Enhancing efficacy of government in new times

Recognizing the crucial role governments play in supporting the economy (especially during times of crisis) and providing foundations for private sector dynamism, McKinsey & Company has started the McKinsey Center for Government (MCG). Along with it came the first publication titled ‘Government Designed for New Times’, which contains discussion on the role of government in the coming days, ways to boost efficiency and induce effective execution of key decisions.

Below is a summary of some of the contributor’s views on the role of government and ways to enhance its efficacy. [The Nepali government can learn a lot from international best practices in making government productive and government services effective and efficient.]

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Five lessons learnt by Tony Blair, former prime minister of Great Britain and Northern Ireland, in leading government transformation:

• Governance (particularly government effectiveness or capacity in government to get things done) should be at the heart of political debate.
• Aim for systemic change, not incremental change to allow government to keep pace in a rapidly changing world (emerging new economic powers; new technologies in communications, energy and medicine; climate change; financial crisis).
• Right conceptual analysis leads to best systemic change and delivery as the best policy comes from a clear, rigorous intellectual approach.
• The people that enact policy and the ones that gets appointed to key posts matter. Management skills are better in private sector. It is better for public sector employees to spend some years in private sector and then come back to public sector.
• Governments around the world can learn from each other.

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Michael Fullan, special adviser to the premier and minister of education in Ontario, offers four directional advise to improve all systems in reasonably short period of time:

• Accountability dilemma (building accountability within the system rather than relying on external control)
• Policy-overload dilemma (don’t develop plans that are too complex, too vague, and contain too many priorities; be focused)
• Capacity-building dilemma (development of individual and group efficacy, especially in skills, resources and motivation)
• Sustainability dilemma (accountability, policy focus and capacity building might lead to sustainability)

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Diana Farrell, co-founder of McKinsey Center for Government, discusses how governments can do more and better with less (in short, tap into the mission-driven mind-set of public sector employees).

• Design and execute multiyear reforms that goes beyond mundane initiatives designed to improve management capability. Aim for big reforms and make big (not incremental) shifts in amount of time, energy and resources required. E.g. expenditure and revenue plans, employment plans, etc)
• Invest in capabilities needed for success, especially employing best practices in technology and operations, organization and human resources, and budgeting and finance. E.g. vocational education, updated data, implement the latest proven project management techniques)

NEPAL: Proejcted agriculture production in FY 2012/13

The shortage of fertilizers and low and late monsoon during peak paddy planting season are expected to lower economic growth rate (unless industrial and services sector pick up rapidly, which seems negative as of now). So, how much is the expected decline in agriculture production in 2012/13?

Prabhakar Ghimire reports (his blog here) that the Ministry of Agriculture and Development estimates food production to decline by 563,000 MT.

• Paddy production to fall by 14.2%. Total paddy output is expected to drop by 720,000 tons this year compared to 5.07 million tons recorded last year. Plantation was done in just 91% of total paddy land. Dhanusha and Siraha, key paddy producing districts, reported plantation in just 49 percent and 50 percent of paddy land
• Maize production to fall by 10%. Total maize production is expected to drop by around 164,000 tons.
• Demand for cereals could rise by 100,000 tons to 5.3 million tons this year.
• At least 27 districts will face food deficit this year.

About 76.3% of households in Nepal depends on agriculture for livelihood and 83% of the population lives in rural areas. Paddy contributes around 21% to agriculture production, which then account for about 35% of GDP. Paddy and maize are the major cereals consumed by a majority of households.

Meanwhile, global food prices is increasing. According to the latest Food Price Watch, global food prices increased 10% between June and July 2012 with staples such as wheat increasing 25% in the period. The high global food and fuel prices gets reflected in domestic prices as almost half of the total food demand is fulfilled by imports. It tends to affect poor and vulnerable the most, while pushing back people just above the poverty line back under it. 

A study (Global Food Price Inflation and Developing Asia) by ADB showed that a 10% increase in food prices will increase the number of poor people (in millions) living below US$1.25-a-day by 3.8, 0.01, 22.8, 6.7, 0.6, 3.5, and 0.2 in Bangladesh, Bhutan, rural India, urban India, Nepal, Pakistan, and Sri Lanka, respectively. More here (and also this one on targeted food subsidies).

Why fiscal stimulus worked in China?

