YCL's and Maoist-affiliated trade union's job to force companies to accept a minimum wage. Leave that to security forces and judiciary. It is the job of the lawmakers and government to fix minimum wage. The minimum wage act was revised recently, jacking up minimum wage in three different sectors. The private sector has complied accordingly. Given this, why does the unions have to vandalize companies and close down factories.

Regarding hiring and firing practices, it is up to a company's management to offer temporary or permanent jobs to its employees. The Employment Act stipulates that companies hire staff permanently after just over 240 days of regular work. The private sector has been complying with this provision. Some have gone roundabouts by firing workers after some months- a decision based on their own discretion and is largely dependent on profits. The private companies are not charity organizations. They operate on the basis of profits earned from the sales of goods and services.

Right now the industrial output and productivity are declining. Profits are razor thin and some companies are falling short of the minimum demand required to keep up their operation costs. Global recession is expected to hit with full force Nepal in mid-2009. Even if there are genuine concerns of the unions (apart from minimum wage and working conditions), this is not a time to put pressure on the private sector, create unfriendly business climate, and pull down factory shutters. If companies go bankrupt, then there will be no employment, forget about minimum wage and working conditions! The best for now is to let the companies stabilize and engage in negotiation to reach a sustained solution.

Oh, about the usage of the word "appropriability", I did define the word in the article. I did not fully explain this jargon because the article was supposed to be below 950 words (good if it is below 800 words). I became familiar with poor appropriability issues from this paper by Hausmann, Rodrik, and Velasco. I do understand that I should have fleshed out a little bit more on what appropriability really means in layman's term! But, space issues constrained me! About low salary, I worked in Kantipur Publications for more than a year and I did feel the salary was too low! It was fairly competitive!! [I don't know how fair it is for a low skilled worker to demand a wage rate fetched by high skilled workers!?!]

Also, poor appropriability of returns to investment is one of the two main constraints (the other is power crisis) on industrial productivity and output, at present (stress on the word, at present). Poor appropriability is definitely a constraint on the economy but it might not be the most binding one. However, poor appropriability and power crisis are the two most binding constraints on the industrial sector. No doubts about that! I think for the whole economy, the most binding constraint to growth is coordination failures in the movement to new tradable activities. More about this in my upcoming research paper. So wait!

Update: Good news is that the Maoist prime minister says he is going to dissolve the YCL's militant structure and return back confiscated property within three weeks and three months, respectively. I hope their action matches rhetoric this time!