January 2007
Economy & Policy

Learning from tanzania

By Madhukar SJB Rana

Canadian journalist John Stackhouse's book, Out of Poverty: And Into Something Comfortable (2001:Vintage Canada), tells stories of the ingenious ways the poor have used to take control of their lives by bypassing the very institutions that were put in place to rescue them. These stories have been drawn from 10 years of experience of living and travelling around Bangladesh , India , Indonesia and Africa . Stackhouse touchingly narrates the ways in which these people have found their own homegrown solutions for their problems.

Reading his brilliant writing, one gets struck by his hope that multi-party electoral democracies coupled with the guarantees of community rights, individual liberty, organisations of the poor, and freedom of markets can lead to poverty eradication with the poor setting their own agenda of development, charting their own destiny, and choosing their own leaders.

In particular, there is a story out of Africa that we choose to dwell on today. Why? Well, simply because our own political leaders need to learn lessons from it--How to treat the poor as subjects of development capable of contributing to economic growth with human development and equity by respecting their aspirations, traditions and way of life. Further, reading the manifestos of the national parties one cannot help feeling that in most of our leaders lurks a latent Nyerere, the failed dreamer of socialism through radical social engineering. This is particularly true of the Communist Party of Nepal (Maoists).

President Julius Nyerere of Tanzania , a former school teacher, came to power in 1961 and ruled a one-party state for nearly 30 years. In 1970, in the first elections ever in his country, he won 99 per cent of the votes. In the elections of 1975 and 1980 he won 93 per cent votes. In 1985 he quit office admitting setbacks but continued as the chairman of his Revolutionary Party till 1990. The first free multi-party elections were held in 1995, which the main opposition groups boycotted. Nyerere died in 1999 having lived to see most of his policies undone before his eyes. Is there a lesson for Nepal from this historical event?

It is said that Nyerere was a man who wished to run, while others walked, development. He believed that development was a race against time, population explosion and poverty. He was full of cataclysmic thinking born out of his adherence to the Malthusian theory of a population bomb. So was much of the development literature of the 1960s and 1970s. He was obsessed with the thought of an impending food scarcity for the projected 75 million Tanzanians by 2001.

So he, and his many development partners (he was spoiled for choice), looked for new seeds, new fertilisers, new technology, and new institutions. In fact, they looked upon the culture of developing societies as a constraint, or as a sheer hindrance worthy of neglect (to those who were disinclined to be politically incorrect). And in being so engaged, they assaulted the history and traditions of these developing nations, especially the indigenous peoples.

And the West lapped up his theory of 'African socialism' as they too were in a race against time from environmental disasters, refugee invasions and the march of Communism. They forgot that Tanzania , with a population of only 15 million in 1961, was about the size of Western Europe and had 120 distinct ethnic groups and 200 languages. They put their own faith behind Nyerere's devout Christianity, his belief in what the state could do for the people's welfare even as he distrusted private initiative and free enterprise like much of the world's leaders then did to a greater degree.

At a period in development history, when the likes of Suharto, Pinochet, and Idi Amin were on the horizon, it is no wonder that the modest, austere, uncorrupted and intellectually gifted Nyerere had many world leaders calling on him for advice, for example, such personalities as Pierre Elliot Trudeau, Chou En-Lai and Robert McNamara, to name a few of the highly illustrious ones.

His vision for a Great Society led by a Big Government and the Welfare State just caught on like fire as everybody, including the then American President Lyndon Johnson had similar visions for his own country with its deprived black people.

Nyerere truly mesmerised the world with his strategy of self-reliance, import substitution and the 'commanding heights of the economy' that he borrowed from Jawaharlal Nehru, a Fabian socialist much admired by him.

In the urban sector he was not content with the export of cash crops like cotton, coffee and sisal. He nationalised urban land, banks, big commercial farms and many industries as well as mineral assets.

