Nepalese economy in 2015: Triple whammy of earthquake, blockade and bad politics

Triple whammy: 2015 was a notably bad year for the economy on three fronts

The April earthquake destroyed physical infrastructure and livelihoods, the trade embargo has disrupted economic activities, and finally Prime Minister Oil-led government is undermining already weak institutions of the country. Among these natural, economic and governance shocks inflicted on the Nepali people and the battered economy, the impact of tinkering with institutions for political gains may potentially turn out to be more debilitating for the nation in the long term.

Catastrophic earthquake

The earthquake and its subsequent aftershocks killed more than 9,000 people, damaged property and public infrastructure, lowered economic growth and per capita income, and thus, increased poverty. Gross Domestic Product (GDP) growth of Nepal dropped by over 1.5 percentage points to 3.0 percent from an estimated 4.6 percent in a no-earthquake scenario. Similarly, nominal per capita income was lowered by about $23. An additional 700,000 to 982,000 people were pushed below the poverty line. The monetary value of the damage was estimated to be about $6.7 billion, almost half of it attributed to housing and human settlement. This natural disaster disrupted and dislocated production networks and distribution systems, whose impact on the economy will linger for years to come unless they are quickly rebuilt following more resilient standards.

The international community liberally launched an unprecedented scale of humanitarian assistance, most notably led by India, Japan, China, and the United States. Equally generous were the financial commitments for reconstruction—to the tune of $4 billion—by bilateral donors and multilateral institutions like Asian Development Bank, World Bank and International Monetary Fund. The 2016 budget anchored on these financial commitments and appropriated about $910 million (3.8 percent  of GDP) for rehabilitation and reconstruction work.

Understandably, expectations were high and there was consensus on accelerating reconstruction with the accepted ‘build back better’ principles. However, the delay in decision making by the government, the seemingly sluggish bureaucracy, and the egotistic political infighting for the National Reconstruction Authority (NRA) frustrated the quake victims and international community. The NRA bill was passed eight months after the earthquake and key decisions of the previous government overturned to suit political interests. While the political apparatus appeared colder and callous than expected when it came to accelerating the reconstruction, the increasingly lethargic bureaucracy seemed inept in swiftly handling normal bureaucratic assignments. Consequently, actual public capital spending is barely above 75 percent of planned spending. Worse, despite the availability of resources, relief distribution and reconstruction are slow and painful.

The blockade

The blockade came immediately after the promulgation of the constitution on September 20. Given that almost 60 percent of Nepal’s trade is with India and it is the only supplier of petroleum fuel and cooking gas, the disruptions at major custom points are virtually stalling and derailing economic activities. It will have far-reaching consequences on the economic potential, production linkages within and among sectors, employment generation, and stability of capital flows.

The Tarai region accounts for about 51 percent of agricultural output, 52 percent of industrial output and 40 percent of services output. It houses about half of the population, which is quite heterogeneous in terms of ethnicity, class, culture, language, literacy, income profile, and employment opportunities. The trade and transportation disruptions in this region have a knock-on effect on production and distribution networks throughout the country. The lack of fuel and cooking gas is crippling household as well as business activities. The uncertainty over market demand and supply has either delayed or destroyed agricultural harvesting, depleting an important source of employment and income source for about 75 percent of the population who depend on agriculture for livelihood.

The blockade-induced shortage of chemical fertilisers is turning fertile agricultural fields into barren lands, and the lack of raw materials and fuel has delayed almost all development projects that are critical to not only accelerate existing economic growth, but also to expand the boundaries of potential growth and employment opportunities. Consequently, for the first time in over two-and-a-half decades, the economy may probably grow at a negative rate. Meantime, prices of general goods and services will stay high, public capital spending may be even lower, more youths may seek employment opportunities overseas, and more households will be pushed below the poverty line.

Political gains

Finally, there is an institutional shock inflicted by the present government that will probably have far reaching financial and operational consequences. The government is scrambling to contain the fallout of the delayed reconstruction and blockade on the economy and the population. However, without political resolution to the Tarai issue and easing of the blockade, economic recovery is almost impossible. So far, the government’s steps to address these are not up to the mark.

The rhetoric does not match the unfolding reality. First, the supplies blockade has abetted black market transactions, and distorted household and business incentives. Smuggling and black marketing of goods and fuel are now considered more lucrative than farming and other productive means of livelihood. Cartels, syndicates, unions and lobbyists are running the show more freely than before, affecting decision-making and operations at key state-owned enterprises and in almost all sectors.

Meantime, the prime minister is expanding the Cabinet and hastily dividing ministries in a way that defies logic. These institutionally damaging steps are taken for political survival, which unfortunately has again superseded concerns about the economy, employment and development. Normally, in order to add one more office, a detailed organisation and management survey is conducted and properly vetted at various layers of bureaucracy and government. By ignoring this process and creating confusion in an already lethargic bureaucracy, the government is further weakening its performance, eroding bureaucratic capacity, creating more layers of bureaucratic maze, and affecting public spending and services delivery. It does not bode well for the economy.

Overall, it was a year of triple whammy of delayed reconstruction, supplies blockade and a bad precedent of tinkering institutions for political gains.

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It was published in The Kathmandu Post on 04 January 2015.

Earthquake and Blockade: A wrecked Nepalese economy

Earthquake and economy

The catastrophic 7.8 magnitude earthquake on 25 April and subsequent aftershocks (two of them very strong) crippled the economy on all fronts: agricultural output as well as agricultural land was lost, and industrial and services sectors struggled to keep operation open amidst widespread disruption of production and distribution networks, especially on the main demand centers (urban areas including Kathmandu) and trade routes with China. Consequently, GDP growth came tumbling down to 3.0% from an expected 4.6% in FY2015 (unfavorable monsoon had already lowered GDP growth from 5.1% in FY2014). Meanwhile, the subdued market prices during the first three quarters more than offset the increase in prices of goods and services post-earthquake (which struck in the tenth month of FY2015), leading to inflation of about 7.2%.

