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Doing Business Index

“A thriving private sector—with new firms entering the market, creating jobs and developing innovative products –contributes to a more prosperous society.
Government plays a crucial role in supporting a dynamic ecosystem for firms,” reads the very first sentence of the preface of the Doing Business 2014 report.

 The report that has ranked Nepal 105th out of 189 countries highlights the importance of efficient government entities along with a strong private sector. Unfortunately, we have neither.

The report prepared by the International Finance Corporation (IFC) portrays Nepal in relatively better terms than in previous year, as it has notched up three places. This development is supposed to have a direct relationship with the inflow of foreign direct investment (FDI).

The improved index hints at a better environment to start business for international investors. But it does not guarantee the investment inflow in real terms. The Department of Industry (DoI)—an advanced version of Udhyog Parishad (Industry Board) established in 1935 to monitor industrial activities—should be strengthened to keep track of whether the investment inflow is actually increasing with the improved situation.

Statistics compiled by the DoI show that FDI commitment from foreign investors is satisfactory. According to the DoI, investors from 36 different countries received approval to start 227 different firms in the country in 2012 alone, with a total investment of Rs 11.92 billion.

Moreover, they expressed commitment to create around 10,000 jobs in the domestic market within the fiscal year. As of the end of fiscal year 2012, investors from 73 countries have DOI approval to make a total of Rs 164.2 billion investment.

This investment is projected to create 164,482 jobs. This number is quite impressive. But, are these investments really taking place, or are these just numbers with no significant meaning Unfortunately, no one knows whether these investors, who knocked the door of DoI for business approval, actually made investments.

A more accurate picture of the economy could be portrayed had the DoI also tracked approved investors and entrepreneurs and released data on whether they made any investment. Keeping a record of the FDI and actual investment would also help us know how serious investors are about coming to Nepal.

Unfortunately, the DoI does not have any records of this nature. The management and operation of DoI is no better than that of other state entities. Poor management, traditional record keeping, and corruption are major problems at the DoI, as in many other government agencies.

The IFC ranks countries based on 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. We may have made improvements on most of these indicators (except on electricity), but we still don’t know the actual investment.

Investment is the most important factor for economic growth. But in Nepal, most of the investment commitments and proposals at the DoI have ulterior purposes. Even though Nepal has been able to make progress and improve its ranking, the situation for investors has actually deteriorated. Problems such as labor unrest, power shortage, policy inconsistency and political instability scare away potential investors.

There are many countries competing to attract investors. Many African countries have been able to boost their economy with FDI from emerging countries such as China. Sub-Saharan African countries like Rwanda, Mozambique, Uganda, Ethiopia, Burkina Faso and Tanzania have successfully achieved an average five percent economic growth since mid 1990s. These countries now have a strong trade and investment relationship with China.

Interestingly, four of these six countries (except Mozambique and Tanzania) are landlocked, like Nepal. This calls for some introspection on behalf of Nepal. It has to identify the bottlenecks to developing strong trade and investment relationship with developing countries, which need natural resources in abundance. China needs large amount of natural resources, and is looking to African countries for the same, battling Western countries in its quest. We have to work on building trust with China not only on political, but also on economic fronts. We need to encourage potential investors from China and India to come to Nepal.

Our economy has been stagnant even though we started opening up and reforming in 1990. India and China excelled during the period, while our country got caught up in the insurgency. Prolonged political transition has hurt every sector, from agriculture to services. We are way behind in the development of infrastructure, hydropower and attracting foreign investors.

The situation was better, but not by much, between 1990 and 1998. Narayan Khadka, in his paper ‘Challenges to Developing the Economy of Nepal’ (1998) argued that the state of politics during Nepal’s democratic experiment was an important factor in hindering development. He argues that frequent government changes and subsequent failure to maintain consistent policies hampered economic development.

 His argument is more compelling when evaluating the country’s development path after the establishment of Federal Republic in 2006. The aspirations that people had for a prosperous life after 2006 have been devastated. Political wrangling, political parties’ apathy towards economic issues, and lack of political will to improve institutions such as the DoI played significant roles in holding the country’s economy back.

We can work on framing sound economic policies only when we know our history. Global investment is fast shifting from developing countries to resource-rich countries. But still, capital seeks a relatively safe place. The improved ‘Doing Business’ situation and quoted figures of investment and employment should reflect on the ground. Our economic development will depend on how actively domestic as well as foreign investors pump money into the economy, in sectors as diverse as infrastructure to manufacturing.

The author is graduate
student at Tsinghua University
in Beijing, China

Published on 2013-11-12 07:33:43
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