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Limited Government and Maximum Governance

The development activities were carried out relatively rapidly during the three-decade Panchayat although the country was ruled under single party system. A lot of infrastructural developments took place then. The roads of Nepal, Mahendra Highway, Arniko Highway (that connects Nepal with China), Tribhuvan Highway, Kulekhani Hydropower Project (the only one storage type project in Nepal), were built during the same period. Institutions such as Nepal Electricity Authority (NEA), Nepal Telecommunication Corporation, Nepal Drinking Water Corporation, and Nepal Airline Corporation (NAC) which were very essential for providing electricity, communication, water and air services to the people were created during the direct regime of the King which lasted till 1990. The development process is similar in other countries as economic development is initiated with the involvement of government intervention.

However, the involvement of government is not a sufficient condition for bringing prosperity at every nook and corner of the country because it monopolizes resources available and, hence, looses the incentive to utilize these resources efficiently in the absence of active participation of private sectors, which is quick in decision-making and following innovative practices. This is very true in case of Nepal as well as evinced by several examples in service and production sectors.

The generation of electricity has increased after deregulating energy sector by bringing Electricity Act in 1992. Private initiatives have already contributed to adding more than 237 MW of electricity to the national grid. Currently, around 44 projects, with a total capacity of 338 MW are under different stages of construction, and 76 hydroelectric projects that can contribute 711 MW to the national grid have already concluded Power Purchasing Agreements (PPAs) with the NEA. The output of electricity is expected to increase after complete deregulation in distribution as well transmission system as it solves one of the critical constraints – the construction of transmission lines by acquiring private land – of this sector. The government has recently decided to form a Transmission Company by including all the stakeholders such as Ministry of Finance (MoF), Ministry of Forest and Soil Conservation, Ministry of Environment, Science and Technology, Ministry of Land Reforms and Management, Ministry of Information and Communications, Ministry of Defense and Ministry of Home Affairs, and general public in order to solve the problems being faced by 18 different projects (worth over 650 MW) – continuous delay in construction of transmission system being the major one.

Access to mobile as well as landline phone has also risen after involvement of Ncell, United Telecom Limited (UTL), Nepal Telecom Satellite Private Limited (Hello Nepal), and through structural change of Nepal Telecommunication Corporation by disinvesting government’s share to its staff and general public and rebranding the same company as Nepal Telecom. These are just a few examples of sectorial development that Nepalese people have observed in the recent past. The easy access on phone has helped in overall development of the country as the farmers living in remote parts of the country can access necessary information such as the price, demand, supply and stock of their product, and initiate new ventures with the support of internet facility that is available in the mobile phones.

Liberalization, followed by privatisation is needed in an economy to mobilize human resources effectively and efficiently, reduce unnecessary expenditure, and manage other available resources more wisely. Furthermore, the involvement of private sector is very helpful for avoiding additional costs associated with insurance, pension and so on. Every year, Nepalese government has to allocate a large chunk of budget for such expenditure which increases with increase in number of employees.

On top of this, it is not necessary for private sector to follow lengthy recruitment processes that requires an examinee to go through a series of exams that lasts for more than a year. They do not have to worry about being unable to fire any staff unless they are legally declared unsound. It is widely accepted fact that without the presence of vibrant private sector, there is possibility of monopolization of the resources that reduces the chance of innovation – which actually results in fewer jobs in the country.

While the private sector helps in achieving high growth trajectory by judicious use of all forms of resources in the country, the government too can aid by maintaining rule of law, providing free and fair justice, and protecting private property. Only a decade ago, nobody wanted to establish any new enterprises in the Indian State of Bihar. This was also before Nitish Kumar came into power as the Chief Minister at a time when entrepreneurs were mugged, extorted and threatened by criminals. There was no security of life and property.

Today, many domestic and foreign entrepreneurs who want to invest in Nepal are not ready to do so due to lack of security of their property and absence of proper patient rights. Therefore, the government should make every effort to create an enabling environment for doing business by formulating necessary policies that bring efficiency to the economy, incentivize investments, and promote the culture of entrepreneurship.

Pramod Rijal

About Pramod Rijal

Pramod Rijal is a Research Associate at Samriddhi, The Prosperity Foundation. He is also a lecturer of Economics at Mega National and Unique College of Management and has contributed a number of articles in various national dailies.

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Transportation Syndicate: Burden on Consumers

transport syndicateIf you’ve ever travelled on public vehicles in Kathmandu, I believe our story would be somewhat similar― a constant struggle to grab yourself a seat, loads of frustration and anger. What if that overcrowded vehicle is your only option? You might complain, but that would be all. I am a student who has to communte to his college in Baluwatar, Kathmandu and I use one particular public vehicle – “Nepal Yatayat.”

