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Where is the trust in the market?

It is somewhat consolation to us all, that the constitution was eventually ratified and a long political process came to an end. But when it comes to prosperity and growth, the constitution does not have enough ground work for better environment for entrepreneurs. Ultimately, it is not the government that is going to be the engine of economic growth of our country. What government can and should do is to lay out ground rules that encourages innovation and protects entrepreneurs. Government should create an environment that promotes competition by reducing barriers to entry and by preventing the formation of cartels.

This is preamble of the Constitution of the Federal Democratic Republic of Nepal:

Nepal is an independent, indivisible, sovereign, secular, inclusive, democratic, socialism-oriented, republican, multiethnic state which shall be called Nepal in short

That sentence without the word ‘socialism oriented’ is still perfect to describe new Nepal under the new constitution. Since the word is there, what is its implication now? Is government going to take responsibility of providing goods and services for its citizens, even if the market is perfectly capable of doing so?

The constitution guarantees all sorts of rights for individuals for example: right to health, right to clean environment, right to education, right to employment etc. Among the rights that is provided for individuals, labor right and right of consumers provides interesting insight into how policy makers think of private sectors. Following are some excerpts from the constitution:

Every worker and employee shall have the right to form and join trade unions and to engage in collective bargaining for the protection of their respective interests, as provided in law

Every consumer shall have right to get quality goods and services. Victim of loss incurred from low quality goods or services shall have right to compensation as provided by the law

These clauses have an underlying assumption that business are always looking at every opportunity to take advantage of their consumers and workers. And these clauses also have the assumption that government is the big brother which is going to protect us (consumers and laborers) all. Another assumption in those clauses is that the government is benevolent saint that has public interests at its core. Well it could not be further from the truth. The fact that it took this long for the constitution to be drafted and ratified (it took eight years) proves that legislative bodies, political parties and bureaucrats have their own self-interest namely: securing votes, re-election and securing budget. Public interest is the least of their concern even if they make us believe it is.

It is true that businesses look for every opportunities to maximize profit. It is also true that there can be incidents of business malpractices. The way out of this problem then is to create an environment of competition driven by efficiency and innovation. In an environment of fair competition, the businesses that engage in mal-practices will not survive and will have to exit the market. The government should let the force of market work its magic rather than imposing iron clad regulations on businesses, which can lead to many unintended consequences and are very hard to change even if the regulations are not leading to desired outcomes.

This lack of trust in the role of market and entrepreneurial spirit (core of which is competition, efficiency and innovation) is very tragic for Nepal, a country which is in desperate need of rapid economic growth. Rapid economic growth does not come from regulating the private sectors. And policy makers should be very mindful of this.

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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पुनर्निर्माणको जिम्मा निजीक्षेत्रलाई

आर्थिक् अभियानमा मिति २०७२ जेठ १४ , बिहिबारमा छापिएको लेख ¦  सो लेख मा निर्देसित् हुन  यहा क्लिक गर्नुस्

नेपाल चेम्बर अफ कमर्शले आयोजना गरेको अन्तरक्रियामा वरिष्ठ अर्थविद्हरूले भौतिक संरचनाको पुनर्निर्माणसँगै सन्तुलित आर्थिक विकासमा पनि उत्तिकै ध्यान दिएर योजना बनाउनुपर्ने बताएका छन् । विनाशकारी भूकम्पपछि अर्थतन्त्रलाई क्रियाशील बनाउन विशेष रणनीति आवश्यक हुन्छ । यसका लागि निजीक्षेत्रले यस्तो बहस शुरू गर्नु सार्थक प्रयास हो । भूकम्पले विनाश मात्रै गरेको छैन, पुनर्निर्माणका लागि अवसरसमेत दिएको छ । यसमा सबैको सहमति भए पनि कसरी पुनर्निर्माणलाई अघि बढाउने भन्नेमा भने स्पष्ट खाका तयार हुन सकेको छैन । जेहास्, पुनर्निर्माणको अवसरलाई खेर जान दिनुहुँदैन । व्यर्थको बहस र विवाद गरेर यस अवसरलाई उपयोग गर्न सकिएन भने यो महान् ऐतिहासिक भूल हुनेछ र यसबाट नेपालले ठूलो मूल्य चुकाउनुपर्नेछ ।

