Econ-ity » Blog Archives

Tag Archives: black market

Clocking Alcohol Availability?

Nepal, like many other nations, has recently planned to adapt regulations which intend to reduce the alcohol consumption of the whole country through supply side interventions. As per the proposed directive, the hotels, bar and restaurants are likely to be restricted from selling alcoholic beverages prior to 5:00 P.M and after 10:00 P.M, while the liquor stores are allowed to perform transactions related to bottled alcohol between 4:00 P.M to 9:00 P.M. Continue reading

Ayushma Maharjan

About Ayushma Maharjan

Ayushma is working as an assistant researcher at Samriddhi Foundation.

Published by:

Market at work amidst Nepalese political-economic crisis

A little over two months into the blockade of supply of basic necessity goods and services including the petroleum products from India to Nepal, Nepal is facing a severe economic as well as humanitarian crisis like one it has never seen before. Hospitals are running out of medical supplies, households are running out of cooking gas, industries are running out of fuel (which has led to the shutting down of hundreds of thousands of enterprises – big and small), majority of the people have been forced to resort to either walking or commuting on crammed buses that are carrying two to three times their capacity of passengers. During the second week of November, Nepal Oil Corporation (NOC) which is the government-owned enterprise with the monopoly of acquiring petroleum products for supplying to the entire country even asked the private consumers to not queue up in the fuel pumps for its stock had come down to a level where it could only supply to operators of emergency services, and even that was only for a few days.

Not a single citizen has been spared from facing the brunt of this crisis. Presumably, everything would have come to a standstill. But amazingly, people are still managing to continue to do what they do. Of late, the traffic is even getting heavier than what it used to be about a month ago. So what is this source from which people are getting fuel for their motor-cycles, cars, public buses and taxis despite the failure of the government monopoly that was responsible to do it?

The answer once again, when the government fails to deliver, is the market. Yes, it is the market. Or as the government likes to call it, “the black market!” Entrepreneurial private individuals around the Nepal-India border (from both sides) are coming together to “smuggle” the basic necessities into Nepal and then send them across Nepal; against all restrictions imposed by the state and risking being caught and charged for committing a crime. And why crime? Because the government has prohibited anyone other than its very own failure of an enterprise from importing petroleum products in Nepal. However, it is this black market that has helped us in our endeavor to live a normal life and do what we do. Yes, we can only do some 25-30% of what we would otherwise do, but still much better than the nil that we would be doing in their absence.

This might raise another question in our minds. How can the market arrange all these things so smoothly while the almighty government is having a hard time doing it? Fortunately, market makes necessary adjustments whatever the situation of the economy be, the very capacity the state lacks. After the supply shock of the petroleum, the higher demand couldn’t be catered to. But the people still needed fuel which resulted in people willing to pay higher prices. The willingness of the people to pay higher prices was communicated to other players in the market (people who did not have to be previously associated with the petroleum industry at all) to divert their resources to ensuring supply of petroleum. The higher returns incentivized them to devote their time, money, energy and most importantly to bear the risk of playing in the “illegal” market of petroleum and supplying them.

The people who valued the petroleum product more and were willing to pay more came in contact with the suppliers and thus made a deal in which both of them mutually agreed and benefitted in their own personal ways. The suppliers who were willing to risk it all got higher profits, and the consumers who needed fuel to carry on with their regular businesses got to use the fuel to do what they do and earn a livelihood by selling other goods or service that they produce. And this is exactly how the market works. Each individual consumer and producer based on his/her knowledge that he/she has acquired from the market, acts and reacts to the market situation in order to achieve personal expectations and benefits.

So what lesson do we draw from this real-life example? What we need to do at the moment is acknowledge and institutionalize this automation in the economy. If the private sector is allowed to enter into this business of petroleum trading freely and fairly easily, the possibility of another economic crisis will be substantially reduced. The government has to loosen all restrictions barring private sector from coming into the petroleum trading business. For instance, the minimum paid-up capital regulation should be dropped. Meanwhile, it should be ensured that exclusivity should not be offered to any private company in order to prevent private monopoly which is much worse than the government monopoly. Furthermore, the international companies interested to enter into the petroleum supply business should also be encouraged by eliminating various discouraging restrictions to them. For instance, tariffs on the import of petroleum product could be reduced to minimum. In this way, competition between various national and international companies should be encouraged. Hence, each and every player in the market will compete against each other trying to gain a large share of the market and therefore will try to supply qualitative product at cheaper price. In the long run, the players who cannot survive the fierce competition and are performing quite bad will exit the market.  So, NOC wither will have to be really competitive and function efficiently or, it will have to be shut down.

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.

Published by:

In Defense of Profits

bishalbazaarIn late September, a few shops in Bishal Bazaar came under Department of Commerce’s scanner. Shops were found selling goods at prices much higher than their cost prices. It is unfortunate that the businessmen obstructed the monitoring and went in as far as shutting down the entire complex in order to protest the department’s move. This also earned them a lot of infamy in the public domain. However, much of this hue and cry over how businessmen were sucking life out of poor Nepalese people, ‘anarchy of businessmen’ and the likes that followed the incident were mostly unnecessary.

As a country that practices liberal economy, what is even more unfortunate is that the government has been excessively reluctant in letting go of the ages-old practice of the controlled-economy. It has adamantly held on to its four decade old regulation that bars businesses from making any profit exceeding 20%. This is outright mockery of the ‘economic liberalisation of 1990s.’ Why else is it that there is no black-marketeering when government imposes a 300% plus tariff in private cars and suddenly there is black marketeering when a private businesses make a profit of 21%? In no way is it a liberal economy when the government tells you how much profit you can make out of a transaction.

But of course, the government imposes such heavy taxes in order to give back to the people, right? Not quite. 65% of the Fiscal budget goes to financing administrative expenditure. Government’s annual revenue is lesser than its administrative expenditure. So, NO, not taxes and other sources of government revenue do not finance development in the same sense that we assume that revenues collected by government will come back to the people. On the other hand, the profits made in free markets do.

No businessman hoards all of his profits in a locker. He consumes other services, invests somewhere or saves his profits through banks and other financial institutions. When he consumes a good X, the producer is making money and the suppliers of the raw materials are getting jobs. This even creates new job opportunities as demands increase. Investments create economic benefits to the society. Even his savings propel economic growth as that is a capital that some other individual can acquire from banks and financial institutions to kick-start his new venture. So other than the amount that a businessman saves in his locker for some unforeseen circumstances in the future, all other profit he makes is channeled back to the economy and that multiplies the wealth of the society. This is the unseen side of the marvelous thing called ‘price’ and the profit it helps generate.

And the misguided notion of consumers being fleeced by businesses in the aftermath of free-markets is the least of my worries. In a free market where the government does not interfere with prices and the profit margins that service providers set for themselves, the transacting parties work-out a fair deal for both of them voluntarily. One can always bargain with the service provider to get a service at an affordable price. But in no way is an individual entitled to an affordable service. If I cannot afford a suit at Bishal Bazaar, that is not the place for me. I better explore alternatives such that my wants fit my budget. If I still think that I cannot have a regular tailor do my suit and I go out of my budget to fulfill my want, then that is a trade-off I have made between the satisfaction of a Bishal Bazaar-tailored suit and the added work-load that I have to take on, to cover for the expenses. There is really no connection with the cost price of tailoring a suit. It is all about the value I see in a commodity.

Liberal economy and profit control are incompatible with one another. Profit is an amount that a consumer is willing to pay to a service provider over the cost price of the same commodity/service to transfer the ownership to himself. A price is a value that a consumer puts over a commodity. Nobody can be forced to buy something that gives him no value in return. Similarly, nobody ought to be forced to limit his profit to an arbitrary figure if the other party in the transaction is willing to pay for it.

There are other things like cartel, adulteration and anti-competitive practices that the Department of Commerce should be looking to curb, if it wishes to protect the consumers’ welfare. But in no way should profits ever be on their list.

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.

Published by: