Attracting Investments for Economic Growth

– This article was originally published by Ashesh Shrestha in the Himalayan Times on the April 21, 2019

Investment is probably the most important factor to promote economic growth. Economists identify that investment has dual effect in the economy. On one hand, investment increases the production capacity of the economy increasing the volume of goods and services that is produced, whereas on the other hand, it increase demand for capital goods which induces the industries producing capital goods to increase the production of these goods. However, the investment flow into the Nepalese economy has not been up to the required level.  Domestic saving is not sufficient enough to generate required investment and Nepal has not been able to attract foreign investment as well.

Identifying the importance of investment, the Government of Nepal recently hosted the Investment Summit in order to attract investment from both domestic as well as foreign investors. The objective of the summit was to invite investors and send a positive message to them that the government is serious about bringing in investment into the economy. However, for us to see tangible outcomes we need to focus on certain areas which would improve investment climate of Nepal, attracting more investment and generating higher growth.

Security of property rights

Secured property rights is one of the basic foundation of economic prosperity. When property rights are strongly enforced in the sense that the owner of the property has all the rights to use his/her in the way he/ she desires, it creates a strong incentive not only to protect and preserve the property but even to expand it. When the individuals have incentives to expand their property, they are willing to use the properties they have to make investments. The investments, not only help expand their own property but also create jobs, increase productivity and contribute to the overall economic growth.

The explanation of the importance of property rights would be incomplete without taking reference from the seminal work of Peruvian economist Hernando De Soto. De Soto, in his book, ‘The Mystery of Capital’ explains the role of strongly enforced property rights in bringing prosperity in the west. He further explains that the poor all over the underdeveloped world possess 9.3 trillion dollars’ worth of property, however due to lack of well-defined property rights, they have not been able to use it to create more wealth.

Nepal also lacks strong property rights. The biggest threat to the property of individual is a big government itself, the body which was supposed to protect the property rights. The government, in the name of greater good of the public, introduces programs that directly infringe on the property rights of the people. The most popular example is the ‘road expansion program’, in which government confiscated land and destroyed buildings of the people for expansion of roads without their will. Without ensuring secured property rights, we cannot expect investors to invest in Nepal.

Conducive Business Environment

Conducive business environment is crucial in order to achieve high level of economic growth and to excavate economic potentiality. When the policy regime is investment and private sector friendly and the political environment is stable, entrepreneurs and businessmen from within the country and outside will be willing to invest more as investments are secured and good return is guaranteed. However, when the country is characterized by political instability, along with unfavorable business environment and unfavorable policies, investment is directed to other countries and the productive resource, viz. capital and labour will move out from the country. Hence, it is imperative to have private sector friendly business environment for achieving higher economic growth.

Even though political stability has been secured in Nepal, Nepal needs to make improve doing business environment. The registration of businesses and permission required for making investment is a hectic and time consuming process. The widespread corruption is another factor which has made investors reluctant to invest in Nepal. Hence, it is imperative to have private sector friendly business environment for attracting investment in Nepal.

Contract enforcement

Another, important condition required for economic prosperity is strong enforcement of contracts. For effective and efficient enforcement of contract, there should be proper judicial system that could act as a mediator between the contracting parties whenever dispute arises between them and provide unbiased and fair decision promptly. Strong Contract enforcement gives the confidence to the parties to engage in big investment contracts with each other. It provides a sense of security to the contracting parties. Hence, it is very important factor for inducing economic growth.

However, the status of contract enforcement is poor in Nepal. According to World Bank’s Doing Business Report 2019, Nepal ranks 154 out of 190 countries in terms of contract enforcement. On an average, it takes 910 days to resolve a dispute. Furthermore, the cost of going through the entire judicial process costs 26.8 percent of the total claim. High cost and large number of days for dispute settlement work as a disincentive to the people to get into a formal contract and hence they are unwilling to take joint investment decisions, which can adversely affect economic growth.