Comments on Manufacturing Sector and Poverty Narayan Manandhar 11 November, 2005

Manufacturing Sector & Poverty + Plus Points Fairly extensive presentation of macro level (available) data – trends, patterns, composition, disaggregation This is probably the second attempt in linking manufacturing sector and poverty in Nepal. “The benefits of the sector has been uneven and limited to the urban sector.” What really is this manufacturing sector manufacturing? Could it be poverty? - Minus Points Some other data sources could have been used e.g., NLSS I & II, NLFS and other research studies on manufacturing sector performance Not much explanation on linkages other than generalization It would be interesting to observe macro level data with micro level analysis

Puzzle: TFP Growth in Manufacturing Export Oriented Industries Import Substitution Industries TFP Pre-Reform Post Reform Source: Industrial Sector Perspective Plan: Vision 2020, Jan 2002

IPP: Vision 2020 Although the industrial sector does not seem to play a big role in poverty alleviation program, per capita income in different development regions is highly correlated with number of industrial establishments (r=.99) (comment: too small observations to have a meaningful conclusion) Exportable industries are paying higher wages compared to import substitution industries Industrial sector can contribute towards poverty alleviation through increasing internal remittances.

Vision 2020: Conclusion Industrial development can play a crucial role in poverty reduction. A two-pronged approach of rural industrialization and urban based industrial development will maximize the short-term impact of the industrial sector on alleviating poverty. Industrial development will affect poverty through increasing employment, productivity, and incomes, directly as well as indirectly through remittances.

Vision 2020: Conclusion Higher incomes will lead to higher demand for all productive sectors. Higher demand for labor will tend to increase wage rates, leading to efforts to increase labor productivity further by employing more capital. A strong economy will also contribute to women empowerment through increased economic independence, eventually also reducing the wage gap.

Year No. of Establishment No. of Workers Workers Per Establishment 1991/ / / / / / / / / / / / / /05 2,575 2,598 3,113 3,582 4,014 4,195 4,292 4,282 4,274 4,296 3,617 3,630 4,186 3, , , , , , , , , , , , , , ,

Labor Absorptive Capacity of Nepali Enterprises

Kishore Sharma, Industrial Strategies, Foreign Trade Regime and Structural Change: An Analysis of Nepalese Manufacturing, Latrobe University, Australia, 1997 Human Capital Intensity Capital Intensity Labor Intensity Human Capital, Physical Capital and Labor Intensity: 1972/ /94

Particulars1991/ /972001/02 (A) Number of Units4,2713,5573,210 (B) Number of Employment 213,653187,316181,695 (C) Wage Bills (Rs in Millions) 3,3484,0586,429 (D) Value Addition (Rs in Millions) 13,65021,87538,364 Ratios/Percentages Employment/Unit (B/A) Average Wage (C/B)(Rs.)16,00022,00035,000 Wage Bills/VA (C/D) (%) VA/Employee (D/B)(Rs.)64,000117,000211,000 Manufacturing Censuses and Labor

Manufacturing Sector: Some Paradoxes The policy of employment generation and productivity improvement does not go hand in hand. Manufacturing sector is important but less significant in poverty reduction SMEs are beautiful but dangerous in Nepal Government’s perverted employment policy will not help poverty reduction program

Manufacturing Sector and Poverty Employment & Wage Dimension –Labor absorptive capacity is going down –Wage level is higher than in agriculture sector –However, minimum wage is till low SMEs, Productivity and Poverty Reduction Gender Dimension –Women employment is increasing –Still wage disparity between male and female workers –Women are the first to be dispensed when it comes to closing units

Minimum Wage in Nepal (in Rs./Month Minimum Wage in Nepal (in Rs./Month)

Manufacturing Sector and Poverty Labor Productivity Determinants of productivity are: workers training, foreign ownership, foreign licensing and technical assistance as well as export business which is highly correlated with foreign know-how Social Security Increased risk of being redundant (units being closed plus demand for flexible labor law) Role of voluntary retirement scheme (VRS) Occupational Health and Safety (Accidents and health hazards, working conditions) Issue of Child Labor/Foreign workforce

Labor Shortage of Skilled Labor Low Labor productivity/High wages and benefits Attitude of workers, work ethics of workers Labor strikes/Unions Labor turnover Major Business Problem Categories Identified in the Survey

Volume, ’000 units a year (log scale) Best of both worlds Variety, number of products (log scale) Transfer line Flexible manufacturing system N C machine tools Dedicated automation Manufacturing cell Productivity Flexibility “Magic Kingdom”