KFC, Pizza Hut closure: A setback for foreign investors in Nepal

KFC and Pizza Hut in Nepal, operated by Devyani International Nepal, closed down the fast food outlets for indefinite period following militancy shown by ad-hoc committee of All Nepal Hotel and Restaurant Workers Union-Revolutionary (ANHRWU-R), the Maoist (Baidya faction) party affiliated trade union which was trying to register one at the Department of Labor.

This should not have happened especially this year, which the Maoist-led coalition government declared as Investment Year (irrespective of its relevance after the partial budget unveiled in July). The manufacturing output has already nosedived due to supply-side constraints, including labor related disputes. Its contribution to GDP is just below 6 percent. Merchandise exports remain below 5 percent of GDP.

Things are not completely clear right now:

• The management says some workers trying to open union beat up managerial staff and gave threats to their life.
• The workers (especially leader of the protesting folks) argue that nothing of the sort alleged by the management happened. They were just trying to register a union.

Few comments:

• Before the truth comes out, it will be hard to say who is right.
• Based on past experiences, the workers (especially those from unions who are dictated by political party bosses) have faulted badly. Read here and here. Also, remember this time when the unions stroke a deal with the industrialists to not go for strikes for four years. What happened to that commitment?
• According to the Nawaraj Bhatta (president of the ad-hoc committee of ANHRWU-R), a team of 66 staff members had applied for the registration of ANHRWU-R at the Labor Office on August 7. But, some workers were surprised that their names appeared on the list without their consent. Is there any room for doubt that some rigging did happen?
• As a result of the dispute, 180 workers have become unemployed. They were earning at least Rs 20,000 per month (this is higher or equal to what Nepali migrant workers usually get for unskilled jobs in Malaysia and the Gulf). The management is adamant that it will stick to “no work, no pay”—something that will flare the fight between the two seemingly warring sides.
• In these kinds of tussle, the unions usually presume that the management will ultimately yield to their demands because of the high fixed cost (sunk cost) and interference by political leaders. However, in the case of international investors we have seen it quite clearly that this gamble won’t work. Evidence: remember how Colgate Palmolive and Surya Nepal Private Limited’s (SNPL) packed shut down production and left the country. You guess who is on the losing side?
• The policy inconsistency of government and stance inconsistency of trade unions (that have been using extralegal means to press their demands) are bleeding the industrial sector. Vested interests of trade union bosses and their bosses of political parties are actually costing dearly not only the industrial sector but also the jobs of naïve workers, who are in a mirage that they are truly represented by their union leaders and politicians (most of whom are past their retirement age). Closing down Surya Nepal cost 650 direct and 1400 indirect employment.
• Read this article that explains how labor militancy is leading to strike-unemployment cycle. This statement is even valid right now: “If you have lost a job, are potentially going to lose, or cannot get one in the market, then blame the outrageous, militant youth wings and the politicians who incite the unions to go on a destructive path.” Read this article that explains the disconnect between outrageous labor demands not matched by labor productivity. Unions need to match up the increase in wages by productivity. While wages increased by multiple folds in the last decade, labor productivity increased by just, on average, 1.10 percent.
• The bottom line is that this is a very unfortunate development. The faster the government resolves it, the lower will be the damage. Too bad it happed just when FDI were starting to increase after years of close disappointing performance.

Linkages between trade and climate change

Here is how trade contributes to climate change: The reduction in average tariffs in major export destinations and the booming trade has also increased production and economic activities. This means it has also increased GHG emissions, which are the major causes of climate change as humans are mostly responsible for the increase in temperature especially in the last 50 years.

In a new research note (the above figure is extracted from the same paper), Canuto and Onder provide that three ways through with trade intensity affects emissions.

1. Increased trade means increased production, which means increased emissions—scale effect
2. Greater specialization on production and export of goods might lower or increase emissions depending on the production structure, i.e. if it is polluting or non-polluting economic activity (think of coal and hydroelectricity respectively)— composition effect
3. Technology transfer might promote ‘cleaner’ ways to produce goods— technique effect

Here, 3 would reduce emissions; 2 would result in neutral outcome as, theoretically, if everyone specializes in production where they have comparative advantage, then one might focus on emission boosters and others emission reducers, leading to existing levels of emissions; 1 would increased emissions.