External sector strengthened as lower import growth and higher remittance inflows immediately after the earthquake increased current account balance and balance of payments surpluses (5.1% of GDP and 6.8% of GDP, respectively). Fiscal performance remained dismal as estimated actual capital spending was just about 70% of planned capital spending, and revenue mobilization grew at 13.8% against 20.5% in FY2014.  Capital spending remains woefully low at around 3.5 to 4.0% of GDP. The low expenditure performance and relatively high revenue mobilization led to a fiscal deficit of around 0.2% of GDP (with primary surplus of about 1.6% of GDP in FY2015). Migration slowed down immediately after the earthquake, unprecedented scale of international assistance (primarily led by India together with PRC and the US) was mobilized, and the affected folks struggled to normalize household activity. About a million people fell below the poverty line.

The government estimated that the recovery cost would amount to about $6.7 billion (half of it needed for housing and human settlement), almost a quarter of FY2015 GDP. The international community pledged about $4 billion to finance post-earthquake rehabilitation and reconstruction (which is more than the share to be shouldered by the public sector). So, money was not an issue. The capacity to spend it effectively was. To give momentum to this, the government focused FY2016 budget (and monetary policy) on “building back better” and faster. To this end, an ordinance was promulgated to establish National Reconstruction Authority. The ordinance never made it to the parliament within 30 days and hence its life ended drastically. A bill on NRA is pending in the parliament. It has become a victim of political infighting, delaying post-earthquake reconstruction (urgently needed for short-term recovery and for long-term preparedness in this seismically active country). Initial euphoria about post-earthquake reconstruction has dampened. Pledged funds have remained idle (some may get cancelled if there is no progress), affected folks are still struggling to get by normal life, economy is weaker than before, and the lack of direction on reconstruction has raised frustration levels and the attrition of labor force. Meanwhile, political leadership has lost the sense urgency, hastened promulgation of constitution disgruntling some section of the population, and is still engaged in political infighting. Bureaucracy remains confused and increasingly looking for guidance from political leadership even in minor matters.

Now, that’s the story about post-earthquake economic tragedy triggered by the natural disaster that affected the upper and middle belts of western and mid-western administrative regions.

Blockade and economy

Enter the crisis in the Terai region and the debilitating impact on the economy. The crisis was brewing prior to the promulgation of the constitution as some Madhesh-based political parties objected to some provisions included in the draft constitution, which was passed by an overwhelming majority in the Constitution Assembly. The main point was the demarcation of federal states in the Terai region. With no flexibility (both sides) shown to settle the issue politically, the discomfort, disdain (not all but among some) and alienation increased. Consequently, protests and the state’s reaction to protesters (at times excessive on both sides) intensified. India came into the picture to influence changes to the constitution and many analysts allege that it is imposing an ‘unofficial blockade’ on the borders. Supporters of protesting parties picketed the border areas, virtually halting the movement of goods and services. What, how, who, when, etc narrative differ based on the ideological leaning (passion is overpowering reason and cool-headedness) of analysts, consultants, journalists, lawyers, politicians, etc (however ‘independent’ they are).

Anyway, the focus here is economy. Since Nepal is a landlocked country and trade with India accounts for about 60% of imports and exports (plus it provides access to its ports), the activities on the border have severely crippled the economy, which was already hamstrung by the impact of the earthquake and the government’s and the bureaucracy’s inability to initiate rehabilitation and reconstruction swiftly.

The supply disruptions (some allege it as official/unofficial blockade by India) have affected pretty much every economic activity. The Terai belt is considered an important agricultural and industrial hub, and it has all the major custom points along the major border crossings with India. The Terai region accounts for about 51% of agricultural output, 52% of industrial output and 40% of services output. The population of Terai (quite diverse in terms of ethnicity, class, language, income, vocation, etc) is about 50% of total population.

The subnormal monsoon was already affecting plantation and hence potential agricultural output. The disruption to household agricultural activities and shortage of chemical fertilizers along with uncertainty over timely harvesting have dented the outlook for agricultural output. Industrial activity has come to a grinding halt. Mining and quarrying, and construction works have not progressed much due to the delay in post-earthquake reconstruction. The shortage of supply of raw materials or intermediate goods (including petroleum fuel and LPG cooking gas) along with the closure of manufacturing plants have affected manufacturing and construction activities. Industrial sector will most probably grow at a negative rate.

Meanwhile, services sector, which is largely based on remittance-financed imported goods, has been severely crippled. Wholesale and retail trade (which is by far one of the most important and stable drivers of growth in addition to agricultural output) has been severely disrupted. Hotels and restaurants are struggling to cope with the acute shortage of cooking gas and diesel (fires up generator during load-shedding hours). Tourist arrival has plummeted. Real estate and associated businesses are in doldrums. Education institutions are shut down or are partially operational. Hospitals are running out of emergency as well as normal items. Services sector will also most likely grow at a negative rate.

So, the economic outlook looks very grim. As of now (with uncertainty over the resolution of the crisis), the growth rate in FY2016 will most likely be negative (it hasn’t happened so far and the lowest growth [0.2%] was registered in FY2002 immediately after the intensification of Maoist insurgency; services growth was negative 1.8%). My estimate is that GDP growth will plunge to around negative 0.8% in FY2016. Importantly, subject to the longevity of ongoing supply and production disruptions, the effect of the disruption to and dislocation of economic activities as a result of the earthquake and subsequently the crisis in Terai (including blockade) are going to linger on for the next few years if the response from the government is not swift (after the resolution of Terai crisis, which lets hope will happen sooner). The rate of exit from the labor force will be high and potentially migration for overseas work will increase. The existing growth rate is already too low. With the weak state of infrastructure supply and institutional fundamentals, the economic and employment potentials are further constricted. Not a good sign to bring back production and economic activities back to normal!

The food as well as non-food inflationary pressures will likely shoot up overall inflation above 10% and it might linger at higher levels in the following year(s). On the external front, trade deficit will come down along with the plunge in both exports and imports. Remittance inflows may remain strong and hence current account surplus may be remain at high levels. Lower lending compared to deposit will likely lead to liquidity surplus. Lower expenditure and lower revenue growths may result in not much deterioration of fiscal position. However, lower expenditure as well as lower revenue growth will mean some of the fiscal targets will be beyond the reach for this year and the next. Lets hope FY2017 will be better!

