Total road network in Nepal (1974-2010)

An insufficient supply of infrastructure is identified as the major binding constraint to growth in Nepal. Road network is one of most important infrastructures that helps in opening up new markets, linking markets, and enhancing development of supply chains, among others.

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*First eight months data

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In 1974/75, total road network created was 3173 kilometer, of which 1575 km was black topped, 416 km was graveled, and 1182 km was fair weathered roads. In 1990/91, total road network created was 8328 kilometer, of which 3083 km was black topped, 2181 km was graveled, and 3064 km was fair weathered roads. In 2000/01, total road network created was 17702 kilometer, of which 4566 km was black topped, 3786 km was graveled, and 7350 km was fair weathered roads. In 2010/11, total road network created was 21455 kilometer, of which 6874 km was black topped, 5036 km was graveled, and 9545 km was fair weathered roads. Overall, construction of fair weathered road is increasing more than the other two.

Nepal signs Double Tax Avoidance Agreement with India

Nepal and India signed Double Tax Avoidance Agreement (DTAA) on November 27, 2011. It follows the Bilateral Investment Promotion and Protection Agreement (BIPPA) signed on October 21, 2011. It replaces the agreement signed in 1987.

Here is a piece by Rameshore Prasad Khanal, economic advisor to the PM.

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[…] Having witnessed the process of negotiations until perhaps the final shape of the agreement emerged, it´s quite a story.

However, let me first begin with the opinion widely gaining currency immediately after the signing of the deal -- now famously known by the acronym BIPPA -- that Nepal could not get the Tax Agreement concluded which could have benefited the country and instead signed the one that would be in the Indian interest. This is the reasoning based on the analogy that what we do first is always in their interest and what we delay or cannot accomplish would have been in our interest. Both are mutual agreements and are in the interest of both the countries.

Nevertheless, the advantage would go to the one who maximizes the opportunities that these agreements open up. In fact, more than the Tax Agreement, Nepal would gain from BIPPA, as we need huge investments to meet our infrastructural needs and scale up manufacturing operations so that extra manpower from agriculture could be shifted to lucrative manufacturing jobs. We already had a Tax Agreement signed in 1987. This was generally sufficient for elimination of the chance of imposing taxes in the two countries for the same income. Any Indian company doing business in Nepal under the Nepalese law and paying taxes for such income would not be required to pay tax in India to the extent it is paid in Nepal. If tax liability in India is more than in Nepal then such a taxpayer would pay only the difference. As far as the elimination of the incidence of double taxation is concerned, the new Tax Agreement does not add substantial value. In that sense, considering the new Tax Agreement a better deal for us than BIPPA is just an expression of ignorance.

The pertinent question here is why the two countries agreed to have a new agreement completely replacing the 1987 agreement.

Tax Agreements between two countries are the outcomes of mutual consultation, but in recent years they draw heavily on the model Tax Conventions issued by OECD or the UN.
All past agreements that Nepal concluded are based on the two conventions. Both these conventions change frequently in light of the emerging trade and investment issues among countries. Particularly after 9/11, OECD model has seen dramatic changes that took tough negotiations between countries. Many countries saw tax havens as either a source of terrorist financing or place where terrorist could park money without much scrutiny. This is a threat to security everywhere. As a result, many countries thought that information exchange between tax authorities could help track down not only cases of deliberate default of tax but also location of illegal money. OECD Model Tax Convention now includes significant provisions for information exchange that can be used for tax purposes or even for any other purpose as per the law. A contracting state cannot decline to supply information just because the information is held by a bank or other financial institution or any trustee.

As India is obliged to follow OECD model because of its commitment in G-20, the request for amendment to 1987 agreement came from India some four years ago. Initial attempts to hold bilateral negotiations on the proposed amendment failed because of frequent change of government on our side. Finally, the negotiation started after the formation of a new government following the Constituent Assembly election.

During the first round of negotiations, our system was not comfortable on the inclusion of “information exchange” clause. It took quite a while for us to realize that the information exchange clause could actually be used to our advantage. The reason is that those who evade Nepali taxes usually siphon off money to the Indian financial market.
On the contrary, Indians evading taxes often stash money in highly secretive Swiss Banks (however, this is now no longer possible as Switzerland is also willing to share information that is kept as bank secrets provided Swiss government is requested for details of the suspected funds). The agreement empowers Nepal´s tax authorities to seek assistance of Indian counterparts in locating funds that escaped the Nepali tax net. This is certainly a good provision.

