Wednesday, August 10, 2011

Employment guarantee scheme in Nepal

The Nepalese policymakers have drafted Employment Guarantee Act promising to provide a job to all the households living below the poverty line (BPL), reports Ashok Thapa in Republica daily.

  • Guaranteed job as a critical part of socio-economic security and fundamental rights of citizens, and promises a job of at least 100 days per year to at least a member of poor families.
  • At least one member of families living below the poverty line will enjoy a job, fetching income equivalent to minimum wage fixed by the government.
  • Jobs will be provided in sectors like construction, infrastructure and other development projects.
  • In case the state failed to provide jobs, the draft says the government will pay unemployment allowance to those families.
  • Based on VDC-level data, the committee, which is drafting the Act, has suggested the government to issue cards to the beneficiary households.
  • In order to ensure the effectiveness of the program, the draft Act asks the local bodies to hold public hearings every four months to dig out grievances and other anomalies.
  • VDC, DDC and NPC to control possible leakage.

It seem the existing plan is almost fully in line with India’s Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), the largest employment guarantee public works program in the world.Its cost as a share of GDP, total expenditure and revenue receipts is decreasing and is expected to be 0.45 percent, 3.19 percent, and 5.08 percent respectively in fiscal year 2011-2012. This social welfare program guarantees one hundred days of employment per year at the prevailing minimum wage rate for unskilled labor. When NREGA was implemented in 2006, eleven states saw a rise in minimum wages. The new revised wages, to be adjusted with CPI, is set to increase wages in twenty states.

Similar programs (public works) have been launched in the US, Ethiopia, Sengeal, Ireland and Bangladesh among other countries. I have batted for this kind of program to solve unemployment problems in the rural areas and to boost infrastructure work. Few things to keep in mind before enacting such program:

  • Without strong local level institutions (VDCs) and representatives manning the local offices leakages will be pretty high. Else, fudging of muster rolls and manipulation of accounts will occur.
  • It should be demand-driven by nature.
  • It is necessary to identify the households below poverty line and then provide employment to one adult members from each household for a maximum of three months (usually during lean agriculture season).
  • Public works should be carried out to boost local level infrastructure that can increase agriculture productivity and promoting local markets.
  • The fiscal cost is a major issues. In India it costs around 0.5 percent of GDP. Almost 53 million households were provided employment in 2009-10. Around 2826 million persondays of employment was created. Women and those from indigenous and backward groups secured most of the employment.

Below I have calculated a rough cost estimate of employment guarantee scheme in Nepal. Based on the latest NLSS III results and assuming population of 30 million, the number of BPL population in Nepal is 3.9 million. If an adult member (working age population of 15-59 years) of BPL household is given employment, then around 4.3 lakhs persons will demand employment at the minimum agriculture wage rate of NRs 170 per day. The wage cost of such scheme per day would be at least Rs 0.07 billion. If employment is provided only during lean agriculture season (which means three months), then wage cost per year would be at least Rs 6.60 billion. If we assume that administrative cost to carrying out such scheme to be 25 percent of total wage cost, then the total cost (wage plus administrative) would be around Rs 8.25 billion. Administrative cost is aimed at 20 percent of total cost in India. In Nepal, it should be higher as we lack many functioning local level institutions and representatives.

Preliminary cost estimate of employment guarantee scheme
Number of BPL population (million) 3.9
Minimum agri wage per day (NRs) 170
Average household size 4.9
Number of households BPL 795,918
Potential employment demand (15-59 years) 431,388
Wage cost per day, billion 0.07
Wage cost per year (3 months of employment), billion 6.60
Administrative cost (25 percent of wage cost), billion 1.65
Total cost (wage plus administrative), billion 8.25
Total cost (share of budget for FY 2011-12) 2.14
Total cost (share of real GDP in producers prices, 2010-11) 1.29

This would be around 2.14 percent of budget (considering FY 2011-12 budget) and 1.29 percent of GDP in producers prices of 2010-11. This cost is higher than in India, where the cost is below one percent of GDP. The program should cost lower if administrative cost is lowered. Considering budget deficit of about 3.8 percent of GDP in 2010-11, enacting employment guarantee scheme in Nepal would increase deficit to 4.83 percent of GDP.

[Note that if you assume at least one member of each household, regardless of working age population, would get guaranteed employment, then the cost would be approximately double of what is estimated above.]