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Three lessons from these recurring blockades

Image Sources: India Today, 1989 (top and bottom left); AFP, 2015 (top right); The Himalayan Times, 2015 (bottom right)

More than two months into the “unofficial” blockade now, it is no surprise that blockade is what (almost) everyone is talking about; be it some casual chit-chat or some blown-up rant on the social media. An interesting observation here is that quite some of these regular people here appear to understand, and be able to scrutinize the geo-politics as soon as the supplies get disrupted. It must be noted that these are not mere hollow outcries; these informal discourses sometimes lead to some meaningful recommendations that could benefit our economy in the long-run. This disruption could be the harbinger of the change – the opportunity for us to reform our economic policies and trade strategies – that can lead us to prosperity. It all depends on how we take lessons from this crisis:

1. Let ’em do it!

The state-owned Nepal Oil Corporation (NOC)’s monopoly, stemming out of the NOC-IOC (Indian Oil Corporation) partnership has barred the private sector from partaking in the industry and exploring alternatives elsewhere. This has further constrained the choices that the public has in terms of procurement of petroleum products. Today, we even pay higher prices for the petroleum products just to cover NOC’s inefficiency. Even after having proved its inefficiency through repeated shortages and bankruptcy, why shouldn’t the government let the private sector do it?

Although the private sector is technically “allowed to import” petroleum products, and even allowed to open a refinery, the paid-up capital requirement is a ridiculously high Rs. 20 billion – equal to 1% of the GDP and multiple times higher than that for the commercial banks. Such high regulatory capital requirements pose a barrier to entry for the private sector. Had we had more flexible policies, and thus private companies bringing in petroleum products from other sources, we would not have been facing this petroleum crisis today. It is unfortunate that even after all of this, the government has instead created a ‘black market’ by banning the entrepreneurial individuals from “smuggle”-ing these basic supplies. Pun intended!

2. Don’t put all your eggs in one basket!

“Self-reliance” has also made it to one of the most discussed issues amidst current political-economic crisis. The people in favor of this “self-reliance” however seem to forget the very reason trade exists. Trade benefits consumers the most through competition in prices and qualities, and giving choices to the people. It is important we be clear that the havoc this disruption has created is because of lack of diversification in our supply-chain, and not trade. Our foreign policies and trade policies have not been liberal enough. Relying on just one source for most of our essential supplies has handicapped us. The answer to guaranteeing an uninterrupted supply of goods and services lies in diversifying our import portfolio instead of relying on one country to supply us almost everything. Had there been a competitive and diverse supply chain, who knows we might even have been importing crude oil from Russia and cooking gas from Kazakhstan!

3. Treat your friends equally, because if you don’t, you don’t see them as friends – Michiyo Yamashita

Free trade in goods, labor and capital would help Nepal from both uninterrupted supply of necessity goods and prosperity perspectives. Otherwise, treaties can be detrimental when they are exclusive. They will divert trade from cheaper goods of non-member countries to more-expensive goods from member countries.

Nepal has signed a transit treaty as well as a treaty of trade with India and some other nations. However we haven’t been able to capitalize on them for mutual benefit. We need treaties that lower the tariffs, reduce and standardize the documentation and provide access to each other’s markets. It is important here that Nepal treats its neighbors at par with each other. Another important factor for free trade is free connectivity. The recent turn of events has paved way for trade and transit treaties with more partners. Nepal, as a landlocked nation needs to secure connectivity through multiple accesses to sea ports. Nepal has already agreed with China to open more transit points, but we also need a transit treaty with China. There is equal need to institutionalize transit treaty with Bangladesh.

The Bottom Line

The above lessons should be one of the defining norms of our economic and trade policies even at normal times – not just when supplies get disrupted. The ability of the free market to coordinate itself through entrepreneurial discovery process is second to none. And when it comes to diversification of imports, what it means is that the government should facilitate, without direct participation, the process of market discovery for our imports from producers worldwide. Such facilitation is only possible by ensuring better connectivity and access through trade and transit treaties that are non-exclusive.

