Abstract
We find the informal sector of Nepal, which employs nearly 60% of non-agricultural labour force, to have underperformed between the period 1995/96 and 2010/11. We locate a large performance gap between the ‘traditional/non-capitalist’ segment, comprising family-based household enterprises that occupy a majority portion of informal sector, and the ‘modern/capitalist’ segment employing wage labour, which shows heterogeneity existent within the informal sector. We find that, by employing an Ordinary Least Squares (OLS) regression of independently pooled cross sections of enterprises over three rounds of Nepal Living Standard Survey (NLSS 1995/96, NLSS 2003/04, and NLSS 2010/11), the performance gap between the traditional/non-capitalist enterprises and the modern/capitalist enterprises did not lessen over time indicating a persistent dualism within the sector. We further explore the rural-urban dimension of informal sector, through the use of a regression-based decomposition exercise, to find that while the rural-urban differential in informal sector shrunk between the period 1995/96 and 2010/11, it is attributed to the underperformance of urban firms and the stagnancy of rural firms over time. The dismal performance of informal sector, particularly the existence of a large (non-declining) proportion of traditional/non-capitalist segment at a meagre income level, raises question on the possibility of transformation in the sector.
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Source: Author’s construct based on calculation from NLSS datasets 1995/96, 2003/04, and 2010/11
Source: Author’s construct based on NLSS datasets 1995/96, 2003/04, and 2010/11
Source: Author’s construct based on the results of Blinder-Oaxaca decomposition exercises
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Data availability
The data sets supporting the results or analyses presented in the paper are available on purchase from the Central Bureau of Statistics, Government of Nepal. The data sets are not available on open access. The Stata software was used for data analysis. The do-file and the log-file executed using the software can be made available on demand from the editor or reviewer(s).
Change history
24 December 2023
The original online version of this article was revised to place model specification 6 correctly in the text.
Notes
Urban biasness in development can be tentatively perceived from the Human Development Index (HDI) measure estimated separately for urban areas and rural areas. HDI was 0.567 for urban region and 0.384 for rural region in 1996. The same measure was 0.630 and 0.517 respectively for urban and rural areas in 2011 (UNDP 2014, 1998; UNDP & National Planning Commission (NPC) 2014). Furthermore, on the rural-urban divide, Pandey (2011) claims that the economic reforms pushed in the 1990s intensified productive activities in the urban sector and contributed to poverty alleviation by raising income and employment levels in the urban sector while bypassing the rural sector.
It is to be noted that the distinction between capitalist and non-capitalist enterprises, based on the presence of capital-wage relation, is an approximate categorisation performed for the purpose of this study, and is not a perfect distinction.
IMF’s macroeconomic stabilisation and structural adjustment programmes were conducted in Nepal in two phases, each in 1986–87 and 1989–90, which were more vigorously implemented in the 1990s when the multiparty system was reinstated (Pandey 2011).
It is noteworthy that the conflict inflicted its greatest impact on rural and less-developed areas, particularly the mid-west and far-west regions.
The use of less than 10 employees as a threshold for the size of informal sector enterprises is in accordance with the criteria used by national labour force surveys in determining employment in informal sector in Nepal.
Informal Survey, conducted by the World Bank in 2009, is an exclusive survey on informal sector enterprises. The dataset from the survey, however, is not used in this study primarily because it is not geographically representative (sample includes 120 enterprises spread across 12 towns with almost half of the sample located in the Kathmandu valley).
The value of GDP deflator for the year is taken from the database of World Bank (2020).
Net revenue is calculated as gross revenue obtained from sales minus direct input cost and indirect operational cost. Imputation for the wages of contributing household laborers is not done.
Exchange rate as on 1 January, 2011: 1 Nepali Rupee (NPR) = 0.0140 USD.
We also performed separate regressions (not presented here), similar to model specifications (1) and (2), taking average labour productivity (gross value added per person) function. We obtained results similar to the ones observed in case of specifications (1) and (2), except that we found the interaction term for the year 2003/2004 positive and significant at 10%, implying an increase in duality during the period (1995/96 to 2003/04).
We also performed separate OLS regressions using a pooled sample of rural and urban enterprises, employing the following model specification 6:
$$Ln \left(Net revenu{e}_{ijt}\right)=\alpha +\varvec{\gamma} {{\varvec{X}}}_{\varvec{ijt}}+{\varvec{Y}}{\varvec{e}}{\varvec{a}}{{\varvec{r}}}_{\varvec{t}} + {\varepsilon }_{ijt} {\hspace{1cm}}{j\in(Rural, Urban)}$$(6)where i = 1,2, 3, …., n number of firms, t = 1995/96, 2003/04, and 2010/11 years, X represents a vector of enterprise characteristics, and ‘year’ is a time dummy variable with base year 1995/96. The results (refer to Table 8 in Appendix 2) are almost in coherence with the earlier findings from the B-O decomposition (refer to Fig. 3) and the descriptive analysis (refer to Fig. 2). The signs and coefficients of the ‘year’ dummy indicate that urban enterprises performed worse in 2003/04, with minimal recovery in 2010/11. However, unlike the results from B-O decomposition and descriptive analysis, which showed that rural enterprises more or less stagnated throughout the entire period, we here found that rural enterprises performed even worse over time. Nevertheless, it is important to note that the proportion of decline faced by urban enterprises was observed to be more than that experienced by rural enterprises.
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Acknowledgements
I would like to express my sincere gratitude towards Dr. Snehashish Bhattacharya, Dr. Anirban Dasgupta and Dr. Arup Mitra for their continuous guidance and supervision from the initiation of this study until its production. I am grateful for the valuable inputs provided by the anonymous reviewer and the Editor, which contributed towards enhancing the arguments presented in this paper. I am also thankful to Ishwor Adhikari for his guidance, comments and suggestion. This paper is built upon the author's Master's dissertation completed at the Faculty of Economics, South Asian University, New Delhi, India.
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The original online version of this article was revised to place model specification 6 correctly in the text.
Appendices
Appendix 1
The detailed results of the twofold Blinder-Oaxaca (B-O) decomposition employed in Section 5.2 to analyse the extent of rural-urban disparity in enterprise performance are reported in Tables 5, 6 and 7.
Appendix 2
The results of OLS regressions performed on net revenue functions using a pooled sample of rural and urban enterprises separately are reported in Table 8.
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Shrestha, S. Exploring the Informal Sector in Nepal: Performance Trend, Dualism, and Rural-Urban Dynamics. Ind. J. Labour Econ. 66, 765–791 (2023). https://doi.org/10.1007/s41027-023-00460-7
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DOI: https://doi.org/10.1007/s41027-023-00460-7