In a nutshell, tough times for the economy, the poor and the middle class throughout the country!

Finally, the issue about what needs to be done?

• Economic outlook will continue to be bleak if the supply disruptions continue. Speeches about self-sufficiency right now are useless. The country cannot simply become self-sufficient [self-reliant(?)] in food and energy in one or three years. Hydroelectricity production is not going to be sufficient over the medium term (within 5 years). While some are awaiting repairs following the earthquake, others are struggling to accelerate construction. However, the issue here is of raw materials/intermediate goods, which need to be imported (ranging from fuel to nuts and bolts and cement to heavy equipment). With the blockade in place, all construction work is already delayed by many months because it will take more time to restore pre-crisis (plus pre-earthquake) pace of work, which will partially depend on the clearance at the border and transportation of inputs to construction sites. So, resolve the Terai issue pronto to rescue the economy. No other way out!
• Rather than giving pompous statement about self-sufficiency and ending load-shedding, the government should bring out a time-bound strategy on how to achieve them. This would require taking tough decisions: taming unruly labor unions and interest groups hindering reform, enhancing productivity of workers, better community relations (think of obstruction caused due to the demand for shares by locals, etc), expedited construction of transmission and distribution lines (these have been trailing behind hydroelectricity construction affecting expected return on some of the investment), reforming NEA and NOC (and a slew of other moribund public enterprises), promoting the use of alternative sources of energy, updating the relevant Acts and implementing them in earnest, creating stable institutions and manning them with competent human resources, etc. The list is long and very challenging to do over the medium term given the will of political leaders and interest groups rallying behind them. See this piece on why Nepal is poor?
• Enough has been said already about National Reconstruction Authority. Just pass the Act, appoint a competent CEO, bring all implementing ministries on board and do the reconstruction within a stipulated timeframe.
• Boost public sector’s capacity to spend money. The availability of funds in the short-term is not an issue. The country is running a primary surplus already. Just use the funds wisely and in an accelerated way in productivity-enhancing investments (physical and social infrastructure).
• Revitalize the private sector and provide it with adequate incentives to focus on domestic production as opposed to trading of imported goods. Here also comes in the strategy to diversify the production base to reduce dependence on a single country for export and import. Upgrade customs points located in the northern and southern borders. Promote value chain development (intra and inter sector) and facilitate supply chains.
• Good governance is very important in all of these. Enough has already been said about it. Time to introspect and do the right thing.

Nepal has the highest minimum wage in South Asia? - Part II

The blog post about changes in minimum wages in South Asia and the rapid rise in wages in Nepal, which meant that we might not have comparative advantage in labor cost, created quite an interest among readers. The wages (monthly minimum wage in US$) was for manufacturing sector only. In this blog post I am presenting further analysis, based on the latest ILO Global Wage Report 2012-13, using national level monthly minimum wage data. At the outset, note that labor productivity in Nepal appears to be decreasing (see this blog post for more).

The figure below shows that up until 2005, Nepal had the second lowest minimum wage (US$33.54 per month) in South Asia. In 2006, it increased by 35.21%, the highest increase than any other South Asian country,  to reach US$45.36 per month. As of 2011, Nepal has the highest minimum wage in South Asia (US$83.76 per month), followed by Pakistan (US$82.17 per month), India (US$ 64.07 per month), Sri Lanka (US$51.22 per month), and Bangladesh (US$40.46 per month)—and which partially explains the increasing manufacturing sector investment in Bangladesh (also dubbed as the next RMG sourcing hotspot by McKinsey).

Regarding the growth rate of minimum wages, Nepal had the largest average growth (2006-2011) both in dollar and local currency terms. Bangladesh and Sri Lanka are taken out of the picture because of lack of full data for the period mentioned above. The average monthly minimum wage (2006-2011) in Nepal increased by 17.77% in dollars and by 18.67% in local currency. For comparative purpose, I have used official exchange rate (local currency unit per US$, period average) to convert local currency wages into US$. The currency movement makes a difference in sales and profits, which will then, to some extent, influence investment or expansion decisions (depreciation along with strong domestic and overseas demand is normally good). Here the minimum wage for Bangladesh corresponds to that of garment sector; overall private sector for India, Nepal and Pakistan; and manufacturing sector for Sri Lanka. All minimum wage data refer to that of unskilled workers in non-agriculture enterprises.

With regard to real wage (in local currency), on average between 2006 and 2011, Nepal had the highest  growth rate (of 5.3%), followed by Bangladesh 3.1% and Pakistan, 2.1% (India and Sri Lanka had negative real wage growth).

Furthermore, the nominal mean daily wage has increased by 127% and 98% in agriculture and non-agriculture sectors, respectively, between 2003/04 and 2010/11 (i.e., between the two household surveys).

Well, in one of the aspects crucial for new investment or expansion of existing investment, Nepal is already at the losing end [Note that, higher wages are not bad in itself as long as they are matched by rise in productivity]. It is further amplified by long hours of power cuts, political instability, excessive labor unionism, low productivity, infrastructural bottlenecks (inadequate and uneven supply of roads, water supply, etc.) and policy unpredictability as well as paralysis.  Against this backdrop, enticing investment in manufacturing sector is a daunting challenge.

Due to high focus on energy and transport (the above listed investment hiccups are less persistent in these sectors) and attractive incentives, foreign investors have planned for sizable investments in key sectors. However, these won’t immediately boost employment and spur economic activities, except for construction sector workers and construction materials produced domestically, throughout the 15 sectors that make up the GDP. With the relaxation of the most binding constraint, i.e. energy shortage, almost all sectors are expected to experience better economic activities. Until then the challenge is to entice investments in other sectors as well. For this the resolvable constraints have to be resolved with decisive political will (like labor issues, skills upgradation, targeted application of import tariffs—eg. agriculture inputs are taxed more than final product) in order to boost efficiency and productivity. The pressing needs are to achieve higher economic growth, generate enough employment opportunities and institutionalize inclusive growth and development activities without negatively impacting efficiency, competitiveness and productivity.