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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Rise of government as paternal authority

As soon as someone hears of something that has happened or is happening that s/he doesn’t like, s/he goes, “The government ought to do something about it!”. Where does this idea that government can solve all of our problems (especially the economic ones) we face, come from?

This characteristic is a remnant of a thought from the past – before modern freedom, constitutional government, representative government, republicanism or federalism. For centuries, there was a doctrine accepted by everyone in this world, that a King, an anointed king, was messenger of the God and he had more wisdom than his citizens. King had supernatural powers and was able to provide and protect his citizens. As recently as the beginning of the nineteenth century, people suffering from certain disease were expected to be cured by the royal touch, by the hand of the king. Doctors were usually better; nevertheless, they had their patients try the touch of the king. Same reasoning can follow as to why a king should overlook other aspects besides the health of his subjects; other aspects like education, food and shelter. The very aspects of life that are best governed by the market interactions rather than decision of some king or benevolent government. One of the relevant examples from the context of Nepal is nationalization of education (both private and public) in 1971. Before 1971, schools were autonomous and functioned in a decentralized fashion.

Today most countries have democratically elected governments and very few monarchs have survived. But has the doctrine of the superiority of supernatural kings with inherited powers that can solve all problems of their subjects disappeared? At present, most of the government bodies consist of elected officials and not an anointed king, but the idea that there is someone wiser and more powerful that could govern and solve all problems of society has not gone away. This is evident from both the wishes of people for government intervention to solve problems, even if markets can provide better solutions, and also the wish of the governing body to try to expand its horizon to solve all problems that societies face by regulating, banning and subsidizing.

This is not to imply that a government does not have any role in the economy. It has very important roles, namely: maintaining law and order, and enforcing property rights so that it can create space for markets to function. Apart from its limited but very important roles, other actions like regulating prices, wages, rents and profits are beyond the scope of government because it does not lead to the desired result. Prices, wages, rents and profits are best determined by the market forces (demand and supply) and any attempt by government to regulate or control distorts the market and leads to unintended consequences like formation of cartels, shortage of goods and services, to name a few. This is also very evident in current crisis of fuel (apart from the Unofficial Blockade) that stems from the government being the sole provider of petroleum based fuel instead of allowing markets to work it out.

Why is it that government actions to intervene and regulate any aspects of the market, even if it arises with the best of intentions, like the minimum wage so a poor can make more money, rent control so a poor can afford a decent living space, price control on gasoline, milk, eggs and other basic goods so that an average earner can afford, banning of alcohol so that people will not be addicted to alcohol etc. do not lead to the intended outcome and only lead to negative unintended consequences instead? It is because in the centrally planned economy, everything depends on the talents, and gifts and perception of very few people that hold the decision-making power. That which the kings/dictators or governing committees do not know is never taken into account in the planning and decision-making and hence always the negative unintended consequences. Even if all the information that is required for sound policy-making is available to the king/dictators or government committees, their plan will never match the invisible hand of the market and the result of millions of interactions of households and businesses driven by self-interest and incentive.

Inspired by readings of Ludwig von Mises

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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SAARC, for the everyday person

This time, let’s get to business right away – no setting the context. Here are four reasons why I cannot be at one with government’s enforcing the odd-even system in the vehicle mobility for 5 days, along with shutting down the entire productive sector for two days.

Halt economic activity:
One day of ‘bandh’ costs the economy NRs. 1.75 billion. And here we stand, facing two days of state sanctioned ‘bandh.’ SAARC Summit, a gathering where the member states’ representatives get together to discuss ways of attaining economic growth at regional level, and here we are, effectively halting entire economy. With enforcement of the odd-even system in vehicle mobility, the burden of transporting whole labor force is now on the shoulder of half the transportation system (on days other than the ones when the state has called for a closure.) And what’s more, this does not apply to the government vehicles. So you mean, the productive sector has to either stay home or battle the state machineries to be able to produce anything, while the government – the unproductive and re-distributive sector gets special privilege?