In the countryside his dream of ujamaa or "familyhood" was founded on communal living, equality and austerity, especially by public servants. His 'new model of rural development' subscribed to communal property and the individual's duty to work on it. His 1973 programme of "villagisation" sought to, forcibly, bring into clusters the peasantry and pastoral people so that they could be 'easily' provided the basics of life like health, education, water, and sanitation. One recalls former Nepali prime minister Tulsi Giri having similar ideas in the early 1970s as a follow up to King Mahendra's 'Back to the Village' national campaign of the late 60s (as if urbanisation was really a problem in Nepal with less than 10 per cent of the total population living in towns).

When the poor lived on millet and corn Nyerere opted for wheat, as aid was readily available from Canada , the world's greatest wheat grower. So was millions of dollars available to erect a modern bakery as a state monopoly that resulted, firstly, in the closure of the local charcoal bakeries and, then, in the closure of the modern bakery itself as losses overtook the original cost of its establishment (already costing 50 per cent more than those available through untied aid).

His grand legacy is a Tanzania that is classified as a least developed country, a national debt that is four times the national GDP and a bankrupt economy.

A school teacher who once dreamed of universal primary education for all has a legacy where over 50 per cent do not attend school even today.

The current government now spends four times the amount to repay debts than on primary education. The stark reality of one party central planning meant that people had no choice over either development goals, objectives, outcomes or indeed choices over means to given ends.

(Rana is a former Minister of Finance)

Private Sector Development, Wage Increase & Power Shortage

By Dr. Shanker Sharma

Macro-economic stability and business friendly environment are essential elements for the development of the private sector. Nepal 's macroeconomic indicators are satisfactory. Inflation has remained low and Nepal has the best record in the region in terms of control of fiscal deficit. The balance of payment situation is favourable.

Nepal also has good potential for development. It has proximity to the giant economies of India and China . Their impressive growth rates are backed by almost 2.5 billion domestic consumers. To benefit from this, Nepal has to develop hydropower and tourism as these are the areas in which Nepal has strong comparative advantage. EU's and India 's preferential treatment to Nepali manufactured products also provide incentives to establish and or expand export-oriented industries.

However, Nepal 's actual performance is disappointing, mainly because of weak institutions, according to the Global Competitiveness Index 2006. Weak institutions mean problems related to political instability, torrid industrial relations and poor infrastructure. There are a number of issues under these categories. However, I would like to focus on four major and fundamental issues that are adversely affecting the Nepali industrial sector. They are: labour related problems, severe power shortage, frequent bandhs, political instability and insecurity.

Trade unions are demanding excessive wage increase for employees and this demand, in fact, has far exceeded productivity. This is neither feasible nor sustainable. The result could be the decline in the rate of return on capital, increase in the number of loss making companies, erosion in the country's competitive position, reduction in future industrial investment and reduction in employment opportunities. This can also adversely affect the health of the banking sector and invite bigger economic crises.

According to business communities, the trade unions, by mobilising workers and creating disturbances in the industries, are trying to meet the objectives of political parties. If it is so, the eight parties should immediately stop these actions. It is a question of the survival of industries and the livelihood of thousands of workers and their families.

Alternatively, possible actions to address the demand for wage increases could include the following:

l Annual wage increase should be negotiated, not forced.

l Wage increase, if it is substantial, should be implemented over a period of time and not in a single year.

l Greater use must be made of variable compensation systems such as bonus payments, profit sharing schemes and productivity incentive schemes (which allows higher wage payment in good years).

l Improvement in corporate governance to make the companies more transparent.

Business communities and trade unions should negotiate the wage rates through a non-confrontational and harmonious manner to sustain the production of the industrial sector.

Similarly, rigid labour regulations, which lead to retention of unwanted employees could have adverse impact on job creation, resulting in inefficiency and bankruptcy which leads to more unemployment and underemployment. Labour regulations must be made flexible. It will create more jobs, not reduce them.

However, some sort of income protection or effective training programme for the reemployment of workers who may be laid-off needs to be initiated and negotiated. Retirement benefits for workers, on the other hand, could be addressed by introducing contributory pension and similar mechanisms.

