The impact of policy reforms on labour productivity, price cost margin and total factor productivity: the Nepalese experience

Using data from the Nepalese manufacturing sector, this article examines whether the policy reforms improve efficiency (productivity) and benefit the poor in least developed countries (LDCs) with weak institutions and poor physical infrastructure. Results indicate some improvements in all indicators of productivity following policy reforms, but the Nepalese manufacturing sector remains fragile due to rigidity in the factor market. Our analysis suggests that despite an increase in labour productivity, increased proportion of manufacturing value added has not been passed on to workers, indicating that the poor have not benefited much from the reform process. Total Factor Productivity (TFP) continued to decline even after the reforms, but at a lower rate. There is an urgent need to introduce further reforms in the labour market and the infrastructure sector. The econometric evidence suggests higher productivity growth in those industries which are able to produce on a large scale, have higher protection and semi-skilled workforce, but lower capital intensity and no public sector domination.