On Sept 8, it was reported that Nepal ranks nearly at the bottom in the WEF Global Competitive Index (GCI). Among 133 countries included in the Index, Nepal was placed at the 125th position. Similarly, on Sept 10, the WB, in its “Doing Business Index (DBI)” placed Nepal at 123rd position among a list of 183 countries. The data indicates that the country is not even moving forward at a snail’s pace.
Global aggregated data on economic and business freedom tell us that as long as Nepal’s political problems are not resolved, it will be too naïve to expect overnight changes in business and economic environment.
GCI is a composite index comprising 12 pillars contributing to make up three distinct competitive advantages of an economy, that is, whether an economy is factor-driven, efficiency-driven or innovation-driven. The pillars are further divided into 112 sub-indicators. As a country moves from a factor-driven to efficiency-driven to innovation-driven economy, the source of country’s productivity changes from a relative emphasis on inputs (factors) to processing (efficiency) to outputs (innovation). The WEF defines competitiveness as “the set of institutions, policies, and factors that determine the level of productivity of a country”. The level of productivity, in turn, sets the sustainable level of prosperity that can be earned by an economy. More competitive economies tend to produce higher levels of income and faster level of growth in medium to long run.
As the name implies, DBI measures the extent of business regulations and property rights in an economy. It measures the hassles or the difficulties faced by businessmen. The measure is composed of 10 factors related to various stages of business-life cycle starting from opening-up of a business to its eventual closure. Ten factors included to measure difficulties in doing business are: (1) starting a business, (2) dealing with construction permits, (3) employing workers, (4) registering property, (5) getting credit, (6) protecting investors, (7) paying taxes, (8) trading across borders, (9) enforcing contracts and (10) closing a business. Each of these components is further divided into several sub-components to capture different dimensions related to the component.
Data on Nepal’s GCI is available from 2006. Ever since Nepal was listed in GCI, Nepal’s scores and rankings have hardly shown any perceptible changes. The country is still a factor-driven economy; there is a long way to go even before we become an efficiency-driven economy. Of the listed 112 sub-indicators, Nepal has competitive advantages only in four sub-indicators. Quiet a dismal picture. These factors are national savings rate, total tax rate, number of procedures required to start a business and financing through local equity market. Nepal is at the bottom of the scale, (133rd position) in relations to two indicators: The quality of electricity supply and the extent of staff training. It is shameful for a country so rich in hydropower and manpower to be ranked at the bottom of the scale.
The other sources of disadvantages for Nepal come from worsening labor-management relations (132nd), quality of overall infrastructure and extent of market dominance or lack of market competition and business cost of terrorism – all ranking at 130th position. Massive brain drain, lack of prevalence of foreign ownership, firm-level technology adoption, production process sophistication and marketing are other sources of disadvantages – all ranked at 129th position.
Global Competitiveness Report also contains the results of the opinion survey of Chief Executive Officers. The chart below gives the top-most ranking of 15 problematic factors related to doing business in Nepal as viewed by Nepali CEOs. More than half of the business problems in Nepal are explained by four factors – government instability, poor or inadequate infrastructure, corruption and policy instability. Earlier, government instability alone explained more than one-fifth of the business problems. Now, it has come down to 17 percent. Still the government is the major source of problems for the businessmen in Nepal.
Source: www.wef.org
The data on DBI for Nepal is available from 2007. The sources of business difficulties in Nepal comes from (1) trading across borders (export-import business), (2) employing workers (hiring and firing workers), (3) dealing with licenses, (4) paying taxes and (5) enforcing contracts. Interestingly, it is easy to start a business in Nepal than winding it up. This must be the reason why Nepali businessmen are calling for “freedom to exit”. Similar logic follows in the case of employing workers – workers are easy to hire than to fire in Nepal. Earlier in 2007 and 2008, the most difficult factor for doing business in Nepal was employing workers, now this factor has been overtaken by difficulties related to trading across the borders (see Table 1). GCI also points out that bad labor relations is a critical factor in doing business in Nepal.
Table 1: Nepal´s Positions on Doing Business Index (2007-2010)
| Year | |||||
| 2007 | 2008 | 2009 | 2010 | ||
| Total number of countries in the list | 104 | 178 | 181 | 183 | |
| Ease of Doing Business (Nepal´s rank) | 104 | 111 | 123 | 123 | |
| 1 | Starting a business | 52 | 60 | 75 | 87 |
| 2 | Dealing with licenses | 125 | 125 | 130 | 131 |
| 3 | Employing workers | 155 | 155 | 147 | 148 |
| 4 | Registering property | 24 | 25 | 29 | 26 |
| 5 | Getting credit | 94 | 97 | 108 | 113 |
| 6 | Protecting investors | 62 | 64 | 70 | 73 |
| 7 | Paying taxes | 90 | 92 | 111 | 124 |
| 8 | Trading across borders | 150 | 151 | 159 | 161 |
| 9 | Enforcing contracts | 123 | 123 | 122 | 122 |
| 10 | Closing a business | 95 | 95 | 105 | 105 |
Source: www.doingbusiness.org
Let me conclude by citing one more indicator related to business and economy published by the Heritage Foundation based in Washington. Every year, the Foundation publishes an index on economic freedom that measures the extent of market regulation and government interference. It is a composite index of 10 factors (www.heritage.org). This year, Nepal is ranked at 133rd position amongst a list of 179 countries of the world. Nepal’s scoring on 10 factors of economic freedom, in a scale of 100, are as follows: (1) Business freedom – 60.5 (2) Trade freedom – 63.2 (3) Fiscal freedom – 86.3 (4) Government size – 91, (5) Monetary freedom – 78.7 (6) Investment freedom – 20 (7) Financial freedom – 30 (8) Property rights – 30 (9) Freedom from corruption – 25 and (10) Labor freedom – 46.9. The total average score for Nepal is 53.2 indicating the country to be “mostly unfree”.
Clearly, Nepal’s advantage comes from the small size of the government. The information is available for Nepal from 1996 onwards. Other than ups and downs by a couple of points, there have not been any significant changes in total scoring. The maximum score was 55.1 in 2007 and the minimum score was 50.3 in 1996 giving an indication that the country has virtually remained stagnant in terms of economic freedom. Pro-market, liberal economists should better spend their time pondering upon these data before making tall claims on the success of economic liberalization in Nepal.
What these global aggregated data on economic and business freedom tell us is that as long as Nepal’s political problems are not resolved, it will be too naïve to expect overnight changes in business and economic environment. The global indicators tell us that Nepal has virtually remained stagnant in terms of economic changes. It will continue to remain so until the political problems are resolved.
Related story
Nothing matters
