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Economics In One Lesson by Henry Hazlitt: Book Review

Henry Hazlitt’s book “Economics in One Lesson” is a rigorous case against the ideals of government interventionism in the market economy. In this book, Hazlitt takes an angle first conceived by Frederic Bastiat, an 18th century French Economist. Bastiat famously quoted, “Government is the great fiction, through which everybody endeavours to live at the expense of everybody else”,  which was to say, the idea that government works for all is as big a lie as sun revolves around the earth. It only sounds nice in fiction and idealism. 

In reality a government while arguing for a case, totally disavows another part of the economy. For example, when a government says it will provide benefits to certain sector like agriculture, because it is “vulnerable” or “important”, what it is actually doing is taxing the productive sector and funnelling the money into a competing sector that might not be as productive. For many years, the Nepalese government has been subsidising the petroleum products through a government monopoly, but has the government ever considered where the subsidy is funded from. It is ultimately funded from the taxpayers’ money, from different sectors of an economy.

The most important argument he makes is on “Broken Window Fallacy”. The idea of “Broken Window” is that when a glass window breaks, the owner has to replace it. This circulates the money to the producer of the glass, the carpenter, the transporter and similarly around a large section of the economy, which stimulates economic activities. Hazlitt argues that this fallacy wrongly assumes that it is the breaking of the glass window that stimulates the economy through increase in circulation of money. Rather, if the glass had never been broken, the money could have been invested in an alternative sector, which would further revitalise the economy. The breaking of the window has merely diverted money into another endeavour which would have been better if avoided. In de-constructing “Broken Window Fallacy”, Hazlitt makes a strong case against Keynesian Economists-economists who follow the economic doctrine professed by John M. Keynes.

In another case, Hazlitt posits that “progressive taxation,” which is identified as all noble, also hurts the economy. When the rich in an economy are taxed higher, the amount they can save and re-invest decreases. Since they have a higher marginal propensity to save and a higher marginal propensity to invest in comparison with poorer individuals, this amount that could have been invested back in an economy is lost. As a result, it hampers the productive capacity of an economy.

The book also furthers its case against minimum wage law which is a popular political agenda, even in Nepal. He argues that “minimum wage” in idealism tries to uplift the living standard of poorer classes in society. However, in reality it actually hurts the poorer classes, because minimum wage increases the cost of production for a producer. The producer then has to lay off the workers to decrease its cost. As such what was seen as a way of helping the poor ultimately hurts them.

Hazlitt furthers criticises many policies that seem noble in political eyes but do not make economic sense. When the policies are not economically viable, no matter how much benevolent they seem, they will decrease the economic dividends a nation derives from a free functioning market. He makes an strong case against protectionism, taxation, subsidising certain industries at the expense of another, etc.

This book is an influential criticism against some of the intriguing fallacies in Political Economy. However, the book lacks somewhere in providing policy measures for certain economic challenges like depression, controlling inflation, or social challenges like distributive justice. This doesn’t necessarily undermine the value of “Economics in One Lesson.” This book does more than merely point to solutions of the economic challenges; it helps us understand the multidimensional phenomenon that “market” is. This book explains, eloquently, how any form of government intervention has counter-productive effects in a market economy, no matter the intentions. Often times, the unintended consequences outweigh the intended benefits.

For a country, where economic development has been sluggish at best, and socialist policies are taken as virtues to development rather than stumbling blocks towards free functioning of an efficient market, this book is a great read.

Sovit Subedi

About Sovit Subedi

Sovit Subedi is a research intern at Samriddhi. He graduated from University of Pune with a Bachelors Degree in Economics. His interests are in entrepreneurship, strategy and development.

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Private hydropower developers’ take on Benefit Sharing

On March 24, 2016 Samriddhi Foundation hosted an ‘Econ-ity’ discussion on the cost imposed on private developers of hydropower project due to lack of a clear benefit-sharing policy framework, at Hotel Himalaya. The parliamentarians, policy makers, bureaucrats, academicians, economists and journalists present at the event discussed over the following issues related to benefit-sharing:

 

Who is the affected and the beneficiary?
When to share the benefits?
How to share the benefits?