The short answer, according to a new paper by Fardoust, Lin, and Luo, is that since the Chinese fiscal stimulus in 2008-09 focused on (i) investments in bottleneck-easing infrastructure projects, and (ii) countercyclical nature of expansionary subnational expenditure on well-chosen infrastructure projects that improved business climate, it worked. The latter one had the largest effect. 

Chinese stimulus money (US$586 billion—1.25% of China’s GDP in 2008) went to housing guarantees, rural construction, energy conservation and emissions reduction, infrastructure development, social services, industrial restructuring, and post-disaster reconstruction of Wenchuan.

Below is an abstract from their paper:

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China's government economic stimulus package in 2008-09 appears to have worked well. It seems to have been about the right size, included a number of appropriate components, and was well timed. Its subnational component was designed to maximize the impact of the stimulus package on the economy and minimize the potential procyclical elements that are usually built into subnational fiscal mechanisms in federal countries. Moreover, China's massive fiscal stimulus played an important role in the overall recovery of the global economy. Using a simple analytical framework, this paper focuses on two key factors behind the success of the stimulus: investments in bottleneck-easing infrastructure projects and countercyclical nature of subnational spending based on the assumption that well-chosen infrastructure projects could improve business climate and thereby crowd in the private investment. The paper concludes that the expansionary subnational government spending played a key role in strengthening the overall impact of the stimulus and sustaining growth. It also highlights the importance of public investment quality and cautions about the sustainability of local government financing through the domestic banking system and increases in local governments off balance sheet or contingent liabilities. These lessons may be of particular relevance today for China, as well as other countries, in formulating policy response to another global economic slowdown or crisis, possibly as a result of the Eurozone turmoil. For China, investing in urban infrastructure and green economy, as well as in higher quality and better targeted social services, will be crucial for improving income inequality and inducing a more inclusive growth path.

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It has more to do with the quality of public investment, i.e. the economy should have enough absorption capacities, which will help stimulate economic activities without jeopardizing inflation too much. Also, the source of such stimulus is important as a one-off investment by borrowing from domestic financial institutions or by increasing contingent liabilities of local governments is not going to be sustainable. The public investments have to be such that they exploit idle resources (human and capital) and are sustainable in the sense that the total costs are paid off in due course of time. It offers an important lesson for economies like Nepal that have constrained economic growth in the face of severe shortage of infrastructure (electricity, transport, urban services, etc.). Prudent management of resource allocation, project selection and quality investment (public, private or public private partnership) in these will have significant multiplier effects.

Doing Business 2013: No improvement in ease of doing business in Nepal

In its latest Doing Business 2013: Smarter Regulations for Small and Medium-Size Enterprises report, the IFC has ranked Singapore as the top economy in terms of ease of doing business. The other top ranked economies are Hong Kong (SAR, China), New Zealand, the United States, and Denmark. Last year as well, the same economies were in the top position.

The report ranks economies based on performance in ten indicators: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, and resolving insolvency. This year’s report data cover regulations measured from June 2011 through May 2012.

Poland was the global top improver in the past year. The other economies that have made the most progress in several areas of regulation last year were Sri Lanka, Ukraine, Uzbekistan, Burundi, Costa Rica, Mongolia, Greece, Serbia, and Kazakhstan.

South Asia

In South Asia, Sri Lanka made the most progress and was ranked 81, followed by Maldives (95), Pakistan (107), Nepal (108), Bangladesh (129), India (132), Bhutan (148) and Afghanistan (168). Last year, Maldives ranked 79, followed by Sri Lanka (89), Pakistan (105), Nepal (107), Bangladesh (122), India (132), Bhutan (142) and Afghanistan (160). The regional average (in rank) was 117 in DB2012 but it was 121 in DB2013, reflecting either a worsening business regulatory environment or a stagnant one or significant progress by other regions (based on data revisions) or addition of new economies (this year Malta and Barbados were added).

Nepal

In terms of ease of doing business, Nepal ranked 108 out of 185 countries. Last year, Nepal ranked 107 out of 183 countries and in DB2011 Nepal’s ranking was 110. Between DB2012 and DB2013, Nepal did not enact a single reform aimed at easing business processes and regulations. Hence, the progress made by other economies dropped ranking one position below last year’s ranking (plus there was addition of two economies in this years report).

