Given the stellar performance of banking sector in the last ten years, its contribution to economic growth and employment generation has been depressing and unidirectional. Overinvestment in unproductive sector means our traditional monetary and fiscal policy response may prove ineffective to produce desired outcome.
HARI SHARMA
Unemployment remains a critical issue in Nepal. It has been a major impediment to output growth and has resulted in social distress. So far policy exercise in unemployment has had limited success since unemployment in Nepal is structural.
As such, merely creating additional demand by increasing government budget (expenditure) will not ensure lasting employment growth. Instead, in presence of supply side constraints, such an expansionary policy will trigger wage-price spiral and push up inflation. Under such circumstances, the quality of economic policy in targeting unemployment depends on nuanced understanding of major determining factors in the economy such as operation of labour market, structure of financial institution, existing demand in the economy and inflation. The success is further governed by the willingness to implement policies.
In economics, the doctrine that explains unemployment is based on the functioning of labour market and its structure. Sustained employment growth is conditioned on improvement in labor market. A real wage (purchasing power of money wage) has to be more flexible and unionization has to be demolished along with increase in labor mobility to produce full employment output.
As a result, job seekers at current wage rate will get employment. But unlike in the developed world, in the developing world, labor market role in explaining unemployment is restrained by the deficiency in demand for labor and number of skilled and capable human resource. In the absence of demand for labor, unemployment cannot be explained by labor market structure. Also, in this relationship, the demand for laborer in developing countries that can be generated through investment in real (productive) sector by financial institutions is completely overlooked. Thus, in latter phase, the role of financial sector as a catalyst in creating labor demand has been acknowledged.
It is well recognized in economic literature that financial sector is the engineer of sustained growth, employment generation, reduced inequality and poverty eradication. Ideally, the channels through which financial institution exerts influence on growth and employment are investment in innovative business ventures and mobilization of public and enterprise funds in growth stimulating areas.
The role of banks is to identify the most capable entrepreneurs to introduce innovation along with mobilizing funds efficiently to finance investment necessary to stimulate growth and capital accumulation. Famous economist Joseph Schumpeter, the proponent of innovation as seed of growth theory, believed that innovation is the most powerful force in human betterment. It can be stimulated by channeling funds into innovative business ventures. Also, when firm’s investment is constrained by lack of internal funds, easy access to external financing ignites growth through industrial expansion.
The encouraging fact is that in last 12 years Nepal has made significant progress in the banking sector by introducing reforms such as attracting FDI by liberalizing domestic market, market determined interest rate, expansion in investment, etc. During this period, Nepal has witnessed significant rise in the number of commercial and development banks. However, in comparison to speedy growth in banking sector, the pace of employment generation has been undoubtedly poor. Again, political instability is to be blamed for depressing employment, disregarding the structural problems in the Nepali banking sector.
The irony is that fairly the developed banking sector and capital markets in Nepal are skewed towards better off and influential people. Primarily it is intended to serve the selfish goal of earning unrealistically high returns through financial engineering, instead of growth and employment. With no venture capitalists (primary investors in innovative and efficient business projects as shareholder), Nepal is yet to experience growth driven by innovation, as envisioned by Schumpeter. Many innovative ideas that have potential to support growth are suffering due to the lack of access to finance.
Moreover, mobilization of funds and credit access are unidirectional. It favors only few. The structure of banking sector in Nepal is like ventures run by business houses where narrow objective of reaping hyper profit supersedes everything else. Credit access is confined to an exclusive group of homogenous people carrying a uniform motive.
The peculiar economics of Nepali banking sector makes the scope of incurring loss almost zero; and shareholder/promoter are maximizing profits at least cost. In the past few years financial institutions have imprudently disbursed credit in real-estate, mainly in land market with provides little employment prospects. While housing prices were rising, banks have never accessed the risk of excessive investment. At its worst, the use of uninsured public savings created a bubble in financial market that jeopardizes the health of the economy.
Also, investment of this nature was designed for speculative purpose. As a result, during 2008 ill-intended boom in land market and credit growth in real estate reached new heights, with 80 percent credit portfolio of banks concentrated in unproductive real-estate sector.
Again in the midst of high inflation in Nepal, major trading companies are engaged in importing activities. Big business organizations’ investment in goods is safe and profitable due to low real rate of interest (lending rate minus rate of inflation) on loan.
Given our economic status, in last ten years major business groups were concentrated on safe and profitable business of importing goods and services instead of investing in comparatively riskier production activities. When investments are going away from productive sector, any policy targeting growth will be ineffective. This could be the reason our policy in addressing unemployment has been so ineffective.
In a nutshell, given the stellar performance of banking sector in the last ten years, its contribution to economic growth and employment generation has been depressing and unidirectional. Overinvestment in unproductive sector means our traditional monetary and fiscal policy response may prove ineffective to produce desired outcome.
Now, the major concern is how our public institutions emerge from years of repression from political and private institutions so that they can independently respond to the need of the people. Therefore, Nepal urgently needs to implement deeper reform in banking laws and policies to support economic growth. The target of the Ministry of Finance to enter the league of developing nation in next ten year will remain unfulfilled if the financial sector continues to exclude them from the process of growth and development.
source:Sharma,Hari(2013),"Not helping", republica,21 August 2013
The author is a founder member of BibekSheel Nepali and a graduate in development economics
LINK
HARI SHARMA
Unemployment remains a critical issue in Nepal. It has been a major impediment to output growth and has resulted in social distress. So far policy exercise in unemployment has had limited success since unemployment in Nepal is structural.
