Econ-ity » September 27, 2015

Daily Archives: September 27, 2015

Where is the trust in the market?

It is somewhat consolation to us all, that the constitution was eventually ratified and a long political process came to an end. But when it comes to prosperity and growth, the constitution does not have enough ground work for better environment for entrepreneurs. Ultimately, it is not the government that is going to be the engine of economic growth of our country. What government can and should do is to lay out ground rules that encourages innovation and protects entrepreneurs. Government should create an environment that promotes competition by reducing barriers to entry and by preventing the formation of cartels.

This is preamble of the Constitution of the Federal Democratic Republic of Nepal:

Nepal is an independent, indivisible, sovereign, secular, inclusive, democratic, socialism-oriented, republican, multiethnic state which shall be called Nepal in short

That sentence without the word ‘socialism oriented’ is still perfect to describe new Nepal under the new constitution. Since the word is there, what is its implication now? Is government going to take responsibility of providing goods and services for its citizens, even if the market is perfectly capable of doing so?

The constitution guarantees all sorts of rights for individuals for example: right to health, right to clean environment, right to education, right to employment etc. Among the rights that is provided for individuals, labor right and right of consumers provides interesting insight into how policy makers think of private sectors. Following are some excerpts from the constitution:

Every worker and employee shall have the right to form and join trade unions and to engage in collective bargaining for the protection of their respective interests, as provided in law

Every consumer shall have right to get quality goods and services. Victim of loss incurred from low quality goods or services shall have right to compensation as provided by the law

These clauses have an underlying assumption that business are always looking at every opportunity to take advantage of their consumers and workers. And these clauses also have the assumption that government is the big brother which is going to protect us (consumers and laborers) all. Another assumption in those clauses is that the government is benevolent saint that has public interests at its core. Well it could not be further from the truth. The fact that it took this long for the constitution to be drafted and ratified (it took eight years) proves that legislative bodies, political parties and bureaucrats have their own self-interest namely: securing votes, re-election and securing budget. Public interest is the least of their concern even if they make us believe it is.

It is true that businesses look for every opportunities to maximize profit. It is also true that there can be incidents of business malpractices. The way out of this problem then is to create an environment of competition driven by efficiency and innovation. In an environment of fair competition, the businesses that engage in mal-practices will not survive and will have to exit the market. The government should let the force of market work its magic rather than imposing iron clad regulations on businesses, which can lead to many unintended consequences and are very hard to change even if the regulations are not leading to desired outcomes.

This lack of trust in the role of market and entrepreneurial spirit (core of which is competition, efficiency and innovation) is very tragic for Nepal, a country which is in desperate need of rapid economic growth. Rapid economic growth does not come from regulating the private sectors. And policy makers should be very mindful of this.

Dhruba Bhandari

About Dhruba Bhandari

Dhruba Bhandari is Research Fellow at Samriddhi, The Prosperity Foundation. He joined the Foundation in July 2015. He completed PhD in Development Economics from Oklahoma State University (USA) in 2013. Prior to Joining Foundation, he worked as Research Associate at Oklahoma State University.

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Selling yet another false promise?

Sub-article two of the Article 17 of the Constitution of the Federal Democratic Republic of Nepal, 2015 states that every Nepalese citizen has a fundamental right to practice any profession, carry out any occupation, or establish and operate any enterprise within Nepal. This freedom to enterprise was also upheld by the Constitution of the Kingdom of Nepal, 1990 and later by the Interim Constitution of Nepal, 2007.

But were the citizens of Nepal really free to carry out any profession of their choice? Not quite! The 15-year (and counting) ban on the registration of taxis in Bagmati Zone is a manifestation of the state depriving its people of their constitutionally guaranteed fundamental right to choose an occupation, a profession or an enterprise.

The taxi industry

In May 2000, the Department of Transport Management put up a “90-day” halt on the registration of new taxis in Bagmati Zone in the pretext of carrying out a study about whether the number of taxis (8000, when this decision was made) had surpassed the carrying capacity of the roads. UntitledNow 15 years down the line, the decision of halt still persists in the form of a quota limit while the number of taxis has fallen much below the year-2000 level and the population in the zone has more than doubled.

