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The Economics of Minimum Wage

(This article was first published in the HImalayan Times on the 22nd of July, 2018.)

Sometimes, the most noble of intentions might yet produce severe unintended and negative consequences. Nepal’s minimum wage law comes ominouslyclose to achieving this feat.

We, as a country, are setting out on a mission to achieve unprecedented levels of growth and create new economic opportunities. We need all the international and domestic investments we can secure in order to trigger that growth. Our policies, institutions and hard infrastructures will greatly determine how successful we become towards that end. But the minimum wage law seems to be incompatible with investment targets; it also appears to have overlooked domestic labour scene.

Scaring away investors

From foreign investment perspective, the new minimum wage (Rs. 13,450) which is a 38% growth from previous minimum wage makes Nepalese labour the most expensive in the region. Merge that with Nepal’s dismal performance in other global competitiveness indices like the Doing Business Index or Corruption Perception Index or Economic Freedom Index (just some among many), any prospective investor could quickly put off thoughts of bringing investments here. It already takes months to acquire a business visa to Nepal. According to the Doing Business Report, it takes 339 hours just to pay federal taxes and three years to enforce contracts.

No investor will research all small initiatives regarding foreign investment promotion in a new host country before making investment decision. They will look at these indicators and work out what country offers them the highest prospect of return. Towards that end, such dismal performance plus minimum wages that have grown 400% in the last decade while labour productivity has failed to keep pace will not help.

An ignorance of domestic reality

Cost of labour is an important factor from a domestic investment perspective as well. Formalisation of labour and organic wage growths are other couple of important aspects of labour.

If we look back at the last couple of years of Nepal’s economy, construction industry has grown at one of the fastest rates. Demand of construction workers is therefore high. Consequently, the wages of construction workers have skyrocketed. Today, one can hardly find a mason who will work for below Rs. 1500 a day. This is way above the government-set daily minimum wage. This simple example goes to show that if we create opportunities for investments to flourish and industries to grow, the government does not have to intervene and set workers’ wages in order to guarantee a decent income to them.

But then again, there is a great number of workers in the service and agro industry who have not seen their wages grow at similar rates. This might beg a question as to what we do about them. But even here, we have to be weary of the fact that a great many of these workers (who make the least income) in these sectors are informal workers in the first place. Therefore, a raise in minimum wage does not really enhance their economic positions. In fact, that brings us to another greater risk – the risk of lay-offs.

Risk of lay-off is real

Once again, for an investor (domestic or foreign) labour poroductivity matters. If the labour productivity increases in a similar rate as wages, then s/he can churn out greater profits from her/his business and everybody is happy. But when labour productivity does not increase at the same rate (which is what is happening in Nepal), then it is only a matter of time before the investor starts thinking of laying off workers and getting the same job done through fewer workers. Of course, s/he could offer some raise to those workers who are more productive and can take in some extra load. Such a raise will have come at the cost of the worker that is laid off. In the end, the law that was supposed to help the worker got her/him out of the job.

Minimum wage should not disincentivise

When we argue that minimum wage should cover at least the basic needs of an individual, we should be careful that a minimum wage does not put an individual in a position that s/he no longer needs to worry about being more productive or enhancing her/his economic position further. At best, it should be a support position while s/he starts out as an economic actor. It should be a position that everyone wants to grow out of. In that sense, it should incentivize an individual to be more productive, and not the stagnate.

Looking back at our minimum wage policy and the growth of minimum wages over the years, this will be another very important factor to look into two years from now when we sit to revise it again; if we continue to live with this policy until then, that is.

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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The Power of a Gentle Nudge!


Most of us are unfortunately too familiar with this scenario: we set the alarm for early morning with the intention of getting some extra work/study done, squeezing in a run before getting to work or hitting the gym. However, we end up either hitting snooze till eternity or turning off the alarm altogether.

Being the rational people we are set out to be, shouldn’t we be making the most efficient choices? In this case, getting up bright and early to tackle our tasks head-on!