• While the ranking in registering property has improved by two positions and ranking in getting electricity is unchanged, the ranking in all other indicators has declined. The largest decline (9 positions) is in dealing with construction permit indicator.
• In South Asia region, Nepal has the best ranking (21) in registering property. It requires 3 procedures, 5 days and 4.9% of property value to register a property in Nepal. The regional averages are 6 procedures, 100 days (250 days in Afghanistan), and 7.3% of property value.
• In terms of documents to export, Nepal has the worst performance in the region, requiring 11 documents against the regional average of 8. Sri Lanka has the best performance with just 6 documents required for exporting a container.
• In terms of number of procedures required to enforce contracts, Nepal has best performance in the region with 39 required procedures as against 43 for regional average.
• In terms of time taken to resolve insolvency, Nepal has the worst performance in the region. While it takes 5 years to resolve insolvency in Nepal, the regional average is 3 years (in Maldives it is just 1.5 years). Furthermore, recovery rate is also the lowest in Nepal (24.5 cents on the dollar) compared 29.1 for the region (50.6 for Maldives).

Nepal's ranking (out of 185 countries)
Topics	DB 2013 Rank	DB 2012 Rank	Change in Rank
Starting a Business	105	102	-3
Dealing with Construction Permits	97	88	-9
Getting Electricity	96	96	No change
Registering Property	21	23	2
Getting Credit	70	67	-3
Protecting Investors	82	79	-3
Paying Taxes	114	109	-5
Trading Across Borders	171	170	-1
Enforcing Contracts	137	136	-1
Resolving Insolvency	121	119	-2

Distance from frontier

This year, the report also provides a new measure called ‘distance from frontier’, which benchmarks economies to the frontier in regulatory practice. In other words, it measures the absolute distance to the best performance on each indicator. When compared across years, the distance to frontier measure shows how much the regulatory environment for local entrepreneurs in each economy has changed over time in absolute terms, while the ease of doing business ranking can show only relative change.

An economy’s distance to frontier is indicated on a scale from 0 to 100, where 0 represents the lowest performance and 100 the frontier. For example, a score of 60 in DB 2012 means an economy was 60 percentage points away from the frontier constructed from the best performances across all economies and across time. A higher score in DB 2013 indicates an improvement.

Compared to DB 2006, in DB 2013, in Nepal, there was improvement in all indicators except trading across borders. The largest improvement was in dealing with construction permits, followed by getting credit and starting a business. Overall, Nepal's ease of doing business improved by four percentage points (i.e. closer to the frontier by four percentage points) between DB 2006 and DB 2013.

Nepal has the highest minimum wage in South Asia?

Workers affiliated to various trade unions have time and again gone on strike demanding hike in wages and allowances. The recurring row over hike in wages and allowances between workers belonging to one or the other politically affiliated (and probably motivated) trade unions and businessmen has led to not only closure of national firms but also reputed international firms. Labor strikers have intensified particularly after 2006 and there has been an explosion of registered unions at the Department of Labor. The business community argues that it is not fair to demand wages and allowances beyond the capacity of the firms to pay them. The trade unions argue that they should be paid more because the cost of living has gone up. Their row has led to repeated revision of minimum wage.

A higher wage means high cost of production. In Nepal’s case, the cost of production is amplified by the inadequate supply of electricity (forcing firms to use diesel generators to run factories), high cost of raw materials, low innovation and strikes, among others. Along with the end of MFA in 2005 and the inability to compete with more competitive international players, high labor costs and strikes are also responsible for the decline of once thriving garment industry (and other manufacturing firms) of Nepal. In order to stay competitive, the government, labor unions and private sector have to work on enhancing efficiency and reducing cost of production (this can be achieved even if there is hike in wages, as seen in Bangladesh's case). Else, investors will be looking for less expensive manufacturing destinations, which would mean less investment, less jobs and low growth for Nepal.

The figure below shows that Nepal already has the highest minimum wage in South Asia. The minimum wage in Nepal increased from US$32.32 per month in 2007 to US$74.75 per month in 2012. In 2007, Nepal had the second lowest minimum wage in South Asia. In 2008, it doubled and since then minimum wage has been the highest in South Asia. Even if we consider the overall wage overheads (minimum wage and allowances), Nepal has the highest wage overhead costs in South Asia.

Now, the question here should be: is the increase in wages consistent with increase in productivity? See this article for the discussion on union strikes and productivity. The basic idea is that the marginal increase in wage should be matched by the marginal increase in productivity for long term survival of firms and employability of workers, i.e. increase in wage costs should be offset by increase in efficiency. As of now, in Nepal, it is not so as hike in wages (from an already relatively high level!) and increase in productivity are not in sync with each other. Bangladesh had synced it, i.e. the rise in wages was more than offset by increase in efficiency. No wonder, Bangladesh is the next hotspot in RMG sourcing.