Nepali labor unions demand medal weighing 1kg for 20 years of service

Nepal has seen a lot of labor union activism especially after 2006. The labor unions, who are dictated by political party bosses, have time and again faulted badly despite their claims that their strikes (sometimes destructive!) are aimed at exercising their rights and fair pay. Fair enough as long as it is limited to that.

But, it ain’t given their past record. Read here and here (the demand for rise in wages and perks is not matched by rise in labor productivity!). Remember this time when the unions stroke a deal with the industrialists to not go for strikes for four years? Keeping true to commitments/promises is a tall order for them. Recently, KFC and Pizza Hut were closed down (partly due to labor dispute). Difficult industrial relation/restrictive labor regulation is one of the most problematic factors for doing business in Nepal.

These aside, the mother of all demands by labor unions (affiliated to UCP (Maoist) and CPN-UML)  is this: According to a news report published in Nagarik daily, workers shut down Hotel Greenwich Village demanding, among others, gold medals weighing 1kg for 20 years of service.

Demands include the following (there are 22 points in total):

• Gold medal weighing 1.01 kg for those working for 20 years and 0.550 kg for those working for 15 years in the hotel
• Hike in wages
• Health insurance of up to Rs 50,000 for family
• New clothes and shoes every six months
• Annual salary equal to 16 months of pay

No comments!

Employment, sales and productivity growth in Nepal

The labor unions have been a serious drag to the development of industrial sector in Nepal. Their demand for wage hike and other services are never-ending, leading to closure of many domestic as well as foreign companies. When the militant labor unions were shutting one firm after another by raising unreasonable demands, I argued if the they would ensure that labor productivity increases with wage hikes. Though some of the union bosses were angry at me for allegedly being insensitive to their demands, they could not furnish a credible answer.

Now, lets see if labor productivity has increased in Nepal. The data from Enterprise Survey 2009 shows that it hasn’t. Real annual sales growth was 2 percent, annual employment growth was 7.6 percent, but annual labor productivity growth was negative 3.9 percent (wages increased by substantially more than the inflation rate). In Bhutan and Sri Lanka, employment, sales and labor productivity growth have been positive. Nepal already has unusually high wage overheads.There is evidence that when real wage growth outpaces labor productivity growth, employment creation is suppressed. We might soon see this happening in Nepal as firms start closing down due to rise in labor cost without a proportional increase in labor productivity.

Looking at sector-wise performance, it appears that labor productivity was negative in manufacturing, retail and services sectors. In small, medium and large firms as well, though real annual sales growth and annual employment growth were positive, annual labor productivity growth was negative.

Enterprise Survey 2009
Subgroup	Subgroup level	Real annual sales growth (%)	Annual employment growth (%)	Annual labor productivity growth (%)
	Overall	2	7.6	-3.9
Sector	Manufacturing	-0.9	0.9	-1.8
	Retail	-1.3	14.1	-13.3
	Other Services	5.6	9.5	-1.4
Size	Small (5-19)	0.5	6.8	-4.2
	Medium (20-99)	11.3	13	-2.7
	Large (100+)	2	2.5	0

South Asian growth prospect: Optimistic & pessimistic scenarios

Ejaz Ghani outlines two scenarios for South Asia: optimistic and pessimistic. Here are the major points:

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Optimistic scenario:

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• The optimistic outlook is based on the favourable structural trends including improved governance, the demographic dividend, the rise of the middle class, and the new faces of globalisation.
• All countries in the region have an elected government for the first time since independence. Governance has improved in two ways that will enhance the politics of democratic accountability. The first is the diminishing importance of identity politics, and the second is that the rates of incumbency – the likelihood of a sitting legislator or state government being re-elected – are down.
• The demographic dividend [=(working-age population)/(non-working age population)*100] will benefit growth not only through the swelling of the labour force, as the baby boomers reach working age, but also due to society’s ability to save more because working age happens to be the prime years for savings, and the increased fiscal space that will divert resources from spending on children to investing in infrastructure and technology.
• A massive shift towards a middle class society is already in the making. India’s middle class (daily expenditure of $10-$100 in PPP terms) will rise more rapidly compared to China, because Indian households will benefit more from growth than Chinese households, given the prevailing distribution of income. The size of the middle class will increase from 60 million in 2010 to more than one billion people by 2025. Growth, education, home ownership, formal-sector jobs, and better economic security are cause and consequence of an expanding middle class.

• The world has already benefited from global capital flows and trade in goods. It is now the turn of trade in services and migration. Technology has enabled services to be digitised, transported, and traded, long distance, at low cost, without compromising on quality. Trade in services are the fastest growing component of world trade during the last two decades. India’s service export is growing at a much faster pace compared to goods export form China.
• Global migration rates have been sluggish over the last 50 years. But this will change. Current demographic trends suggest a rapidly ageing population in OECD countries, and a young population in South Asia. This generates powerful incentives for labour mobility, as well as unique opportunities for improved global efficiency.

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Pessimistic scenario:

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• Growth in the region could be derailed by lopsided spatial transformation, lack of entrepreneurship, large informal sectors, high levels of conflict, gender disparities, and deep pockets of poverty.
• Rapid growth has produced billionaires in India. But, the broad character of the region remains agrarian and rural. This has more to do with the peculiarities of growth patterns -- services-led growth, which is more skill-intensive, compared to manufacturing-led growth, which is less skill-intensive, and the fragmented nature of transformation, than the pace of growth.
• Slow growth in manufacturing despite rapid GDP growth should by itself not be a worry, provided it is not in the way of growth in employment opportunities for unskilled and low-skilled workers at decent wages in industry and services so that these sectors still manage to rapidly pull the underemployed workers in agriculture into gainful employment.

• Entrepreneurship is central to job creation. But South Asia has too few entrepreneurs. While India has a disproportionately high rate of self-employment and many small firms, this has not as readily translated into as many young entrepreneurial firms as could be hoped. Yet there is no question that entrepreneurship works. Formal-sector job growth has been strongest in regions and industries that have exhibited high rates of entrepreneurship and dynamic economies.