The questions faced by policymakers is: How to boost prosperity without increasing emissions and the lowest cost possible? Looks like 3 is the best option but then it might not be fully financially and technically viable when viewed from developing country perspective. The added cost of adopting such method of production at the country level (i.e. without international common standards) would mean decrease in price competitiveness and loss of export markets. Hence, the unwillingness of rapidly growing economies to comply with strict emission reduction standards.

Canuto and Onder argue that “trade may help mitigate climate change, as long as the temptation to resort to inappropriate trade policies is avoided.” For this, implementation mechanisms need to be very explicitly well defined in multilateral agreements. To make trade and climate change policies compatible, they say:

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[…] multilateral investigations are necessary for jointly accepted trade and climate policies. Careful and detailed definitions of implementation tools and procedures are crucial in preventing the undesired protectionist consequences of trade policies.

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Regarding Nepal’s emissions level, here are some stuff from a previous blog post:

As expected, emission levels are very low in Nepal. But, annual temperature change between 2045-2065 (relative to the control period 1961-2000) is projected to be higher than in even Bangladesh, China, India and the USA. Hot days and warm nights are expected to increase by 2.5 days and 8 days respectively between 2045-2065 (relative to the control period 1961-2000).

The figure below compares CO₂ emissions, projected annual temperature change and projected change in hot days/warm nights (2045-2065).

And, here is how climate change will impact agriculture production and trade in South Asia:

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Climate change affects agricultural yield, which in turn has a strong bearing on economy and livelihoods. It alters comparative advantage in the trade of agricultural goods. Due to an expected decline in yields, potential restrictions on food trade and food- price inflation, food insecurity might increase. Against such a backdrop, apart from attempts to reduce agricultural as well as non-agricultural emissions and smoothen trade flows, adequately funded and concerted adaptation measures have to be implemented in South Asia.

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Nepal ranks 79 out of 105 countries in food security

The EIU has come up with a new global food security index by considering three factors (corresponding weights in brackets): affordability (40%), availability (44%), and quality and safety (16%).  The 1996 World Food Summit defines food security as the state in which people at all times have physical, social, and economic access to sufficient and nutritious food that meets their dietary needs for a healthy and active life.

Out of the 105 countries, Nepal’s overall rank is 79 with a score of 35.2 (low rank and high score are better). The overall index is composed of 25 indicators related to the three main factors. The table shows ranking of South Asian countries with the most favorable conditions for food security. Its no wonder that Nepal’s ranking is the lowest in the region in terms of affordability given that the food prices have been higher than non-food prices (see this blog post, and also this, this and this paper).

The report notes that Nepal’s major strength with regards to food security are

• Nutritional standards
• Volatility of agricultural production
• Agricultural import tariffs
• Food safety (most run by multilateral agencies and NGOs)

And major weakness are:

• Public expenditure on agricultural R&D
• Food consumption as a share of household expenditure
• Gross domestic product per capita
• Diet diversification
• Protein quality

FOOD SECURITY INDEX
OVERALL SCORE			AFFORDABILITY
Rank	Country	Score	Rank	Country	Score
62	Sri Lanka	47.4	61	Sri Lanka	45.6
66	India	45	70	India	38.4
75	Pakistan	38.5	78	Bangladesh	33
79	Nepal	35.2	79	Pakistan	32.9
81	Bangladesh	34.6	91	Nepal	22.6
AVAILABILITY			QUALITY & SAFETY
Rank	Country	Score	Rank	Country	Score
52	India	51.3	56	Pakistan	55.5
58	Sri Lanka	49.2	70	Sri Lanka	46.8
71	Nepal	43.8	73	India	44.2
81	Bangladesh	37.6	74	Nepal	42.6
82	Pakistan	37.4	92	Bangladesh	30.4

Overall, the top five countries having the most favorable conditions for food security are the US, Denmark, Norway, France and Netherlands.

Affordability is composed of sub-indicators namely food consumption as a share of household expenditure, proportion of population under global poverty line, gross domestic product per capita, agricultural import tariffs, presence of food safety net programs, access to farmer financing. In affordability, the US, Switzerland, Netherlands, Norway and Australia are top ranked countries.

