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Private Property Right – You have it, but you don’t

The freedom of an individual to keep ownership of the fruits of his/her labor is the fundamental principle of private property right. This right manifests in the form of lending the owner of a property, the freedom to use, dispose of, and transfer the ownership of that particular property to any other individual/group through voluntary transaction. It is one of the fundamental pillars of economic freedom – the harbinger of prosperity. The UN has also ratified it as a Human Right. Countries today guarantee this right to their people as their fundamental right through their constitution – the supreme law. So does Nepal. Or does it?

Mere addressing property right as a fundamental right does not necessarily guarantee it. Particularly so when the article instating the property right is quickly followed by the lawmakers’ favorite little word – explanation. This is usually where the lawmakers tweak the preceding texts in such a way that they promise something, but they don’t really have to keep the promise. The Constitution of the Federal Democratic Republic of Nepal lends us an example:

Article 25: Right to Property

“Every citizen shall, subject to laws in force, have the right to acquire, own, sell, profit from, or engage in other transactions relating to, property.”

And then (you guessed it right): Explanation!

“(3) … when the state acquires private land for purposes relating to public interest, the basis and process of compensation will be as per the law.

“(4) Nothing … shall be deemed to prevent the State in enforcing land reform, management and regulation for the purpose of increasing production and productivity of land, modernization and commercialization of agriculture, environment preservation, organized housing and planned urbanization.

“(5) As per the sub-article 3, when the state acquires any individual’s private property for public interest purpose, nothing shall prevent the state from using the property in any other public interest purpose than the one cited at the time of acquisition.”

Note: The above text is an unofficial translation by the author.

Since the constitution stipulates that the property expropriation1compensation be determined as per by the law, the compensation against the expropriation of private property per se is no more guaranteed by the constitution. It would depend on the Acts relating to the purpose that it is actually being expropriated for. And it is again possible (although not necessarily so) to amend the Acts to rid the state of the burden of compensation altogether. One recent example would be the government denying land-owners a compensation for the acquisition of their land by the state during the road expansion drive in Kathmandu. The constitution does not make it mandatory that expropriation only be allowed after complying with a due process, including a just, fair and reasonable compensation. Instead, it states that nothing shall prevent the state from expropriating private property for ‘public interest’ purpose.

Here are a few examples of how other countries protect private property, and make compulsory provisions for compensation if there ever need be to expropriate somebody’s private property:

Article 31, The Constitution of India 

“… it shall not be lawful for the State to acquire any portion of such land … unless the law relating to the acquisition of such land, building or structure, provides for payment of compensation at a rate which shall not be less than the market value thereof.”

The Constitution of the United States, Amendment 5 – Trial and Punishment, Compensation for Takings. Ratified 12/15/1791: 

“ … nor shall private property be taken for public use, without just compensation”

Compare these constitutional provisions with those of Nepal and it becomes clear that you and I, the citizens of Nepal have our property right, and yet not.

“The right to life is the source of all rights—and the right to property is their only implementation. Without property rights, no other rights are possible. Since man has to sustain his life by his own effort, the man who has no right to the product of his effort has no means to sustain his life.”

Man’s Rights, Ayn Rand

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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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Misdirected goal (?)

In a bid to curb rising unemployment, and international migration of rural youth to seek economic opportunities elsewhere, Nepal Rastra Bank (Central bank of Nepal) has recently issued a ‘Working Procedure on Interest Subsidy for Agriculture Loans to the Youth.’ As the name suggests, through this document, the government and Nepal Rastra Bank (NRB) are aiming to revive the Nepalese economy through agriculture. The plan is to encourage the youth to work in Nepal itself, make them feel like the country values them and is constantly working to providing better economic opportunities to them in Nepal, and develop the agriculture sector of Nepal; a nationalist policy I’d say. While the intentions are highly commendable, there are a few things that the authorities seem to have overlooked.

More farmers does not mean a prosperous Nepal

fragmented farming in NepalFirstly, the goal of the state has been misdirected. The new move by the state aims to bring in more and more people into agriculture. As 66% of the total population currently depends on agriculture, the sector’s total contribution to Gross Domestic Product (GDP) is only 33%. Furthermore 85% of these people who practice agriculture are in the sector purely for subsistence. Despite the fact that there are around 4 million Nepalese youth toiling in the foreign land, this figure has not really changed. The productivity of the sector has not declined with respect to the number of people exiting the sector. During a consultation meeting of the Agriculture and Water Resource Committee at Singhadurbar, Honorable Hari Prasad Parajuli, the Minister of Agriculture Development himself clarified that given this background, Nepal won’t lose even a kilogram of food grain that lands in the market due to the fact the Nepalese people are going abroad for foreign employment, neither will Nepal gain a kilogram even if some of these people come back. This is the reality of our agriculture. Yes, agriculture will allow people to earn a living, but the kind of agriculture we practice today – farming in fragmented plots of land to feed one’s own family – will not offer better economic opportunities to the poor.

Remittance on the other hand

On the other hand, the scores of youth that have been forced to seek economic opportunities in foreign lands due to unfavorable enterprising environment in Nepal seem to have given some respite to poor Nepalese populace. In the last twenty years (mid-90s being the period when Nepal began to see an increase in outward migration of Nepalese people due to the civil war), remittance has grown 111 folds, from $50 million in 1994 to $5,551 million in 2013. This has contributed largely to reducing poverty in Nepal, raising the quality of life of rural Nepalese and enhancing their access to education, health education and services, and technology. If the state really wants these migrant workers to come back, then the economic gain that they get upon their return has to be greater than the one they are currently getting in foreign lands. But this aspect has not been addressed by the state plan.

The Bankers’ Dillema

The other problem with the NRB guideline is how it fails to see the impact of a policy like this on the bankers. The guideline fails to recognize the fact that the money that commercial banks hold is actually savings of the general public itself and the profits belong to the shareholders. The bankers are accountable and answerable to these stakeholders if their money is channeled into making risky investments. Banking is a business and it is guided by the prospect of making profits. If a project looks lucrative to the banks, it will finance the project. If not, not even the one being undertaken by the poorest Nepali will be financed by the bank in the pretext of helping the poor. Besides, the administrative cost of availing services to great number of small scale farmers (esp. when these farmers fail to produce properties that can be entertained by the banks as collateral) is far greater than availing services to their corporate clients. If the state fails to acknowledge this fact, then this plan is bound to fail like other similar programs where the bankers opt to pay the fines instead of complying with the state policies.

Therefore, under the current scenario, what the state really needs to do is ease the process of holding formal entitlements of the land, buildings and small enterprises that people have owned and run for years. What the state needs to do is acknowledge people’s property, secure their property rights and convert their ‘dead capital’ into ‘live capital’ such that these can be used as collateral in the banks to acquire loans to enterprise (not just farming but everything) and create wealth, instead of subsidizing an inefficient farming practice in the name of nationalism.

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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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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