Kathmandu valley alone has higher population to taxi ratio, and lesser taxis per square kilometer of area, compared to some of the cities with better alternative public transportation services. This ban, and the agreement between the government and the Federation of Nepalese National Transportation Entrepreneurs (FNNTE) requiring the recommendation of the FNNTE to issue service license or route permits to enter the industry, together, have created an almost-impenetrable entry barrier for prospective entrepreneurs that want to enter the industry and make a living by providing transportation service.

On top of it all, the government has also exercised price control by setting fares for the taxi service – one that is almost never followed.

How it affects prospective entrepreneurs

The quota (quantity control) means that new players will not be able to enter the industry. That automatically converts the taxi operation licenses into valuable assets. The taxi operators, who were already in the industry before the ban was introduced, now have the opportunity to collude and engage in anti-competitive practices. Today, the taxi licenses sell for around nine hundred thousand Rupees while the registration of other vehicles of similar capacity (car, jeep, van, pick-up and tempo) is only Rs. 750 as per the Motor Vehicles and Transport Management Rules, 1997. Used taxis sell for another one million Rupees in the market. That makes it around Rs. 1.9 million just to enter the industry with a 15-year old third-or-fourth-hand cab, excluding time and money that these prospective entrepreneurs have to spend trying to build ties with the Federation and earning their favor.

How often do we hear of ‘access to finance’ as one of the major challenges to micro, small and medium entrepreneurs in Nepal? And how often do we read of young Nepalese men and women going to the Middle East or Malaysia in search of jobs and in the hopes of earning a decent living for their families back home, just to come back a corpse locked up in coffins? An ‘awful’ lot of times! And yet, here we are, restraining them from enterprising in Nepal itself. Are we forcing them to seek opportunities in hostile environment in some foreign land by denying them their fundamental right of engaging in a profession or an enterprise of their choice in Nepal?

Deregulation the only way

A complete deregulation of the taxi industry will guarantee that the people are free to exercise their fundamental right. The Ministry of Physical Infrastructure and Transport (MoPIT) is mulling introducing a fixed number of taxis into the market. But this will still mean that lots of other prospective entrepreneurs cannot enter the industry at will. At this point, I urge the readers to keep in mind that not entering a market because one does not see great economic prospects in the market, and not being allowed to enter the market are two very different things. The former is a voluntary action of the individual while the latter is a violation of his/her right due to barriers created by regulations.

MoPIT, as the line ministry will then have to mitigate the opposition that it is likely to face from the existing taxi operators that are benefitting from the existing set-up. Countries like Ireland and New Zealand adopted a zero-compensation policy while deregulating the industry because the privilege (for example, the Rs. 900,000 for an otherwise Rs. 750 service license in Nepal’s case) that the taxi operators were about to lose were unfair benefits of an unfair policy. However, there were also people that had only recently taken loans and just bought their way into the industry. In cases like these, the MoPIT would have to learn practical lessons from how other countries have deregulated their transportation sectors.

Conclusion

Of course, deregulation of the taxi industry is only a small example of the many economic reforms that are necessary to create a favorable environment for the people to enterprise freely in Nepal and become prosperous. The advent of the new constitution does not only signify the federation of the country into autonomous states, and the devolution of the powers of the central government to the local bodies. To the citizenry, it signifies new hope and new spirit. The people believe that in this new Federal Democratic Republic of Nepal, they will finally find economic opportunities within their homeland and be able to earn a decent living and grow prosperous together with their fellow men and women. But, will the autonomous states be bold enough to make such strides, or will words like ‘prosperity’ prove to be just another ‘word’ put up on the new constitution to justify the eight years that it took to write the constitution?

This article was originally published in Perspectives, The Himalayan Times, on the 27th of Spetember, 2015. Click here to access the published version.
Akash Shrestha

About Akash Shrestha

Akash Shrestha is Coordinator of the Research Department at Samriddhi, The Prosperity Foundation where his focus areas are petroleum trade and public enterprises. He also writes newspaper articles, blogs and radio capsules, based on the findings of the studies conducted by The Foundation.

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Three ways how GoN has complicated international trade

Last week, Samriddhi Foundation launched the Economic Freedom Country Audit Report. The country audit delved into six areas of economic freedom based on the forty-two components and sub-components of Economic Freedom of the World Report, 2015 produced by the Canadian think-tank, Fraser Institute.

As per the latest economic freedom of the world update, Nepal ranks 117th in the category “Freedom to Trade Internationally” with a score of 6.4 out of 10. Here are some of the problems areas within Nepal’s international trade sector as identified by the country audit.

1) High Tariffs

Nepal imposes duties on both imports and exports. Take imported vehicles for example; Brace YourselvesNepalese customs levies up to 241 per cent tax and duties, which means, a TATA Nano which costs 170,000 INR (272,000 NPR at prevailing exchange rate) in India will cost you 1.18 million NPR in Nepal after imposing duties and taxes.

The government might have numerous arguments for imposing high duties but when the cost of doing business through official channels is high, it is likely that unofficial ways will be used. Taxing international trade implies discouraging it. This is a counter-intuitive move, especially for a poor country like Nepal, where international trade can prove to be the engine of growth.

2) Excessive Regulatory Trade Barriers

Import and export has never been easy in Nepal. The traders have to submit 11 different documents while trading internationally. Certificate of origin, permission for financial transactions, foreign exchange provision, are some of the many documents that need to be submitted. If we compare the number of documents to required for international trade in other land locked countries such as Luxembourg (4), Switzerland (4) Czech Republic (6), we can see that the number of required documents is much more in Nepal.

In addition to this, lack of clarity of roles and responsibilities among ministries, departments and implementing agencies are few of the institutional barriers that discourage international trade.

What If I Told YouNepal, being a land-locked country, does not have access to sea transport. Nor does it have railway systems or efficient airports. All of this already makes international trade a challenging business for Nepal. Road transport thus remains the only viable option. It is unfortunate that we have such weak economic diplomacy and regulatory regime along with incoordination between various government agencies that the only possible mode of international trade for us takes 40 days to complete an import or export process (Doing business Report 2015, World Bank).

3) Movement of Capital and People

Nepal imposes control on flow of money outside and inside the country, creating a restrictive environment for foreign investors. Foreign investors, for example need approval for direct investments, technology transfers and/or providing credit. Also, foreigners cannot own land in Nepal and have to go through stressful immigration process to acquire a business visa. Additionally, there is a minimum investment requirement of USD $50,000 which discourages FDI in Nepal. Companies, which don’t require more than $10,000 as capital, such as some software companies, will be discouraged from entering Nepalese market because of such cut-offs. Similarly, there is practically no outflow of capital as Nepal Rastra Bank imposes restrictions on Nepalese to invest abroad.

The policies for foreign employment in Nepal are also discouraging. Nepal’s Foreign Investment Policy (2014) sets a condition Too Damn Highthat as long as a Nepalese citizen can do a particular job; he/she has to be preferred to an expatriate. Foreign workers may only be hired if individuals with such skills are not available in Nepal. Such approval is to be secured from the Ministry of Labor (MoL). After hiring a foreign worker, the investor also needs to guarantee that such expertise is transferred to a Nepalese citizen so that a domestic worker may replace the foreign worker within five years. The same policy of preferring Nepalese to expatriate was originally stipulated in the Labor Act, 1992, the governing labor Act as of now. Such terms and conditions not only dissuade foreigners from undertaking employment in Nepal, but also discourage foreign investment.

The Way Forward

The phrase “making a prosperous Nepal” has never been as frequently used as since the promulgation of the new constitution. You can find the word ‘prosperity’ all over the constitution. But how exactly is Nepal planning to achieve it? Perhaps working towards a higher degree of economic freedom is the right way to go. Given that countries with high levels of economic freedom are also the ones with some of the highest economic growth, per capita income and life expectancy, it is perhaps through economic freedom that Nepal will also be able to attain this “prosperity.”

International trade can be encouraged by rationalizing the tariff regime, removing the revenue dependence on tariff and by moving away from para-tariffs. Another solution is simplifying regulatory regimes by removing requirements to contact multiple government agencies for permits and authorizations to trade, which would help resolve coordination failures amongst government agencies. Furthermore, as for the movement of capital, it can remove capital controls and facilitate foreign investment both inward and outward such that it can become a credible player in the international market.

For more details on the 2015 Economic Freedom Country Audit Report Nepal, please click here

Abyaya Neopane

About Abyaya Neopane

Abyaya Neopane is an independent researcher. He comes from an Economics background.

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