Aside from this entirely new elaborate feature, the new agreement reduces the number aggregate of days in a year to 90 only (from earlier 183) for a consulting or service business set up to be termed as “resident” for the purpose of taxation. This certainly increases Nepal´s tax base as there are more Indian consulting companies working in Nepal than our companies working in India. The new agreement reduces the rate of tax dividends paid by the resident company of Nepal to the resident company of India to five percent if the Indian company is holding at least 10 percent of the shares of the Nepali resident company.

For holding below 10 percent the applicable rate is 10 percent. As the rate of dividend tax in Nepal is already low the reduction simply reflects the existing laws of the country. Similarly, the applicable rate of tax on interest payment from a person of one country to the person of another country has been reduced to 10 percent. The new agreement includes provision for the taxation of capital gains, which was not covered in the earlier agreement. The income of Nepali students studying in India will not be subject to Indian taxation for six years. This limit earlier was only three years.

The most significant feature of the new agreement is that anyone living a cozy life in India by defaulting on Nepali taxes in the past can now be brought to book. Nepali tax authorities can obtain assistance of Indian authorities to collect any revenue claims, not just income tax, from a person living in India whose taxes are due in Nepal. If the request is so made the Indian authorities will use the powers as per their law as though they were collecting their own tax arrears. If there is a request from Indian side, Nepali authorities should certainly reciprocate.

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Types of non-tariff barriers (NTBs)

With fast decline in tariffs due to multilateral, regional, bilateral and unilateral liberalizations, non-tariff barriers (NTBs) have become the most important trade policy tool of almost all countries. Some of the commonly used NTBs, sourced from Hiau Looi Kee and Cristina Neagu’s presentation, are listed below:

• Origin of materials and parts
• Import license fees
• Customs inspection fees
• Testing requirement
• Direct consignment requirement
• Requirement to pass through specified port
• Service charges
• Labeling requirements
• Certification requirement
• Processing history
• Systems Approach
• Temporary geographic prohibition for SP
• Conformity assessments related to SPS
• Traceability information requirements
• Certification required by the exporting agencies
• Storage and transport conditions
• Microbiological criteria on the final product
• Quarantine requirement

Tariffs and NTBs can be either substitute or complementary depending on context. To protect key sectors, countries might increase ad valorem equivalent of NTBs by the same magnitude (keeping protection at its optimal level) of a decrease resulting from slashing tariffs, making them substitutes. Meanwhile, trade policies influenced by interests parties through lobbies and government’s care about social welfare as well as campaign contributions would be to both tariffs and NTBs, making it complementary.

NTBs are harder to implement than tariffs as the latter are more transparent in nature. Some NTBs (like RoO) affect multiple industries while tariffs are more targeted. NTBs are not primary revenue generators as tariffs are, which are important for developing countries.

The authors conclude that tariffs and NTBs could be substitutes within importer-HS6 products, comparing across exporters. Example: preferential tariffs often come with RoO requirements. Also, tariffs and NTBs could be compliments within importer-exporter pair, comparing across products. Example: products that have low tariff barriers often have lower NTBs.

Infrastructure and education are key to unleashing entrepreneurship

Ghani, Kerr and O’Connell argue it is entrepreneurs who create jobs and there is a “strong link between initial levels of young and small firms and subsequent job growth”. They maintain that even though there are not enough entrepreneurs in India (and other South Asian countries) for its stage of development, cities and states that have embraced entrepreneurship have created more jobs than those that have not. So, entrepreneurs create jobs. But, what creates or attracts them? Its physical infrastructure and an educated workforce. It is especially true for manufacturing and services sectors. The authors argue that “supportive industrial structure for input and output markets are strongly linked to higher entrepreneurship rates”.

The authors define entrepreneurship as the presence of young establishments, less than three years old, in the formal manufacturing sector. There area also other characteristics of entrepreneurship such as self-employment, firm size, ownership, entry and innovation.

