‘To boost trade, foreign direct investment is must’

The country has been facing issues of low productivity since long due to lack of investment and proper infrastructure. Low productivity has become a structural constraint of the economy to move forward towards a higher growth trajectory to achieve the target to be a middle income country by 2030. Swarnim Wagle, vice chairman, National Planning Commission, spoke to Pushpa Raj Acharya of The Himalayan Times on how the country can overcome such structural constraints. Excerpts:

Low productivity has long been a problem of the Nepali economy. How can Nepal overcome this structural problem which is interrelated with the widening trade gap and low job generation?

Low productivity has been a problem not just in recent years but for a long time. Our economic growth has been sluggish not just in the years of conflict and in the post-conflict period but over the last 50 years. Nepal is handicapped by structural constraints, landlocked status, remote location, lack of entrepreneurship, and lack of adequate public and private investment historically. There have been notable political and social achievements but economically we really have not made a dramatic leap. The challenge from now on is to match our tall political and social achievements with an equally ambitious economic programme. Our productivity has been low because there has not been adequate private and public investment. Regarding the widening trade deficit, I think there are three aspects to that. The first is appreciation in our real exchange rate, which is also tied with our monetary choice of pegging Nepali rupee with Indian currency. Over the last two decades productivity levels in the Indian and Nepali economy have diverged. India has made dramatic reforms and has had sustained high rate of growth in the last two decades. Productivity divergence has led to a misalignment of our exchange rate. Second issue is very weak production base in agriculture and manufacturing, among others. The manufacturing sector’s share in gross domestic product has halved in last 20 years from 11 per cent in 1996 to around five to six per cent at present. Third issue is we have not been able to facilitate trade in our procedures at the border and we are lagged behind in improving connectivity. We have to unbundle these larger issues to better handle them. Regarding the currency issue, we need to conduct a thorough study on whether we need to make adjustments or stick to the current nominal anchor that a stable Indian currency provides. Ideally, during transition, we may not want to mess with it but policy makers should be looking into this option on whether there is room for realignment. And enhancing production base in agriculture and reviving manufacturing sector are medium term solutions. Something that can immediately be done is trade facilitation and export promotion.

You always lay emphasis on strong production base to sustain higher economic growth. Do you see any prospect of massive industrialisation in the country?

In Nepal, we really have not had much industrialisation. If we look at the general trend in the developing world including India, China and Africa, there has been premature deindustrialisation from the perspective of employment. If we look at today’s developed world when they developed their industrial sector, manufacturing sector had a share of 30 per cent of the total employment before they went into services. In the US, we saw that peak in 1953, in South Korea it was in 1980s. But in India and China share of employment of manufacturing sector peaked at about 19 per cent. So there is something more fundamental going on in the way industrialisation happens in the 21st century. There is fragmentation in production and there are new technologies. The old modes of production and trade have completely changed. Eighty per cent of the world’s trade production is managed by integrated production networks. If our industries are isolated and producing goods in a compound way, that model is outdated. This is a phenomenon that is worrying not just Nepal but other countries as well. The nature of industrialisation itself is changing because of policy and technological evolution. Now the issue in Nepal specifically is we did reasonably well in 1990s. We were gathering momentum but that has halted in recent times which is reflected in the manufacturing sector’s share in GDP. To revive our industrial sector, we have to learn from our past experiences. We also have to look at the broader global and regional trends. And then we can devise appropriate policies. In that regard, looking at the broader regional and international trend, Nepal has potential to latch on to regional production networks, a mode through which many East Asian countries have made dramatic progress. Even in India now, Prime Minister Narendra Modi is trying to revive the manufacturing base that could be potential for Nepal to latch on to. Unless our policy regime is made more liberal, our connectivity situation improves, hassles that occur at the border (partly related to customs and partly to physical infrastructure) are addressed, the kind of seamless inter-border movement of goods and people that the new paradigm demands cannot be achieved. If we can latch on to these fragments of production, which are labour and energy intensive, Nepal has the potential to create jobs at a mass scale, especially in the Tarai region. In the mid-hills and larger urban centres we do have an advantage in products in which value to weight ratio is high like in adventure gear and some agricultural products. Our preferential market access is also our strength. We have not exploited the European Union market and the US where there is duty free access for 66 items, and emerging markets like India and China.

What can the government do to facilitate Nepali industries to integrate them into the global production network?

For this we need to have a conducive business climate and we have seen that it can happen.  Recently, India jumped 30 places in doing business indicators. If there is a political commitment, this can happen. After January, the new government can undertake such bold initiative. Until the 1990s, trade and investment were seen as substitutes. Those who could not export due to high tariff walls were forced to stay in the country and produce goods and services in that particular market. In this era, trade and investment are compliments. To boost trade, foreign direct investment is must. Through investment,

investors also bring a ready market. We can take an example of Dabur Nepal that produces goods and sells domestically as well as in India. FDI and trade regime should compliment each other and be attractive for foreign investors as investors are always looking for good returns. They come here to make legitimate profit and we have to compete with many countries to attract FDI.

There has always been a problem in coordination among concerned agencies to implement the government’s plans and policies. How can we get rid of this problem?

Lack of coordination among concerned bodies has been a perennial problem. We are now at a critical juncture whereby we are about to fully adopt a federal structure of governance. Many of the traditional tasks that the central government has been doing will now be constitutionally delegated to provincial and local level. The federal government is expected to become leaner and more efficient. The large number of ministries, which is one of the major reasons for lack of coordination, is going to be dramatically reduced. Once the ministries are consolidated and the number is brought down then we can expect better coordination among them. Secondly, the one institution that can play a very important role in developing coordination is National Planning Commission (NPC). We have planned to restructure NPC. We are about to propose a new legal structure to the Cabinet. We have drafted the new formation and operation order and we are trying to make NPC much more focused on evidence based policy research and set a long-term vision rather than five-year periodic plans. We will focus more on monitoring, evaluating and resolving the large coordination bottlenecks. Just within three months since my appointment as NPC vice chairperson I have had several meetings just to resolve problems in coordination like in the fast track project, electricity grid connection problem in Special Economic Zone and others because concerned entities refuse to talk to each other.

NPC has envisioned separate law to expedite the execution of National Pride Projects. Has the law been drafted?

We systematically looked at 21 such projects and analysed which project has been stymied by what factor. After analysing all the issues, we concluded that they can be best addressed through dedicated laws. This is not just only for the NPPs but for all mega projects. There is a joint initiative being taken by the Ministry of Finance and the NPC to draft a more general Project Execution Act. There are two options — we can either have a separate law to govern execution of large mega projects at the federal level or make a special section within that broader law of general project implementation. We are still having discussions on it. But I think, we need a special, more stringent disciplinary legal device if we want big projects to be implemented on schedule and within the stipulated budget. We have also applied the project readiness filter under which projects will begin only based on the ‘check list’ approach for ground works.

NPC is also carrying out loss assessment caused by the recent floods. What are the findings of the assessment?

The severe floods in the Tarai have had more local impact. There has been a lot of destruction of individual houses. Agriculture and livestock were also affected in a substantial manner but the biggest damage was witnessed in the housing sector. NPC, with the help of World Bank and the United Nations Development Programme, has undertaken the rapid needs assessment that is, Post Flood Recovery Need Assessment. The immediate emergency programme was undertaken by the Ministry of Home Affairs and we are looking at the medium-term recovery on health, education, infrastructure, irrigation, agriculture and rebuilding of houses. We have incurred damages of about Rs 62 billion including private houses, for which the government will give partial compensation. We need about Rs 73 billion for the recovery purpose and we expect to finish it in the next two to three years.