Richard H. Thaler’s Nobel Prize-winning Nudge Theory explains with refreshing clarity that we as human beings are wired to act on convenience rather than rationale. Simply put, we opt to do what’s easier than what’s wiser.  It comes as no surprise then that the “far-sighted Planner” in us – who roots for our long-term welfare – is generally at odds with our “myopic Doer”, battle-stricken in a tightrope act of temptation vs. self-control. Continue reading

Sneha Pradhan

About Sneha Pradhan

Sneha Pradhan is a Researcher at Samriddhi Foundation with an interest in good governance. She is a graduate student at Heinz College, Carnegie Mellon University in Pittsburgh, Pennsylvania, pursuing a Master of Science degree in Public Policy and Management. She also has a Bachelor of Arts Degree in Economics and Statistics with a minor in Complex Organizations from Mount Holyoke College, South Hadley, Massachusetts.

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क्षय हुँदै गएका सार्वजनिक संस्थानहरुको आन्तरिक सुधार कि निजीकरण ?

भर्खरै मात्र सरकारले सार्वजनिक संस्थानहरुको वार्षिक स्थिति समीक्षा, २०७३ सार्वजनिक गर्यो । यसले नेपालमा १४ वटा संस्थानहरु खुद घाटामा संचालन भएको देखाएको छ भने बाँकी २० वटा संस्थान खुद नाफामा संचालन भएको देखाएको छ । यो अघिल्लो आर्थिक वर्षको भन्दा केही सुध्रिएको तस्वीर जस्तो देखिन्छ जुन बेला १७ वटा खुद घाटामा र १९ वटा खुद नाफामा सन्चालन भएका थिए ।  तर गत वर्षझैँ यसपटक पनि १८ वटा सार्वजनिक संस्थान सञ्चित नोक्सानीमै रहेका छन् । अझै पनि सार्वजनिक संस्थानहरुको कोषमा व्यवस्था नगरिएको दायित्व रु. २५ अर्ब ८० करोड ६८ लाख देखिन्छ । यसले नेपालमा सार्वजनिक संस्थानहरुको अवस्था सन्तोषजनक नरहेको र यी दोहनकारी संस्थाहरुको रुपमा स्थापित हुँदै गएको देखिन्छ । अब प्रश्न उठ्न सक्छ सार्वजनिक संस्थानहरु रहिरहनुको औचित्यता के ? सार्वजनिक संस्थानलाई लगभग असफल अवस्थामा डोहोर्याउने कारक तत्व के के हुन ? यी कारक तत्वलाई कसरी सुधार गर्दै जाने त ? सार्वजनिक संस्थानको सुधारको लागि निजीकरण नै किन ?

सार्वजनिक संस्थानको औचित्य

नेपालमा सार्वजनिक संस्थान स्थापना गर्नु रहर होईन आवश्यकता हो भन्दै अर्थतन्त्रका सबै क्षेत्रमा सार्वजनिक संस्थानको उपस्थिति लाई व्यापक बनाईयो । आर्थिक सामाजिक रुपान्तरण गर्दै राष्ट्र निर्माण गर्न सक्ने एकमात्र कर्ताको रुपमा सार्वजनिक संस्थानलाई विकास र विस्तार गर्दै लगियो । तर जुन लक्ष्य र उद्देश्यका साथ सार्वजनिक संस्थानहरुको शुरुवात भएको थियो ती लक्ष्य र उद्देश्य कति पूरा भए भन्ने कुरा खाद्य गोदाम हुने तर खाद्यान्न नहुने, विद्युतका तार खम्बा हुने तर विजुली नहुने, आयल निगम हुने तर ग्याँस, पेट्रोल  माग गरे अनुसार नपाउने अवस्थाले चित्रण गर्दछ । सार्वजनिक संस्थानको स्थापना हुंदैमा सार्वजनिक सेवा प्रवाहमा प्रभावकारीता आई सामाजिक आर्थिक रुपान्तरणमा महत्वपूर्ण भूमिका खेल्न सक्यो भन्ने अवस्था पनि छैन । देशको आर्थिक मेरूदण्डको रूपमा स्थापित सार्वजनिक संस्थानहरू कालान्तरमा राज्यको ठूलो बोझका रूपमा बाटो हराएको बटुवा जस्तो दोबाटोमा एक्लै ठिङ्ग उभिन पुगेको अवस्था छ । सार्वजनिक संस्थानहरुले न त आर्थिक, सामाजिक विकासको संवाहकको भूमिका खेल्न सके, न त निजी क्षेत्रको पथ प्रदर्शककै ।

