Broadly speaking, at present two problems – low private appropriability of returns to investment and load shedding – bedevil the industrial sector in particular and the economy in general. The first one is the direct result of the ruling party’s inability to discipline its militant youth wing (YCL) and trade union that are headstrong in waging an all out war against the private sector under the pretext of labor rights and better working conditions. The second problem is engendered by the previous government’s visionless energy policies and withdrawal of investment in hydropower due to senseless sabotage of projects by the Maoists during their rebellion. Despite earning high returns on investment, as indicated by the eagerness of new firms to secure contracts, one wonders why private investment is still low in the potentially lucrative hydropower sector.
When there is low appropriability, i.e. the inability of the private sector to retain returns on investment, domestic as well as foreign investments decline, as has been the case in countries like Zimbabwe, Congo, and lately in the Latin American countries that are nationalizing key natural resources-based industries. Poor appropriability is usually the upshot of high taxation, poor property rights and contract enforcement, labor-capital conflicts, learning and coordination externalities in the economy, or uncertainty and macroeconomic imbalances.
At present, one of the major hurdles in the Nepali economy is poor property rights and contract enforcement – a result of the YCL’s and Maoist-affiliated trade union’s hostility toward the private sector. It is reported that the YCL has opened extralegal camps in major industrial districts in the country. Worse, their recruits have allegedly abducted and tortured businesspersons for refusal to comply with their ludicrous diktats. Meanwhile, the Maoist-affiliated trade unions have been at loggerheads over minimum wage with the manufacturing sector. For instance, they have demanded varying minimum wages, i.e. no uniformity in their demands, implying that their cause is politically motivated and is just a populist stint to maintain the indoctrinated supporter base. They have waged a war on media, which is mainly run by the private sector, for its critical reporting of the union’s activities and refusal to accept the unjustified hiring procedures.
All these are issues related to lack of property rights and contract enforcement, which have fuelled uncertainty over retaining profit and return to investment. Illegal occupation of industrial districts and manufacturing plants by politically motivated, militant youth wings is an encroachment on private property rights. Furthermore, incessant pressure (often threats to life and property) on the business sector to permanently hire temporary staff is a mockery of contract enforcement mechanism in the economy. The unjustified demand for increasing wages at a time when the industrial sector is going bust is beyond sound economic reasoning. Worse, some lawmakers are encouraging the extralegal acts of the militant youth wings and trade unions by eulogizing their terror campaign as a war against the oppressive and exploitative bourgeois class, a wrong-headed belief hinged on the outdated Marxist philosophies.
On top of the poor appropriability problem stays the load-shedding issue. Power outage, which is expected to exceed 15 hours daily from next month, is severely crippling the industrial and service sectors. Businesspersons complain that power outage in every six hours is negatively affecting efficiency and productivity of the industrial sector. Already, productivity has slowed down by 50%. More worrisome is the fact that several small and medium-size enterprises (SMEs) are going out of business. These SMEs not only produce final goods but also supply intermediate goods to big firms. A sudden halt in this process means that the industrial sector will soon be in short supply of intermediate goods which would then affect final industrial output. It is impossible for the private sector to increase wages and hire staff permanently at a time when both production and demand are declining and profits are razor thin. These factors will not only decrease domestic investment but also scare away foreign investment, a sign already visible in the economy. Already, several domestic jute mills, local FM radio stations, cyber business, paper factories, and tourism sector are going bust.
Without resolving the issues associated with poor appropriabilty to investment returns and the ominous power crisis, the economy will witness a further eroding of the industrial sector, without which the dream of double-digit growth is virtually impossible. The combined effect of these two problems in the industrial and service sectors will potentially drag down productivity and growth rates next year, regardless of the improvement in the agricultural sector.
Effective adherence to the rule of law, disciplining the trade unions, purging militant youth wings that are pigheaded on dismantling the “bourgeois” class and a stopgap power supply arrangement to keep the industrial sector breathing are some of the vital steps needed right now to avert a potential economic and political chaos. Declaring a short-term “industrial crisis” – which would ensure smooth power supply to the industrial sector and keep them insulated from the extralegal threats and unjustified demands of militant youth wings and unions – should be given an immediate consideration. This would be the timeliest and appropriate New Year’s gift to the industrial sector!
sapkotac@dickinson.edu
(The writer is studying at Dickinson College, USA.)
Related story
Poverty: A Multidimensional Problem, Nepalese Context