पुनर्निर्माणको कसको नेतृत्वमा कसरी गर्ने भन्नेमा विवाद गरिरहनु पर्दैन । निश्चित रूपमा यसको जिम्मा निजीक्षेत्रलाई नै दिनुपर्छ । प्राकृतिक विपद्पछि विश्वका विभिन्न देशमा भएका पुनर्निर्माणमा निजीक्षेत्रले प्रमुख खेलेको पाइन्छ । सरकारले योजना, नीति बनाउनुपर्छ र त्यसअनुसार निजीक्षेत्रलाई पुनर्निर्माणको ठेक्का दिनुपर्छ । त्यस्तै विदेशी सहायताको ठेक्का पनि नेपालकै निजीक्षेत्रलाई दिनुपर्छ । यदि नेपालको निजीक्षेत्रले गर्न नसक्ने काम छ भने पनि नेपाली कम्पनीका सहायकका रूपमा मात्र विदेशी कम्पनीलाई काम गर्न दिनुपर्छ । अहिलेसम्मको प्रचलनमा यस्तो ठेक्का विदेशी कम्पनीलाई नै दिने र विदेशी कम्पनीले नेपाली ठेकेदारहरूलाई टुक्राटुक्रा काम गर्ने दिने चलन छ । तर, अब त्यसलाई बदल्नुपर्छ । यसो गर्दा नेपाली कम्पनीहरूको अनुभव र दक्षतामा अभिवृद्धि हुन्छ । त्यस्तै उनीहरूले नयाँ प्रविधिको उपयोग गर्न पनि सिक्छन् । त्यसो गर्दा नेपाली निर्माण कम्पनीहरूमा आत्मविश्वास बढ्न सक्छ र भोलिका दिनमा उनीहरूले नेपालमा मात्र होइन, विदेशमा समेत काम गर्ने अवसर पाउँछन् । यसबाट नेपालको सन्तुलित आर्थिक विकासमा योगदान पुग्छ ।

पुनर्निर्माण गर्दा सकेसम्म स्वदेशमै उत्पादन भएका निर्माण सामग्रीहरूको प्रयोग गर्नुपर्छ । विदेशी सामान प्रयोग गर्नुपरेमा त्यसको प्रोक्युरमेण्ट पनि नेपाली बजारबाटै गर्नुपर्छ । नेपाली उद्योगहरूले हालको अवस्थामा ऊर्जा अभावका कारण क्षमताअनुसार उत्पादन गर्न सकिरहेका छैनन् । त्यसैले उनीहरूलाई डेडिकेटेड फिडरमार्फत चौबीसै घण्टा विद्युत् आपूर्ति गरी पूर्णक्षमतामा चल्न दिनुपर्छ । पुनर्निर्माणका लागि विदेशबाट सामान मगाउनैपर्ने भए विदेशी कम्पनीलाई दिनु हुँदैन । नेपालकै निजीक्षेत्रलाई यस्तो जिम्मेवारी दिनुपर्छ । यसरी पुनर्निर्माणको जिम्मेवारी निजीक्षेत्रलाई दिँदा एकातिर नेपालीले कामको मौका पाउँछन्, बढी दक्ष बन्नेछन् भने अर्कातिर यसमा भावनात्मक सम्बन्ध पनि हुन्छ । यसले पनि पुनर्निर्माणमा मनोबल बढाउ“छ । तर, निजीक्षेत्रले गर्ने काम सबैमा इमानदारी हुन्छ भन्ने छैन । यसलाई रोक्न सरकारले आफ्नो नियमन र अनुगमन संयन्त्रलाई बलियो बनाउनुपर्छ ।

 

Deekshya Nakarmi

About Deekshya Nakarmi

Deekshya Nakarmi is Communications and Outreach Assistant at Samriddhi, The Prosperity Foundation. She is a student of Development Studies.

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Analysis of Budget 2071/72 Presented by GoN

The Ministry of Finance has presented a budget of Rs. 618 billion for the fiscal year 2071/72. While the Finance Minister has promised to kick-start second generation of economic reforms by reforming economic policies, bringing down anti-competitive practices like syndicate and cartels, encouraging the private sector and offering various fiscal incentives like tax exemptions and rebates, the budget has, in the mean time, also been a subject of debate in terms of issues like Constituency Development Fund, being pro-rich and many more.

Samriddhi, The Prosperity Foundation hosted its latest round of Econ-ity on “Analysis of Budget 2071/72 Presented by GoN” on the 17th of July, 2014 at Hotel Everest, New Baneshwor, Kathmandu.