 

Who shapes trade patterns?

In a new paper, Caroline Freund and Martha Denisse Pierola argue that it is the top one percent of exporters that shape trade patters. Abstract of their paper as follows:

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This paper shows that the top 1 percent of exporters critically shape trade patterns, using firm-level data from 32 countries. In particular, variation in average firm size (the intensive margin) explains over two thirds of the variation in the sector distribution of exports across countries, the remaining share is explained by variation in the number of firms (the extensive margin). Variation in average firm size across sectors is largely driven by variation in the sectoral distribution of exports from the top 1 percent of firms in a country--export superstars. In contrast, the sectoral distribution of exports from the remaining 99 percent of firms is more similar across countries, and the distribution of the total number of firms across sectors is very similar across countries. This paper also finds that current export superstars typically entered the export market relatively large, reached the top 1 percent after less than three years of exporting, and account for more than half of a country's total exports, export growth and diversification. The results underscore the role of individual firms in determining both trade volumes and trade patterns.

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Comments on Immediate Governance and Economic Action Plan 2012

On 16 October 2012, the BRB government unveiled Immediate Governance and Economic Action Plan 2012, which has 201 reform activities in 15 different fields. Earlier, BRB government also introduced Immediate Action Plan on Economic Development and Prosperity 2012 and Immediate Relief Program 2011. It also introduced a good governance action plan.

The major points from the latest ambitious action plan are as below:

Economic progress and prosperity

• Get eight aircrafts (two for international and six for domestic) for Nepal Airlines within six months. Fire employees who fail to ascertain procurement process initiation within a month.
• Operate an appropriate manufacturing activity/industry inside the defunct Janakpur Cigarette Factory within six months.
• Invite private sector to construct an exhibition and convention center in the premises of the defunct Himal Cement Factory within three years.
• Lease Birgunj Sugar Factory to either cooperatives or private sector within 18 months.
• Revive Hetauda Clothing Factory and mandatorily use its products by government agencies that get clothing allowance within a year.
• Revive the sick industries within a year.
• 24 hour security in major trade routes and industrial corridors to be enacted immediately.
• Dedicated Security Force to firms employing more than 500 employees within a month.
• Operate Nepal Orient Magnesite Factory under PPP model within six months.
• Open track of Kathmandu-Terai and mid-hill postal road within a year.
• Start construction of regional airports to be built in Bhairawaha and Pokhara within six months.
• Prepare DPR of Budhi Gandaki hydropower and West Seti hydropower projects within two and a half years.
• Start civil works of Tamakoshi hydropower project within two years.
• Seal agreement with a new constructor for Melamchi Water Supply Project within six months.
• Construct at least 25 kms of canal in Sikta irrigation project within a year.
• Disburse Rs 3 billion under Youth Self-Employment Program to 15000 youths within six months.
• Establish think-tanks related to security, foreign affairs and strategic affairs within six months. Similarly, establish economic and social issues related think tank within six months.
• Prime Minister National Award to investors investing more than Rs 2 billion (to be implemented within three months)
• Organize high level economic summit within six months.
• New Nepal Development Fund to be established within six months by collecting at least one day of income from Nepali and NRNs.
• Publicize 50 bankable projects by Investment Board within six months.
• Provide at least 100 days of employment within a year to those having poverty identification card.
• Increase number of public servants in PM’s Advisory Council within six months.

Corruption control and transparency

• Facilitate corruption related complaints, salary to be indexed to NRB’s data on inflation rate; random sampling of at least 3 percent houses in urban areas to check compliance with building codes and standards; plug leakages by at least 25 percent in supply of electricity, water supply and petroleum products; one door policy to all money coming via NGOs and INGOs and make mandatory for all to make public their accounts and activities

Transport management

• Terminate driving license if caught five times for drunk driving; no passengers on the top of vehicles; parking space management in Kathmandu valley; passenger pick up and drop off only at designated bus stops; operate Sajha buses in Kathmandu valley and other major cities

Supply of essential items

• Import 200,000 MT of fertilizers for this year; discounted price shops to be established during festival season; stop illegal collection of duties along highways; at least 25 percent veggie supplies in Kathmandu valley to come from cooperatives; market monitoring

Power sector

• Include supply of petroleum products in emergency items; plant twice the number of trees for each tree cut until 5000 MW of electricity is produced; construct at least six transmission lines to connect at least 30MW additional electricity to the grid; import 200MW of electricity; operate multi fuel plants in Duhabi and Hetauda; limit load-shedding to 12 hours in dry season

Comments

On an optimistic note, let us hope that the government will be able to fulfill at least 50 percent of the promises made in its latest action plan. That much should suffice given the difficult political transition and weak economic fundamentals.

