October 31: The World Bank’s latest Nepal Development Update has identified labour productivity deficit across three sectors in Nepal – agriculture, industry and services – compared to its peer countries and trading partners.

The October issue of World Bank’s Nepal Development Update states that Nepal suffers from a considerable labor productivity deficit compared to its regional and structural peers - the countries that share similar characteristics with Nepal such as landlocked nature and high remittances.

Some of them are also regional peers, reads the report which is published twice a year to report on key economic developments that occurred during the year, placing them in a longer-term and global perspective.

According to the report, Nepal’s labor productivity gap against peers is especially striking in the agriculture and industry sectors, where Nepal’s productivity is lower than in any other peer country.

In the industry sector, the average Nepali worker adds less than one-third of what the workers in peer countries add on average. The value added by an industrial worker in Nepal is less than half of that of a domestic service worker. However, even though labor productivity in services was higher, compared to peer countries Nepal again lags, with the average service worker adding around 80 percent of the value that workers in peer countries add, reads the report.

Nepal’s productivity gap relative to India has widened across all sectors over the past decades, the report further states.

According to the World Bank, Nepal’s labor productivity deficit in the non-agriculture sectors manifests in slower structural labor market shifts.

“Labor movements away from agriculture were lower in Nepal than in most peer countries included in the analysis.”

From 1996 to 2019, employment in agriculture as a share of total employment fell by 25 percentage points in Bangladesh and 36 percentage points in Cambodia for example, while the reduction in Nepal amounted to 13 percentage points. As a result, Nepal continues to exhibit the largest share of workers employed in agriculture by a margin, with more than 60 percent as of 2021, more than double the average of peer countries’ share.

The report further states that employment shares in the industry and services sectors increased moderately, but productivity gains from these movements were limited due to the inherent low sectoral productivity in these sectors.

“Several factors hinder labor productivity growth in Nepal, including the continuous large-scale emigration. The substantial outflow of workers can result in a brain drain, where the country loses its most talented workers to foreign markets. This can lead to a shortage of skilled labor in the domestic market and suppress labor productivity growth.”

High emigration can also have negative effects on domestic labor force participation among the recipients of remittances, said the report adding, “These factors may outweigh some positive effects of emigration, such as increased investments in education by remittance-receivers.” Other factors that contributed to low productivity include low levels of capital investment and technology. High import tariffs and capital flow restrictions were key disablers of technological advances, preventing foreign investments and knowledge and technology transfers, according to the report.

Another challenge in Nepal is the slowing overall productivity of the economy. In the period immediately following the end of the armed conflict (2007-2014), Total Factor Productivity (TFP) contributed 1.2 percentage point of growth on average to Nepal’s total growth. In the previous and subsequent periods, however, the contribution of TFP to economic growth in Nepal was negative, illustrating the underperformance of the Nepalese economy given the factor inputs, says the report.

Low TFP in Nepal can be linked to several factors, including high emigration if the net effect of it on human capital development was negative. Inefficient technologies have also impeded production processes and efficiency and therefore suppressed TFP. Other factors include the inefficient use of resources, and poor management and functioning of firms. Again, Nepal underperforms compared to its peer countries as well as India, particularly during the later 2010s.