The speakers at Econ-ity interacting with the audience

The speakers at Econ-ity interacting with the audience

This edition of econ-ity featured Dr. Chiranjibi Nepal (Chief Economic Advisor to the Prime Minister) and Prof. Dr. Bishwanbher Pyakuryal (Senior Economist) as speakers. The event was moderated by Mr. Rameshore Khanal (Former Secretary, Ministry of Finance) who started by acknowledging that this budget has been presented in the right time for Nepal. He shared that the current government is capable of staying in power throughout its tenure and has potential to deliver results in terms of constitution drafting, delivering economic growth, enhancing production, generating employment, etc. In the meantime, he also acknowledged the fact that this budget has been critically analysed in the parliament itself and opposition parties have raised concerns over its not being regionally balanced.

Here is a snippet of what the speakers said during the forum and what their analysis was regarding the new fiscal budget.

Prof. Dr. Bishwanbher Pyakuryal

Prof. Dr. Pyakurayal commenced his deliberation by acknowledging the good aspects of this budget. He mentioned that the allocations justify the government mission of employment generation, economic growth, social physical infrastructure, long term growth and poverty reduction.

He then went on to warn that this budget will not it yield any result unless the plans and policies and reform measures are implemented. The underlying assumptions that are made during the preparation of the budget do not seem to hold up in reality in Nepalese context. He talked about how theoretical economic policies and ground realities of Nepal do not match.

Nepal has seen wages go up or down, without really affecting labor productivity; despite the much talked about effect of India’s economy, Nepal’s inflation was still double digit when only last year it was contained at zero in India; the monetary policies have failed to deliver desired results in inflation. There does not seem to exist a robust relationship between Nepal’s monetary policy and inflation. He further expressed that we need to understand which among the factors like policies, capital adequacy/inadequacy, governance structure, and institutional set-ups are responsible for these issues.

He highlighted that one of the major problems in Nepal is the inability to make capital expenditures. Despite Local Self Governance Act and guidelines set by the fiscal commission, we have failed to spend on time. This raises concerns over our resource allocations. He said that we have already missed the train if we are to make it to Developing Nation status by 2022. We need to make 13-18 billion dollars worth of capital expenditure to graduate to Developing Nation status, but our current growth rates will not lead us there.

He raised serious concerns over how we never study India’s budget allocations’ impact in Nepalese economy despite its being released few months in prior. With their levels of planning, their currency is going to strengthen against USD. This will lead to lower production costs in India. On the contrary, our production costs are higher than market prices in India. Only 13% of the agricultural produces reach the markets in Nepal. In this case, the priority of the budget should have been making markets available to these entrepreneurs, farmers, businessmen. This has not been addressed by this budget.

While on one hand, the budget talks about reforming policies and Acts, in reality we have been relying on very old policies. We are still guided by Foreign Exchange Regulation Act, 1962, while India has made 3 amendments to the same Act of theirs till date. There are as many as three dozens of proposed policies and Acts lying around in the cabinet; some are stuck in the parliament. These processes need to be expedited.

He also expressed that we need to make structural changes in our tourism sector. 55-65% contribution to tourism sector comes from domestic tourism, but we have failed to recognize the domestic tourists. We need to explore further on possibilities of pilgrimage tourism, adventure tourism, trekking, sights-seeing, and formulate relevant programs for the domestic tourists. He also mentioned that we should look into popular international tourism practices like keeping Tourism Competitive Indices.

He concluded his deliberation by commenting over lack of capital/financial management in Neal and economic viability of possible federal states. There is domestic saving worth Rs. 2 trillion in Nepal itself but we have failed to channel these funds into productive sectors. He further drew attention to the issue of economic viability of federal states. While have been talking about federalism in Nepal, we have been overlooking facts like 60 % of Nepalese districts only somehow manage to collect revenues worth 10% of their total expenditure. Under such a situation, it is obvious that it makes no economic sense to go into federalism.

Dr. Chiranjibi Nepal

Dr. Nepal commenced his deliberation by expressing that we cannot have very high expectations from the budget. His focused majorly on our inability to make time-bound reforms to our existing policies and regulations. He acknowledged that for the first time in history, this budget has addressed Second Generation of Economic Reforms. However, lot needs to be done for the promises sowed by the budget to materialize.

He stressed on the need for industrial policies to adapt and respond to the changing trends and rapidly developing technological innovations coming in the market. Comparing it with India and China, he lamented that Nepal has been very slow in economic reforms and mentioned capital and financial market as an example of how the economy has been hit by lack of timely policies. China has continued to grow since its economic reforms of 1978, achieving as much as double digit annual economic growth and falling to single digit only recently. Industrial policy of China changes every 3 years to allow the industries to adapt to the technological advancements in the world. Similarly, India, that opened up its economy in 1994 has been continually reforming its economic policies and is all set to be one of the biggest economies in the world by 2020. In the meantime, Nepal has failed to internalize the positive changes occurring in the neighboring countries.

Dr. Nepal also shared that the Constituency Development Fund (CDF) will do away with the long bureaucratic procedures delaying the funds from reaching the local level, and expressed his consensus with the policy.
The pre-budget discussion, addressing Public Procurement Act, Financial Accountability, Land Acquisition and quality control are some major highlights of this budget, as expressed by Dr. Nepal.

Interaction with the audience

The participative and interactive audience then further talked about education, ability of the government to spend, youth self employment, foreign employment, sectors of comparative advantage, and other issues pertinent to the topic. Some highlights of the interaction session are as follows:

• Currently in Nepal, inflations has been rising and output is falling. There is therefore a situation of stagflation. Similarly, there does not seem to be a sound link between growth and employment. We have seen unemployment levels remain the same despite economic growth. In order to address situations like these, we need to form coordinated policies.

• Agricultural Development Bank has gone on loss due to its subsidy program. Now, instead of going for technological up-gradation and commercial agriculture, we are giving continuity to the same subsidy program. It appears that necessary homework has not been done in this regard.

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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O thy expenses, dear law!

O thy expenses, dear law!

O thy expenses, dear law!

Not that long ago, a friend of mine wanted to have his business registered. He asked around a few places, did his market research, did whatever else he needed to do and then went on to hire a middleman do get the official papers done. As a layman in a country where local level systems are set up to help one with legal compliance one would wonder why he did what he did. Might I add, he’s not the only one who finds problems with navigating the legal labyrinth on his own—the country is filled with countless others who have no faith in the legal structure as such. The mistrust is, to say the very least, built in the very process of socialization. From friends who have had property cases that have now started to span over generations to the new and aspiring entrepreneurs who think that paying the middlemen rather than making endless fruitless visits to the government offices for registration of a new business is a viable option to businessmen who do not hesitate to use third party coercion—these are but few in the laundry list of things that are not so ideal in terms of legal compliance in Nepal.

As such, courts are the formalized state structures that deal with the legal issues in the country and being state-run structures they are subsidized by the government and at least on papers provide services at minimal costs to the larger populace. But as a better known fact, courts in Nepal are plagued by their own set of worries—their dockets are overflowing and they face resource (human, technical, financial) crunch. As per Supreme Court’s Annual Report there are 52,098 backlogs in all courts across the country and the number is only growing. As a layman, for me as well as for countless others the choice of the contracting and enforcement mechanism would naturally depend on the cost of using it. The focus is not only on the costs (say, a court fee) that is incurred to get a contract enforced, but on transaction costs (for example, time spent in court, bribes, social detriment in escalating disputes) of getting a service. People make their choice based on these costs and when the costs are high they either look for alternatives or do not undertake such transactions in the first place.

The fact the people struggle with legal compliance in Nepal can be evinced in the journey of my aforementioned friend. After having had the legal assistance from the middleman and a couple of lawyers and having bribed a handful of officials here and there he finally set up a business. It so happened that the business ran breakeven for a few years and it came to a point where he wanted to close it down for good. The forthcoming reality hit him hard—it was difficult to close the business afterall! He needed to appoint liquidators and auditors, get all clearance from his employees and comply with an endless list of procedures—the cost of which became extremely high. There again are middlemen and the added costs. He found himself in a lose-lose situation.

This is what happens to a majority of those who wish to close their business. It takes around 5 years of paying annual taxes and visiting the concerned authorities time and again just in case one wills to close the business down. This is why many companies choose to pay the minimum amount and decide to run for losses, or cut through the red tape. Contrary to what happens in countries like Australia where it takes two months to exit a business.

Smaller private enterprises which usually face greater transactional uncertainty and risks of cheating and have shorter business time-horizons than large enterprises tend to resolve contract disputes largely outside the courtroom, partly due to a lack of confidence in the courts’ ability to enforce judgments in a timely manner. For a transition economy like ours that has been struggling with its micro-economic instabilities, the inability to enforce judgments timely often entails substantial adverse commercial implications. This lack of confidence in the state systems most critically, even a short delay in recovering debt or payment through formal enforcement by “slow” courts can cause significant financial losses in real terms.

Across the globe, the failures of the nation’s public courts—for example, overcrowded dockets, costly delays, and legal uncertainty—have spurred the development of private-sector alternatives. Privatizing dispute-resolution services, and contracting out to the private sector, can offer better service at lower cost. Precautions however, should be taken so as to minimize undue influence by interest groups. Easier said than done!

 

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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