 

Due to lack of clear policy framework regarding Benefit Sharing, the burden of all of these issues falls on the private developers of hydropower project. These issues ideally should fall on the government’s shoulder, and clear and enforced policies should have taken care of it.

 
When it comes to issue of- how to share benefit, the existing mechanism of energy royalty being redistributed to the area where project is located, should have taken care of the problem but it is not working effectively. The mechanism has provision of distributing 38% of total royalty to the development region where the project is located and 12% of total royalty to the district but due to the weak governance the royalty amount gets lost in the system. That is why, locals demand all the services like roads, health clinics, schools from the private developers- these basic services could have been provided in the area with the re-distributed royalty.

 

One of the panelist in the Econ-ity discussion was Kumar Pandey, General Secretary of Independent Power Producers’ Association of Nepal (IPPAN). His take on the issue, especially focused on when to share benefit, was– We are private developers and thus we are guided by the profit. Benefit sharing is big and burning issue, and we agree, it should fall into our business plan. But the big question is-

Popular practice today, due to the lack of clear regulatory framework and strong governance, is we have to share the benefit with locals before any benefit from the project is realized as without sharing the benefit with locals, it is difficult to develop any project.

 

Against this background, his argument was that if there were some clear guideline on pre-benefit Benefit Sharing, it would greatly facilitate private developers. Once the construction is completed and the project goes into operation, energy royalty should then take care of the after-benefit Benefit Sharing.
Going by Pandey’s deliberation, it appears that the private developers are still willing to spend benefit-sharing with the locals but they want stable business environment . Our study also shows that private developers are willing to spend 0.5% to 2% (depending on the size of the project) of total cost of project on benefit sharing.

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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Regulatory challenges in hydropower development in Nepal

 

Image Source: www.proofpoint.com

Out of 40,000 MW of economically feasible hydropower potential in Nepal only about 791 MW is currently developed. The reason for underutilization of hydropower potential is that there are various challenges to developing hydropower projects in Nepal, namely- technical, financial and regulatory. Foreign Direct Investment (FDI) in hydropower sector in Nepal can be a solution to the technical and financial challenges as developed countries interested in investing in Nepal have necessary finances and have technical knowhow, but they still face regulatory challenges imposed by the government of Nepal. Regulatory challenges arise due to lack of co-ordination among ministries (industry, energy, forest, water, etc.) and political parties. A hydropower project has to deal with 7 ministries, 23 government departments and comply with the terms and conditions of thirty-six Acts. In case of FDI there is additional bureaucratic hurdles on issues related to visa, ownership of capital and exchange rates.

 
In Samriddhi’s new study “Benefit Sharing in Hydropower Projects in Nepal,” which looks into the cost imposed on private hydropower developers due to lack of clear benefit sharing regulations, we  asked private developers to list the major actors and causes that obstruct development of hydropower project in Nepal.  They responded local politics and political leaders along with co-ordination among the parties involved, lack of transmission lines and Power Purchase Agreement (PPA) as major agents and causes.  These agents and causes not only obstruct the construction and operation of projects but also hinder the projects at planning phase from coming into the fruition.

 
Tamakosi III (650 MW) project would have been the biggest FDI in Nepal with estimated cost of $1.5 Billion, but Norwegian company Statkraft decided to back out from the project. The company had been working on the project since 2007. The company cited increased bureaucratic hurdles, fragile political situation, insufficient transmission capacity and absence of necessary policies and regulatory frameworks for operationalizing power sales as causes for backing out of the project. Few years ago, the Australian Snowy Mountain Engineering Corporation (SMEC) also pulled out of the export-oriented West Seti (750 MW) hydropower project in western Nepal after battling bureaucracies for two decades.

 
While Nepal is facing power shortages and lacks sufficient funds and technical skills to build mega hydropower projects, FDI in hydropower sector will be reasonable alternative to solve the current problem. In order to attract FDI for such projects, there must be an environment of ease of doing business so that the investors can feel confident to invest in Nepal. This objective can be achieved with well thought out regulatory framework and well-coordinated bureaucracy. Careful amendments to the Industrial Enterprise Act 1992, the Foreign Investment and Technology Transfer Act 1992 and the Electricity Act 1992 can create favorable environment of  doing business and can attract FDI for mega hydropower projects in Nepal.

