Friday, October 2, 2009

The state of no reform

My latest op-ed is based on two reports released last month. One measures how business-friendly  an economy is and the other measures how competitive a given economy is. Nepal does not do well in both the rankings. I argue that the main reason for stalemate in reforming reforms is because of a lack of consensus (political) on economic issues, mainly economic growth and broad-based economic development. I think the political parties need to agree on and abide by the principle of rules-based economic system so that the messier political rattle does not infect economic reforms as has been in the past.


State of no reform

Two crucial reports related to the state of Nepali economy concerning business-friendly environment, competitiveness and the economy’s overall openness were released last month by two reputed institutions. Given the level of political turmoil and a complete disregard for the need to stimulate the economy by reforming key sectors and resolving major stumbling blocks that have been impeding economic activities, it is no wonder that the reports painted a bleak picture of the economy. In a nutshell, last year, dirty political game and bickering for more political clout and wealth clouded the need for forging a consensus on chalking out an actionable inclusive plan for structural transformation of the lagging economy.

Probably the most important report that is looked upon closely by business community and donors is the Doing Business Report 2010. It shows that the progress in fine-tuning reforms that would make doing business in the economy easier stagnated at a low level. Among 183 economies, Nepal’s standing in the easy of doing business ranking is 123. Compared to the year before, doing business was not any easier last year. It is a well-known fact, but hardly acknowledged by the politicians, that economic activities are severely constrained by transport obstructions, forced closure of industries, labor union strikers, depleting industrial security, dilapidated and a short supply of infrastructure, severe power shortage and labor market rigidities. These issues have been reflected in various indicators used in the reports.

The Doing Business Report, published annually by the International Finance Corporate (IFC), ranks countries on the ease of doing business by looking at 10 key indicators. Singapore has been consistently ranked as the most easiest/favorable nation in doing business. In South Asia, Pakistan was the top reformer, followed by Maldives and Sri Lanka. Rwanda – the same country that lived through genocide in 1994 and experienced a complete collapse of political and economic institutions – is one of the top reformers.

Led by a dedicated statesman, President Paul Kagame, the Rwandan economy has been growing registering impressive growth rates. Such a strong political resolve and leadership is virtually absent in the Nepali political economy where leaders are more interested in amassing political clout and wealth than building a consensus to leave economic activities free of political interference.

Looking at specific indicators, it becomes clear where the economy stands on various issues. Starting a business was even harder this year, slipping down in ranking by 12 points to 87 from 75 last year. It takes seven procedures to start a business—verification of the uniqueness of proposed company name; verification and certification of memorandum by a professional; purchase of stamp to be attached to registration form; filing documents with the Company Registrar’s Office; making company seal; registering with Inland Revenue Office; and enrolling the employees in the Provident Fund. The whole process takes at least 31 days and costs 53.6 percent of income per capita.

In dealing with construction permits, it takes 15 procedures, 424 days and costs 221.3 percent of income per capita. Note that it takes 424 days and costs 221.28 percent of income per capita to just build a warehouse. Meanwhile, due to pressure from politically-backed trade unions to increase wages and welfare at a time when production is decreasing, it is of little surprise that employing workers has also become difficult. The rigidity of employment index (a composite index of difficulty of hiring index, rigidity of hours index and difficulty of redundancy index) is 46. For South Asia and OECD, it was 26.3 and 26.4 respectively. A higher value represents more rigid regulations.

The only indicator in which Nepal made progress was in registering property. Nepal’s ranking went up by three positions to 26 from 29 last year. It takes three procedures, five days and costs 4.8 percent of property value to register a property. This improvement came along with the passage of the Finance Act 2008, which reduced the fee for registering a property from 6 percent to below 4.8 percent of the property’s value.

However, getting credit from financial institutions was not any easier; the ranking slipped down by four positions to 113 from 109 last year. Similarly, Nepal did a bad job in protecting investors, leading to decline in ranking by three positions to 73 from 70 last year. There was no progress in making transactions transparent, sorting out liability issues for businesses and the ability of shareholders to sue officers and directors for misconduct.

Despite an increase in revenue generation, partly attained by forcing tax evaders to pay taxes, the process of paying taxes was not any simpler; ranking dropped by 13 positions to 124 from 111 last year. An entrepreneur had to make 34 payments a year, spend 338 hours per year preparing tax documents and pay 38.8 percent of profit as taxes (with 11.3 percent of profit as labor tax and contributions). Likewise, trading across borders was also cumbersome. Among all the indicators, ranking in ‘trading across borders’ was the worst (down by two positions to 161 from 159 last year). Similar poor result was seen in The Global Trade Enabling Report 2009, which ranks countries based on their efficiency at border administration and environment conducive to trade, where Nepal ranked 110 out of 121 countries incorporated in the study. It takes nine documents, 41 days and costs US$1764 per container to export a standardized shipment of goods. Additionally, it takes 10 documents, 35 days and US$1,825 per container to import a standardized shipment of goods.

There was no progress in enforcing commercial contracts and in simplification of closing down a business. From the evolution of a payment dispute to its settlement, it takes 39 procedures, 735 days and costs 26.8 percent of claim to enforce a contract. Additionally, to resolve bankruptcies, it takes 5 years, costs 9 percent of estate and the recovery rate is 24.5 cents on each dollar.

Overall, there were no discernible reforms in easing bottlenecks associated with doing business in the country. Nepal lacked what strong reformers had: A long-term inclusive agenda involving relevant public agencies and private sector representatives for institutionalization of reforms aimed at increasing the competitiveness of firms and economy.

Meanwhile, in the Global Competitiveness Report 2009-2010, published annually by the World Economic Forum (WEF), Nepal ranks 125 out of 133 countries, highlighting the fact that due to a lack of progressive reforms, the economy is one of the most uncompetitive in the world. The state of infrastructure and technological readiness is so horrible that it ranks 131 and 132 respectively. Note that bad infrastructure has already been identified as the most binding constraint on economic growth. Overall, the report notes that Nepal had four “advantages” and 116 “disadvantages” in making the nation globally competitive. The economy is still factor driven and lacks the capacity for innovation and a business culture conducive to stimulating entrepreneurial activities.

Though these reports have deficiencies in accurately rating the true status of an economy, they do, however, show some interesting trends in increasing/decreasing red tapes in an economy. They highlight areas where reforms are dearly needed in order to stimulate entrepreneurial activities. Reforms can be piecemeal and experimental. It could be as simple as extending the opening hours at the borders (like in Rwanda) if commercial activity is picking up during favorable season.

Having grand reforms idea is worthless if the political leaders do not forge a consensus to create rules-based economic structure, where all political actors work to attain a common goal, i.e. broad based economic growth and keep politics out of the activities and reform proposals that are geared towards that goal. This is missing in the Nepali political sphere. No wonder the economy is without any discernible reform!