Economic prosperity through free market

This article was originally published by Prience Shrestha on The Himalayan Times in December 11, 2016.

Price system in a free market enables producers to gauge supply and demands of specific products or services in the market and consequently produce those demanded items. In the process, the price system helps the market guarantee an optimal utilization of resources. Following this notion, the idea of encouraging free market while limiting the role of the government in commerce and infrastructural services has remained valid, and has also delivered prosperity in different societies.

The drive towards liberalizing the economy in the 1990s where the private sector took charge of the economy while the government played the role of a facilitator and a monitor sparked impressive economic growth in Nepal in its consecutive years.

However, it should not be taken to mean that Government is a hindrance to prosperity, and therefore deserves to be completely extricated. Instead, Government has a strategic role of framing and enforcing laws and regulations that allow effective functioning of the market in the society. After all, free market relies on rules of just conduct that assures security of certain rights (private property, engaging in free enterprises) and enforcement of contracts for it to prevail and yield prosperity.

‘Strong and limited’ versus ‘weak and unlimited’

Economic prosperity through free market occurs in presence of a strong government that keeps itself to playing the role of a facilitator and only administers justice and provides protection to people lives and properties while allowing the private sector to thrive. On the contrary, unlimited government that participates in all such activities that the private sector could do more efficiently, but is weak in performing its role of enforcing foundational rules of the market is disastrous to economic prosperity.

Renowned economist Tom G. Palmer makes similar assertion as he attempts to range government effectiveness from the lowest scale of “weak and unlimited” to the highest scale of “strong and limited” in his essay called ‘20 Myths of Market’. Interestingly, this continuum offers an opportunity to scale the effectiveness of our own Nepal Government on the very measure of “strength” in enforcing market propelling rules and “limitedness” in keeping itself away from practicing commerce and providing public services and infrastructures – things that can be better taken care of through private sector under clearly laid down regulatory framework.

Weak government

In judging the strength of our Nepal government on this regard, its success in being able to enforce the legislated rules and regulation impartially among all participants of the market is definitely one of the important deciding variables. Given how it has remained exclusively lenient in imposing commercial regulations among large business houses, it only reckons double-standard and weakness from the side of the government in effectively enforcing rules and regulations. The latest running probe against Patanjali Ayurved Group of India regarding its unauthorized investment of more than NRs 150 crore in Nepal without retrieving permission as per our Foreign Investment and Technology Transfer Act (FITTA) is definitely a relevant illustration for it. Though this case scenario has especially charged the Indian Herbal FMCG company as guilty for skipping Foreign Investment regulations, the influence of the company and its founders’ strong stature on our government’s enforceability cannot be undermined either.

Besides, similar concern of lack of government enforceability has also been observed in regards to outbound foreign Investment from Nepal. Speaking of it, people that can exercise influence on the government havemanaged to make foreign investment outside of Nepal despite such practice being barred by the law. In no way could a layman have succeeded in practicing Foreign Investment as such.

The idea here is not to favour the capital control intention of our Investment regulation. It is in fact to highlight the partiality in enforcing the laws and regulation on different individuals and institutions based on stature and political connections. Ultimately, this lack of objectivity only pictures the inability of our government to enforce the legislated regulation.

Except for the inability of the government to enforce laws and regulation objectively, dearth in institutional capacity of the government is also known to have hindered strong enforcement of law and justice. While this issue has infected all areas beyond commercial affairs, unfocused diversion of limited institutional capacity of the Government can be mostly found culprit for it.

The unlimited government

In turning towards evaluating the limitedness of our Nepal government, the boundless extension of ever-ballooning budget of the Nepal government is self-explanatory. After all, it is quite clear that the Government has chosen to remain limitless regarding its scope of influence in the economy. Economic Survey Report FY2015/16 published by the Ministry of Finance (MoF), shows clearly that the growth rate of fiscal budget, and the ratio of Government Budget to National GDP are observing rise in approximate average of 19.77% and 28.26% respectively; in other words, Government of Nepal has adopted the principle of unlimited government in terms of its role in the economy.

If we now revisit the aforementioned scales in terms of measuring the government effectiveness, Government of Nepal unfortunately appears to lie close to the ‘weak and unlimited’ category (as against the more favoured ‘strong and limited’). Therefore, it is advisable for the Nepal government to gradually strengthen its role in areas of law enforcement and justice by curtailing its presence in commercial activities. Gradual divestment of State-owned enterprises mostly involved in commerce is one of the many widely favoured measures prescribed on this regard.Such measure allows the Government to concentrate its unnecessarily dispersed institutional resources in fundamental areas (i.e., administration of justice, contract enforcement, protection of lives and properties, and market monitoring) that support Free market and liberalization.

Prience Shrestha

Prience works in the research department at Samriddhi Foundation. And, he attempts to specialize in the field of Development Economics

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