• The Economics of Minimum Wage

    (This article was first published in the HImalayan Times on the 22nd of July, 2018.)

    Sometimes, the most noble of intentions might yet produce severe unintended and negative consequences. Nepal’s minimum wage law comes ominouslyclose to achieving this feat.

    We, as a country, are setting out on a mission to achieve unprecedented levels of growth and create new economic opportunities. We need all the international and domestic investments we can secure in order to trigger that growth. Our policies, institutions and hard infrastructures will greatly determine how successful we become towards that end. But the minimum wage law seems to be incompatible with investment targets; it also appears to have overlooked domestic labour scene.

    Scaring away investors

    From foreign investment perspective, the new minimum wage (Rs. 13,450) which is a 38% growth from previous minimum wage makes Nepalese labour the most expensive in the region. Merge that with Nepal’s dismal performance in other global competitiveness indices like the Doing Business Index or Corruption Perception Index or Economic Freedom Index (just some among many), any prospective investor could quickly put off thoughts of bringing investments here. It already takes months to acquire a business visa to Nepal. According to the Doing Business Report, it takes 339 hours just to pay federal taxes and three years to enforce contracts.

    No investor will research all small initiatives regarding foreign investment promotion in a new host country before making investment decision. They will look at these indicators and work out what country offers them the highest prospect of return. Towards that end, such dismal performance plus minimum wages that have grown 400% in the last decade while labour productivity has failed to keep pace will not help.

    An ignorance of domestic reality

    Cost of labour is an important factor from a domestic investment perspective as well. Formalisation of labour and organic wage growths are other couple of important aspects of labour.

    If we look back at the last couple of years of Nepal’s economy, construction industry has grown at one of the fastest rates. Demand of construction workers is therefore high. Consequently, the wages of construction workers have skyrocketed. Today, one can hardly find a mason who will work for below Rs. 1500 a day. This is way above the government-set daily minimum wage. This simple example goes to show that if we create opportunities for investments to flourish and industries to grow, the government does not have to intervene and set workers’ wages in order to guarantee a decent income to them.

    But then again, there is a great number of workers in the service and agro industry who have not seen their wages grow at similar rates. This might beg a question as to what we do about them. But even here, we have to be weary of the fact that a great many of these workers (who make the least income) in these sectors are informal workers in the first place. Therefore, a raise in minimum wage does not really enhance their economic positions. In fact, that brings us to another greater risk – the risk of lay-offs.

    Risk of lay-off is real

    Once again, for an investor (domestic or foreign) labour poroductivity matters. If the labour productivity increases in a similar rate as wages, then s/he can churn out greater profits from her/his business and everybody is happy. But when labour productivity does not increase at the same rate (which is what is happening in Nepal), then it is only a matter of time before the investor starts thinking of laying off workers and getting the same job done through fewer workers. Of course, s/he could offer some raise to those workers who are more productive and can take in some extra load. Such a raise will have come at the cost of the worker that is laid off. In the end, the law that was supposed to help the worker got her/him out of the job.

    Minimum wage should not disincentivise

    When we argue that minimum wage should cover at least the basic needs of an individual, we should be careful that a minimum wage does not put an individual in a position that s/he no longer needs to worry about being more productive or enhancing her/his economic position further. At best, it should be a support position while s/he starts out as an economic actor. It should be a position that everyone wants to grow out of. In that sense, it should incentivize an individual to be more productive, and not the stagnate.

    Looking back at our minimum wage policy and the growth of minimum wages over the years, this will be another very important factor to look into two years from now when we sit to revise it again; if we continue to live with this policy until then, that is.

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  • Public Debt Debates Under Federal Nepal

    In May 2018, immediately after taking the oath for the seventh Prime Minister of Malaysia, Dr. Mahathir Mohamad had announced to take measures to control his country’s escalating public debt. Few days later, his government announced to reducing Ministers’ remuneration by ten percent, canceling the Kuala Lumpur – Singapore high-speed train and requesting citizens to voluntarily donate money; all targeted at helping government to deal with country’s public debt. At the same time, the Government of Uganda, which was enlisted as one of the thirty-nine heavily indebted poor countries by the World Bank in 2012, had amended the existing Excise Duty Bill to tax citizens for using major Social Media platforms and collect necessary resources to finance nation’s debt. Continue reading

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  • Fiscal Framework of Nepal: An overview

    This article was originally published in The Himalayan Times on June 24, 2018.

