Econ-ity » November 8, 2015

Daily Archives: November 8, 2015

Rise of government as paternal authority

As soon as someone hears of something that has happened or is happening that s/he doesn’t like, s/he goes, “The government ought to do something about it!”. Where does this idea that government can solve all of our problems (especially the economic ones) we face, come from?

This characteristic is a remnant of a thought from the past – before modern freedom, constitutional government, representative government, republicanism or federalism. For centuries, there was a doctrine accepted by everyone in this world, that a King, an anointed king, was messenger of the God and he had more wisdom than his citizens. King had supernatural powers and was able to provide and protect his citizens. As recently as the beginning of the nineteenth century, people suffering from certain disease were expected to be cured by the royal touch, by the hand of the king. Doctors were usually better; nevertheless, they had their patients try the touch of the king. Same reasoning can follow as to why a king should overlook other aspects besides the health of his subjects; other aspects like education, food and shelter. The very aspects of life that are best governed by the market interactions rather than decision of some king or benevolent government. One of the relevant examples from the context of Nepal is nationalization of education (both private and public) in 1971. Before 1971, schools were autonomous and functioned in a decentralized fashion.

Today most countries have democratically elected governments and very few monarchs have survived. But has the doctrine of the superiority of supernatural kings with inherited powers that can solve all problems of their subjects disappeared? At present, most of the government bodies consist of elected officials and not an anointed king, but the idea that there is someone wiser and more powerful that could govern and solve all problems of society has not gone away. This is evident from both the wishes of people for government intervention to solve problems, even if markets can provide better solutions, and also the wish of the governing body to try to expand its horizon to solve all problems that societies face by regulating, banning and subsidizing.

This is not to imply that a government does not have any role in the economy. It has very important roles, namely: maintaining law and order, and enforcing property rights so that it can create space for markets to function. Apart from its limited but very important roles, other actions like regulating prices, wages, rents and profits are beyond the scope of government because it does not lead to the desired result. Prices, wages, rents and profits are best determined by the market forces (demand and supply) and any attempt by government to regulate or control distorts the market and leads to unintended consequences like formation of cartels, shortage of goods and services, to name a few. This is also very evident in current crisis of fuel (apart from the Unofficial Blockade) that stems from the government being the sole provider of petroleum based fuel instead of allowing markets to work it out.

Why is it that government actions to intervene and regulate any aspects of the market, even if it arises with the best of intentions, like the minimum wage so a poor can make more money, rent control so a poor can afford a decent living space, price control on gasoline, milk, eggs and other basic goods so that an average earner can afford, banning of alcohol so that people will not be addicted to alcohol etc. do not lead to the intended outcome and only lead to negative unintended consequences instead? It is because in the centrally planned economy, everything depends on the talents, and gifts and perception of very few people that hold the decision-making power. That which the kings/dictators or governing committees do not know is never taken into account in the planning and decision-making and hence always the negative unintended consequences. Even if all the information that is required for sound policy-making is available to the king/dictators or government committees, their plan will never match the invisible hand of the market and the result of millions of interactions of households and businesses driven by self-interest and incentive.

Inspired by readings of Ludwig von Mises

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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Reading Gaige in 2015 – Part I (A synopsis of a 1975 study on the Tarai)

Photo credit: Himal Southasian

A lot has been said about the on-going Madhesh protests and burgeoning silent conflict between us and our southern neighbor. A lot more surely will. Numerous attempts to map the initiation of this quagmire and comment on its exiting state has filled many papers. In this light, the following article aims to aid the understanding of the general populace of the geo-political history of the Tarai based on a certain 1975 research by Frederick H. Gaige named ‘Regionalism and National Unity in Nepal’. Though the research is old by at least four decades, few will argue its significance in explaining the blooming of the Tarai as we know it now better than Gaige. This is thus a simplification of all that Gaige found on his thorough research on namely six districts of the Tarai – Jhapa, Mahottari, Dhanusha, Bara, Kapilbastu and Kailali, in terms of the economic, political and social set up of said area with the hills and India.

Chapter I – Geopolitics of the Tarai

We begin with a general examination of religion, language and caste in the hills and the tarai. Hinduism was and largely is, the primary religion in both the hills and the tarai yet there are stark differences between the cultures of the two. Hill Hindus, as a result of frequent interaction with Tibetan Buddhism, became more ‘modern’ and less severe in their channeling of religious nuances. Plains Hindus, as Gaige terms them, had in turn more interaction with the Muslim community across the border and subsequently began adopting their ‘parda’ (veil) system. Banke had the highest reported Muslim population in Nepal with no forest in the south of the district to restrict migration from North UP. While the hill Hindus have about a dozen castes, there were reportedly 59 castes in the Terai when researched. They are also some marked differences in their treatment of the same caste, such as the Sonars, who are seen as the highest of the craft castes in the plains but are seemingly worse than blacksmiths in the Hills.

