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Restricting Investment Abroad and Illicit Capital Outflows

Given Nepal’s unfavorable business environment–Nepal ranks 107th in the World Bank’s Doing Business Report 2016—it is not very surprising if Nepalese wished to invest abroad for better returns. However, the Government of Nepal has barred Nepalese from making any foreign investments through the Act Restricting Investment Abroad, 2021B.S (1964) with genuine motives of preventing Nepalese capital to go out of Nepal so that it could all be channeled to Nepal’s economic growth. This Act was introduced 53 years ago when globalization was a far cry. However, the relevance of this law today is questionable.

The Global Financial Integrity (GFI) report released in December 2015, Illicit Financial Flows from Developing Countries: 2004- 2013, has ranked Nepal 86th out of 149 developing countries surveyed for Illicit Financial Flows (IFF). Nepal’s average illicit capital outflow from 2004-13 was 567 million US dollars per year. According to an article in Republica, economists reason, “prolonged political transition, lack of an investment friendly environment, and no guarantee of profit due to low productivity are encouraging the capital outflow.” The GFI report has drawn attention to the existing illegal means by which people have taken their money out of their borders. It is therefore clear that the government’s attempt at protecting and promoting the economic growth of Nepal through restrictive measures has failed to achieve its desired goals.

Circumventing laws in Nepal is not a new practice – Nepal ranks 131st in Transparency International’s Corruption Perception Index, 2016. If people with right connections are already capable of taking money out of Nepal despite the Act to Restrict Investment Abroad (1964), and it is agreed that Nepal’s investment climate is not very favorable, restricting its other citizens (without connections) from making more profitable investments does not sound like a 21st century idea of development. If there are better prospects outside, any rational investor will start looking for loopholes in the law to be able to invest outside. If a government so wishes for capital to channel it towards domestic investments, then it would make more sense to in fact frame policies that incentivize even foreigners to come and invest in their country. When even foreigners are coming in for this host country which now offers better returns and better investment climate, then fewer domestic nationals would take their money out of the country.

There are several benefits of globalization that Nepal has not been able to capitalize on. These are missed opportunities for Nepal and for Nepalese. The relevance of policies that bar Nepalese from making foreign investment needs to be reconsidered. It only makes sense to have laws that are implementable. Laws that are binding only upon those who are unable to violate them are of no good to the nation, and is clearly indicative of the public sentiment around it. Coercion has its own limitations, and even if Nepal tries to shy away from globalization, the citizens will not.

About Shalini Gupta

Shalini is a Research Officer at Samriddhi Foundation

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Trade Policy for Nepal

Sir Thomas Harris discussing trade policies for Nepal with young parliamentarians and leading businessmen of Nepal

Sir Thomas Harris discussing trade policies for Nepal with young parliamentarians and leading businessmen of Nepal

One of the highlights of globalization and liberalization that followed has been the global trend of cross-border capital flow. Cross-border trades have proliferated, creating new avenues for every prospective player to prosper, even more so, for financial institutions. In 2007 alone, the cross-border capital flow was $11 trillion. For many countries, exports grew faster than their GDP.

But then, in 2008, the world faced the worst financial crisis since the Great Depression. Twenty largest economies of the world then gathered to discuss how to deal with the crisis. In unison, they decided to not repeat the mistake that was made in the 1930s – protectionism. Today, the efforts of pro-market forces have succeeded by and large. Despite the pledge to stop protectionism, however, many governments have continued to practice one policy or the other that bars free capital flow. It has therefore been such that the damage brought about by the financial crisis in 2008 has not been escaped altogether. In 2013, the cross border capital flow was down to a third of its 2007 figure. FDIs have come down and Doha Round has collapsed.

Today though, one can garner some optimism. Firstly, the world has managed to come out of the recession. The international capital flows are beginning to recover. One of the reasons for this is that international trade itself has become much more diverse. This is evinced by the geo-political shift of power from the west to the east (towards India, China and Japan).

Secondly, although the Doha Round has collapsed effectively, trade liberalization has been the economic approach of most of the countries around the world. In the last 5-8 years, bilateral trade treaties have proliferated, particularly in Asia. The EU, in the last two years has negotiated bilateral trade treaties with India, Malaysia, Korea, Singapore, Canada and many more. Trans-pacific and trans-atlantic trades are also growing in practice and popularity. To the surprise of most of the countries, even China is now willing to join Trade in Services Agreement (TISA) and has applied for membership.

