A World Bank report says Nepal has comparatively better business environment in South Asia but that does not tell the whole story
By Shiv Raj Bhatt
In any country, the government, with its power to regulate the economy through the implementation of fiscal, monetary, industrial, agricultural, trade, aid and other policies and development plans, plays an important role in promoting economic and business activities. Such role of the government is always crucial for the country’s overall development, including poverty reduction efforts. However, the role of the private sector too cannot be undermined. A vibrant and innovative private sector with firms and entrepreneurs engaged in making investment decisions is equally vital in creating jobs and improving productivity that promotes growth and expands opportunities for poor people.
Governments in most countries have implemented a wide range of reform programs, including macro-stabilization programs, privatization, trade liberalization, and price liberalization, to create such a vibrant and innovative private sector. Nepal is not an exception. The country started wide ranging reform initiatives in the mid-1980s, which gained momentum after the restoration of multi-party democratic system in 1990. There have been some improvements during the reform period but entrepreneurial activity still remains limited, poverty is rampant, and growth is stagnant. Despite various reform measures taken for the promotion of the private sector, an enabling environment for conducting economic and business activities is still lacking.
According to ‘Doing Business in 2006’ report, New Zealand has the most business-friendly regulation in the world. Nepal ranks at 55, which is comparatively a good position in South Asia. Among SAARC member countries, Maldives ranks at 31, while Pakistan ranks at 60, Bangladesh at 65, Sri Lanka at 75, Bhutan at 104, India at 116 and China at 91.
Many factors determine the business environment. The most important determinants include, among others, economic policies (fiscal, monetary, industrial, trade); political conditions (stability, corruption, rule of law and governance, including business laws and regulations); resources (natural and human); infrastructure (transportation, communication); and institutions (government and non-government).
Various indicators have been developed by different organizations/researchers to assess the business environment in a country. The most important indicators of business environment include country risk, economic freedom, business regulations and international competitiveness, among others. These economic and political indicators have been used by investors, researchers and policymakers to explain the condition of business environment across the world.
Rule of Law: As an indicator of business environment
To start, operate and grow their business; firms and entrepreneurs need business friendly laws and regulations, therefore, rules/regulation are also used as an important determinant of business environment. To create new business, productive jobs, and wealth- companies need to adjust to new market conditions and seize opportunities for growth. But all too frequently this flexibility is taken away by cumbersome rules and regulations.
To assess the legal environment to conduct a business, the World Bank with other partner organizations has produced a series of ‘Doing Business Report’ that on the one hand explains role of laws and regulations in business environment and on the other hand compiles and presents various law and regulation related indicators of business environment. The first report was published in 2004 on the theme ‘Understanding regulations’. The report covers five fundamental aspects of a firm’s life cycle, which are starting a business, hiring and firing of workers, enforcing contracts, getting credit, and closing a business. The second report, published in 2005, added three new topics: registering private property, dealing with government licenses, and protecting investors. The last in the series ‘Doing Business in 2006’ added three more topics: paying taxes, trading across borders and improving law and order.
Business Environment in Nepal: How it can be improved?
According to ‘Doing Business in 2006’ report, New Zealand has the most business-friendly regulation in the world. Singapore is the second and the United States ranks the third. Nepal ranks at 55, which is comparatively a good position in South Asia. Among SAARC member countries, only Maldives has better position than Nepal. Maldives ranks at 31, while Pakistan ranks at 60, Bangladesh at 65, Sri Lanka at 75, Bhutan at 104, India at 116 and China at 91.
But, this ranking on the ease of doing business does not tell the whole story. The indicator is limited in scope. Many determinants of business environment are not included in the index. For example, it does not take into account a country’s proximity to large markets, quality of infrastructure services, political climate and corruption, security of property from theft and looting, macroeconomic policies and conditions or the underlying strength of institutions, among others. Thus while Nepal ranks above Italy (at 70) and India (at 116) on the ease of doing business, this does not mean that businesses are better off operating in Kathmandu compared to Rome or Delhi.
A high ranking on the ease of doing business does definitely mean that the Nepal government has created a regulatory environment conducive to the operation of business. However, efforts from the government, political forces, civil society organizations, media, academia and private sector are still needed to improve Nepal’s business environment. The problems that should be addressed urgently are basically related with infrastructure, political and policy stability, law and order condition, financial ease (availability of credit at good terms and conditions to run a business), human resource development (establishment of institutions that helps develop skills of entrepreneurs and labor), capacity building of government officials and policymaking institutions, among others. If not addressed properly, all of these would make Nepal a less attractive destination for investment, both foreign as well as domestic.
(Bhatt is a consultant economist at the South Asia Watch on Trade, Economics and Environment (SAWTEE) – a Kathmandu-based think tank and can be reached at [email protected]. Full version of this article was published in June 2006 issue of the New Business Age magazine published from Kathmandu.—Ed.)
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