There is no agreed upon definition of national competitiveness; the term means different things to different people. A country is always competitive in global markets in that it always has a comparative advantage (it is comparatively more efficient) in producing something that it can then export to other countries, even if the country has lower productivity in producing that good. In this chapter, the term competitiveness is defined more narrowly as cost efficiency, i.e., how cheaply and reliably a country can produce the goods and services in which it competes. Three indicators are used to measure the competitiveness of Nepal and its firms:
! Relative unit labor costs in the manufacturing sector, expressed as a common currency: total labor costs of producing one unit of output, measured in a comparable currency. Labor productivity, wage costs, and exchange rates are all taken into account in this measure, which is sometimes defined as the real exchange rate;
! The Real effective exchange rate (REER), which measures the overall competitiveness of the country by taking into account movements in its exchange rates and inflation relative to those of its trading partners;
! Total factor productivity (TFP), the growth in productivity of all productive factors taken together. In the long run, competitiveness is measured by growth in total factor productivity, as the exchange rate settles into its equilibrium value and wage rates also increase as productivity increases. TFP growth
54 A small, focused survey of exporters was conducted for this chapter to update and add to the information gathered in a large, countrywide World Bank/FNCCI survey of manufacturing in 2000. The questionnaire and a brief synopsis of the responses are included in the Background Papers volume.
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allows a country to support higher wages, a stronger currency, and attractive returns on capital—and with them higher standards of living. Productivity depends on the value of a country's products and services, measured by the prices they can command in world markets, and the efficiency with which they can be produced.
Short-run Productivity
The authors of this study compare Nepal’s unit labor costs, as defined above, with nine Asian countries (Table 4.1).55 While Nepal clearly has an advantage of lower wages (column A), this is more than offset by low labor productivity (column B). As a result, unit labor costs are among the highest among its competitor countries. This points to the need for a competitive exchange rate and for higher labor productivity in order to keep unit labor costs low.
Encouragingly, Nepal’s unit labor costs declined over the 1990s. As Table 4.2 shows, Nepal’s unit labor cost declined at an annual rate of more than 3% during the 1990s, 1% per year faster than India's. Nepal, in fact, made substantial gains in competitiveness, compared with the Asian countries listed in Table 4.3.
Compared to Sri Lanka, Indonesia, and Malaysia, Nepal’s competitive gains were quite substantial (about 8% per year compared with Sri Lanka and 3.6% against both Indonesia and Malaysia). Even in the case of China, Nepal was able to improve its price competitiveness by 2.6% per year over the period.
Table 4.1 Index of Cost Competitiveness Indicators of Nine Asian Countries, 1999
Country Labor Cost per Worker (A)
Value Added per Worker (B)
Unit Labor Cost (C)
Nepal 100 100 100
India 130 205 81
China 180 271 72
Bangladesh 110 130 90
Indonesia 120 276 87
Thailand 480 390 94
Sri Lanka 160 195 105
Malaysia 960 909 93
Philippines 600 742 93
Note: A = average labor cost per worker manufacturing, B = value added per unit of labor, C = labor cost per unit of output manufacturing according to the internationally accepted definition of the U.S. Department of Commerce.
Source: UNIDO Yearbook of Industrial Statistics, 2001; ILO Yearbook of Labor Statistics, 2001 (India’s labor cost index is 260 according to ILO data; the lower number here is based on discussions with the private sector in Nepal); World Bank/FNCCI Industrial Survey, 2000.
55 It should be noted that comparisons of unit costs across countries have serious methodological problems. See Nabi and Anjuria, 2002.
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Table 4.2 Nepal’s Annual Rate of Improvement in Unit Labor Cost , 1990-99
Country Annual % Change Relative Improvement in Competitiveness % per annum
Nepal - 3.7
India - 2.3 1.4
China - 1.1 2.6
Indonesia - .1 3.6
Thailand - 2.3 1.4
Sri Lanka + 4.5 8.2
Malaysia - .1 3.6
Philippines - 2.7 1.0
Sources: UNIDO, 2001; ILO, 2001.
What accounted for the improvement in Nepal’s price competitiveness over the decade? Table 4.3 suggests that slow growth in Nepal’s wages kept costs low. Thus, even when Nepal’s productivity growth was the slowest among these countries, wages grew at an even slower pace, which lowered unit labor costs, compared to other countries. As the data in Table 4.3 illustrate, wage costs grew four times faster per year in India than in Nepal during the 1990s, while the annual rate of labor productivity improvement in India was only slightly higher (.2%). Thus, while both countries improved their price competitiveness (as measured by unit labor costs) over the period, Nepal's rate of decline in unit labor cost was more than 1.4 percent faster per year than India's, due mostly to India’s higher growth of wage costs.
Table 4.3 Annual Percentage Change of Labor Costs and Labor Productivity of Eight Asian Countries
Country Labor costs Labor productivity
Nepal .5 4.2
India 2.1 4.4
China 9.0 10.1
Indonesia 8.1 8.2
Thailand 8.4 10.7
Sri Lanka 5.3 .8
Malaysia 9.1 9.2
Philippines 7.4 10.1 Source: UNIDO, 2001; ILO, 2001
Real Effective Exchange Rates
Another indicator of competitiveness is the REER, a trade-weighted average sum of the real effective exchange rates of all of Nepal’s trading partners. In this case, a depreciation of 9% in the index over the decade has increased Nepal’s competitiveness. However, like the unit labor costs in manufacturing, this index also suggests that Nepal's improvement in competitiveness was largely a phenomenon of the early
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1990s following Government policy reforms. Toward the end of the decade, the REER appreciated significantly, signifying deterioration in the country’s competitive position.