Experts now anticipate a trend in international trade which is different from what has historically been the case. The global economy is shaping up for a different make-up. The anticipation is that from the current 38% stake in global output, that of the emerging markets will reach 63% by the year 2040. Trade between developing countries is also expected to rise to 40% by 2030, which currently stands at 18%.

From historical view-point, Nepal has had problems in benefitting from the global trends owing to its land-locked nature, poor track record in economic activities as evinced by its major deficits in trade of goods and services and remittance-driven nature. Stringent labor law is another impediment to Nepal’s economic growth. While there are extremely difficult and inflexible labor laws, keeping the brain-drain in check is a goal that cannot be achieved. When businessmen/investors cannot hire and fire a labor, that makes for a perfect recipe for mass youth unemployment as in Spain and Greece. Therefore, it is imperative that Nepal set right kind of policies to reap the benefits of the emerging and anticipated global trends.

Firstly, Nepal needs to change its perception of being land-locked and transform it to being market-locked. India and China are growing at over 8%. Even if there growth were to slow down to 5-6%, Nepal would still be surrounded by the fastest growing economies in the world.

Secondly, despite the recent political trend, if Nepal were to switch to pro-business and pro-investment outlook, the interested companies would still face fewer challenges in global trade than they would otherwise face anywhere else in the world. Nepal has comparative advantage in terms of market access. Nepal does not face the protectionist barriers that some other countries face. In Europe, Nepal can export anything but arms and ammunitions. Even India does not have that. There is prospect in terms of FDI. Bilateral trade promotion treaties can entice foreign investors.

Thirdly, Nepal has a comparative advantage over any other Nepal-like countries (development phase wise) – tourism is an example. There is urgent need to work on airports and air services. Nepal can start exporting services like tourism. Eye lenses export from Tilganga Eye Hospital is another example of how Nepal can export medical services. Nepal has comparative advantage in exporting legal services. Exporting services is the key to tap the prospects yielded by the emerging global trends and Nepal is rightly positioned to do so.
However, none of these will happen without the right political adaptations. Nepalese politicians have not been able to rise above the politics-is-the-key mindset. Sufficient focus has not been rendered to bringing economic reforms, removing barriers to business and fostering investment. These are the real political challenges. Modi’s Gujarat experience is the epitome of how politics and economy can move forward together. While the world envies Gujarat’s economic growth, the politicians there are winning elections through economic reforms. Politicians cannot exclusively focus on politics. As politicians, they have a duty to the people to foster prosperity, towards their (voters’) family. One of the fundamentals of politics is to ensure the well-being of the country.

Countries should open up their markets. Studies done by IMF and World Bank have shown that if developing countries open up their markets, they grow, on an average, at 5% a year as opposed to 1.5% of those which did not open up. Another argument for open economies can be derived from the case of Koreas – two countries with same geography and same socio cultural aspects. While South Korea subscribed to the ideals of a liberalized economy, North Korea imposed a closed economy. The current state of economy of these two countries can serve as the best example of how open economies grow faster. Markets bring prosperity across an economy. How to manage this economic growth can later be a political issue.

Through all of this, the role of government will then be that of a monitor and a facilitator. Government should make sure that allocation of resources is done in a proper manner. Private parties should be entrusted with the role of empowering an economy. Private sector’s involvement can generate employment and prosperity sooner. Governments should encourage competition and make sure than corruption is kept at bay.

Property rights, rule of law, transparency and accountability are pre-requisites to economic growth. These are the fundamental issues that no economy can boycott in its path to prosperity. Philippines, like Nepal, was overly dependent on remittance and corruption was a national endemic. Rwanda, with its genocide cases was among one of the most feared countries in the least-developed world. But with the aforementioned reform measures, these countries have done considerably better in terms of economic performance. Philippines moved up 30 places in World Bank’s Doing Business Report in just one year while Rwanda’s current economic growth rate hovers around 6-8% per annum.

With the existing ideological divide in Nepal’s political spectrum, politicians need to understand that they are in power not just to reflect the views of their constituencies, but also to reflect back on those views and take necessary steps – show leadership. Margaret Thatcher is the best example. Showing the right kind of leadership for the betterment of her nation is just what she did. At times of need, she went against her own party’s notions. A practical political leadership is what is required for Nepal to realize its goal of prosperity.

This is an excerpt from an engagement between Sir Thomas Harris, Vice-Chairman, Standard Chartered Capital Markets and some young parliamentarians and businessmen of Nepal. The theme of the discussion was ‘Trade Policies for Developing Economies’

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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