Wednesday, June 18, 2014

Four binding constraints to growth in Nepal

The government and MCC have jointly published the constraint analysis report, which identifies four main binding constraints to economic growth in Nepal:
  1. Policy implementation uncertainty
  2. Inadequate supply of electricity
  3. High cost of transport
  4. Challenging industrial relations and rigid labor regulations
The analysis draws on the ‘growth diagnostics’ methodology developed by Hausmann, Rodrik and Valesco in Harvard, and builds on an earlier similar study jointly done by ADB/DFID/ILO, which also found similar constraints to economic activities in Nepal.  I had also followed the same methodology in 2009 and came up with similar constraint (mainly inadequate supply of infrastructure, including transport). 

The constraint analysis points out that protracted political transition and instability results in policy implementation uncertainty, rigid labor regulations and challenging industrial relations, and reduced government effectiveness and capital expenditures (the last one in turn leads to inadequate supply of electricity and high cost of transport). 

Below are the major highlights of the report:

Policy implementation uncertainty: Frequent changes in government leadership have resulted in policy implementation that has been unpredictable for firms in Nepal. While much of Nepal’s bureaucratic structure and policy documents have remained the same, changes in leadership of a ministry often leads to significant shifts in the implementation of government policy. This lack of continuity and predictability of policy implementation is consistently cited by firms as a major constraint to making investments in Nepal.
Inadequate supply of electricity: Nepal suffers from the worst electricity shortages in South Asia. Only half of the demand for electricity can be met by the nation’s grid. This results in load shedding of up to 18 hours a day during the dry winter months, when hydropower generation is low. The low availability of electricity creates significant costs for businesses which have to run generators on expensive imported fuel.
High transport costs: Nepal ranks 147th out of 155 countries in the Logistics Performance Index (World Bank LPI). While Nepal’s rugged terrain and landlocked geography contribute to this poor performance, the high of cost transportation in Nepal is also driven by poor quality and quantity of roads, a lack of competitiveness in the trucking sector, and by costly customs procedures. The result is that transporting goods within Nepal and reaching international markets is expensive and unreliable
Challenging industrial relations and rigid labor regulations: Nepal’s labor code is complex. Implementation of the code and mediation by the government between labor and business is both challenging and inadequate. The Federation of Nepalese Chambers of Commerce and Industry (FNCCI) Employers’ Council summary report identifies three primary reasons why the labor code needs revision: poor implementation, protracted court rulings, and long firing. These difficulties appear to alter the hiring and firing practices of firms in costly ways that include firm size remaining small to avoid the difficulties of labor negotiations. However, evidence from focus group discussions in Nepal suggest that these issues are improving and thus the team has categorized this constraint as less severe