यसर्थ, नेपालको सन्दर्भमा मिश्रित अर्थतन्त्रको दर्शन अनुरुप सरकारले समेत उद्योग धन्दा, बन्द व्यापार गर्ने अथवा निजी क्षेत्र सक्षम नहुन्जेल सरकारले नै व्यवसाय संचालन गर्ने भनी खडा गरिएका कैयन संस्थानहरु, जो वर्षौं वर्ष देखि घाटामा गई रहेका छन्, तिनलाई अब सरकारले संचालन गरिरहनुको औचित्य देखिँदैन ।

सार्वजनिक संस्थानमा देखिएका साझा समस्या

सार्वजनिक संस्थानलाई यस अवस्थामा ल्याउने उत्प्रेरक तत्व न हामीले भन्ने गरेको जस्तो अति राजनीतिक हस्तक्षेप हो न त यसले भन्दै आएको जस्तो कम स्वायत्तता । यो त जोखिम र उत्तरदायित्व पनि नव्यहोर्ने तर प्रतिफल मात्र खोजी हिँडने प्रवृत्तिले हो । गाईलाई आँफूले  घाँस पनि नहाल्ने, घाँस काट्ने दु:ख पनि नगर्ने तर दूध भने दोहीरहने परिपाटीले गर्दा नै हो यस्तो भएको । कतिपय सार्वजनिक संस्थान अब दूध नै दिन नसक्ने गरी थारो लाग्न थालेको अवस्था छ ।

सार्वजनिक संस्थानहरुमा देखा परेको अर्को साझा समस्या हो स्वउत्प्रेरणाको अभाव । जुन सबैको हो तर कसैको होइन भने जस्तै, जब सम्म कुनै व्यक्तिले कुनै चीजको स्वामित्व लिँदैन, तब काम गर्ने व्यक्तिमा स्वउत्प्रेरणाको अभाव रहन्छ । घरको कम्पाउण्ड भित्र रोपिएको आँप र कम्पाउण्ड बाहिर उम्रिएको आँपको विरुवामा कसलाई बढी स्याहार सुसार गरिन्छ भन्ने कुराले नै थाहा हुन्छ कि सार्वजनिक संस्थानहरु यस्तो अवस्थामा  आईपुग्नुको कारण । तलब भत्ता पाएकै छ तर त्यसको लागि आँफूले केही गुमाउनु पर्ने र जोखिम लिनुपर्ने नभएपछि सार्वजनिक संस्थानहरु घाटामा जानु अस्वभाविक हुँदै होइन ।

नेपालमा सार्वजनिक संस्थानहरुको सुधारका उपायहरु

सार्वजनिक संस्थानको सुधारका लागि मुख्यत दुई वटा कुरालाई विचार गर्नु पर्ने हुन्छ । पहिलो, सार्वजनिक क्षेत्रमा नै रहन दिएर सुधार गर्ने । दोश्रो, सार्वजनिक संस्थानहरुको स्वामित्व हस्तान्तरण गरेर निजीकरण गर्ने । सार्वजनिक संस्थानमै रहन दिएर सुधार गर्ने भन्ने मतले यसलाई बढी भन्दा बढी स्वायत्तता दिएर यसो गर्ने भन्दछ तर नेपालका सबै सार्वजनिक संस्थान कानूनत स्वायत्त छन् । यसर्थ, यो उपायले मात्र सार्वजनिक संस्थान प्रभावकारी तथा उत्पादनमूलक हुने देखिँदैन ।

