From the fiscal year 2019/20, the Government of Nepal has imposed a 10% custom duty on import of books. While many Nepalese readers and experts have already termed it as an unacceptable tax on knowledge, there is no doubt that this protectionist policy also comes with many long term consequences that directly affect the local consumers, industry, as well as government.Continue reading
With the permission given to nine private companies to import and sell petroleum product, and thus break the monopoly of the state-owned Nepal Oil Corporation only on July 10 being scrapped on July 21, the Government of Nepal (GoN) has pulled a massive joke on the Nepalese private sector, and consecutively the Nepalese consumers. On a very serious note, this is an ominous level of policy instability and has sent all kinds of negative signals to the foreign investors that have (or had) been thinking about making investments in Nepal.
If nothing else, the recent trade blockade should have taught us a lesson. Nepal was compromised largely in terms of availability of goods and services that the government has monopolised, for example, petroleum products. Another observation here will be that government to government agreements can sometimes compromise the well-being of the citizens. Because India wanted to make a statement, IOC was forced to do as per the interest of the Indian government. And since IOC is the only supplier and NOC is the only importer, Nepalese people had no way out
Had there been private companies involved in the process, they would be guided by a completely different set of interests – profit, for example. Irrespective of the government’s interests and stance, they’d be looking to make as much profit as possible. This means that the movement of goods and services would continue. And in fact, we saw this happen, too. We saw that some private individuals managed to bring in petroleum products through informal channels. This is how more than three-fourths of Kathmandu’s demand was met. It was illegal, but only because the law barred them from getting involved in the process. But people needed fuel and they were willing to pay. Now imagine if private companies were legally allowed to engage in petroleum trade! The impact of such blockade on Nepal, and most importantly, on the lives of Nepalese people could have been much less.
But now, that’s a thing of the past; and we need to focus more on the future; and we have a lot on our plates already. We need to build infrastructures, we need to invest in education, health, agriculture … you name it. And for this, we need capital to invest. And people invest when there is some prospect of return. In order to see this prospect of return, there needs to be policy stability in place. What policy stability does to prospective investors is that it gives them a sense of predictability. Irrespective of the ideologies of the government, when investors can be secure that the policy environment is going to stay stable for a certain period of time, they can at least plan their investments factoring for other constraints within that time frame and work out possible returns. But when policies change in a matter of days, investors will not bother doing all that maths. What’s worse, if you are a poor nation and need to bring in foreign investors to solve your third-world problems, you’re frankly not even going to make it to the list of possible countries in which to make an investment.
Property rights as defined by James D. Gwartney – Florida State University, Richard L. Stroup – Montana State University, Dwight Lee – University of Georgia in the article ‘Importance of Private Property’ involves ensuring three important criteria: 1. the right to exclusive use, 2. legal protection against invaders those who would seek to use or abuse the property without the owner’s permission, and 3. the right to transfer to (that is, exchange with) another. If the owner is barred from exercising any one all of these aspects, it is the violation of the property rights.
The state has the primary responsibility of warranting all these criteria to the citizens and thus, protecting their property rights. However, what if the one that is supposed to protect the right of the citizen is itself involved in the violation. Here, the context directly relates to provision in the recently formulated budget of Nepal. In the section related to Land Reform, the budget specifies that all the lands will be classified on the basis of their use and the land classified for the specified purpose shall not be used for other purposes. Additionally, the budget has also provisioned that no agricultural land should be left barren. In case it is left barren, there is the provision of imposing penalty of 25 percent of the potential average production of such barren land.
This budget is unswervingly trying to infringe on the property rights of the citizens. After the implementation of the budget, no citizens will have liberty to use their piece of land as according to their preferences. The use of land will be directed by the state itself. This directly bars the citizens from enjoying the very first criterion, the right to exclusive use of the property (land in this case). Furthermore, as the provision limits the use of land, market value of the land will get reduced. For example, if a piece of land can be used for multiple purposes like making residential house, commercial building, cultivation etc., its market price will be high because of high demand from multiple sector. But, if its use is only restricted to, say agriculture, there will be reduction in the demand, which reduces it market price, thus adversely affecting the land owners and their property rights.
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
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?
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.
In the year 2000, the government of Nepal said there were too many taxis plying on the streets of Kathmandu and so it banned the registration of new taxis. This has meant that for almost the last 15 years, no new entrepreneur has been able to register new taxis—and the result has been that the market has run as per the whims of whatever limited entrepreneurs exist. All this has led to regular complains from the consumers who agree to have paid more for mediocre taxi quality in the lack of better alternatives and an absolute dearth of choices.
Similarly, there was a time when the phrase ‘mushrooming of schools’ was probably a favorite in Kathmanduites’ lexicon. Needless to say, mushrooming of schools was brought to a halt—the government did what it does best—it banned the registration of new schools as well. No private schools can be registered in Kathmandu valley and such has meant that whatever schools exist are as much choices that people have.
And very recently, the government decided to move beyond Kathmandu valley and stopped the registration of Paragliding companies in Pokhara. Civil Aviation Authority Nepal (CAAN), citing air safety as a reason has stopped providing licenses to additional paragliding companies for operating their businesses in Pokhara and is infact preparing to issue directives for no more paragliding companies to be based in Pokhara.
In all the instances, it would be naïve to assume that the government brought about the restrictions just to ensure greater good for all its citizens by curbing the possibilities for young and aspiring entrepreneurs. Sure there must be other reasons—say you are an entrepreneur with a few taxis plying on the road in a very competitive market and if you could cut your competition, you would do that to ensure that nobody else gets a cut from the profit that you alone could make, would you not, now? And there sure are benefits for the already existing entities in all the cases mentioned above in case they are able to keep the possible new entrants at bay. And there is much more to this than what appears to a normal eye—why does the government legislate as per the interest of certain groups? George Bernard Shaw had the answer when he said that a government that robs Peter to pay Paul can always depend on the support of Paul. So a government in a society like ours can be seen to represent the organized interests of the most dominant groups (or Pauls) that wish to live at the expense of others (the Peters) and so can always depend on the backing from Pauls. Political support from businesses or strong groups afterall holds much for the government in question.
For those who blame capitalism, crony capitalism in Nepal then has been able to find expression through—not despite—government policy. There are many who argue that no particular interest group can monopolize power because there are always one or more groups working against it. To them a countervailing power exists in all societies—there are entrepreneurs who, needless to say, organize themselves and say that ban on registration in either of the cases mentioned above is not the way to go about and in an ideal society that would indeed create a sense of balance—keeping the essence of a free and democratic society alive and kicking.
Perhaps here’s where the assumption is wrong—interest groups like the political parties try and influence public policy but unlike the political parties they are not responsible to the public. Interest groups usually focus on specific programs and issues and are rarely represented in the formal structure of government and such groups in a weak state are often characterized by coercion—the activities depend on the groups’ willingness of operate within the law and so has not always been the case. Are we missing the balancing act between the twins then? Perhaps the answer is a definitive ‘yes’ and not a ‘may be’.