Sunday, January 31, 2010

Costs of strike/shutting down Nepal (bandas)

In my latest Op-ed I estimate the costs of strike or closing down a country. It is called banda in Nepali. Political parties, student unions, ethnic populations and anyone trying to show discontent over government policies call for banda and disrupt normal live and economic activity. There is only loss and pain (and no gain) from bandas.


Costs of Nepal bandas

Organizing strikes (popularly known as bandas) have been the easiest way to either show discontent over government policies or to press for one that serves the interest of a certain group. The people dislike bandas because it never serves their interest. It costs them their freedom, vocation and income. Frustrated by the disruption of normal life, youths have initiated a campaign DIE Nepal Bandh DIE. Even Mother’s Groups in various cities have protested against bandas.

It has been a cancer to the industrial sector, whose contribution to the GDP has nosedived in recent years. A World Food Programme survey conducted last year in Tarai showed that 93 percent of food traders identified bandas as a major constraint to do business. Almost 14 percent of traders were forced to close down their businesses. According to Enterprise Survey 2009, 62 percent of enterprises think instability is the biggest constraint.

What are the costs of bandas to the country and importantly to the public? By looking at the cost incurred by each sector if it is shut down for a day, I did a quick back-of-the-envelope calculation. The numbers are startling: On an average, one day banda would cost Rs 1.96 billion, which is around 88 percent of the total value of goods and services produced in the country in a day. The industrial sector alone would suffer over Rs 346 million per banda day. Yes, you read it right. The country bleeds enormous amount in lost production and revenue.

The economy is divided into three major sectors: Agriculture, industry and service. The agriculture sector consists of two sub-sectors: Agriculture and forestry, and fishery. The industrial sector consists of mining and quarrying; manufacturing; electricity, gas and water; and construction sub-sectors. The service sector is composed of nine sub-sectors: Wholesale and retail trade; hotels and restaurants; transport, storage and communications; financial intermediation; real estate, renting and business; public administration and defense; education; health and social work; and other community, social and personal services. Each sub-sector’s contribution to GDP is different. Depending on the level of market integration, bandas impact these sub-sectors either fully or partially.

I look at two scenarios to estimate the cost of bandas. In the first scenario, agriculture and forestry; public administration and defense; education; and health and social work sub-sectors are not affected by bandas. In the second scenario, all sectors except 40 percent of agriculture and forestry sub-sector are affected by bandas. This is a reasonable assumption because bandas do not affect market transactions of all agricultural goods. No matter what, people do trade and consume bare minimum goods for survival. The rigidity value, which I define as the responsiveness of agricultural sector to bandas and assume it to be 40 percent, varies depending on the intensity and breadth of bandas. The less responsive the agricultural sector (i.e. the more rigid), the less it is affected.

Under the first and second scenarios, the cost would be at least Rs 1.23 billion and Rs 1.96 billion per banda day respectively. The second scenario is most likely when there is a nationwide strike. The first scenario is likely when there is a strike in certain parts of the country. Though these numbers might differ from other estimates with different assumptions, they nevertheless give a fairly good picture of the costs associated with bandas.


On an average, one day banda would cost Rs 1.96 billion, which is around 88 percent of the total value of goods and services produced in the country in a day. The industrial sector alone would suffer over Rs 346 million per banda day.


Based on the second scenario, let me put the costs in perspective. On average, one hour of banda would cost at least Rs 82 million to the economy. In other words, each person in the country would lose Rs 69 per banda day. If we consider the working population only, i.e. 15-64 years, then the cost would be Rs 117 per banda day. Furthermore, if there were a rural employment program that provides jobs and pays Rs 100 per day to people below the poverty line during the lean agriculture season, then one day of banda would have cost over 218,190 rural jobs.

The total cost would be even higher if we add indirect costs. For instance, bandas are complemented with destruction of public and private infrastructures, which costs millions to rebuild. Also, a few hours of economic activity are lost before the sub-sectors bounce back to full gear after bandas. Besides affecting the existing as well as future potential of tourism industry, one of the major sources of foreign exchange for the country, it also causes external migration and decline in exports. Rapid decline in exports is one of the reasons for Rs 20 billion balance of payments deficit in the first quarter of this fiscal year.

Frequent bandas trigger capital flight, which is detrimental to long-run economic growth. Partly due to bandas, multinational companies like Colgate Palmolive ceased production last year. The garment industry is near extinction. It is also putting upward pressure on general prices of goods and services, thus contributing to a double-digit inflation rate.

It is frustrating to see political leaders, who promised to develop Nepal like Switzerland, encouraging and initiating bandas. They are depriving citizens of the potential for an increase in per capita income, freedom to pursue one’s dream and vocation, and to live a peaceful life with a hope for a bright future. Bandas have ripped people off the very things that the organizers promised to bring them. Enough is enough. Say NO to bandas!