डा. हरि पौडेल लेख्नुहुन्छ, “नोक्सानमा गएका संस्थानहरुलाई यथाशक्य सरकारी क्षेत्रमै कायम राखी तिनमा सुधार गर्ने विभिन्न विकल्पहरु धेरै अघिदेखि नेपाल लगायत विभिन्न मुलुकहरुमा अपनाइएता पनि तिनको अनुभव सुखद र सकारात्मक रहेको देखिँदैन । नेपाल लगायत अन्य केही मुलुकहरुमा केही केसहरुमा कार्य सम्पादन सम्झौता गरी दक्ष व्यवस्थापकहरुलाई लिज वा करारमा संचालन गर्न दिएका कुरामा सफलता देखिए पनि अधिकांशका हकमा यो सफल नदेखिएको र छिमेकी मुलुक भारतको अनुभवले पनि हाल आएर यो विकल्प सफल नदेखिएको अनुभव छ । त्यस्तै संस्थानहरुलाई संचालन गर्न सक्ने पूँजी, व्यवसायिकता र उद्यमशिलता निजी क्षेत्रमा समेत पर्याप्त विकास भईसकेको छ । त्यसैले यस्ता संस्थानहरुलाई जतिसक्दो छिटो निजीक्षेत्रलाई हस्तान्तरण गर्ने वा आर्थिक रुपले निजीक्षेत्रले समेत लिन उपयुक्त नभएका संस्थानलाई खारेज गर्नु उपयुक्त हुने देखिन्छ ।”

नेपालको सन्दर्भमा जहाँ निजी क्षेत्रलाई पनि जनताले पूर्ण रुपमा विश्वास गरिसकेको अवस्था छैन र निजी क्षेत्र पनि आफ्नो धर्मलाई बिर्सेर अनुचित लाभ उठाउन तर्फ उद्यत रहेको देखिन्छ, त्यहाँ सार्वजनिक संस्थानको निजीकरण नै रामवाण त होईन तर सरकारले शक्तिको दुरुपयोग गर्ने सम्भावनालाई कम गर्दै व्यक्तिको उत्प्रेरणालाई बढावा दिन तथा जनताको छनौटको दायरालाई फराकिलो पार्न सार्वजनिक संस्थानको निजीकरण गरिनुको विकल्प छैन । निजीकरण नै एउटा यस्तो विकल्प हो जसले सार्वजनिक संस्थानलाई बढी उत्पादनमूलक तथा प्रतिस्पर्धी बनाउँछ । बजारमा रहिरहनका लागि “गर या मर”को अवस्था रहने भएकोले उनीहरुले आफूलाई गतिशील बनाउँदै लैजान्छन् ।

तर बिडम्वना नेपालमा निजीकरण भएका अधिकांश सार्वजनिक संस्थानहरु कि त बन्द भईसकेका छन् कि त विवादको भुँमरीमा रुमल्लिरहेका छन् । यसो हुनुको प्रमुख कारण निजी क्षेत्रको असफलता नभई निजीकरण गर्दा हस्तान्तरणका बखत पूर्णत ध्वस्त भईसकेका सार्वजनिक संस्थान सुम्पिएकाले हो । निजीकरण बाट अपेक्षित उपलब्धि हाँसिल हुन सकेन भनेर जनमानसमा निजीकरणको विषयप्रति नै नकरात्मक धारणा उब्जाउन खोज्नु सदासर्वदा गलत हो । हेटौँडा कपडा, जसले खास साइज र प्रकार बाहेक अन्य खालका कपडाहरु उत्पादन नै गर्न सक्दैनथ्यो, यस्तो सार्वजनिक संस्थान निजीकरण नगरी अहिले सम्म पनि एकाधिकार प्रदान गरेर राखेकोे भए निजी क्षेत्र कपडा उद्योग प्रति आकर्षित हुने थिएनन् र जनताको छनौटको अवसर कम हुने थियो । के अहिलेको यो अवस्था निजीकरणले ल्याइदिएको होइन र ?