    In order to ensure optimal outcome from the federal structure, it becomes imperative to have a proper fiscal arrangement at place. In a system with multiple tiers of government, power and responsibilities, especially regarding fiscal matters should be allocated among various levels of governments. The success of federalism is heavily dependent upon the way in which the powers and responsibilities are assigned to these governments. Principally, the literature on fiscal federalism emphasize on determination of expenditure responsibilities followed by revenue assignments. Tax assignment should be followed by assignment of the expenditure responsibilities as tax assignment is generally guided by the spending requirements at different orders of government. The basic principle that guides the allocation of expenditure responsibilities is the “efficiency principle”. Each expenditure headings should be analysed and allocated in such a way that efficient provision of public services could be ensured.

    Scholars with primary focus on “efficiency principle”, have designed a revenue- expenditure framework in order to ensure efficient provision of public services. No countries have exactly replicated such design, however, the design has provided a basic outline for assignment of revenue and expenditure among various levels of government in federal countries. Nepal is no exception. Nepal’s fiscal framework does not exactly match the design provided by the scholars, but we can see similarities. Issues of national and international importance such as defence, international trade, foreign affairs, citizenship and migration have been allocated to federal government. Policies affecting the entire nations such as fiscal and monetary policies are also exclusively handled by the central government. States have responsibilities of managing land, irrigation and drinking water supply, transportation, higher education, intra-state commerce, and state-level electricity. Local government is assigned to look after health, sanitation, local market management, local road, rural road, agriculture road, and irrigation.

    The constitution has provided grounds for assignment of revenue rights among three tiers of government. Federal government can levy customs duty, excise- duty, Value Added Tax (VAT), corporate income tax, personal/ individual income tax and remuneration tax. States have exclusive right to levy Agro-income tax, whereas local government can levy wealth tax, house rent tax, land tax and business tax. House and land registration fees, motor-vehicle tax, entertainment tax and advertisement tax are jointly levied by state and local governments. Similarly, on the non-tax revenue headings, passport fee, visa fee, gambling and casino fees are prerogative of federal government. Service charge/fees, tourism fee and fines are jointly collected by federal, state and local governments. The revenue assignment is made in such a way that federal government is able generate higher percentage of the total revenue, which is estimated to be about 70 percent. The rest is generated by states and local government.  As large share of revenue goes to central government’s coffer, vertical fiscal imbalance is inevitable. Additionally, as individual states and municipalities do not have same revenue base, horizontal fiscal imbalance can also be predicted.

    In order to overcome horizontal and vertical fiscal imbalances, like other federal countries, Nepal has also made arrangements for inter-governmental fiscal transfers. Intergovernmental Fiscal Arrangement Act, 2017 has made provision of revenue sharing and fiscal- equalisation grant as two medium of fiscal transfers. It has been provisioned that the revenue generated out of Value added tax (VAT) and Excise is shared in 70- 15-15 percent basis among federal, state and local governments respectively. The distribution of these funds among the state and local governments are made by taking population, total area of the respective jurisdiction, Human Development Index (HDI), and low development indicators as the parameters. The weightage given to these parameters are 70 percent, 15 percent, 5 percent and 10 percent respectively.

    Furthermore, sub-national government are also entitled to fiscal equalisation grant whose main aim is to reduce horizontal fiscal imbalances. The fiscal equalisation grant are distributed by the federal government to the sub-national governments on the basis of gap between need of expenses and capacity to generate revenue, Human Poverty Index, social and economic discrimination indicators, and indicators of infrastructure availability. The weightage assigned to these are 60 percent, 15 percent, 15 percent, and 10 percent respectively.

    In addition to fiscal equalisation grant, there is also provision of conditional grants, complementary grant and special grant. The conditions for distribution of conditional grant is prescribed in the National Natural Resource and Fiscal Commission Act, 2017. The criteria for providing complementary grants and special grants have also been specified in the same act.

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  • Uncategorized

    Know Thy Economist: Frédéric Bastiat

    Image source: https://www.armstrongeconomics.com/markets-by-sector/technology/claude-frederic-bastiat-father-of-libertarianism/

    Frédéric Bastiat was a lucid and classic writer who spent his life writing in favor of freedom. He was a leader of the free-trade movement in France from its inception in 1840 till death. He may not labelled a great “contributor” in the traditional economic sense, but there is perhaps no writer better at expressing the economic truths. This, is what sets him apart from his contemporaries.