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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What do the taxes on vehicles say?

A quick look into custom duties of vehicles is enough to tell us how discouraging it is for any individual to purchase a car. For the vehicles that run on fossil fuel, the customs duties on 9 categories stand at 30% while that on the ‘Jeep, car and van’ category is almost three times that of other categories. Similar is the case with the electric vehicles. The customs on Jeep, car and van is 40% which is much higher than the 15% customs in other categories. The general belief that cars are luxury goods and should be taxed high seems the logic behind this. But, are cars luxury or high taxes have made them a luxury?  Higher taxes resulting into higher prices have made the cars less affordable to the middle and lower income class and thus only providing privilege to the rich. And, even if we regard them as luxury, are the rich only the ones who get to enjoy this luxury?

In the midst of current fuel crisis, promoting the use of the electric vehicle has become talk of the town. The customs on electric vehicles are definitely lower when compared to the vehicles that run on fuel, however, this rate seems still high for encouraging its use. If the uses of electric vehicles are really to be encouraged and promoted, the custom duty along with other taxes must be further reduced.

Ashesh Shrestha

About Ashesh Shrestha

Ashesh Shrestha is an independent researcher. He has an Economics background and is interested in Monetary economics and Public finance.

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Many Heads Creating Hurdle in Hydropower

loadsheddingNepal achieved multiparty democracy in 1990 and a series of liberal and private sector friendly policies were formulated then after. Hydropower Development Policy, 1992 and Electricity Act, 1992 also came into effect which paved the way for foreign and domestic private sector participation in generation side. Electricity Act, 1992 made a provision whereby even the private sector could acquire licenses for undertaking survey and generation purposes.

In the beginning, survey license was very cheap to acquire; for eg., NRs. 100, 150 and 200 for 1-5 MW, 5-10 MW and 10-15 MW respectively. The bureaucrats were quick to act at this. Majority of licenses were acquired by the employees working at the Ministry of Water Resource (MoWR), Water and Energy Commission Secretariat (WECS), Department of Electricity Development (DoED) and Nepal Electricity Authority (NEA), or by their relatives. What’s more, the licenses were distributed on first-come-first-serve basis without conducting sound financial and technical analysis. The license holders did not even have to construct the project, but could sell it to developers at higher prices. Thus, began the license-holding culture. These people who held licenses cited cases of landslides, local issues and others to renew their licenses time and again, without really conducting any survey. Due to this, real investors did not get a chance to construct hydropower projects. Interested parties had to buy it from these license-holders, which increased the time and cost of projects. In order to discourage pseudo license-holding, the license acquisition fee has been reviewed three times till date.

Commission for the Investigation of Abuse of Authority (CIAA) recently directed Ministry of Energy (MoE) to revoke the licenses of 10 different hydropower projects as the promoters of these projects could not complete necessary procedures such as signing Power Purchasing Agreement (PPA), making financial closure, etc. Once the license is repealed, the entire process of development of these projects starts from the beginning i.e., acquiring survey license, conducting feasibility study, finalizing Environment Impact Assessment (EIA) and so on, which costs additional time and money. Therefore, it may not be a good step to scrap licenses of projects that have already initiated pre-construction works as this will further delay the development of hydropower projects. In case of Upper Khorang Khola Hydropower Power Project, the developers could not conduct PPA in time due to delay in decision-making process of NEA. The delay in signing PPA has further delayed managing investment from financial institutions for the project. Although the license period of Kabeli “A” has matured, it has already given Letter of Intention (LoI) to contractors, issued right shares and acquired land to construct the project. A lot of initial investments made in these projects will go in vain if the licenses are nullified and the construction of projects will be further delayed. The solution to these problem lies in initiating competitive bidding process instead of issuing survey and generation licenses for construction of hydropower projects because the nation gets more benefits as it receives free energy and equity ownership along with royalty through international bidding. For example, GMR, the company that won the bid on Upper Karnali Hydroelectric project, has promised to give 12 percent free energy and 27 percent free equity. Likewise, Satluj Jal Vidyut Nigam got permission to construct Arun III after providing 21.9 percent free energy. Additionally, the public limited company of India agreed on providing 20 units of free electricity to each house of Sankhuwasabha district, where the project is located. Furthermore, the promoter of the project has agreed on issuing shares to local people. The system of providing share to the local people helps to reduce level of inequality in society to some extent as they also get return from their investments. They can further utilize that sum of money for starting other income generating works, educating children, receiving vocational training and much more.