 

Some of the findings are:

• Their estimate derived from Indian data suggests that a ten percent increase in initial entrepreneurship in a region-industry in 1989 was associated with a 1.3 percent higher rate of employment growth to 2005.
• While infrastructure and an educated workforce encourage entry to entrepreneurs, strict labor regulations discourage them to enter the formal sector.
• Start-ups are more frequent in cities with common labor needs and have customer-supplier relationships with cities’ incumbent businesses.
• For jobs creation, policymakers should focus on promoting entrepreneurship locally. Since educated labor force is a crucial factor for the entry of new entrepreneurs, establishment of local colleges and education institutions should be promoted. [Just look at the number of start-ups and the growth of education institutions in Nepal. They have moved positively and youths are at the forefront of this phenomena.] Similarly, infrastructure such as roads, electricity and telecommunication are prerequisites for enticing entrepreneurs.
• South Asian countries need to work more on developing infrastructure, improving education, lowering entry costs, reducing regulatory burdens, and developing financial access to unleash business creation and job growth.
• It is estimated that almost one million new workers will join the labor force every month for the next two decades in India.

Road to Busan: Aid effectiveness in Nepal

[It was published in Republica, November 23, 2011, p.6]

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Road to Busan

Chandan Sapkota and Rita Shrestha

Between November 29 and December 1 stakeholders associated with the aid industry are gathering in Busan, South Korea, for Fourth High Level Forum on Aid Effectiveness. The summit will review progress made since the last high level forum and make commitments to set new agendas for donor’s involvement in development sector. A group of ‘sherpas’—who are elected representatives of developed and developing countries— is working on commitments to be endorsed at Busan, according to the Organization for Economic Co-operation and Development ( OECD).

The summit is held against the backdrop of the food, fuel, financial and economic crises; concern over aid reduction by donors in the face of the Euro crisis and persistently high unemployment and stagnant growth in the US; increasing role of Southern donors; and climate change concerns. It will determine how over US$160 billion will be spent annually. Importantly, it will dictate how approximately US$1 billion will be spent in Nepal by donors. Hence, for a country whose 26 percent of total annual budget is funded by aid money (both loan and grants), the deliberations and outcomes of this summit are highly significant.

The Busan summit is the fourth in a series that started in 2002 with the First High Level Forum, organized in Rome, which for the first time outlined three principles of aid effectiveness. It was followed by Second High Level Forum in Paris in 2005, which outlined five principles of aid effectiveness. Then Third High Level Forum was organized in Accra in 2008. It accentuated the need to achieve the goals of the second forum and proposed further improvement in the areas of ownership, partnerships and result-oriented activities. The five principles outlined in the Paris Declaration (PD) — ownership, alignment, harmonization, results, and mutual accountability— remain a cornerstone of the evaluation of aid effectiveness.

In order to get a clear picture of what aid has or has not achieved so far with so much assistance, the PD set targets for 13 indicators covering all the five principles. The 2011 Survey on Monitoring the Paris Declaration shows that while at the global level only one out of the 13 targets has been met, there has been ‘considerable progress’ towards meeting the remaining 12 targets. In a way, this shows that the aid industry has failed to meet its own target and has opened up avenues for further criticisms from those who accuse them of inhibiting growth and development in developing countries.

According to a recent country report on monitoring of PD, published by the Ministry of Finance (MoF), the performance on aligning donors’ activities with respect to that of Nepal’s strategies for achieving goals such as poverty reduction, improving institutions and tackling corruption (also referred to as ownership) is well below the target set for 2010 by OECD. This indicates that aid alignment remains a challenge in Nepal. Specifically, technical assistance (over 25 percent of total aid) remains one of the least coordinated activities of donors. No wonder every big or small donor agency is organizing multiple and duplicate conferences and training programs, and publishing reports to just spend the allocated money.

If all technical assistances/capacity building in one sector are to be aligned and coordinated, then a lot of the Kathmandu based donors will find it hard to spend money. Most of their expertise is on technical assistance, which by the way opens up avenues to employ consultants from donor countries themselves. This has created an oversupply of consultants and reports. Usually, hiring certain number of consultants for technical assistance, irrespective of their need, is included as conditionality in assistance packages. The PD infringes on interests and incentives of donor countries, who in principle want to tie up aid to serve interests of their domestic constituencies as well as that of recipient country. At times, the seeming incompatibility of interests and incentives has led to the disinclination of donors to follow the government’s procurement and implementation mechanism, which are aimed at better coordinating aid. In terms of aid predictability, the situation has not improved much as is evident from the wide variation between commitment and disbursement.