    His essay, “What is seen and what is not seen” gives insight into economics in a way that tricks our mind. He reminds us of how things often go wrong if the focus is on the immediate effects and hence unintended consequences are ignored. The essay starts with the story of the broken window; it is thought that the incident creates jobs and prosperity to the glaziers. The glazier is encouraged as his business gets benefited. The apparent prosperity is seen, what is unseen is what would have been produced had the windows not been broken. The owner would had spent that money for some other purpose; to buy a new pair of shoe or add a book to his library. The remaining essay covers the prominent aspects such as tax, government spending, credit, trade, role of intermediaries and profit in an economy.


    As we perceive, government spending stimulates the economy as it carries out the works efficiently and effectively by directing the funds in the right sector of the economy. But Bastiat disagrees since the government action has the ripple effect after its implementation. Had there been doctors and medical equipment made available in the hospitals of remote areas as promised by the government, people wouldn’t have lost their life by the diseases like dysentery, uterus prolapse, cholera, diarrhea and many other preventive diseases. It is also more focused in centrally planned public spending. The apparent impact is seen vividly in certain sectors where the government spends its budget but its absence in the other sectors is unnoticed. At the end, the money is only shuffled among the bureaucrats but not in the market.

    The government collects the tax from the citizens. When the service is provided by the government at the taxpayer costs, the service is plainly seen such as different infrastructures like roads and bridges. Sometimes, these services comes as the task that must be done; no matter if it sustains or not.  If the services provided by the government are useful and proficiently given to the citizens, then it’s great. But as politicians are never honest and frugal, we can only dream of getting the government services at its best. The tax we pay, that could be used for personal benefits, is wasted on pomp and splendour as well as travelling expenses for political leaders. For instance, we can see dilapidated roads, unmanaged public vehicles, disappointing civil services and wretched public health and educational institutions. The fact that the taxpayer receives nothing or very less in return is not fair.

    Remittance has played pivotal role in our economy till date. In fact, Nepal is on the top five list of the highest recipient among the smaller countries. The significant reduction in the poverty and the improved living standard is what is seen as the result of the remittance that inflows in the country. What actually is not seen is we are selling our human resources to other countries. Nepal has not been able to utilize its human resources within the country.

    In this way, Bastiat illustrates the common sense. He considers what is not seen as well as what is seen. Today, Bastiat provides conservatives and libertarians with intellectual ammunition to stand against misguided policies. We would all do well to revisit Bastiat’s work, and introduce him to those who have not yet read them on this day, his 217th birthday.

    Some remarkable quotes by Bastiat
    •“Not to know political economy is to allow oneself to be dazzled by the immediate effect of a phenomenon; to know political economy is to take into account the sum total of all effects, both immediate and future.”

    •“To break, to destroy, and to dissipate is not to encourage national employment,” or more briefly: “Destruction is not profitable.”

    •“You compare the nation to a parched piece of land and tax to a life- giving rain comes from and whether it is not precisely the tax that draws the moisture from the soil and dries it up.”

    •“Public spending is always a substitute for a private spending, and that consequently it may well support one worker in place of another but adds nothing to the lot of the working class taken as a whole.”

    •“No nation was ever ruined by trade.”

    •“There are two consequences in history; one immediate and instantaneously recognized; the other distant and unperceived at first.”

    •“It is with the surplus of the rich that the bread of the poor is made.”



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  • ‘Tis the season to be RED – The government’s contribution to NEPSE’s perennial fall

    For the past year, the bearish sweeping red flooding the secondary market in Nepal has wreaked havoc on millions of investor portfolios. The declining trend has been caused by a number socio-political factors including political instability and liquidity crunch in the banking sector as well as BFIs being forced to give out large numbers of bonus and rights shares as a result of increased paid up capital requirement. In addition to the supply demand mismatch, a recent directive released by the Inland Revenue Department further triggered a drastic reaction from investors plummeting the market by 76.02 points to a closing at 1231.64 points yesterday (10th June 2018) . This nosedive tailed the first of its kind boycott by Nepalese investors protesting an increase in the capital gains tax on bonus and right shares at the companies’ market value. Continue reading

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