[Published in Republcia, January 30, 2010, pp.4]

Book Review - Unleashing Nepal: Past, Present and Future of the Economy

Liberating Nepal

In depressing times like these, Shakya offers a number of reasons to remain optimistic

Trying to grasp the multitude of problems that our economy faces is nearly an impossible task. The roots of these problems are all intricately linked, leading to multiple constraints on growth. In order to track the sources of these constraints, it might be helpful to go back to the time when Prithivi Narayan Shah spearheaded the unification campaign and look at how political, social, and economic lives were designed to facilitate the status-quo.

In his new book Unleashing Nepal: Past, Present and Future of the Economy, Sujeev Shakya, a business executive who writes the popular column Arthabeed in the Nepali Times, not only discusses economic and social issues from a historical perspective, but also examines the present economic climate and proposes ambitious reform agendas to unleash the potential of the economy.

Shakya explores the origins, causes, and consequences of the tumultuous economy and offers recommendations based on the centrist economic model, which he calls “capitalist welfare state”. According to this model, the state takes care of welfare related issues and regulates the market, while leaving the remainder of economic activities in the hands of the private sector. He sees the Nepali youth as the most likely candidates to steer Nepal into an era of high productivity, efficiency, and growth.

The most interesting part of the book is the discussion on how the economy was kept in isolation with a protectionist mindset before 1950. It led to preservation of the status quo, severely stagnating economic growth and depriving millions of people from rising above the poverty line. In the name of land reform, the Shah kings and the Rana rulers — who presumed that the economy belonged to them and that the citizens unreservedly served for their interests — arbitrarily distributed land for their own gain.

Liberal economic policies never became the main agenda of the Shahs, the Ranas, and the political parties. This, along with the lack of favorable social and institutional conditions, kept capitalism away from the economy. The rise of militant youth wings and their disruptive activities in industrial sites further distanced investors and entrepreneurs, costing low income people their jobs and the much-needed revenue to fund development and employment programmes.

Shakya argues that given the level of political interference, it is understandable that the public sector did not deliver on its promises. However, an indigestible fact is that the private sector also failed to live up to its promises.  It was driven by the level of concessions extracted from bureaucrats — often by paying bribes — and special treatment in markets. He contends that value addition, productivity, and efficiency were not the main variables of their business equation. A case in point is the fate of beleaguered garment and textile industry after the end of Multi-Fiber Agreement (MFA) of 2005.

Shakya also blames the aid industry for instituting a “business of development”. He argues that the aid industry, which has already spent over US$ 15 billion in four decades, has not only failed to deliver intended results, but skewed the human resource distribution. The great minds are drawn to the aid industry primarily because of high wages with respect to the one prevalent in public and private sector. Instead of creating a new model based on local condition, they ended up fitting local data with an alien model. Consequently, they produced more reports (approximately 270,000 in the past eighteen years) than results.  He also highlights success stories such as community forestry and biogas programs that were funded by donors.

Policymakers and politicians should seriously consider Shakya’s six reform agendas (land, tax, capital market, financial sector, labour, and fiscal) that will potentially help unleash the latent potential of the economy. The underlying themes are liberalization with strong oversight and regulation; promotion of incentives instead of corruption; and creation of a system where value-addition is paramount to yes-man chakari and jagire mentality. He asserts that attaining economies of scale in agro-based, hydropower, infrastructure, and tourism industries must be explored.

Shakya recommends that the private sector be ambitious; the government be pragmatic; and the development community be more supportive in aiding projects that would enhance efficiency and productivity. Furthermore, galvanising the youths’ energy and guiding them in the right direction should become Nepal’s economic focus. He advocates that the education sector reform be consistent with the demand of the globalising world, independent of politics, and free from the clutches of militant trade unions.

The past and present states of the economy as outlined in the book are crucial to understand the turbulent economic history. However, sweeping generalisations of the economy without adequate literature reviews and research makes some sections of the book a bit superficial. Comparing Nepali economic issues vis-à-vis Malaysia is hardly appropriate as these countries vastly differ in terms of geography, endowment, culture and mobility of labour across political, social and economic lines. Also, the reforms advocated in Nepal by the Bretton Woods institutions were nowhere close to the Keynesian model. They were more akin to Hayekian and Friedmanite principles. Furthermore, the highest GDP growth rate occurred in 1984 (9.2 percent), not in1994 (7.9 percent).

Despite these minor glitches, Shakya’s book sets out a baseline for people of all age, color, creed, race, ethnicity and political affiliation to see the past, present, and future of the economy in as clear terms as possible. In depressing times like these, Shakya offers plenty of reasons to be optimistic!

(Published in The Kathmandu Post, January 30, 2010)