In harmonizing aid activities, there has been some improvement in implementing program based approaches but the performance as of now (31 percent) is still short of the OECD target for 2010 (66 percent). Additionally, evaluating the progress in managing for results, the report notes that though the overall framework and procedures to carry out aid activities are already in place, the quality of results-based programming and monitoring is still below expectation. Donors have not fully used the Medium Term Expenditure Framework and the Poverty Monitoring and Analysis System. Note that only 41 percent of total aid inflow is recorded in the budget systems. The government has concluded that donor support is not always “sufficiently consistent and sustained” and they respond more to advocacy activities and less to securing resources to executing the very lessons learned from such activities and capacity building sessions. Furthermore, donors have spread their wings in more sectors in 2009 than they had in 2005, which means that aid fragmentation has in fact increased instead of the goal of decreasing it. Right now the donors lack clear exit strategies to sustain the progress made through technical assistances.

In mutual accountability for development results by both donors and government, there has been some progress but not of the expected level. Sector-wide Approach (SWAp)—which brings together all stakeholders within any sector— in health and education has shown impressive results, but according to the report, there still is not enough interaction between donors and government on matters regarding aid effectiveness. The government is trying to bring in all aid activities under the Foreign Aid Policy (FAP), whose draft is being widely circulated among all stakeholders. However, the policy is still not enacted allegedly due to objections by some donors, who think that FAP as of now, if implemented, will restrict them from fully implementing their own programs under their own guidelines. Moreover, due to the high concentration of donors and their missions (which increased to 341 in 2010 from 262 in 2007), our government officials are becoming more responsive to them rather than to their own citizens.

The Busan summit will take up these issues, formulate new strategies and make commitments drawing lessons from country review reports such as the one prepared by our MoF. The evolving global economic scenario after 2008 means that aligning donors’ domestic interests regarding country ownership, aid alignment and tied-aid will be even more challenging than it were when the PD was crafted. Meanwhile, convincing Southern donors to adhere to the PD principles will face resistance as they are still guided primarily by commercial and foreign policy interests, which are not entirely compatible with the PD. Nepal receives approximately US$ 140 million per year from Southern donors, namely India, China, Kuwait, OPEC Fund, and Saudi Development Fund.

The aid commitment, priorities and strategies of donors, both Development Assistance Committee (DAC) and non-DAC (read as Northern and Southern donors respectively), in Busan will have important implications for development activities in our country. It will primarily determine the course of development interventions before the deadline for achieving the MDGs expires in 2015. By forging a new consensus on development cooperation, the donors have the task of convincing the public that their activities are driven more by the need of the people than by their own self interests.

Sapkota is associated with South Asia Watch on Trade, Economics & Environment; Shrestha is with Alliance for Aid Monitor Nepal. The views expressed are personal.

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Food deficit and insufficient inputs

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Food deficit in Nepal is mainly the result of insufficient inputs in the production process, conversion of food grain into animal feed, erratic rainfall, delayed monsoon and poor land husbandry. The crop yield data show big yield gaps (the gap between attainable yield and the national average yield). The gap is three tons per hectare for wheat, three tons per hectare for maize and two tons per hectare for rice. Thus, over a million hectares of cultivable land yield below average. Agro scientists in Nepal often complain that there is not enough money for research and awareness programs aimed at farmers, which would be of enormous help in reducing these gaps. Unavailability of quality seeds, fertilizers and plant-protection chemicals for the crops are other important factors. Moreover, the government does not have enough space to store all of the food grain produced in the country; instead traders across the border store Nepali harvest, thus leading to seasonal shortages. If the farmers are supported with proper inputs in time and storage facilities are improved, we can attain the goal of food sufficiency in a not too distant future. Also, if the farmers could store rainwater during monsoon for its use in the dry season, millions of tons of additional yield can be achieved. None of these measures require genetic manipulation of seeds, which is Monsanto’s forte. 

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Read more by Krishna Bahadur Karki here.

My take on food security in Nepal here (research brief) and here. Here is a link to a detailed paper on high food prices in South Asia.

Crisis and creative destruction

Well, economic crisis does not necessarily mean exit of uncompetitive firms and entry of competitive ones. This is shown by Hallward-Driemeier and Rijkers in a new paper whose abstract is as follows:

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Using Indonesian manufacturing census data (1991-2001), this paper rejects the hypothesis that the East Asian crisis unequivocally improved the reallocative process. The correlation between productivity and employment growth did not strengthen and the crisis induced the exit of relatively productive firms. The attenuation of the relationship between productivity and survival was stronger in provinces with comparatively lower reductions in minimum wages, but not due to reduced entry, changing loan conditions, or firms connected to the Suharto regime suffering disproportionately. On the bright side, firms that entered during the crisis were relatively more productive, which helped mitigate the reduction in aggregate productivity.

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