On mobility:
As long as the vehicles are mobile, it would seem that traffic would be fine; as traffic problem is not about the volume of vehicles on the road, but their management. If the traffic police department concentrated on enforcing the existing traffic rules better, much of the trouble that the public is being put through, could have been done away with. Well maybe, our traffic police department lacks the capacity to manage the vehicles within the capital. But if that is so, then shouldn’t we not be doing SAARC summits in Kathmandu? The traffic police department should not be so powerful that it curtails the rights of Nepalese people to earn a living. You cannot sacrifice the natural rights of entire population in the name of welcoming 7 dignitaries. You have the choice to not take up this responsibility if you are not capable of handling it. Until yesterday, it was illegal to over-cram a public vehicle and today the authorities leave you no option but to do exactly that, and twice as much. Well, Kudos to the Traffic Police Department anyway!

Oh ya, education! It’s being shut down for four days:
As per the Ministry of Education data, there are currently 8, 112,058 students enrolled in different formal educational institutions in Nepal (Grade 1 to university level.) For the sake of calculation, let’s assume one education day is a 6-hr day. That is 194,689,392 learning hours shut down by the government. This is on top of all the strikes and existing holidays we have in one calendar year.

And I can definitely not miss out on the new beautiful roads:
Well, we pay the road tax, the vehicle tax; the government name it, and we pay it all. So we are already entitled to better roads to ply our vehicles over. We don’t need SAARC to deliver to us what we have already paid for. It is a misguided notion if you believe that thanks to SAARC, we’ve been getting better roads, street lights and new parks. Imagine all Nepalese people (from all parts of the country) paying taxes and all of that being spent on the beautification of the capital. In fact it could create an imbalance in the economy, or be unfair to the people from the rest of the country, if it were so. I urge the readers to think about what other sectors the money could have been channeled to; the number of new start-ups that could have been established, the infrastructures that could have been built to facilitate transportation of goods and services from currently inaccessible areas, the number of poor kids who could have been educated through direct transfer of funds, and the list could just go on. Can the welfare of Nepalese throughout the nation be compromised in the pretext of beautifying Kathmandu? This is not to mean that government should rather focus on redistribution, but to hint that resources could have been put into better use if not for beautification of Kathmandu. The mechanism by which that can be attained, I would personally have different opinion than that of central planning.

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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When being INFORMAL comes with incentives

faulty incentives' systemNepal’s economy is largely informal; informal sector here comprises of a group of production units that form part of the household sector as household enterprises or equivalently, unincorporated enterprises owned by households. Much likely, such units have limited capital investment and are a subsidiary activity of the owner. Their activities are not regulated under any legal provisions and/or they do not maintain any regular accounts. In Nepal, a good chunk of production and consumption is contributed through such informal sector activities. The sector also contributes to much of the income generation through employment thus providing means of livelihood to millions of Nepalese. Kirana Pasals that are small mom and pop shops selling groceries and fast moving consumer goods form a major segment of this informal economy in Nepal.

What makes these shops informal can be attributed to an endless list of reasons—a primary reason being that informality to these shops means a much better deal than choosing to formalize their operations. Given, the informal sector helps during economic crisis. But the fact that the benefits of informal employment may not be sufficient to achieve an acceptable standard of living as informal employment rarely comes with social protection, good working conditions and adequate wages cannot be ignored for long. But in our case, the scenario of choosing informal as opposed the formal begs to not be changed until a few things are set straight.

First in the list being the registration of these Kirana Pasals. Such shops are required to register at four different places; these fall under the jurisdiction of six major government agencies and they are subjected to 15 major laws and policies. Given their size and monetary weaknesses, these shops have less capacity than larger firms to navigate through the complexities of regulatory and bureaucratic networks. When formalized, the government has rights to inspect them and close them down if regulations are violated—here regulations are manifold and are more often than not subjected to interpretation and discretion of the official thus allotted for the job. Generally, Kirana Pasal owners are aware of few of those laws that are applicable to their businesses but there always remain minuscule provisions and clauses which the businesses would not be in compliance with, simply because of the volume and scattered nature of those regulations, which keeps the business always on offence. And as De Soto rightfully said, “informal economy is a by-product of over regulation and bureaucracy in the formal economy” and unless we do away with such hurdles there seems to be not enough hope for such small ventures to grow or even formalize their operations.

