Friday, January 27, 2012

What’s up with PM Bhattarai’s Immediate Action Plan?

Each time a new government comes in, it has now become a fashion to introduce new programs for transforming Nepal. PM Baburam Bhattarai unveiled a long Immediate Action Plan (or see this) yesterday that outlines what he thinks should be done rather than what can be done in reality given the existing political, economic and social structures. It looks like a budget speech. Let me focus on the economy aspects here.

A majority of of the programs are already been floated by previous governments. There is no need to give a different name to the already floated programs and include them in a supposedly new agenda of the government. Frankly, it would be better to just implement the programs of the previous administrations. Giving new names to old programs and adding a few new programs without any clue of how to attract capital required for such programs is just ludicrous. Attracting US$1 billion FDI in the next six months is just unbelievable when the total FDI last year was just US$39 million. All I can say is: Good luck, PM!

The prime minister argues that his government will try to execute some of the programs using the same budget for this fiscal year (about six months left for the next fiscal year to start). This is simply not going to happen because the amount will not be sufficient to launch all the programs loftily outlined by the PM. 

Investors are primarily concerned with political stability, law and order, security of their investment and returns from it, hospitable labor force and government bureaucracy, and less red tape. Consider the following points:

  • It is not worthwhile to list all the economic programs (for “big push”) outlined by the prime minister. Read it here. It is too long and he is trying to do way too many things like the finance minister when he outlines fiscal budget.
  • Political stability is a far cry. Prachanda is already trying to pull the plug of PM Bhattarai’s government. The uncertainty over longevity of this government means a disincentive (for fear of policy change) for investors to come here and invest. Solution: Let the bureaucrats decide on these policies and the politicians support them and may be tweak them a bit (to give breathing space for politicians, whom by nature are more self-interested than what Adam Smith imagined!). Evidence: See how Japanese and Thai economies are doing just fine even when government changes frequently.
  • In order to unite capital, entrepreneurs and ideas, there should be effective property, contract, and business laws so that when whimsical government tries to change agreed terms and conditions, investors can drag them to court. This is one of the most reliable ways to entice investors to invest in this country. It would be better to focus on disciplining the politically affiliated, militant trade unions, ensure property rights (think of how you are going to return back the illegally seized properties instead of legalizing them), control corruption (first by political parties and leaders and then in bureaucracy), and bring out business friendly laws.
  • The reasons why domestic investors are hesitant to invest in whatever capacity they can is because they lack easy access to capital and favorable investment climate. The money required for large infrastructure projects cannot be sourced domestically (it would take more than double the annual budget to construct a railway link from the East to the West of the country). The government could choose a handful of strong and able domestic firms that can execute such projects, guarantee and insure international loans taken by them (interest rate is low compared to domestic loans), give positively discriminatory licenses to competent firms only, strictly supervise them so that they achieve what they commit to do, control unruly labor unions and disruptive activities, and then see how it yields concrete result. Evidence: study how Park Chung-hee applied similar approach in South Korea after the coup in 1962 and transformed a struggling economy into an economic powerhouse in a generation. Also, read how the Japanese economy got transformed during the Meiji period.
  • Bringing new program and policies each time a new government comes in confuses bureaucrats. Spare them from political wrangling and its fallout. Just stick to a plan that all can agree upon. Let the bureaucrats decide what that plan be. The political parties can work on brining legislation on this regard, help in executing and supervising the program and policies. Or, even if politicians want to bring new programs, make sure they are in line with the existing ones and one that can easily pass through the bureaucratic weaving across so many agencies. This Bhattarai led government could at least do this. Or, can they?
  • It is sad to not see concrete programs for export promotion and industrial development. Where happened to the idea of Special Economic Zones? Here are some of the measure the government could look at to revive exports. And, what about addressing the myriad of supply-side constraints ailing the industrial sector? About diesel plant, how are we going to bring one in operation without putting further strain in NOC? Diesel plant is expensive and it will further put financial burden on NEA and NOC. It would be better to pour the alloted money in a mid-sized hydropower plant without any delay. Or guarantee that much of loan amount to private sector to execute such hydropower plant.
  • One of the reasons why food prices are high and productivity low is due to the rigging of markets by middlemen. How about clearing them out so that farmers get the right price for their produce and an incentive to produce more?  Read this piece about how middlemen are distorting the food markets in Nepal.
  • That said, I am positive about the emphasis on infrastructure development. It is the binding constraint to economic activities. We have to tirelessly reiterate this point even if no progress happens right now. Hopefully, at some point, a right time will be created when investors, government, labor unions, and public wholeheartedly back the idea of infrastructure development, that too massively. I don’t expect the present government to create a right environment for this even if it wants to. Nor do I hope that it will create a foundation for that. It is too fractured to do anything substantive because these programs require consensus among all stakeholders  (investors, political parties, labor unions, and public). The idea is good though. Here is a list of projects of national pride as outlined by the Bhattarai led government:
      • Kathmandu-Tarai Fast Track
      • Mid-Hills Highway
      • Regional airports in Bhairahawa and Pokhara
      • Detailed Project Report of Budhi Gandhaki within a year
      • Second international airport in Nijgadh
      • Tamakoshi Hydropower Project
      • East-West Electric Railway
      • Postal Highway
      • Melamchi Drinking Water Project
      • Open tracks for north-south highways in Koshi, Gandaki and Karnali
      • Sikta Irrigation Project
  • The projections related to growth stimulus and employment generation are just a wild guess. For employment generation, my suggestion is to focus on the idea of Employment Guarantee Scheme (EGS) recently floated by the National Planning Commission. This program has the potential to employ about 431,388 people of households living below the national poverty line at the cost of 2.14% of budget (fiscal year 2011-12). It comes to around 1.29% of 2010-11 real GDP in producers prices. It is better to replace the Youth Self Employment Fund (funds have been misused by successive governments) with this one. Why not back the idea of EGS? It has been successfully implemented in India and several other countries.
  • I like the idea of government sponsored think tanks. Here is my take on this issue. This one and some other programs are somewhat in line with the recommendations of the PM’s Economic Advisory Council. Good job!
  • Above all, here is a simple idea for the Bhattarai led government to stay effective and relevant: just implement previously floated programs and resolve policy implementation paralysis. Enough with the leftists lofty talks and promises!