Power shortage

Power shortage and excessive load shedding has become a major impediment to the industrial development of the country. Two facts are noteworthy. Firstly, Nepal 's power consumption is only about 50 per cent of the average of the least developed countries. Secondly, Nepal has not been able to meet even this scanty demand.

The existing power cut has declined the capacity of operation of enterprises by 25 to 40 per cent. Irregular load shedding has further aggravated this problem.

The continued power shortage in industries can have several effects, which could be the following:

l It is estimated that approximately 100,000 workers will be laid-off from factories.

l Production cost will go up by up to 20 per cent.

l It will not be possible to attract new industries.

l Industrialists will be compelled to shut down their business.

The government can initiate the following actions to address these problems:

l Publish the load shedding schedule and strictly follow it;

l Initiate effective programmes to reduce the present 25 per cent leakages;

l Establish captive power plant especially in Hetauda-Birgunj and Sunsari-Morang corridors;

l Implement variable tariff during wet and dry seasons, and peak and off-peak hours;

l Initiate strong demand-side management to save energy;

l Initiate reforms to attract investment in hydropower;

l Utilise turnkey contract to finish project on time.

Frequent bandhs have been again one of the severe threats in conducting business here. The cost of a one-day bandh is estimated to be over Rs.1 billion in terms of turnover. The raw materials cannot be delivered and exports cannot be transported to the destinations on time. The private sector is deprived of timely services from the government as well as private offices.

The impact of bandhs has been severe. It has resulted in several cancellations of export orders. Several multinationals as well as domestic companies have already decided to close down their factories in recent weeks. This, in turn, has resulted in the lay off of several thousands workers and loss of probably billions of rupees in government revenue. Bandhs should be banned; industrial areas should be declared peace zones and highways should not be closed. Political commitment is required in this area, too.

Political instability and insecurity

The political parities and the government have failed to create a conducive environment for investment due to the lack of clear policies regarding investment because of the deteriorating law and order condition, lack of consensus even in a minimum economic agenda, frequent change in the government, low priority provided to the economic agenda, confusion about various policy issues among different political parties, including in private sector development, foreign investment, economic reforms, role of the state in education and health and so on. The government should guarantee the continuity of the existing policies and their effective implementation.

Industries, though operated largely by the private sector, are national assets. They are needed for providing jobs and bringing prosperity to the country. They should be given a healthy environment to operate and grow.

Most developing countries, particularly our neighbours, are growing very fast. We should be thinking about these issues seriously or we will be left behind and will again fall in the vicious circle of poverty and conflict.

(Dr. Sharma is former vice-chairman of the National Planning Commission. This article is an excerpt from a paper presented by the author at the 15th AGM of Nepal German Chamber of Commerce and Industry.)

NEPAL-CHINA TRADE
More than the language barrier

Nepali exporters to China are facing problems not only due to language.

There is huge gap between opportunity and the realisation of benefits. Nepal 's economy can see growth if it takes advantage of the opportunity of being China 's neighbour. But it has not been able to realise the benefits that this opportunity provides.

Nepal ran a deficit of more than Rs. 102 billion in 2005-06 in its official international trade, out of which Rs. 6.5 billion was accounted for by the People's Republic of China , i.e. excluding Hong Kong . Though this is a reduction when compared to the Rs. 8.2 billion deficit suffered in 2004-05 (this was achieved by reduction in the imports as well as an increase in exports), the figures are far from satisfactory. While imports run in billions of rupees, the exports are in millions. If the unofficial trade is included in this, the deficit figure would be much higher. Smuggling in of Chinese goods into Nepal is rampant while smuggling Nepal goods into China is said to be almost impossible.

It is not that the Nepali exporters have not made efforts to increase exports to China but the results are elusive. This is because the exporters are still unorganised, as Keshav Bahadur Rayamajhi, General Secretary of Nepal Trans-Himalayan Trade Association confesses. "We are still not running businesses in an organised manner and this has led to China reaping all the benefits of being close to us." He further says that whatever little is being exported to China is not backed by any market research. Moreover, most of the goods being exported to China are raw material, not processed goods.