As such, merely creating additional demand by increasing government budget (expenditure) will not ensure lasting employment growth. Instead, in presence of supply side constraints, such an expansionary policy will trigger wage-price spiral and push up inflation. Under such circumstances, the quality of economic policy in targeting unemployment depends on nuanced understanding of major determining factors in the economy such as operation of labour market, structure of financial institution, existing demand in the economy and inflation. The success is further governed by the willingness to implement policies.
In economics, the doctrine that explains unemployment is based on the functioning of labour market and its structure. Sustained employment growth is conditioned on improvement in labor market. A real wage (purchasing power of money wage) has to be more flexible and unionization has to be demolished along with increase in labor mobility to produce full employment output.
As a result, job seekers at current wage rate will get employment. But unlike in the developed world, in the developing world, labor market role in explaining unemployment is restrained by the deficiency in demand for labor and number of skilled and capable human resource. In the absence of demand for labor, unemployment cannot be explained by labor market structure. Also, in this relationship, the demand for laborer in developing countries that can be generated through investment in real (productive) sector by financial institutions is completely overlooked. Thus, in latter phase, the role of financial sector as a catalyst in creating labor demand has been acknowledged.
It is well recognized in economic literature that financial sector is the engineer of sustained growth, employment generation, reduced inequality and poverty eradication. Ideally, the channels through which financial institution exerts influence on growth and employment are investment in innovative business ventures and mobilization of public and enterprise funds in growth stimulating areas.
The role of banks is to identify the most capable entrepreneurs to introduce innovation along with mobilizing funds efficiently to finance investment necessary to stimulate growth and capital accumulation. Famous economist Joseph Schumpeter, the proponent of innovation as seed of growth theory, believed that innovation is the most powerful force in human betterment. It can be stimulated by channeling funds into innovative business ventures. Also, when firm’s investment is constrained by lack of internal funds, easy access to external financing ignites growth through industrial expansion.
The encouraging fact is that in last 12 years Nepal has made significant progress in the banking sector by introducing reforms such as attracting FDI by liberalizing domestic market, market determined interest rate, expansion in investment, etc. During this period, Nepal has witnessed significant rise in the number of commercial and development banks. However, in comparison to speedy growth in banking sector, the pace of employment generation has been undoubtedly poor. Again, political instability is to be blamed for depressing employment, disregarding the structural problems in the Nepali banking sector.
The irony is that fairly the developed banking sector and capital markets in Nepal are skewed towards better off and influential people. Primarily it is intended to serve the selfish goal of earning unrealistically high returns through financial engineering, instead of growth and employment. With no venture capitalists (primary investors in innovative and efficient business projects as shareholder), Nepal is yet to experience growth driven by innovation, as envisioned by Schumpeter. Many innovative ideas that have potential to support growth are suffering due to the lack of access to finance.
Moreover, mobilization of funds and credit access are unidirectional. It favors only few. The structure of banking sector in Nepal is like ventures run by business houses where narrow objective of reaping hyper profit supersedes everything else. Credit access is confined to an exclusive group of homogenous people carrying a uniform motive.
The peculiar economics of Nepali banking sector makes the scope of incurring loss almost zero; and shareholder/promoter are maximizing profits at least cost. In the past few years financial institutions have imprudently disbursed credit in real-estate, mainly in land market with provides little employment prospects. While housing prices were rising, banks have never accessed the risk of excessive investment. At its worst, the use of uninsured public savings created a bubble in financial market that jeopardizes the health of the economy.
Also, investment of this nature was designed for speculative purpose. As a result, during 2008 ill-intended boom in land market and credit growth in real estate reached new heights, with 80 percent credit portfolio of banks concentrated in unproductive real-estate sector.
Again in the midst of high inflation in Nepal, major trading companies are engaged in importing activities. Big business organizations’ investment in goods is safe and profitable due to low real rate of interest (lending rate minus rate of inflation) on loan.
Given our economic status, in last ten years major business groups were concentrated on safe and profitable business of importing goods and services instead of investing in comparatively riskier production activities. When investments are going away from productive sector, any policy targeting growth will be ineffective. This could be the reason our policy in addressing unemployment has been so ineffective.
In a nutshell, given the stellar performance of banking sector in the last ten years, its contribution to economic growth and employment generation has been depressing and unidirectional. Overinvestment in unproductive sector means our traditional monetary and fiscal policy response may prove ineffective to produce desired outcome.
Now, the major concern is how our public institutions emerge from years of repression from political and private institutions so that they can independently respond to the need of the people. Therefore, Nepal urgently needs to implement deeper reform in banking laws and policies to support economic growth. The target of the Ministry of Finance to enter the league of developing nation in next ten year will remain unfulfilled if the financial sector continues to exclude them from the process of growth and development.
source:Sharma,Hari(2013),"Not helping", republica,21 August 2013
The author is a founder member of BibekSheel Nepali and a graduate in development economics
LINK
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