It is a ambitious, long list of work and set action plan. The problem is that similar plans have already being unveiled by the same government and there has been no systematic evaluation of the achievement of targets. At the outset, the core issues here should be: (i) Why do we need a new plan with lofty targets and aims, which have in one way or the other been the main topics in pretty much all of the earlier short, medium, long and ad hoc plans and programs?; (ii) What new does this plan offer other than seemingly unattainable hope?; (iii) Can the nature of this government (caretaker) bring to fruition the plans within the stipulated deadline?; (iv) Given the history of non-implementation of similar plans and programs with the same kind of bureaucracy and political culture, are these realistic?

First, if growth and prosperity are the two main concerns then we already know what is required to kick-start the growth engine in the first place. It will be hard to bring in new investments in sectors other than hot potato ones (infrastructure—mainly energy and transport—and some services sector) right now. The ones that is most important in terms of attaining decent growth rate and creating employment opportunities are manufacturing and agro-processing sectors, which are beset by lack of adequate supply of electricity, labor problems, lack of innovation, uncompetitive production structure, inconsistent policies, corruption and lack of finance among others. Simply solve these by using the already available policy tools and implementing the already introduced policies. Keep it simple. Keep it real.

Second, difficult labor relations are eating up whatever investors’ confidence there was after 2006. We need a solid understanding and setting up of parameters for labor unions to operate both in public and private sectors. Several firms, both domestic and foreign, have closed down due to labor disputes. Labor unions are way too politically motivated and less concerned about actual welfare of workers. It is not inappropriate to have a policy that anchors pay and benefit hikes to productivity. Furthermore, the distortions created by middlemen in veggie and fruit markets are not touched upon.

Third, what good it is to revive the defunct state-owned enterprises and sick industries? Without the solution to the issues mentioned above, reviving defunct firms will serve no purpose other than employing party faithful and draining state’s coffers filled with taxpayer’s hard-earned money and loan from development partners.

Fourth, getting aircrafts for Nepal Airlines will not solve the core problems, which lie in the excessive politicization of the once healthy institution. Keep politics out of Nepal Airlines, rightsize and downsize redundant staff, and give it plans, things will get better. No master plan is needed at least in the initial phase. Is six months timeframe realistic given that even with more than six years of talks and planning, Nepal Airlines has not seen its fleet of airplanes increased.

Fifth, preparing DPR of hydro projects and expediting works are commendable. Hopefully, these will be done within the given timeframe and without much opposition from one or the other political parties in the name of sovereignty! Playing by the international rules, let investments come in, especially in infrastructure and manufacturing sectors, regardless of the source country.

Sixth, the commitment to expedite the process to again kick-start Melamchi related works and establishing think-tanks is also commendable. The only worry with the latter one is that it should not be a parking space for retired bureaucrats, should be demand-driven and independent, strictly focused on policy analysis and advisory services, free of political interference, and staffed with competent people that can be retained as and when required. Also, why need a foreign affairs think-tank when Nepal already has Institute for Foreign Affairs to do the job (at least in principal)?

Seventh, there should be a rigorous evaluation of Youth Self-Employment Fund (YSEF) as reports of mismanagement of funds and doling out money to party faithful are coming out in a regular basis.

Eighth, most of the plans and programs included in this list are the ones that have either already being featured in previous plans by the same government or were in pipeline to be included in budget. Also, are the deadlines realistic given the political constraints, particularly legislative constraint?

Ninth, and the most important of all, is finance. Where will the money come from to implement these plans and programs? Even if a full budget is unveiled, it is impossible to incorporate all of these in the two-third budget and garner political support/consensus. Granted, some of the works don’t need to wait for budget, but then given the quality of executing and implementing agencies, it is quite unbelievable to expect that the set targets will be achieved in time.

With adequate financing, political and bureaucratic consensus and will, cooperation from development partners, responsive public and private sectors apparatus, and the guts to meticulously and painstakingly follow up on the targets and compliance by executing and implementing agencies, the hope is that some of them will be achieved. Even 50 percent achievement of the targets would suffice for now.