• The informal sector remains overwhelmingly large and persistent. Around nine out of ten employees in India do not have formal jobs. What is worrying is that informal employment does not seem to disappear with rapid growth. There is a strong association between informality and poverty.

• South Asia has experienced high levels of internal conflict. Most countries in South Asia are currently immersed in, or are just emerging from, conflicts of varying nature and scope, ranging from the recently ended civil wars in Sri Lanka and Nepal and insurgency in Afghanistan and Pakistan to low-level localised insurgency in India. The result is human misery, destruction of infrastructure and social cohesion, and death. The knock-on effects are huge.

• India, despite reaching middle-income status, is home to the largest concentration of poor people in the world. More than one billion people lived on less than $2 a day in 2005 in South Asia. Nearly 250 million children are undernourished and suffer from hidden hunger. Child mortality and malnutrition levels are among the highest in the world. More than one third of adult women are anaemic. One woman dies every five minutes from preventable, pregnancy-related causes. The share of female employment in total employment is among the lowest in the world.

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Spurring growth in Nepal during crisis

Here is the PowerPoint presentation I used during a guest lecture at Department of Conflict, Peace and Development Studies, Tribhuvan University, Kathmandu, Nepal.

Spurring Growth During Crisis_2011-12-05

Are Nepali workers underpaid in terms of salary and benefits?

Well, so claim the labor union leaders. That might be true. But it is unfair to ask for similar benefits for workers in Nepal like the workers (even Nepali) in South Korea, Malaysia and the Gulf get. It is fair to ask for a decent working condition, but most of the strikes are hinged on politics and salary hike only. Both the sides (industrialists and unions) are on fault here. That being said, there is no doubt that the unions are more politicized than warranted and this is more problematic than the complain about salary and compensation issue. Is there any cases where unions and industrialists (at central and firm level) sat down together, talked about working condition and productivity, and honestly did the necessary from their part to work on this regard?

Below is a piece by Prem Khanal who looks at both sides of the debate. My take on the issue here, here and here.

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Embroiled in low pay and poor performance dispute

Prem Khanal

It needs no close scrutiny to discover the biggest obstacles to Nepal´s industrialization. Talk to any group of industrialists and you will hear scary accounts of militant extremism of Nepali workers.

Surya Garment, one of the largest apparels producing multinationals with annual turnover of over one billion rupees and providing employment to 700 workers, decided to fold down operations after it was compelled to call for police intervention to free three dozen officials locked for two days without food and water by workers in June. 

Another foreign venture, Fire and Ice, a famous Italian pizza restaurant located in downtown Kathmandu, and employing some 70 youths remained closed for six weeks after workers padlocked the restaurant demanding dismissal of a newly appointed manager. Undoubtedly, the two incidents speak volumes about how workers here have made Nepal an unsavory place for business.

Are the Nepali workers really so undisciplined? Absolutely not. Nepali youths in the Indian and British Armies have earned repute for hard work, bravery and obedience. By winning the best performance award for the two consecutive years in South Korea, Nepali youths have proved that they possess unparalleled qualities.

The South Korean government has announced to increase the quota for Nepali workers to 15,000 from 2012. What´s more, Japanese factories, which employ a large number of South East Asian and Chinese workers, have also started eyeing Nepali workers.

However, it is puzzling that the Nepali workers who are so notorious back home undergo a dramatic behavioral change when they are outside the country.

“It is the attractive incentive -- that is well over ten times -- that brings about this drastic transformation,” says Bishnu Rimal, president of General Federation of Nepalese Trade Unions (GEFONT). “When the monetary incentives you get from your job barely makes your ends meet, not only do commitments falter but even makes the workers hostile to the management,” he says.

On the top of the handsome incentives that Nepali workers enjoy in South Korea, they also get additional reward for hard work. This results in greater commitment to work and increased productivity, says Rimal, who has also authored a book “´Enhancing Decent Work Agenda in Workplace: Trade Unions Efforts through Social Dialogue in Nepal.

Padma Jyoti, former president of Federation of Nepalese Chambers of Commerce and Industry (FNCCI) and the Chairman of Jyoti Group of Companies, admits that low incentives instigate unrests. But he blames politicization of labor unions as the biggest obstacles to industrialization in Nepal.

“Frequent strikes in factories that provide good pay are the testimony that trade Unions instead of promoting workers´ welfare have become tools in the hands of political parties. This has posed a big challenge to Nepali industries,” Joyti says. Growing factionalism in political parties and the tendency of dishonoring agreements have made matters worse,” he said.

Rabi Bhakta Shrestha, former FNCCI president, says politicization of labor unions, has sounded death knell for Nepal´s industries. “The productivity of Nepali laborers has shrunk so dangerously in recent years that even the businesses with absolute comparative advantage have become financially unviable,” Shrestha says.

According to a study, the productivity of a Nepali garment worker is currently 9.6 pieces of shirts in an 8-hour shift whereas the same for the Chinese is 25.5, Bangladeshi 18.6 and Indians 16.

“How we can we increase the workers´ incentives in this situation,” questioned Shrestha, adding, “We are ready to double the salaries if the workers bring up their productivity on par with the South Asian average.

However, Rimal, a lawmaker with nearly two-decades of involvement in labor activism, rubbishes the claim that politicization is the only reason for low productivity of Nepali laborers. Apart from the non-labor related factors like power shortage, Rimal blames the industrialists themselves for low productivity of workers.

“How many factories pay enough to ensure workers a decent life, how many factories invest for trainings to enhance workers´ skills, and how many factories have a healthy working environment,” he questions.

Dr Shiva Sharma, General Secretary of National Labor Academy, concurs and attributes low pay scale for poor productivity. “Low pay scale has forced Nepali workers to opt for jobs in Malaysia though they are not very lucrative,” Sharma said.

Sharma also blames factory owners for politicization of labor unions. When workers feel that the employers are indifferent toward their grievances, it is natural for them to seek help from political parties, he said.