Secondly, empirical results have demonstrated that firms rank taxation as among the most severe obstacles to the long-term success of their enterprises. Likely, the shops in Nepal (if formalized) face a disproportionate burden from tax in comparison to larger firms. Those with turn over greater than 2 million rupees or income greater than two hundred thousand rupees are eligible to pay VAT tax of 13% and Corporate tax rate for Private Limited Co., Limited Co., Partnership Firm in the retail sector – a total of 25%. In many cases, not having books or audited accounts may result into the amount of tax to be paid being established by the tax official based his judgment, making use of a variety of indicators, including the observed standard of living of the entrepreneur. This might result in very high tax rates for enterprises.

Thirdly, there are standards that shops have to abide by. As much as the shops would be willing to do so in the light of protection of consumer rights, here too, the inability to bring in efficient intervention leads to losses on the part of the shop owners.

With problems as such to be encountered in terms of wishing to bring the shop into the formal stream, it seems that it is in the light of their own well-being that most decide to cling to their informal operations. Until and unless the aforementioned hurdles are done away with, the shops will remain informal because being so has more incentives than choosing to be otherwise.

Anita Krishnan

About Anita Krishnan

Krishnan holds dual degrees--in law and sociology. Currently, she works as a Research Associate at Samriddhi, The Prosperity Foundation.

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Shop(s) next door

kirana pasalFor anyone living in Nepal, it is all but normal to run to the shop next door quite often—need a kilogram of sugar, one match-stick box or a month long supply of essentials like rice, oil, biscuits and what not—you name it and those Kirana Pasals have it. I call it the shop(s) next door because the Kirana Pasals in urban areas exist in almost every house facing the street and it might not be an understatement to say that people like you and me run to these next door shops every now and then even for something as small as a one rupee worth of wrapped happiness—a chocolate.

Given this ‘deep’ significance of Kirana Pasals, has it ever occurred to you as to why year in and year out these shops go on and never really grow? Yes, most of these shops add new products, perhaps a few more sacks of rice but what I am taking about is a slightly different idea of growth—what my idea of growth entails is that these micro enterprises expand into medium or large-sized operations, like department stores or supermarkets. In saying so, I am not advocating for every shop next door to become a Bhat-bhateni (too wishful!). That said, why don’t they really grow can be attributed to a few causes—inability to access finance, regulatory hurdles or just a sense of content with a small shop (subjective to who the owner is, of course).

Talking about difficulties in terms of access to finance, it is important to understand that such shops are started with an investment of around NRs. 200,000 which mostly comes across in the form of savings and support from friends and family. Such shops are mostly run by a single individual who is both the owner and the manager. The fact that these shops have no elaborate book keeping or formal accounting and that the lines of separation between the owner and the business entity are slightly blurred makes it a little more difficult for formal financial institutions like banks to invest in such ventures, and hence the hindered growth. And minus the investment, there is not much that can come up from meager savings or even friends and family for that matter.

Now that access to finance has been a problem, what are the solutions? As banks have associated risks investing for the expansion of the shops, cooperatives can be a way out. If the insurance industry regulations are eased up, the risk associated with this sector would also be minimized. This would then provide an incentive for commercial banks to enter this market and provide loans on the basis of business plans rather than on collateral.

As much as such shops form a major part of our largely informal economy, these also have the do-gooder spirit as they create a healthy labor market, reduce income and social inequalities, and provide vital goods and services to local communities and markets. These overarching good deeds aside, I wouldn’t know how to survive minus the endlessness of these stores that make buying of goods so easy and efficient. So we do need to understand that these need to grow and not close down unnoticed, right?

Keep posted for I intend to write more on these Shop(s) next door in the upcoming posts!

Anita Krishnan

About Anita Krishnan

Krishnan holds dual degrees--in law and sociology. Currently, she works as a Research Associate at Samriddhi, The Prosperity Foundation.

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