Bad business

ECONOMIC MEMOIR OF 2012

In a recent World Bank report, Nepal fell from 107th to 108th position in the ‘Doing Business Index’. Unsurprising, given that Foreign direct investment (FDI) commitment in the period declined substantially: the government’s ambitious plan of bringing in US$ 1 billion in FDI could not be accomplished, not by a long shot, nor could the Investment Year 2012/13 kick off on time. The International Monetary Fund (IMF) labeled Nepal’s private sector a weak player in national economy. Inflation continued on its upward tick, and so did hours of load shedding. Why did things go so badly wrong in 2012?
The country’s vital institutions fell far short of delivering the expected results. In their recently published book Why Nations Fail?, Daron Acemoglu and James Robinson argue that the prosperity of a country depends on the nature of its institutions and not the country’s historical, cultural or geographical background. Our weak institutions aren’t even able to carry out their regular work, let alone devise innovative ways to boost performance.

PHOTO: ARTMAGZIN.FILES.WORDPRESS.COM
The institutional failures were there for all to see. First of all, the Ministry of Agriculture Development (MoAD), assigned to ensure the availability of chemical fertilizers to farmers during plantation season, failed in its task, resulting in significant decline in paddy production. According to MoAD, paddy production is estimated to fall by 11.3 percent (to 4.5 tons) this year, inflicting a loss of Rs 12 billion on the national economy.
In another misguided move, the government decided to fix the maximum retail price (MRP) of some essential commodities, drawing widespread criticism from the private sector. The government’s move was supposed to provide some relief to consumers from galloping inflation. Unfortunately, the government’s immature decision ended up making people pay even more than they were paying before the price fix. This was owing to the failure of the Ministry of Commerce and Supplies (MoCS), entrusted to enforce laws and monitor the market, to ensure proper monitoring of prices in line with the government announced MRP.
Third, public enterprises like Nepal Electricity Authority (NEA) and Nepal Oil Corporation (NOC) continued to underperform due to red tape, unresponsive bureaucracy, and lack of political willingness to vital reforms.
Fourth, the vital sectors of the economy continued to perform poorly compared to previous years. The contribution of manufacturing to gross domestic product (GDP) fell to 6.2 percent, the lowest in a decade. The services sector, though still doing well in comparison, is also not performing up to the desired level. As a result, overall growth has declined to just 3.8 percent in the current fiscal year, and achieving double digit growth appears a distant dream.
Fifth, remittance, the economy’s only reliable lifeline, continues to increase gradually, but most of it is going into unproductive areas. The scenario of foreign employment is sadly worsening.
Sixth, the gap between import and export is ever increasing. We have always been inefficient in tapping the duty-free and quota-free facilities granted by countries such as China, the US and the European countries. The government has not been able to hold regular bilateral meetings with the US, which have been due for one and a half years.
Looking at the big picture, year 2012 started with a hope that the country would get a constitution, which would spell the end of the long transition. People were expecting a constitution that would lay the country’s economic foundation. Instead, there seems to be more turbulence ahead.
The private sector, for its part, is afflicted by political instability, power shortage and labor unrest. Over three dozen firms recently scaled down production by as much as 50 percent owing to energy shortage. Like the public sector, the private sector is extremely inefficient, politicized, corrupt and unresponsive. The main reason behind the privatization of public enterprises after 1990 was to make them more competitive and professional. Unfortunately, two decades later, the private sector still seems to be in wilderness. The private sector’s unnecessary lobbying and unethical activities have damaged the country’s trade with neighboring as well as faraway countries. The case of illegal re-exporting of goods such as beetle nuts and pulses, among others, came to light this year.
Political instability aside, the crucial question is: how can the private sector make itself effective even during transition? Most private sector players are still busy in dirty political games than in doing business. Their unholy engagement in politics has ultimately cost the national economy a lot.
Our private sector’s effectiveness is far below that of other South Asian countries, where private sector continues to perform well despite political instability. For instance, the private sector in Bangladesh, which has seen many more political upheavals than Nepal, has proved to be the country’s growth engine.
In short, though there has been progress in certain areas, the year 2012 was largely disappointing for businesses and national economy. As things stand, 2013 is shrouded in even more uncertainty. Let us hope our politicians can get their acts right in 2013 and work at getting the country on track to economic prosperity.