Rimal claims that the factories that have addressed workers´ grievances have not suffered strikes for many years. He also blames the factory owners for allowing political clout inside the factories. Instead of making efforts to win workers´ confidence by addressing their genuine concerns through regular dialogues, many factory owners opt for fast track solutions by using political connections to suppress labor unrest.

As a result, the mistrust between the workers and factory management has been widening like never before. Workers see employers as oppressors, whereas owners feel that laborers are least concerned with the growth their workplace.

“The desperation of workers for higher incentives in Nepali factories so high that there is hardly any resistance to calls made by any unions of any political hue to go for strikes,” says Sandeep Gautam, president of Labor Union of Him Electronic Nepal.

Jyoti acknowledged that some employers seek the support of political parties to deal with labor disputes and said such practices have made political leaders the de facto owner of Nepali factories. Shrestha further added that the practice has become so prevalent that an employer needs political connections to bring the workers back to work even after meeting their demands.

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Need for immediate relief for industrial sector in Nepal

This was published in Republica, September 12, 2011, p.6. Here is a piece on the same issue by Milan Mani Sharma of Republica.

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Relief for industrial sector

At a time when the public’s confidence on bureaucracy and political leaders is ebbing down to arguably the lowest level after skyrocketing of hope following the 2006 revolution, the newly appointed Prime Minister Dr. Baburam Bhattarai’s team has announced a slew of “relief” measures to convince Nepali people that the new government feels and fathoms the desperation for tangible change. While some of the measures are consistent with the major party’s political agenda and are outright populist, they are nevertheless required in one form or the other. Pundits and talking heads can preemptively debate on the intention and nature of the relief package, but the application of these initiatives merit some time. Their success has to be judged against the intended objective and efficacy.

Now, as much as the public needs relief package, the industrial sector also deserves immediate measures to kick-start jammed growth engine and jobs creation. It needs immediate relief for two main reasons. First, due labor related problems and policy inconsistency, the investor’s morale and market confidence are pretty low right now, leading to withholding and withdrawal of investment plans. Second, due to lack of adequate supply of infrastructure and supply-side constraints, industrial output is declining and cost of production is rising, leading to low economic activities, stagnation in employment generation, and loss of competitiveness.

Unless the industrial sector gets the badly needed relief from these constraints, the dream of attaining double-digit growth—also reiterated by Finance Minister Barsa Man Pun as soon as he assumed office and trumpeted by the UCPN (Maoist) bigwigs multiple times– won’t be realized. High growth will not be attained just by customary assistance to agriculture sector—whose output and volatility largely depends on the monsoon— by offering fertilizer subsidies, investment in irrigation and promotion of agriculture cooperatives. High and sustained growth requires structural change and more reliance on industrial activities.

Unfortunately, our industrial sector— which constitutes mining and quarrying; manufacturing; electricity, gas and water; and construction sectors—has been consistently losing ground. Currently, its contribution to GDP is approximately 14 percent only. Meanwhile, manufacturing sector is fast losing strength, bringing down its contribution to GDP to 6 percent. Note that a strong and sustained growth of manufacturing sector means more jobs, stimulation of economic activities, and a high but less volatile growth rate. We just have to look at our neighbors—China and India—for example.

It does not come as a surprise that the dismal performance of industrial sector, particularly manufacturing sector, is also reflected in the export-oriented sector, one of the most important sectors through which our economy gets foreign exchange reserves. The latest annual macroeconomic data released by the central bank shows that total exports are estimated to be just Rs 64.6 billion in 2010/11, down from Rs 76.7 billion in 2008/09 but up from Rs 60.8 billion in 2009/10. When the data was released the authorities were quick to point out that exports have increased by 6.1 percent, which is higher than 5.4 percent growth of imports. There is nothing to be exuberant about on this one as the high growth rate of exports was relative to previous year when exports plunged by Rs 7 billion. A slight improvement when the base is too low obviously gives a larger bump in growth rate! Also, the relatively low growth rate of imports has to do with decrease in imports of certain commodities, thanks to restrictive policies imposed by the government.

The situation has gotten so worse that we cannot even finance our petroleum imports (Rs 75.07 billion in 2010/11) by exports revenue. Diversification of exported product and destination is not happening as our export basket is squeezing and we are increasingly dependent on India for both exports and imports. Overall, exports of goods and services have declined from as high as 27 percent of GDP in 1997 to less than 15 percent today. Meanwhile, imports of goods and services have exploded to 28 percent of GDP. This has resulted in total trade deficit of around 22 percent of GDP. Similarly, an estimated Rs 2.93 billion of balance of payments surplus following two successive years of deficit has more to do with a fluke of handsome transfers and reimbursements as our economic fundamentals have not changed much. Our current account deficit is still negative despite a surge in remittances.

You might be wondering how all these dismal numbers are related to the above-mentioned call for industrial relief. Well, persistent labor dispute, which exacerbated after the UCPN (Maoist) affiliated unions formally entered the industrial sector as an organized group plus the destructive activities of Young Communist League (YCL), hit investor and market confidence pretty hard. It led to closures of multinational companies and withholding of investment spending. The unruly activities of trade unions, which are run by people who care more about themselves and party leaders rather than job security and welfare of workers they claim to represent, was continuing even when the relief package was announced. Recently, it cost us Surya Nepal Private Limited’s Biratnagar-based garment manufacturing unit. The popular Fire and Ice restaurant in Thamel is the latest victim of few unruly trade union members who are trying to dictate management level appointment, which is beyond their jurisdiction and obligation. Furthermore, the inadequate supply of infrastructure (power and roads network) and other constraints such as policy inconsistency, security, and sporadic blockade of major trade routes are also contributing to withdrawal of investment, capital flight and closure of firms. Domestic investors are moving to service sector (save hotel and restaurants) that has relatively low union pressure and less cost of doing business.

These constraints are also identified as problematic factors for doing business in Nepal by the latest Global Competitiveness Report 2011-2012, which has ranked our economy as 125^th most competitive (out of 142) in the world. We are ranked the lowest in supply of electricity and second worst in supply of infrastructure. The ranking is miserable in labor regulation, labor market efficiency, productivity, security, production sophistication, and innovation. The business sector thinks government instability is the most problematic factor for doing business, followed by inefficient government bureaucracy, policy instability, corruption, inadequate supply of infrastructure, and restrictive labor regulation.

