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Top 3 reasons why Economic Freedom matters for Nepal

(This article was originally published in the national daily The Himalayan Times, Perspectives on Nov. 23, 2014)

Like every year, the annual Economic Freedom of the World report 2014 was released last week. Samriddhi, The Prosperity Foundation is a co-publisher of the report which is produced by The Fraser Institute, Canada’s top ranked think tank. This year too, Nepal’s glory as one of the least economically free nation continues. Of the 43 variables used in the report, major weaknesses for Nepal remain in Legal System and Property Rights, Labor Market Regulations and Regulatory regime for trade and business. Read the full press release from Samriddhi Foundation on Nepal’s performance here.

For now, here are top 3 reasons on why Economic Freedom matters to a country like ours:

1. We need economic growth to deal with poverty. Aid will never get us out

We probably already know that aid is not going to lift Nepal out of poverty. Living in Nepal, we have seen this. What we probably know a little less is about is what has lifted people out of poverty. Here is a case in point:

Back in August 2011, the Nepal Living Standards Survey-III revealed that Nepal was able to achieve an astonishing 18 percent point decline in absolute poverty in the six years between 2003/04 and 2009/10. Would you attribute this achievement to the government’s periodic plans to reduce poverty, or to the efforts of more than 20,000 NGOs and INGOs spread across Nepal?

As studies are yet to answer to these very important questions, another set of statistics from the same report suggest an important perspective. The report revealed that 55.8 percent of households received remittances in Nepal, which is a sharp rise from the 31.9 percent reported in NLLS 2003/04. So when 55.8 percent of Nepalese households started receiving regular money from their families working in construction sites and mines in Qatar, Saudi Arabia and other countries, they were able to buy food, get basic health care and even send their children to good schools. THIS IS ECONOMIC FREEDOM. People are not only free to buy and sell things (including their own labor) but also to travel, do what they deem as the most effective thing to help themselves earn a living under a certain minimum legal boundary.

(Read my full essay on Economic Sustainable Development published by the Center for International Private Enterprises, which was the first place winner in CIPE’s 2011 Youth Essay Contest.)

dow e have economic freedom info graph

2. Political redistribution of wealth is not the way to deal with the Nepal’s prevailing income inequality.

Through Economic Freedom redistribution of wealth can take place more efficiently and morally than through political redistribution. Efficiently because Economic Freedom means allowing market forces to work which redistributes wealth on a massive scale. Morally because when market forces are allowed to take its course, voluntary exchange takes place and people are free to choose on what they buy, sell and the terms of exchange as opposed to political redistribution of wealth which is done through use of force (taxes, laws, etc.).

Here’s quoting Mr. Tom Palmer who puts it even more succinctly:

“If we want to understand the relationships between policies and outcomes, it should be kept in mind that property is a legal concept; wealth is an economic concept. The two are often confused, but they should be kept distinct. Market processes regularly redistribute wealth on a massive scale. In contrast, unwilling redistribution of property (when undertaken by individual citizens, it’s known as “theft”) is prohibited under the rules that govern free markets, which require that property be well defined and legally secure. Markets can redistribute wealth, even when property titles remain in the same hands. Every time the value of an asset (in which an owner has a property right) changes, the wealth of the asset owner changes. An asset that was worth 600 Euros yesterday may today be worth only 400 Euros. That’s a redistribution of 200 Euros of wealth through the market, although there has been no redistribution of property. So markets regularly redistribute wealth and in the process give owners of assets incentives to maximize their value or to shift their assets to those who will. That regular redistribution, based on incentives to maximize total value, represents transfers of wealth on a scale unthinkable for most politicians. In contrast, while market processes redistribute wealth, political processes redistribute property, by taking it from some and giving it to others; in the process, by making property less secure, such redistribution tends to make property in general less valuable, that is, to destroy wealth. The more unpredictable the redistribution, the greater the loss of wealth caused by the threat of redistribution of property.”

Read Tom Palmer’s full essay or watch a video of him debunking twenty myths about market.

3. Real ‘inclusion’ would mean having more Economic Freedom.

Inclusion is a big agenda in Nepal. A lot of non-profits from the country and abroad are working to improve the lives of the marginalized. However, the way inclusion is practiced right now is by handing out special privileges to groups based on population, area of residence, ethnicity, gender and other similar categories. If special rights are handed out to people based on above categories, it naturally means that the rest of the population is being excluded. So it is just perpetuating the cycle and not really creating an environment where everybody is treated equal. Real inclusion would mean everybody is treated equal. THIS IS ECONOMIC FREEDOM because “the key ingredients of a legal system consistent with economic freedom are rule of law, security of property rights, and independent and unbiased judiciary, and impartial and effective enforcement of the law.”

Finally, here is a checklist of the major things Economic Freedom stands for:

economic freedom checklist

Watch this video to learn more about why economic freedom is so great. If you are more of an academic type, you might like this report from NICLAS BERGGREN which uses data and empirical evidence to demonstrate the arguments used in this article.