Nepali businessmen seem to be at a disadvantage while exporting to China because the payment procedures are dictated by the Chinese. "We have to play by their rules. After goods reach the client and the quality is okayed, the payment is done in installments in which the schedules are generally violated by the client," informs Rayamajhi. Furthermore, the contracts are seldom in writing. "As a result, many of our exporters have been cheated," says he.

But only blaming the Chinese would be injustice. Some private Nepali parties tend to delay their delivery thereby causing others to lose business. "Some parties in Nepal have the habit of delaying their exports by months. When this happens, it is not only them who lose business but other honest exporters too face difficulties in getting new businesses as this erodes the confidence of Chinese importers on the entire Nepali business community," says Rayamajhi.

It is important to note that almost half of Nepal's exports to China go through the land border at Tatopani because this route is much cheaper than the sea route to reach central and western Chinese markets. But exporters complain that the Chinese customs officials at Tatopani are not cooperative. The reason behind this is the lack of any agreement between Nepal and China on the quality standard of the goods that can be exported by Nepal . As a result, many items that are meant for export are left stranded at the Chinese customs office at Tatopani and returned on the whims of the Chinese officials. If we argue with them, they tell us to take our goods to Beijing for quality inspection. If we were to do so, it would greatly increase our lead time and ultimately delay our delivery," says Rayamajhi. According to him, though the association has made several represents to the government for such an agreement with China , the suggestion has fallen on deaf ears.

IPR Violation

Like the Americans and Europeans, Nepalis too have had their IPR (Intellectual Property Rights) violated in China . The most prominent example of this is in vanaspati ghee, one of the major exports to Tibet . Chinese companies have started manufacturing ghee with popular Nepali brand names, such as Shanti, Arun and Nirban, thus diluting the market of these brands in Tibet , informs Rayamajhi. Shanti and Nirban brands are already registered in China by some Chinese people, informs Kamal Kumar Begani, president of the Nepal Vegetable Ghee Association.

Again, one can blame the Nepali companies for failing to register and protect their trademarks in China . But the exporters point out that the legal costs in China are very high and the process is too drawn out.

Language barrier is another problem in China since most of the Chinese don't speak English while Nepali exporters who are a fluent in speaking and writing Chinese are rare specie. "Our entrepreneurs still lack knowledge about the Chinese legal system due to this reason," informs Rayamajhi.

The way ahead

In this situation, benefiting from the gargantuan economic neighbour will only be a distant dream if the current problems are not addressed immediately. Moreover, since a train has already reached Lhasa , Nepali exports will now have to directly compete with goods that come in from mainland China . Hence, if Nepal does not enhance its competitiveness and explore competitive advantages, market share of existing Nepali exports in Tibet might be gobbled up by those of mainland China .

'We want the government to be a facilitator in the true sense. We want them to listen to our concerns and address the ongoing issues instantly. We are very optimistic that the Chinese officials would be positive in addressing our issues as they have seen that India is positive towards Nepal and they want to match it," says Rayamajhi referring to the Indian decision to waive the 4 per cent tax on Nepali goods after Prime Minister Girija Prasad Koirala's diplomatic visit to India .

Chinese Investment in Nepal

One way to increase Nepal 's exports to China is to increase Chinese investment in Nepal . Chinese investors, who invest to set up factories in Nepal , would them be importing the product from such factories, thus increasing Nepal 's exports to China . Till date, there are 28 Nepal-China joint venture companies in operation, according to the statistics of the Department of Industry. Moreover, 68 new projects have been approved, four are currently under construction and 11 have been licensed. In this fiscal year, though the total volume of FDI committed to Nepal decreased by 80 per cent as compared to last year, FDI commitment from China reached Rs. 94.6 million which is the highest for the year from any foreign country. But for this to be sustainable, the government must identify potential areas of investment and products of interest to Chinese investors.

According to FNCCI documents, among the potential areas of investment in Nepal are leather, shoes, silk farming, sheep farming, vegetable and fruits processing and pharmaceutical industries that use indigenous plant resources. Chinese investors can produce goods in Nepal and export them to developed countries by utilising the advantages that Nepal enjoys under WTO as a Least Developed Country. More focused promotional activities are needed in China to convince Chinese investors of this opportunity.

Data Source: Trade Promotion Centre

Customs modernisation, simplification of documents, mutual recognition of quality certification, encouraging trade through banking channels based on documents, reducing delays in surface transport of goods, simplified immigration procedures are some of the areas for improvement to facilitate trade with China . Conditions of highways and other infrastructures for smooth trade need to be improved or constructed. Nepali businessmen and the related government officials learning the Chinese language and business etiquette may also be essential while doing business with China .

(Manish Bikram Shah)

Nepal is now hopefully on the track to achieve political democracy. But what about economic democracy? The answers depend on whom you ask and how they perceive democracy. Generally, everybody seems to perceive economic democracy as the opportunity to get goods and services at low prices, choices of goods available in the market and guarantee of quality in these goods and services. This could be ensured by promoting healthy competition in the market .

But there are different views on how healthy competition are going to be promoted in the market ? Some groups believe that one method could be the enactment of Competition Law and its effective implementation. South Asia Watch on Trade & Economics and Environment (SAWTEE) has been advocating for such a law for the last several years. Therefore, when the Parliament recently passed the Competition Bill into an Act, the professionals at SAWTEE were elated as it was the result of over a three-year long advocacy campaign launched by it. And the Act does have some good provisions.

However, SAWTEE professionals are also chagrined that the whole spirit is watered down by some other provisions. For example, the law provides for a Competition Promotion and Market Protection Board (CPMPB) that is empowered to implement the law. But this Board will be headed by the Secretary at the Ministry of Industry, Commerce & Supplies and its members are to be appointed by the government. Worse, they are all accountable to the government. There have been several instances in the past where the board has not been able to function properly if the responsibility is given to a government employee who has other priorities and cannot also practice autonomy. The board that is formed under Consumer Protection Act is an example. And under these circumstances, if there is a dispute between a government-owned company and a private one, the former is likely to have a big advantage.

Nepal became a member of the World Trade Organization on 23 April 2004 . During its accession Nepal also made a voluntary commitment to enact Competition law. SAWTEE had started its campaign to raise awareness about Competition law since 1997. A study conducted by SAWTEE has found that many anti-competitive activities like syndicates, carteling, tied selling, false advertisement, bid rigging and predatory pricing wear prevalent in the Nepalese market .

Over the last three years, SAWTEE carried out a project titled 'Competition Education and Awareness Programme' (February 2004 - January 2007) with the help of Department for International Development- UK . Under the project activities, number of discussions were held with multiple stakeholders like government officials, the private sector, consumer groups and the civil society to collect the views and inputs on the draft of Competition Legislation prepared by the government. The programmes were conducted throughout the country including at the faraway places like Ilam in the east and Nepalgunj in the west. However, the experts working in this field have complained that when finalising the law, the government did not incorporate the suggestions that were made by the stakeholders. ,

Now that the law has already been enacted, SAWTEE professionals say the first stage of their campaign has concluded successfully. Now they are about to launch the second stage under which they will advocate for proper implementation and refinement of the law and will also work towards building a competition culture among the stakeholders. Because they are of the view that for successful implementation of the law building a culture among the stakeholders is a must. Among major points of amendment felt required is of course independent and autonomous Competition Authority. Similarly, the law has contradictory provisions for fines for similar offences and it has no provision to compensate a business for the loss it has to incur if a baseless complaint is filed with the Board. Another weakness pointed out is the lack of clarity in the jurisdiction of the competition board and other regulatory bodies such as the Central Bank, the Insurance Board, Civil Aviation Authority of Nepal, Nepal Electricity Authority and the Securities Board. Equally important is the lack of provision that allows people to lodge complaints directly with the court. For even minor complaints, the process is to lodge the complaint with the Competition Board which will go to the court through a government attorney.