Chapter II – Economy of the Tarai

Moving on to economy, Gaige begins with the inference of how Indian timber contractors and hill laborers logged the Tarai forests to supply for Indian railroads. Between the 1890s and 1930s, the Rana government encouraged settlement into the Tarai in order to increase land revenue but those in the hills disliked the intensely hot weather of the Tarai and it was left for zamindars (landowners) to exploit this land and induce tenant cultivators out of those living in the plains. Tarai was well understood as being extremely fertile and was the bread basket of the country. In 1965, Nepal was the fifth largest rice exporter in the world, with exports of 348,000 metric tons to India alone. Indian currency heavily dominated transactions in Nepal and the Tarai in particular in 1960s. The surplus of Indian currency was used by the Ranas to purchase real estate and/or invest in industries in India. Because Indian currency had been largely embraced in the Tarai for dealings with the border – this prevented the state from exercising monetary control over that economy in later years. A barrier rose between the hills and the Tarai as monetary transactions began to be conducted in two currencies: the Nepalese and the Indian.

In terms of business, the upper – caste plains Hindus dominated these dealings even though the area was traditionally thought to be middle – caste. Early industrial development in the Tarai was financed to a large extent by Indian capital. For instance, a certain Radha Kissen Chamaira, a Marwari crucial in Calcutta’s jute processing and exporting business, was largely responsible for establishing Nepal’s largest jute mill in 1936. Biratnagar became a major jute-growing area by 1930s and Chamaira persuaded his friend, Juddha Shamsher (the PM of that time), to jointly set up a holdings company. Chamaira along with his partner was successful in establishing Biratnagar’s first rice mill, and a cotton and sugar mill in the area by 1946.

Chapter – III Nepal-India Border Problems

An examination of the Indo-Nepal border now begins with the classification of border problems into 4 categories: border demarcation disputes (fights over forest area and demarcations as dictated by natural resources such as the Gandak that overflowed on particular years and seemingly left more land on the Indian side every time), political terrorists (outlaws on either side who used the other side of the border as a hiding place), smuggling (goods that came in as aid were smuggled back to India for cheaper prices than their existing market rates; for instance in 1951, Nepal experienced a massive cotton and yarn shortage which was provided for by India sans excise tax, making it cheaper in Nepal than in India) and migration of settlers from one country to another. These goods eventually found their back into India via smuggling. The shortage became so high that Nepal passed a ‘The Mill Made Cotton Yarns and Cloth Anti-Smuggling and Anti-Black Marketing Act’).

It is interesting to note that the establishment of stainless-steel and synthetic-textile factories in the Tarai aided smuggling. By mid-1969, there were seven stainless-steel factories in Nepal. This was a result of Nepal’s industrial-licensing policies, excise-tax benefits and the opportunity to buy raw materials from overseas in mostly Indian rupees. By 1968, these factories were exporting large quantities to India and were cheaper there despite their protectionist import duties. Indian businessmen were beginning to lose money and thus protested heavily with the Indian government. Eventually, the Indian government obtained a promise from Nepal that they would restrict production of goods manufactured from raw materials imported abroad. Despite this promise, India began stalling shipments of these products saying that they exceeded quotas as agreed upon by the two governments. The stalled goods then were black-marketed and began snaking its way into Indian markets. India then continued to try and get Nepal to strengthen its smuggling laws but Nepal resisted on grounds that it would harm its economy. Eventually, Nepal began discouraging the import of luxury goods from overseas and converted all but two of the 17 stainless-steel and synthetic-textile factories into plants that would manufacture goods from domestic materials.

Chapter IV-Migration into the Tarai

The Nepali-speaking Sen Kings of Palpa and Makwanpur gained control of mid-west Terai in the 15th-16th century. They saw the malarial forests of the area as their best defense against the India and colonial British and thus did not do away with it. When the Shah Kings (in 1970s) were blossoming in their reign, they allowed some settlement in the area. In the 1860s, the Ranas began to turn to diplomacy when dealing with the British and subsequently, Jung Bahadur Rana encouraged Nepali slaves to settle in the Tarai by giving them the title of free men. Tharus were indigenous to the forest of the tarai and eventually cowherds and loggers became among the first settlers into the plains. Between 1860s and 1951, the Nepalese government tried to encourage hill-people to settle into the Tarai but they were reluctant considering the Tarai’s hot-malarial climate. The state thus content itself by letting in migrants from India to develop the economy of the Tarai.

Degradation of the existing forest and land resources in the hills and blooming trade across the border eventually pulled in hill people for settlement into the Terai. More than anything the eradication of malaria in 1950s by the Nepalese government in cooperation with the WHO and USAID in the Terai acted as a strong pull-factor for potential settlers. Most hill settlers into the Tarai belonged to the ‘higher-castes’ while plain settlers were mostly considered ‘low-caste’. Because local administration in the Tarai was controlled by Nepali-speaking officials, hill people in the Tarai found it relatively easier to access economic and political power compared to the less-literate plains people in the Terai. They began settling thus in areas where the plains people were less knowledgeable about matters of land and resources.  The state was also approving of this Nepalization of the Terai. In 1972, the government began giving ownership certificates to those who had recently cleared forest land and begun settling. The government also aimed to vigorously make hill people settle into the Tarai for further national integration but there were no trained personnel to manage these resettlement projects. These projects were also not pursued actively because it may have invited India to react to same nationalist sentiments to migrants from Nepal heavily located in areas like Sikkim.
The following chapters dealing with citizenship rights, language and other aspects of the Terai shall be dealt with in a follow-up blog post.


Labisha Uprety

About Labisha Uprety

Labisha Uprety is a Research and Communications Officer at Samriddhi. She enjoys debating and likes her tea black with a little sugar.

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