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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Micro and Small enterprises in Nepal could do lot better in a more economically free environment

Press Release

Kathmandu, Oct 20, 2014: Micro and Small enterprises in Nepal could do lot better in a more economically free environment, shows the findings of a study conducted by Samriddhi Foundation on Kirana Pasals (small retail stores selling groceries and fast moving consumer goods whose services are used by a vast majority of Nepali people) in Kathmandu Valley. Samriddhi Foundation shared a first of its kind report on how Economic Freedom translates into the day to day lives of micro and small entrepreneurs in Nepal, taking the example of Kirana Pasals. The study (which was conducted from April – September 2013) focused on identifying some key hurdles in the growth of these independent businesses run by entrepreneurial and hardworking people.

Part of the research, two hundred and sixty eight Kirana Pasal  owners were interviewed to capture valuable information, insight and stories on the impediments they face to grow their enterprises. The report reveals that regulatory environment pertaining to registration, taxation and standardisation are immediate areas of concern. The report also highlights the fact that laws and regulations that are applicable to KiranaPasal s are scattered across several acts, regulations and rules; and are enforced through several government agencies, which makes it difficult for these entities to be operating in a fully legal manner.

The report shows that taxes are also something which further suppresses the growth of Kirana Pasals, especially those that are registered. Thus the report highlights the need to reform the tax code by reducing tax rates and simplifying it to widen the tax bracket. This would help Kirana Pasals operate legally and consequently access finances and other resources to grow.

The report also recommends rethinking the current standards applicable to Kirana Pasals and fixing practical and acceptable standards in consultation with the Kirana Store owners and consumer groups. Access to finance was another issue of concern for Kirana Pasals wanting to grow. According to the report, capital available from micro finance institutions (which most Kirana Pasals use) are limited and often more expensive than loans from commercial banks and other financial institutions. Since most owners/manager of Kirana Pasals have limited capital and little formal education in business, documents like business plans, balance sheets, rental contract, letter of approval from municipality, tax documents, asset valuation, etc.  are hard to produce.

Finally, barriers to exit were also considered as barriers to growth as when entrepreneurs fail, they have to have an opportunity to wipe the slate clean and start again. This is almost not an option for retailers such as Kirana Pasal  owners in Nepal as exiting formally is extremely difficult. The report makes recommendations to address the aforementioned impediments to the growth of Kirana Pasals and the recommendations together help increase Economic Freedom in Nepal.

Download the full report here
Download the summary of the report here
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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Economic Freedom of the World 2013 launched in Nepal

In the first episode of Econ-ity, Economic Freedom of the World Report 2013 was released in Nepal and discussed upon on September 18, 2013.  The annual peer-reviewed Economic Freedom of the World report is produced by the Fraser Institute, Canada’s leading public policy think-tank, in cooperation with independent institutes in 80 nations and territories, including Samriddhi, The Prosperity Foundation from Nepal. The report is prepared by economists James Gwartney, Robert Lawson, & Joshua Hall for the institute and measures the degree of economic freedom citizens of different countries around the world enjoy. The report measures 42 different components of economic freedom to determine the overall economic freedom scenario of an economy. Economic freedom is measured in five different areas: (1) size of government, (2) legal structure and security of property rights, (3) access to sound money, (4) freedom to trade internationally, and (5) regulation of credit, labor, and business.

economic-freedom-report-release-2013

According to the report, this year Nepal ranks 125th out of 152 nations in economic freedom with a score of 6.19 out of ten. Nepal had ranked 110th out of 144 countries last year with a score of 6.33 out of 10. Following the performance of Nepal in different components of the economic freedom:

Size of government:
Worsened from 8.34 to 7.6 (31st in the world)

Legal structures and security of property rights:
Improved from 3.85 to 4.2 (126th in the world)

Access to sound money:
Slightly improved from 6.26 to 6.3 (136th in the world)

Freedom to trade internationally:
Worsened from 6.74 to 6.4 (118th in the world)

Regulation of credit, labor and business:
Slightly improved from 6.47 to 6.5 (109th in the world)

Dr. Bholanath Chalise, Dr. Chiranjibi Nepal, Mr. Baburam Nepal, Dr. Bishambhar Pyakurel and Dr. Hemant Dabadi spoke about Nepal’s performance in the five components of the index.

Speaking about size of government, Dr. Bholanath Chalise focused on the need to have a limited but effective and efficient role of the government unlike the case of Nepal where government is found of have unlimited size and negligible effectiveness. He further added that the government’s role should be limited to curtailing monopoly, safeguarding rights and providing security, and implementation and enforceability of contracts.  He drew comparisons from around the world to show how the limited size of government had helped countries like Hong Kong, Singapore achieve a greater level of economic freedom. He criticized the context of Nepal where much was left to the domains of government and how the dependency had brought about more evils than good in terms of economic freedom.