Availability is composed of sub-indicators namely sufficiency of supply (average food supply and dependency on chronic food aid), public expenditure on agricultural R&D, agricultural infrastructure (existence of adequate crop storage facilities, road infrastructure, and port infrastructure), volatility of agricultural production, and political instability. In availability, Denmark, Norway, France, the US and Netherlands are the top ranked countries.

Quality and safety is composed of sub-indicators namely diet diversification, nutritional standards (national dietary guidelines, national nutrition plan or strategy, and nutrition monitoring and surveillance), micronutrient availability (dietary availability of vitamin A, animal iron and vegetal iron), protein quality, and food safety (agency to ensure the safety and health of food, percentage of population with access to portable water, and presence of formal grocery sector). In quality and safety, Israel, France, the US, Portugal and Spain are the top ranked countries.

The figure below shows the overall food security index score with respect to per capita GDP, poverty, agriculture infrastructure, and political stability risk. Nepal’s position is marked by a red dot. The yellow dots are South Asian countries. Needless to say, Nepal’s standing is quite low in all of them (except for poverty).

Crowding out of the private sector in fertilizer supply in Nepal

Here is a classic case of distortion of incentives and ‘crowding out’ of private sector in fertilizer supply.

Initially, when there was no subsidy in fertilizer, there was adequate supply in the market despite high prices. Then the Maoist-led government introduced fertilizer subsidy in 2007/08 and started increasing the subsidy amount in successive years. The supply by AICL, which is assigned to procure fertilizer and sell it at subsidized rate, undercut the market price. The private sector importers were unable to compete and survive at the prices offered to farmers by AICL through local cooperatives. Gradually, they got crowded out from the market. Since the government could not allocate adequate funds to subsidize fertilizer, AICL was unable to procure enough of it, leading to acute shortage during peak paddy planting season. AICL is able to meet only 20-25 percent of the demand for fertilizers. See this blog post for more.

Here are excerpts from an interesting piece on the same issue by BR Kaini, a former chairperson of AICL Board:

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[…] Various surveys conducted in the past (ASPR in 2000/2001 and OPM in 2001/2002) estimated fertilizer usage ranges from 56.0kg to 58.0kg nutrient/hectare. But if we consider only the amount of fertilizer imported from formal sources for calculating per hectare use of fertilizers, it would be less than 30kg. This clearly indicates that about 50 percent fertilizer used in Nepal is imported from informal sources, which is both illegal and unreliable. Therefore, ensuring an adequate supply of fertilizer to farmers in the country has always been a challenge for the government.

The government has, however, changed fertilizer policies several times in a bid to ensure a smooth supply of fertilizers in the country. In this context, the government has recently re-introduced a subsidy on 25 percent chemical fertilizers of the total requirements. This new subsidy policy is now being implemented and the percentage of subsidized fertilizers is gradually increasing every year.

Nepal’s fertilizer supply growth rate is negative while the demand growth rate is over 15 percent (approximately) every year. AICL is meeting only 20 to 25 percent of the present demand of fertilizers in Nepal. Private importers have almost given up this business because of their inaccessibility to subsidy. Hence; there is a glaring gap between the projected demand and supply of fertilizers. The average supply gap is reported to be around 46 percent. In order to reduce this gap and make fertilizers available to farmers in time, some measures are imperative.

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Read the full article here. Kaini also proposes some remedial measures, ranging from a study to estimate the real demand for fertilizer to domestic production and a fertilizer agreement at the regional level.

Difference between farm price and wholesale price of fruits and veggies

Here is an interesting piece about the lawlessness in Kalimati wholesale market for fruits and vegetables. Kantipur’s Lokmani Rai reports the distortions created by YCL, the Maoist party’s youth wing, and syndicated business. 

Below is a snapshot of the difference between farm price and wholesale price of fruits and veggies.

