Sometimes, it's better to cut off dying industriesJoseph Schumpeter’s creative destruction should be applied to the economy, and to politics as well.
In Hinduism, Lord Shiva is worshipped as both a creator and destroyer. He destroys in order to create anew. In economics, the so-called creative destruction concept was popularised by the Austrian—later a naturalised US citizen—Joseph Schumpeter, who drew on Marx’s thoughts. Schumpeter described how the economic structure, and the industries within it, constantly evolves—destroying early forms and relying on innovation to stay relevant. In life, new ideas constantly take root and old ones are put to rest. In the good old days, the eight-track tape ruled. This went the way of the dinosaur when the cassette tape came along. This was replaced by the compact disc, which, too, in due course was pushed aside by web-based streaming services. A CD manufacturer that did not see this coming and tried to stubbornly stay in business was destined for bankruptcy. In government, policies that try to support dying industries amount to a waste of resources that could have been utilised elsewhere. This is how zombies are born.
Zombies are fictional, speechless dead humans who have been supernaturally reanimated. They survive under someone else’s control—the same way a zombie company or industry stays ‘alive’ due to supportive government policy. The moment the spoon-feeding is stopped, the entity gets taken off life support. In the September 2018 issue of its quarterly review, the Bank for International Settlements—known as the central banks’ central bank—argues that the prevalence of zombie firms has ratcheted up since the late 1980s. In the 14 advanced economies the report covered, the average share of zombie firms rose from around 2 percent back then to some 12 percent in 2016.
Blind quest for self-sufficiency
In the wake of the 2008 global financial crisis, major central banks the world over flooded the system with liquidity. In developed economies including the US, Japan and the eurozone, interest rates were pushed to the floor. In the latter two, they went negative. This saved the financial system from falling into the abyss, but this was no panacea. More than a decade later, leverage has grown. Investors have moved up the risk curve, pushing rates lower for not only investment-grade companies but also high-yield, also known as junk. In a normal cycle, as economies contract, weak companies are forced to restructure or just fold. This time around, Schumpeter’s creative destruction has not really kicked in. In an environment like this, surplus capacity results; the urge to compete on price remains high.
Nepal Rastra Bank recently published the average capacity utilisation of Nepali factories for the first half of the fiscal year 2018-19. At 98 and 89 percent respectively, utilisation was very high in pashmina and beer, while industries such as soap and garment languished in the 32 percent range. Currently, while Nepal’s economic growth rate stands at the 6-7 percent range, only 60 percent of the national industrial capacity is being utilised. Two-fifths of the capacity lying idle is not much of an issue when times are good. But when times are bad, there is not enough good happening to offset the bad. Should industries with low utilisation get government support? Further, how should a government go about deciding which ones to support and which ones not to? Emerging industries with promise may need help at certain stages of their lives. But if this is not carefully done, the government might end up supporting numerous zombies.
Handouts don’t make sense
In his budget speech for the fiscal year 2019-20, Finance Minister Yubaraj Khatiwada said that about two dozen industrial products would be encouraged to becoming self-sufficient within two years. Each political party has its own agenda. What the KP Oli government prioritises is likely to be different from what a Nepali Congress administration would. So, the right analysis is not about which industries need government support, but rather which ones have the potential to turn into zombies. Take sugar, for instance. India is the second-largest producer of sugar after Brazil. On average, sugar sells cheaper across the border than in Nepal. In order to compete with imports—primarily Indian—Nepali mills lobby hard for import quota and tariffs. In April last year, customs duty on sugar imports was doubled from 15 to 30 percent. Producers then wanted it raised to 60 percent. The government compromised at 40 percent.
It is easy getting addicted to easy handouts. But, when it is all said and done, it is the zombie policies that give rise to zombies. The inability of senior leaders of a leading political party like Nepali Congress to make way for junior leaders and groom them for leadership is nothing more than zombie mentality. The decision by the Nepal Bankers’ Association, which represents 28 Class A commercial banks in Nepal, to fix deposit rates—but not lending rates—is an example of the zombie mindset. In free markets, banks do not collude and should not be allowed to fix rates. Besides hurting depositors, the act of artificially setting rates essentially ensures business for unproductive banks. The natural process of creative destruction is tampered with.
News late last month that Nepal would play host to the 20th International Indian Film Academy awards should have elicited a favourable response. Next year is Visit Nepal Year 2020, with the concerned agencies aiming to attract two million tourists. A major Bollywood event like this could go a long way in boosting tourism. Then, politics got in the way. The cost of the event for the government would have been around $4 million, plus the cost of transportation, logistics, security and lodging. After a parliamentary committee opposed the idea, the government decided not to proceed with the event. One can quibble over whether or not the show was costing too much, or even whether the cost should be considered an expense or an investment, but it is befuddling to hear lawmakers argue that this infringes on Nepal’s ‘sovereignty, independence and prestige’. Such reasoning is the byproduct of an outdated mindset—playing the proverbial sorcerer to zombie ideas. The sooner lawmakers and politicians are able to channel Schumpeter and his creative destruction, the better their policies.
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