The World Bank has recently come out with its Doing Business Index for 2014, which has ranked Nepal 105th among 189 countries. According to this Index, Nepal has climbed three steps in the ranking since last year, indicating that Nepal is a better place to do business in.
Unfortunately, in a scenario which has too many variables, analyses often miss some valuable ones, or underestimate their impact. The Doing Business Index is an example, as it leaves out some important factors that have a far stronger bearing on the business environment in Nepal than the indicators employed.[break]
For developed nations which this Index primarily caters to, the political situation may not be too much of a hindrance for conducting business. However, in politically unstable countries, constant political flux and frequent change in government often mean drastic changes in policies and laws. Sudden fluctuations in tax rates, for example, make investment risky business, and do not inspire confidence in aspiring entrepreneurs abroad.
Foreign investors hesitate because their investment is not secure in case of change in laws regarding foreign investment. Then there is the related question of security for businesses. In addition to these problems Nepal in particular is plagued with militant labor unions, which enjoy strong backing of mother parties. Especially since 2006, many companies had heated altercations with labor unions, which have become increasingly aggressive. Their demands, in many cases, have been unreasonable, beyond the company’s capacity to fulfill. Unable to face these demands, many companies have closed down, and new ones fear to open for the same reason.
Besides, Nepal has progressed only on two indicators out of the ten in the Index. Starting business in Nepal has become simpler, with online registering of businesses now available.
This has contributed to cutting short the number of days required to open business from 26 to 17. The second indicator Nepal has made progress in is “obtaining electricity”, which means a reduction in the time and effort required to obtain electricity for an industry. However, in a country still plagued by as much as 17 hours of load shedding in dry seasons, this improvement may not mean much. And Nepal is still to make headway on the other eight indicators of the Index itself, which include important factors like trading across borders and enforcing contracts (both of which, incidentally, are determined to a large extent by a country’s political situation).
For countries like Nepal, the Doing Business Index misses the big picture. In other words, it addresses the symptoms rather than the disease itself. The three-step leap that Nepal has made in its ranking is no cause for joy, since it does not really mean that doing business in Nepal is any easier than in the previous year. It would be better to focus on the basic problems that hamper business environment in Nepal.
First and the foremost, we need a common economic policy from the major political parties, at least until the end of the transition period. Such a policy will automatically address many of the problems outlined above.
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