It is leading to an erosion of our industrial capacity, without which growing at a steady 5 percent growth rate—let alone a double-digit rate—is impossible. Hence, the call and need for immediate industrial relief. A tentative relief package could be: taming labor militancy and smoothening industrial relations; policy consistency on key issues related to investment regime and sectoral support; effective end of syndicate; credit at low interest rate to key sectors where we enjoy comparative advantage consistent with our land, labor and capital resource endowment; emergency measures to supply power for at least two shifts in manufacturing plants; fast track endorsement of investment plans and lowering cost of doing business in Nepal; enactment of SEZ bill; and industrial security. These are doable and are not populist measures.

PM Dr. Bhattarai and FM Pun are well aware of these constraints and the challenges faced by the industrial sector. Now, they should at least make an effort to bring out industrial relief package to restore confidence of investors and markets. Of course, they will face resistance from their own party and other vested interest groups. But, it should be rightly confronted with as demanded by the emergency nature of our eroding strength of industrial sector.

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Update on the human cost of Maoist insurgency in Nepal

• Killed: 17,828
• Disappeared: 1,452
• Disabled: 5,912
• Displaced: 89,171
• Property loss suffered: 14,348

Source: Republica, September 10, 2011, p.3 (quoted Ministry of Peace and Reconstruction)

The latest numbers are higher than the previous estimate.

Pic sourced from NepalStats

Imprudent unions & weak industries of Nepal

This was published in Republica, August 27, 2011. For an earlier discussion on the same issue, please check this blog post.

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Imprudent unions & weak industries

The economy is in such a mess that we really don’t need any more negative news to further dampen market confidence. The political instability, deteriorating industrial relations, power outages, misplaced government emphasis on cooperatives, and strikes have been already enough to discourage investors. Now, add to that list the troubles caused by perennially insatiable labor unions that are bickering with industrialists time and again over unjustified demands related to wage and compensation. The latest victim of the trade unions’ irresponsibility and misguided judgment is Surya Nepal Private Limited’s (SNPL) Biratnagar-based garment manufacturing unit, which permanently ceased production.

The blame squarely goes to the unruly and militant trade unions that think more about reaping short-term gains to its top echelons than the welfare of its members and its institutional sustainability. The irresponsible stance and acts of opportunist trade unions and its leaders have cost direct and indirect employment of over 2000 workers, mostly women. Worse, it has sent a very bad signal about market conditions. Investors, foreign and domestic, will now think multiple times before they commit to invest in Nepal, let alone in the manufacturing sector.

Established in 2004 with an investment of approximately Rs 700 million, SNPL’s garment manufacturing unit was producing popular international brands like John Players and Springwood. It was established at a time when the Nepalese garment industry was fast losing its market abroad. It was not only successful in capturing the rapidly growing Indian market, but also exported garments to the US, Canada, and the EU. Needless to say, it was also popular in the domestic market. Finally, we had a manufacturing firm that could compete in the international market and also be successful in the domestic market. This was the kind of manufacturing firm we needed to help reduce ballooning trade deficit— by increasing exports and at the same time supply goods to the domestic market to substitute imported garments.

Alas, the unruly unions cost us an established garment manufacturing firm that was providing hundreds of jobs, and contributing revenue and foreign exchange reserves. At one time the garment industry was the stronghold of our industrial sector. Now, this beleaguered sector is struggling to survive amidst loss of competitiveness and markets, mainly attributable to erosion of preferences following the expiry of Agreement on Textiles and Clothing (ATC) in 2005, and increase in cost of production due to inefficient production, power outages, frequent strikes and persistent labor unrest, which particularly intensified after 2006.

Previously, the political instability and labor union militancy in the industrial sector led to exit of multinational companies (MNCs) that have been providing hundreds of jobs and supporting numerous households. The Maoist-affiliated labor unions, through their idiotic demands, chased away Colgate Palmolive and Dabur Nepal, and briefly stopped Varun Beverage Nepal Ltd—the bottler of Pepsi—from operation, leading to withdrawal of planned investment of approximately Rs 1 billion. The trade unions have failed to acknowledge the fact that locking up management staff, threatening businessmen, smashing equipment in factories, opening camps inside industrial zones, seizing land and making a mockery of private property right, demanding compulsory donation, and having my way or the highway attitude will do nothing but erode whatever meager confidence investors have on the Nepalese economy. No wonder, Nepal is consistently ranked as one of the less investor friendly destinations to do business. Its hire and fire policies are one of the most rigid in the world.

There is nothing wrong in having strong trade unions that care about its members and the firms where they are employed. But, in our case it is not so. Two fundamental problems inflict our industrial sector: policy inconsistency and stance inconsistency. First, there is policy inconsistency on the part of government, especially with regard to the methodology of fixing wage and compensation of workers in the industrial sector. The Ministry of Labour and Transport Management (MoLTM) does not have a structured industrial conflict resolution framework. Most of the decisions are taken in an ad-hoc basis, leading to policy inconsistency. For instance, the latest industrial strike flared up after the MoLTM unilaterally revised wage and compensation to please some trade unions and its leaders. This was against the agreement between the major trade unions and industrialists and was also being looked upon by the Supreme Court. Most of the time settlement of labor disputes has happened at the whim of influential political leaders, union bosses and ministers. In SNPL’s case, persistent labor dispute over wage and compensation and demand for salary even for days not worked (the company says it followed ‘no work, no pay’ principle) culminated into lock up of management staff of the garment factory. This led to cancellation of existing and future orders and ultimately closing down of the factory.