Price difference (Rs per kilo), 2012-08-03
Item	Farming site (Dharke, Dhading)	Wholesale market (Kalimati, Kathmandu)	%difference
Tomato	25	48	52.08
Pumpkin threads (per roll/mutha)	8	15	53.33
Pear	15	35	42.86
Bitter melon	16	35	45.71
Cauliflower	18	40	45.00
Cucumber	27	35	77.14

Other stuff from the article:

• In the wholesale market spread over 42 ropanis, two to four dozen farmers are left to squeeze in a small corner to sell veggies. There are about 450 stalls, including 300 wholesale stalls, in Kalimati Fruit and Vegetable Market.
• Since the last six years the YCL has grabbed 45 stalls without even paying rent and electricity bills. The owe about Rs 6.5 million to the management.
• The rent for each stall ranges from Rs 5000 to Rs 7000 per month. But, middlemen charge as much as Rs 70000 per stall per month. Only a dozen stalls are owned by ‘real’ farmers and only 20 percent of the stalls are operated without middlemen being involved in rigging rents.

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Earlier, a report about the same issue stated that farmers get 40-50 percent (similar is the case with the percentage of farm price in wholesale price in the table above) of retail price of veggies sold in Kathmandu.The market distortion created by middlemen is not a surprise in a developing country like Nepal where the government lacks monitoring and supervision capabilities and political parties indirectly abet middlemen, who provide them with a strong financial and support base. Here is more on market distortion created by middlemen in Nepal.

The apparent incoherence in retail prices, farm prices and output is market manipulation by middlemen or agents, who act as monopsonist and monopolist. About 1,000 metric tonnes of vegetables enter the Kalimati Fruit and Vegetable Market during the season and about 600-700 metric tonnes in the off-season from Dhading, Kavre and Nuwakot .

Furthermore, a government committee headed by the chief secretary brought out a report claiming that high rent inside the Kalimati Fruit and Vegetable Market plays a key role in vegetable price hike. Obviously, the association has refuted the claim by arguing that the price hike is due to short supply arising from drought in March-May and high veggie prices in India.

Impact of late monsoon and fertilizer fiasco on the Nepali economy

It was published in Nepali Times, Issue #616 (03 AUG 2012 - 09 AUG 2012).

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Failure to yield

Lack of fertiliser and delayed monsoon are depriving poor farmers of their only source of income and stunting the country's economy

While the government boasted an increase in growth rate to 4.6 per cent in 2011-12, the highest in the last four years, the country faced an acute shortage of fertilisers and delay in monsoon by about two weeks.

Although the state cannot control the monsoon, it has almost complete control of the supply of fertilisers.

Unfortunately, its inability to swiftly handle procurement and distribution will result in a decline in agricultural production next year, particularly paddy and maize. More importantly, it will lower growth rate, increase food prices further, which will then heighten overall inflation, and compel poor farmers in the far and mid-west regions to migrate to bordering Indian towns for seasonal employment.

The importance of agriculture for inclusive development and to support modest economic growth cannot be overstated. About 76.3 per cent of households in Nepal depend on agriculture for livelihood and 83 per cent of the population lives in rural areas. Furthermore, the agricultural sector constitutes about 35 per cent of the country's GDP. Since growth of the services sector after 2001-02 is almost constant and growth of the industrial sector is very low, the agricultural sector largely determines the overall economic growth rate. Its average growth in the last decade was 3.3 per cent, which is higher than 2.4 per cent growth of the industrial sector.

Between 1990-91 and 2000-01, overall economic growth hinged on the performance of the non-agricultural sector, which grew at an average 7 per cent (far higher than 2.5 per cent of the agricultural sector). The main reasons for the poor performance of the non-agricultural sector are the destruction of infrastructure and erosion of industrial capacities, due in large part to the Maoist insurgency and supply-side constraints, including labour militancy.

It indicates that the agricultural sector is still the backbone of our economy. The government's negligence to supply adequate fertilisers in time and initiate remedial measures to counter the impact of late monsoon clearly shows how much importance it gives to this sector despite lofty talks about agricultural revolution and commercialisation.

Initially, the delay in monsoon severely affected maize plantation in the hilly region, which contributes 76 per cent of total maize production. It was followed by a shortage of fertilisers just before plantation of paddy all over the country. According to the Ministry of Agriculture and Development, paddy was planted in just 62 per cent of farmlands in mid-hill, 54 per cent in upper-hill, and 44 per cent in the Tarai.

This means the 5.5 per cent growth and 7.5 per cent inflation target set by the central bank in the latest Monetary Policy 2012-13 won't be met. The decline in agricultural production along with the never-ending labour and power problems in manufacturing sector will bring down growth rate well below the target despite the services sector's constant growth, thanks to remittances.

Second, the short supply of food grains will exert pressure on already escalating food prices. It will be compounded by the projected high food prices in India and other major cereal producing countries, owing to low rainfall and droughts. Since one-third variability of domestic prices is determined by prices in India and the remaining two-thirds by domestic production and supply conditions, overall inflation will be far higher than the figures projected. It will mean more hardship for common Nepalis and erosion of their purchasing power. There is a high probability that more people in the far and mid-western regions will migrate to India for work as a result of decrease in income from agriculture and worsening food insecurity.

There is little the government can do now to influence production this year as planting season is ending in a few weeks. However, it can still introduce measures to limit the impact of shortfall in production on the economy and food security. First, the state should ensure that there is an adequate supply of fertilisers for next year. Enough money should be allocated for procurement of fertiliser as no private player is going to jump into this market given the deep distortions.

Second, the government should be ready to import enough food to bridge the gap between demand and supply as the country is very likely to experience food deficit just a year after having surplus production. Major grain producing countries (including India, which already had 21 per cent less rainfall than average) badly hit by droughts and floods might restrict export like they did in 2008 at the height of global food price hike.

Third, it should plan ahead to guarantee adequate food supply in perennially food insecure districts in the far and mid-west. Fourth, development partners need to be ready to scale up food aid, if necessary.

Humans are responsible for climate change: Berkeley Earth

The latest analysis of land-surface temperature by Berkeley Earth shows that the rise in average world land temperature is approximately 1.5 degrees C in the past 250 years, and about 0.9 degrees in the past 50 years. And, to the relief of IPCC, they claim that humans are responsible for the increase in temperature especially in the last 50 years.

It notes:

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The annual and decadal land surface temperature from the BerkeleyEarth average, compared to a linear combination of volcanic sulfate emissions and the natural logarithm of CO2. It is observed that the large negative excursions in the early temperature records are likely to be explained by exceptional volcanic activity at this time. Similarly, the upward trend is likely to be an indication of anthropogenic changes. The grey area is the 95% confidence interval.

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Richard A. Muller, a professor of physics at the University of California, Berkeley writes in the NYT:

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The Conversion of a Climate-Change Skeptic

By RICHARD A. MULLER

CALL me a converted skeptic. Three years ago I identified problems in previous climate studies that, in my mind, threw doubt on the very existence of global warming. Last year, following an intensive research effort involving a dozen scientists, I concluded that global warming was real and that the prior estimates of the rate of warming were correct. I’m now going a step further: Humans are almost entirely the cause.

My total turnaround, in such a short time, is the result of careful and objective analysis by the Berkeley Earth Surface Temperature project, which I founded with my daughter Elizabeth. Our results show that the average temperature of the earth’s land has risen by two and a half degrees Fahrenheit over the past 250 years, including an increase of one and a half degrees over the most recent 50 years. Moreover, it appears likely that essentially all of this increase results from the human emission of greenhouse gases.

These findings are stronger than those of the Intergovernmental Panel on Climate Change, the United Nations group that defines the scientific and diplomatic consensus on global warming. In its 2007 report, the I.P.C.C. concluded only that most of the warming of the prior 50 years could be attributed to humans. It was possible, according to the I.P.C.C. consensus statement, that the warming before 1956 could be because of changes in solar activity, and that even a substantial part of the more recent warming could be natural.

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With more emphasis, again, from their research:

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The historic temperature pattern we observe has abrupt dips that match the emissions of known explosive volcanic eruptions; the particulates from such events reflect sunlight and cool the Earth’s surface for a few years. There are small rapid variations attributable to El Nino and other ocean currents such as the Gulf Stream. The gradual but systematic rise of 1.5 degrees C is best explained by the record of atmospheric carbon dioxide, measured from atmospheric samples and air trapped in polar ice.

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Here is a related video: