Econ-ity » March 11, 2014

Daily Archives: March 11, 2014

Concerned about the wealth gap? Spread Economic Freedom!

Last month, international development organization Oxfam released a startling figure about the wealth gap between richest people in the world and the poorest half. According to the report, 85 of the wealthiest people in the world own as much wealth as the poorest half of the world.  The figures are disturbing to anyone regardless of their political inclinations and their profession. As usual, the leftists rushed in to embolden their criticisms against capitalism and free market system. Nepalese media and public intellectuals have too picked up the issue. The issue is of utmost importance to Nepal as well since it ranked 157th in the Human Development Index 2013 and the Gini Coefficient is 32.8 suggesting a significant income inequality.

economic-freedom-income-inequality

High levels of inequality are not desirable for any society wishing to achieve sustainable growth and peace. Inequality does not only have economic implication but also social and political implications. Desiring a more equal society, therefore is justifiable. But the question here is: does free market capitalism create inequality or it is because of lack of free market capitalism inequality arises? The question here is not just why 85 richest people own more than the poorest half of the world but also, more so in my view, why does the poorest half of the world produces and owns so little?

It is interesting to note that majority of the poor in the world live in societies that are miles away from free market system and are supposedly pursuing policies aiming equality and wealth redistribution. India alone hosts one-third of the world’s poor and until 1990s, its major policy thrust had been wealth redistribution and state control of the economy. China which is another major home for world’s poor, started down the path of market economy only after disastrous 3 decades of anti-market and supposedly pro-poor policies. By moving towards market economy and promoting growth rather than redistribution, India has reduced its poverty rates from 51% in 1991 to 22% in 2013. China has achieved an ever more impressive progress by reducing poverty rates from 84% in 1981 to around 12% in 2013. What critics of market system have left out is the fact that the wealth distribution around the world was even more skewed before 1990s when many countries around the world started moving towards market economies.

Empirical studies conducted in the context of developing countries have also found that economic freedom and income inequality have inverse relation suggesting that higher degree of economic freedom would result in lesser income inequality. For instance, a study titled “Economic Freedom and the trade-off between inequality and growth” conducted by economist Gerald W. Scully has found that economies with higher economic freedom not only enjoy higher growth rates than less free economies but they are also more equal. Economic freedom reduces inequality by increasing the share of market income going to the poor and lowering the share going to the rich. Economic Freedom of the World Index, a cross-country study on economic freedom conducted by Fraser Institute of Canada also shows that freerer societies are comparatively more equal than societies with lesser economic freedom.

Therefore, gap between rich and poor either in terms of income or in terms of wealth stems from the fact that many of the societies that are home to the world’s poorest people do not have as much economic freedom as the richer societies. In this context, it is imperative that governments and civil society focus on spreading economic freedom to the poorer societies rather than using inequality as an excuse to push more populist and redistribution policies which will ultimately harm the poor even more despite having noble intentions.

Surath Giri

About Surath Giri

Surath Giri is a student of Economics and works as Research & Publications Coordinator at Samriddhi, The Prosperity Foundation. He also writes for Khabar South Asia, a south Asian online news portal.

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HPPCL owes us all

sancho-550x550Established in 1981 by Government of Nepal with an objective of utilizing the immense range of herbs found in the country while also creating employment, Herbs Production & Processing Co. Ltd. (HPPCL) is well known among consumers for the production of Sancho, a herbal oil used for curing common cold, cough, rheumatism, fatigue, body ache, headache, neuralgia, sprain, and itching.

Annual Performance Review of Public Enterprises, 2070 published by Ministry of Finance indicates that HPPLC has a net worth of negative NRs. 1494.95 lakhs. Similarly it owes the government a total of NRs. 6421.06 lakhs as loan. The enterprise employs a total of 204 staffs and has unfunded liability of employees benefit worth NRs. 1035.76 lakhs. HPPLC has been unable to perform financially since its establishment for various reasons and has accumulated cumulative loss of NRs. 1775.26 lakhs until the year 2068/69. It also incurred a loss of NRs. 393.37 lakhs in 2068/69.

Recent news published in a national daily indicates that HPPLC is planning to sell off its property to pay its employees’ salaries. The Ministry of Finance has given it the permission to sell off the land on conditions that employees are to be laid off and commercial production is to be started. The Head of Privatization Cell in the ministry, Mr. Bashudev Sharma is skeptic of the whole idea and believes the enterprise can only perform post privatization.

While HPPLC, Ministry of Finance, and the Privatization cell all have their own agendas, the most important stakeholders i.e. the citizens are completely sidelined and forgotten. Since government and other government institutions are the major shareholders of the enterprise, it directly or indirectly implies that “we the people” own HPPLC and it is us who are losing our hard earned (taxed) money to an inefficient enterprise which essentially sells us products that private players are selling more effectively.  Sancho and other products that HPPLC produces are not even essentials like petroleum and electricity. Then the question arises as to why the government needs to play “god” and poke its nose in every other business.

The intentions of the government were well and good during the 50’s and 60’s when the private sector was not contributing much to the economy. With time and with changes in the system we have experienced a growing private sector capable of producing goods and services for the people at affordable rates while also creating much more employment opportunities than the public sector could possibly imagine.

Most of the public enterprises in Nepal along with HPPLC suffer from the phenomenon that is most encapsulated in the form of “tragedy of the commons”. In simpler terms what belongs to everyone does not belong to anyone. Take for example our own Ratna Park, a governmental park which is free and open for everyone. The park is in a very sorry state while Garden of Dreams, a privately run park where an entry fee is required has been doing way better.

Coming to the point, although the amount of loss incurred by HPPLC when divided among the citizens comes up to being a very small sum adding up losses of all the PEs is a very alarming issue for the taxpaying citizens. The taxpayers neither have the time nor have intentions to question the government on the viability of running HPPLC and other PEs. Keeping tracks of 37 enterprises run by the government is not going to be an important agenda for the taxpayers when they are busy running their own lives and paying taxes to fund government’s businesses. While few of us are concerned we are merely small fishes in a big ocean and such issues raised by concerned citizens like you and me never reaches the concerned authorities and even if they do it does not fall under priority issue when we all are more focused on constitution and politics. They will ignore you once, they will ignore you again and again but they cannot ignore you forever so it is time we ask questions and demand satisfactory answers from the concerned authorities.

Koshish Acharya

About Koshish Acharya

Acharya is a student of social sciences and has been associated with Samriddhi, The Prosperity Foundation for the last three years.

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