Second, and the biggest culprit of all, are the trade unions and inconsistency in their stance on major labor issues. The top echelon of trade union has become a bunch of selfish opportunists that care more about sucking concession and donations from the industrialists to please their political masters than advocate the welfare of hardworking workers in factories. At times, the ego problem and governance issues within trade unions have led to union break-ups—the seeds of more industrial disputes. It has led to ever-changing wage and compensation demands of trade unions. Even if the industrialists agree to jack up wages and compensation, one or the other trade unions object to it. It leads to a war in pressing for higher demand, undo the agreements already sealed, and hoodwink workers by making false promise of wages increase if they go for strikes. The wage rates have been revised multiple times this year alone. The question is: What is the final deal and stance? Moreover, what is baffling is that the demands of unions are not matched by labor productivity (see ‘Union Strikes & Productivity’, Republica, 24 March, 2011). How can you increase wage and compensation if marginal labor productivity does not increase proportionally?

No matter how far the industrialists stretch their neck to reach out to unions for an amicable and sustainable solution, they are unable to do so due to the unruly and always unsatisfied trade unions and their bosses, who are bestowed with the blessing of crooked political leaders. The unions are so illogical that even when struggling factories want to close down operation after paying due compensation and swallowing ‘sunk cost’, they are arguing that investors can’t do that. This is utter nonsense. There is no relief from unions before opening, during operation and after closing down a firm. The trade unions should digest the fact that investors are here to do business, not charity. The unions are there because workers are employed by factories. The one-sided action of unions is leading to strike-unemployment cycle (see ‘Strike-unemployment cycle’, Republica, 17 December, 2009). The Maoist-affiliated trade unions are on the forefront of this destructive process.

The closure of the SNPL’s garment manufacturing unit sends a frightening message to potential investors and MNCs. This threat is never acknowledged by trade unions mired in money and politics. Worse, the government is under-acknowledging the situation right now. It will have a disastrous impact on the already stagnating economic activities. The unruly and uncompromising trade unions and their bosses should be held responsible for the loss of over 2000 jobs in the garment manufacturing plant in Biratnagar.

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Interesting stats from WDR 2011: Conflict, Security and Development

Below are some of the interesting facts and figures from World Development Report 2011: Conflict, Security and Development:

• No low income fragile or conflict-affected country has yet achieved a single Millennium Development Goal. Violence is the main constraint to meeting the MDGs. 
• Poverty rates are 20 percentage points higher in countries affected by repeated cycles of violence over the last three decades.  Every year of violence in a country is associated with lagging poverty reduction of nearly one percentage point.
• 1.5 billion people live in countries affected by organized violence, either currently or recovering from political violence, fragility and/or high levels of homicide.
• People living in countries currently affected by violence are twice as likely to be undernourished and 50 percent more likely to be impoverished. Their children are three times as likely to be out of school.
• 42 million people (roughly equivalent to the entire population of Canada or Poland) are displaced today as a result of conflict, violence or human rights abuses. Of these, 15 million are refugees outside their country and 27 million are displaced internally within their own country. 
• Countries with recent human rights abuses are far more likely to experience conflict than countries with a strong history of respect for human rights. Each one-step deterioration on the five point Political Terror Scale - which measures arbitrary detention for nonviolent political activity, torture, disappearances, and extrajudicial killings - resulted in a more than 43 percent increase in the risk of civil war in the following five years.
• Countries with weak government effectiveness, rule of law, and control of corruption have a 30 - 45 percent higher risk of civil war, and significantly higher risk of extreme criminal violence than other developing countries.
• 90 percent of civil wars in the 21st century occurred in countries that already had a civil war in the previous 30 years.
• The global trade in cocaine and heroin, which are largely produced in countries affected by conflict and violence, is valued at $153 billion. The drug trade is the largest income component of global organized crime and is roughly comparable to the global total of official development assistance (ODA, which equaled $110 billion in 2010).
• It took the 20 fastest reforming countries in the 20 century between 15 and 30 years – a generation – to raise their institutional performance from very fragile to more resilient levels.  Specifically, it took 17 years on average to reduce military interference in politics and 27 years to reduce corruption to establish rules-based controls against corruption.
• Over the last 20 years, on average, a country with 20 years of violence experienced twice the volatility in aid flows of a country that did not experience violence. Revenue volatility has considerable costs for all governments, but particularly for fragile situations where it may derail reform efforts and disrupt institution building. 
• Maritime piracy is estimated to have direct economic costs of between $5.7 billion and $11.2 billion, including ransoms, insurance and re-routing. Global efforts to contain and deter it are estimated at between $1.7 and $4.5 billion in 2010.
• The economic spillover effects for countries affected by conflict are often huge. Countries lose an estimated 0.7 percent of their annual GDP for each neighbor involved in civil war.
• What drives people to join rebel movement and gangs?  In surveys conducted in six countries and territories affected by violence, the main reasons cited for why young people become rebels or gang members are very similar—unemployment predominates for both. This is not necessarily the case for militant ideological recruitment.
• What are citizens’ views on the drivers of conflict? In surveys conducted in six countries and territories affected by violence, involving a mix of nationally representative samples and subregions, citizens raised issues linked to individual economic welfare (poverty, unemployment) and injustice (including inequality and corruption) as the primary driver of conflict.

Nepalese industrialists and unions strike a deal

Good news! Seems like most of the issues related to industrial strike and labor-related industrial woes are being addressed in the latest deal between the three main trade unions and industrialists (represented by FNCCI). The deal will go into effect beginning March 15.

Main features of the deal:

• No industrial strike for four years.
• Increase in monthly salary and daily wage plus social security for workers. Remuneration per month has been increased by Rs 1500 (monthly salary increased by Rs 50 and dearness allowance by Rs 1450). This has increased minimum wage to Rs 6100 per month from Rs 4600. Daily wages have been increased to Rs 226 from Rs 190. Monthly remuneration has been increased by 32.6 percent and daily wage by 18.9 percent.
• Employers and workers have also agreed to contribute 20 percent and 11 percent of their respective basic remunerations for implementing different social security schemes for workers.
• The trade unions promised to extend their full cooperation to employers in curtailing the work force if any enterprise is forced to fully or partially close operations due to rise in labor cost or other adverse market conditions.
• The workers have committed themselves to fully cooperate with the employers to increase industrial productivity.
• They have also agreed not to take part in any political activities during working hours.

Most of the issues I raised in yesterday’s piece were addressed. Good for both FNCCI and unions. Let us just hope that the terms of the deal will be honored by both sides.