Dr. Nepal provided his insights on “legal structure and security of property rights”. He shed light that Nepal ranked 125th in this regard in the report, which was not at all a sign of free economy. He shared how he found property rights to be the dividing element between whether people prosper or fall under poverty. He constantly focused on the need to respect individual property rights and how the legal system in any country should be responsible in catering to that right of its citizens. He criticized the way property rights in Nepal were being encroached upon in reference to the road expansion programme in the Kathmandu valley. If hinted that if the country’s legal system continues to overlook the importance of individual property rights the consequences will be dire.

Mr. Babu Ram Nepal said that “freedom to trade internationally” is the primary factor of economic freedom. He shared that trade was the way to bring about positive economic changes and that poor became poor not because of the market but because of lack of access to market. He shared example on how other nations that are open to international trade have prospered and the policy makers in Nepal need to learn from these stories. Protectionism provided to local industries will, in the longer run, hamper the domestic economic.

Dr. Pyakuryal explained the concept of sound money and why the status of “access to sound money” is a vital element in determining the level of economic freedom in any economy. He stated that the rules and directives imposed by the government of Nepal do not favor the access to sound money. The current regulations encourage the private sector to evade the taxes. He added that unless a thorough reform in the financial policies is made, Nepal cannot progress in the ranking nor can prosper.

Dr. Dabadi shared his insights on “regulation of credit, labor, and business”.  Credit, labor and business, he shared were important elements of economy and there was a need to regulate these elements or else cartels, black-markets, politicized trade unions and corrupt market practices would take town the possibilities of economic freedom. He shared that the business environment in Nepal was characterized by lack accountability and transparency and practices ranging from corruption to monopolization were way too evident from economic growth to sustain and hence there was a need to foster good governance.

Surath Giri

About Surath Giri

Surath Giri is a student of Economics and works as Research & Publications Coordinator at Samriddhi, The Prosperity Foundation. He also writes for Khabar South Asia, a south Asian online news portal.

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Botswana is poor…or so I was told.

According to 2013 Index of Economic Freedom, Hong Kong, followed by Singapore and Australia is the most economically free country in the world. In the same Index, Nepal lies at 141 in the ‘mostly unfree ’ category out of 177 countries under the scanner. Botswana, the country that we all grew up learning to be one of the poorest countries in the world, now lies at 30, followed by Norway. The per capita income of the people of this ‘once poor’ country has increased from a mere $300 in the 1960s to $16030 today. So in the past five decades while Botswana made a giant leap, Nepal was not able to get rid of its history of poverty like Botswana. What could be reason? Is economic freedom a part of the change?

If we look at facts, registering a business takes upto 29 days in Nepal, that is, if every procedure is fulfilled swiftly. Surely, there is a lot of red-tapism and need to bribe the bureaucrats for something that they will never actively play a part in and never bother about the performance of. Then, there is a series of directives and regulations to follow. When all of that is fulfilled, the entrepreneur has to deal with the aftermath of political instability and labor tensions. Finally, to what he earns, there is a mammoth corporate tax of 25% imposed by the government, which, if put right, is nothing but a coercion against the right to one’s own labor and property. Hence, ‘mostly unfree!’

Hong Kong’s economy is characterized by ease to open up an enterprise, low taxation, and a well established international financial market. In fact, an entrepreneur can first run his business and register it only later. That gives a perspective to how supportive the administration is to enterprising.

Similarly in Botswana, after independence from British colonization, the government formed under Prime Minister Khama, introduced the mechanism of a free economy. He kept the size of the government small and encouraged private ownership of one’s resources and labor. Foreign investment was encouraged in the country. This resulted in the improved workforce and productivity. Another interesting practice was that unlike a lot of other under-developed countries that solely go by the proposals of IMF and the likes, local-level Batswana economic policy advisors were able to openly and candidly explain their policies as they worked with the government to obtain popular support for the programs and policies. Their understanding of the local environment and a clear picture of the desired consequences through the policies turned out to be very effective. Besides, Khama managed to keep the inflation low and the corporate tax rate was 15%. The surge in the per capita income is the aftermath of this very economic freedom.

In Nepal also, there is a possibility of making this surge. We need to tap into our own resources and create a conducive business environment for the private and international sector to take chances here. Two of our most profitable industries, tourism and hydropower can be mobilized, among many. But banks and financial institutions are barred from investing in a single specific sector at their will. Also, there is a misconception about foreign investments. Unlike foreign practices like the ones we have seen already, they are bogusly feared for their rent-seeking nature and the threats they bring to the domestic industries. Even the bureaucracy creates hindrances to prospective investors. As long as there is protectionism and excessive regulation by the government, the economy will never be free.

The engine of the globalization is economic freedom and right to life and property. Apparently, Nepal seems to be lagging behind in these aspects. If we want to see us out of the mostly unfree category of the Index of Economic Freedom, it is high time we set out change what is holding us back. Economic reforms that encourage economic activities are the needs of the hour. Once there is a substantial amount of activity in the domestic market, that will provide compelling incentives to foreign investors.

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.

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