Developing hydropower by awarding a project through international competitive bidding is the most scientific way to solve the issues related to license regime in Nepal as it creates win-win situation for all stakeholders.

Dinesh Karki

About Dinesh Karki

Dinesh Karki is an independent researcher. He has Economics degree from Xi'an Jiaotong-Liverpool University, Suzhou, China.

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#Notmyconstitution

The constitution came…. after 8 years…apparently we had the time, and the money, and we could totally afford it…so no worries. We even survived the earthquake to live under this constitution.

But we survived to live under THIS constitution? These are six things about the constitution that really perturbs me.

1) The definition of us : “Nepal is an independent…state, oriented towards democratic socialism…”

Did we really agree to have the government take one of our two cows (that we bought from our sisters’ and brothers’ remittance) and give it to our neighbor when we voted for them to write the constitution?

Did we really agree to be forced to join a cooperative where you have to teach your neighbor how to take care of his cow (which was actually yours?)

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2) Welfare dependence: Sit back, relax, enjoy the constitution, and the country.

We have right to clean environment, employment (and thus unemployment benefit), food, healthcare, and other social securities. Everything we need is a right! You’re gonna get these things no matter what. So, Sit back, relax and enjoy the country. The omnipotent state is going to do everything for us. It does not matter if these are realistically deliverable. Where else, if not the constitution, will you dream high and set tall ideals? Afterall, उद्देश्य के लिनु उडी छुनु चन्द्र एक ….

cat relax

If you are smart, the next thing you do after reading the constitution is get hold of a good lawyer to make some good money cause there are likely to be enough opportunities to sue the government in near future. If you are lucky, you will actually get a date at the court in a couple of years and if you are super lucky and win, the government will actually pay you after losing!

3) The haziness associated with property rights: Keep your property, only as long as the state does not want it!

It does say “Every citizen shall, subject to laws, have the right to acquire, own, have professional gains, sell and otherwise utilize, or dispose of property.”

But wait….after a few lines its says : Provided that it shall not be deemed to obstruct land reform, management and regulation by the State for increasing produce and productivity of land, modernization and professionalization of agriculture, environmental protection, and for an organized settlement and urban development as provided for by sub-clause 93) and (4).

I don’t know any property owner whose property might not be interpreted to violate this law.

brookins

4) Creating this ‘us against them’ for perpetuity : All Nepalese are equal but some are more equal than the others.

Some of us are really special to secure a special clause in the fundamental rights section. Like the Labour Unions, but not the employers huh (c’mon why put this profit hungry evil employment providers whom we don’t even need cause we now have unemployment benefits lined up). If you belong to certain caste group, great for you, you are right there on the fundamental rights section. Rest of you – better luck next constitution. Hopefully you will have become a minority by then. Divide people across those lines. Perpetuate minorities, that’s how you get elected every time.giphy

 

5) Defeating the purpose overall: Autonomy! What does that mean?

Local states are all made of Jon Snows. They know nothing! That’s what the drafters thought. Otherwise there would be something local states could do, other than waiting for the center to send them leaders, money, food, administrators, everything basically.

Jon snow

6) And the vagueness: Prepare to fight!

The duties of a citizen as mentioned in the constitution includes “Compulsorily enlist when the nation needs the service”! Somebody please tell me what would ‘when the nation needs the service’ could possibly mean. Big flood? Big earthquake? Diarrhoea epidemics, etc.?

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Welcome to the New Nepal!

Let me know if there are things in the constitution that you disagree with. Use the hashtag #notmyconstitution and share!

 

 

Note: Views are personal!

 

 

Sarita Sapkota

About Sarita Sapkota

Ms. Sapkota is the Coordinator of Communication and Development at Samriddhi Foundation and was previously engaged with the Foundation as a Research Associate for more than three years. She is a graduate of political science and also contributes articles for Samriddhi's column at The Himalayan Times' Perspectives supplement.

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