नेपालमा निजीकरणको अवस्था

नेपालमा २०४६ को राजनीतिक परिवर्तन पछि सरकारले अपनाएको खुला र उदार अर्थतन्त्रको कारणले गर्दा सार्वजनिक संस्थानको निजीकरण प्रक्रियालाई तीव्र रुपमा अघि बढाईयो । निजीकरण ऐन, २०५० कार्यान्वयनमा आउनु पूर्व देखिनै निजीकरण प्रक्रिया शुरु भै २०६३ चैत्र मसान्तसम्म देहाय बमोजिम २९ वटा सार्वजनिक संस्थानहरुको शेयर विक्री, व्यवस्थापन हस्तान्तरण, खारेजी, सम्पत्ति विक्रि तथा अचल सम्पत्ति लिजमा प्रदान गरी निजीकरण कार्य सम्पन्न भयो तर यसपछिका दिनमा निजीकरण प्रक्रियाले मूर्त रुप पाउन सकेन । यसरी विगत लामो समयदेखि निजीकरणको प्रक्रिया रोकिनुमा राजनीतिक स्वार्थ पूर्ति गर्नका लागि नै हो भन्ने कुरा सायदै कमले नबुझेका होलान । बरु निजीकरण गर्दाको पृष्ठभूमिलाई बिर्सेर निजीकरण पछिका असफलताका कथा गुनगुनाउनु र निजीकरण कुनै पनि हालतमा गर्नु हुँदैन भन्दै हिँड्नु लोकप्रिय भयो । सार्वजनिक संस्थानलाई एकाधिकार दिएर पालन पोषण गर्दा कसरी भूमिगत अर्थतन्त्रको विस्तार हुन्छ भन्ने कुरा नाकाबन्दीको समयमा आयाल निगमको एकाधिकारले अर्थतन्त्रमा ल्याएका समस्यावाट थाहा हुन्छ तर यसका विषयमा धेरै निर्णयकर्ताहरु चूपै रहन रुचाउँछन् ।

निजीकरण नै किन ?

निजीकरण बाहेकका सुधारका प्रक्रियाहरुमा स्वामित्व हस्तान्तरण नगरी करदाताकै पैसावाट तलब भत्ताको व्यवस्था गरिन्छ जसले गर्दा कुनै पनि जोखिम लिएर काम गर्नु पर्ने अवस्था रहँदैन । जस्तै, रणनीतिक साझेदारीमा जाँदा अझै पनि सरकारको भूमिका नै हुन्छ तर भूमिका अनुसारको व्यवसायिकता तथा उद्यमशीलता नहुनुका साथै जिम्मेवारी पनि नलिने अहिलेकै प्रवृत्ति कायम हुन्छ । नयाँ व्यवस्थापन ल्याउँदा पनि व्यवस्थापन मात्र हस्तान्तरण हुन्छ तर जोखिम अझै पनि करदातामा नै पर्छ । व्यक्तिगत रुपमा कुनै पनि प्रकारको जोखिम लिने अवस्था सृजना हुँदैन ।


अत: लोककल्याणकारी राज्यको नाममा सरकार आँफैले व्यवसाय संचालन नगरी व्यवसाय संचालनको लागि सबैलाई बराबर खेल्ने ठाउँ उपलब्ध गराईदिनु पर्दछ । कुनै पनि संस्थानलाई संरक्षण गर्ने भन्दा पनि त्यसलाई बजारसँग प्रतिस्पर्धा गर्न दिनु पर्दछ । प्रतिस्पर्धा गर्न नसक्ने लाई प्राकृतिक मृत्यु हुन दिनुपर्दछ । यसो गर्न सकेमा मात्र सार्वजनिक संस्थानहरुको उत्पादकत्व बृद्धि भई करदाताले तिरेको मूल्यको सम्मान हुन जाने छ । यसको लागि सार्वजनिक संस्थानको निजीकरणको विकल्प छैन । तर निजीकरणबाट बजारमा एकाधिकारको अवस्था भने सृजना हुन दिनुहुँदैन । यसका लागि सरकारले आफ्नो नियमनकारी भूमिकालाई प्रभावकारी बनाउनै पर्दछ र आँफै संस्थान नचलाउँदा निष्पक्ष रुपमा प्रभावकारी नियमन क्षमता अभिवृद्धि हुन सक्छ ।



About Niranjan Niroula

He strongly believes in liberal values and individual freedom. He is also interested in analyzing global economic trends and political news.

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A “How to” on Promoting Indigenousness

When the armed conflict between the Maoist rebels and the Government of Nepal ended, certain conditions were put forth by the (then) rebels before they became part of the new government. One of the agreements that were signed entailed the reformation of the country’s governance structure in order to end the prevailing autocratic regime and to better the situation of the indigenous populace. Ethnic federalism became an attractive option to Nepal considering that there are many ethnicities in Nepal and it could provide the mechanisms for protecting the disappearing ethnic heritage. Moreover, given the logic that individuals are likely to identify with and aim for the betterment of the situation of individuals like themselves, this option seemed to fit the bill. However, satisfying the parties who designed the proposal has been a futile effort. Currently, lawmakers and leaders alike are debating on very important issues like the names of the states and the number of states that Nepal would need. Obviously, the most important aspect of any country is the name that is given to the regions where people live. Of course it is impossible to love or work for the benefit of your homeland if you do not love its name first.

Jokes aside, this is arrangement has failed to convince the participating political parties resulting in disagreements and power struggle. Of course, great leaders, you have forgotten what is truly important to us citizens because you are leaders. You have failed to implement the same logic you employed while deciding ethnic federalism: individuals who identify with each other think and conduct activities that benefit each other. You call yourselves leaders and strive to gain the stature of leaders. With your leader-mentality, how can we citizens expect you to identify with our needs? This is probably why you are completely unaware of the fact that indigenous people, in order to preserve their lifestyles and culture, do not need fancy names for the regions they reside in; they need the opportunity to benefit from the existence of such lifestyles and culture. Yes, great leaders, your constant squabbling and bickering have indeed empowered these people who you claim to serve…….NOT!

The existence of economic opportunity from saving one’s culture or the prevalence of benefit from saving ones culture will certainly safeguard cultures and heritage. There are clear examples of how economic opportunities (from conservation rather than exploitation) help protect resources that were once unsustainably consumed. In Nepal, Community Based Conservation practices have shown strong performance in terms of preserving local flora, fauna, and culture. On the flip side, alternative or conventional approaches to meeting the same end, i.e. conservation of local flora, fauna, and wildlife, have failed when the government forcibly stepped in to protect one group, at the expense of another. The example of Koshi Tappu Wildlife Reserve is relevant for a discussion on conservation efforts that have been unsuccessful. The government forcibly took over the land that was once the source of livelihood of the local populace for the conservation and protection of Nepal’s Wild Water Buffalo population. However, the conservation program has had to constantly struggle with the locals accused of encroachment and allowing domestic animals to graze in protected land. On the other hand Annapurna Conservation Area has received much accolade for empowering the locals to conserve the area they reside in; a local, non-political conservation committee by the name of Conservation Area Management Committee (CAMC) collects all the proceedings and uses it for the development of the area. In other words, the Annapurna Conservation Area Project envisioned the local communities as being stakeholders whereas in the case of Koshi Tappu, the local individuals were seen as a threat and, thus, driven out of the land to make room for water buffalo, which fueled resentment among the locals and fostered an environment of “rule breaking.”

What I wish to have highlighted from the above stories is that the willingness to conserve arises when there is benefit tied to the conservation effort. The individuals from the Annapurna Conservation Region have the initiative to actively promote the conservation of the National Park because they have incentives tied to their conservation efforts. The poor inhabitants of the Koshi Tappu Wildlife Region in the other hand were driven out of their land, where they had been grazing livestock for generations, to make room for Wild Water Buffalo who continue to be threatened due to habitat loss and encroachment. To make matters worse, the locals were not even properly compensated for their loss, in other words, they had to forcibly obey a government directive.

In our issue involving the creation of ethnicity based federal states, it is important to realize that this action may very easily create “water buffaloes” and “Koshi Tappu inhabitants” out of many societies and peoples. The politician’s and party leader’s lofty words of enriching cultural diversity and inclusion will do little for actually preserving indigenous language, culture, heritage, and the like if those who engage in conservation practices are not allowed to reap the benefits of their efforts. This proposed system can easily create new autocrats and displace many individuals from their ancestral homelands and do nothing to enrich or conserve indigenous culture and heritage.

It is very easy to provide economic incentives to protect culture, environment, and language and it is very hard to force people to do the same. The ruling parties do not have to continue beating around the same bush, rather, it is time they understood simple economics. People respond to incentives.

Anurag Pant

About Anurag Pant

Anurag holds a Bachelors of Science in Economics and works as a Research Assistant at Samriddhi, the Prosperity Foundation. He also lectures on Economics at Xavier International College.

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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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