The bus plies the Koteshwor –Baluwatar– Chabahil route. I always wondered why the number of buses on this specific route is limited. That the buses are always overloaded with passengers. Therefore, it is obvious that there is high demand. But why aren’t people investing in this industry despite such profitable prospect it offers. This sure is a question that seeks an answer.

So one day, one of my daily commutes, I was seated beside the bus driver. After easing myself up (somehow) into the dilapidated seat, I initiated a casual conversation. I inquired about the limited availability of buses. He replied, “Our bus association determines the number of vehicles that are allowed to ply this route”. He further added that operating a bus on this specific route would cost four times the actual amount of buying a bus. The association charges this three-fold fee to permit a new bus to entering the business. Based on our dialogue and my personal experience, it was crystal-clear to me that transport entrepreneurs were operating a syndicate. Now this was supposed to have ended by fiscal year 2011/12 as supreme court had termed these forms of fraudulent associations illegal. The duty of an accountable state then would have been to enforce rule of law and serve the consumers – the people that were bearing the cost of such illegal activity. It is a pity that the government could not, and till date, has not been able to do its duty to the people. Supreme Court’s order against transport syndicates has not yet been translated into any form of action. All attempts of consumer rights advocates have gone in vain.

What if someone wants to operate a bus on a specific route? Why should the route permit cost thrice as much as the cost of the vehicle itself? The entrepreneurs’ association seems to have created an artificial entry barrier in Nepal by offering special previleges to a bunch of cronies allowing them to reap the benefits of a public infrastructure built by the state by taxing lawful citizens of the state.

What syndicates do is limit the resources by creating entry barriers and playing around the market causing unnaturally high prices which in the end has to be borne by consumers like you and me. By killing quality and stifling innovation, syndicates allow for market monopolies to firmly set themselves into the system and we, the consumers, are made to pay exorbitant prices for low quality goods and services in the wake of lesser options being available to us.

As a consumer, and as a future taxpayer, it gives be great displeasure in learning that the state has been unable to acknowledge these day-to-day practicalities that rob the taxpayers of the kind of quality service that they are entitled to. All it requires from the state’s side is to monitor these market malpractices and instate the rule of law. I firmly believe that competition in market renders better services to consumers at lower prices and I wish that these syndicates are broken as soon as possible for the sake of protecting consumers’ rights.

Suraj Dhakal

About Suraj Dhakal

Suraj Dhakal, a student of Development Studies works with Research Department at Samriddhi, The Prosperity Foundation. Mr. Dhakal was previously associated with We Inspire Nepal (WIN), a youth led leadership and personal development organization.

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For the love of legislation

Most often when folks from the media (or elsewhere) see a situation where the outcomes are not ideal, the most convenient conclusion or suggestion offered is the need for legislation. Few days ago I read a feature on a very popular magazine about living-in relationships in Nepal and why there is a need for a legislation to address the situation. The feature had case studies of women who were ‘lulled’ into a living-in relationship by being promised a marriage down the line and were physically abused while in the relationship. So the article argued that to address this injustice, a new legislation on living-in relationship was required. There is no doubt that the physical abuse of a human being is completely unacceptable but does it really require a separate law if a woman in a living-in relationship is abused? How is it different than a single, married, divorced or a woman of any civil status being abused? If these women are not being able to get justice in the present system, how will women in ‘living-in’ relationships get justice through the introduction a new law merely?

Fact is, we have grown to be a legislation loving society and sadly, it is doing us more harm than good. We are beginning to think that legislating something is a ready-made fix to most problems without paying much heed to who is benefiting at whose cost. Here are few examples:

Problem: Too many private schools in Kathmandu
Solution: Nepal government legislated that new schools cannot be registered anymore
Who benefits: Already existing schools. They have successfully stopped competition and can have a captive market.
Who pays: Parents pay more for mediocre education.

Problem: Private schools not providing quality education
Solution: Nepal government legislated that the schools have to meet a long list of requirements to ensure quality (from the number of bathrooms, to minimum number of students to size of desks and every possible detail)
Who benefits: Already existing big schools, who meet those requirement already.
Who pays: Poor parents, who want to send their children to low-cost private schools, are not able to do so because there is no way their neighborhood’s “ghar najikaiko” school is able to meet those requirements. Sadly, they will have to send their children to a public school or just cut down on their meals to afford a ‘quality’ private school.

Problem: Too many vehicles (taxis and public vehicles) in Kathmandu
Solution: Nepal government legislated no new registration of taxis and no new route permits to be given in a number of routes
Who benefits: Taxi syndicate, public vehicle syndicate in that route
Who loses: Consumers again, who pay a lot to ride on a cab with unpredictable fares and engine conditions or put themselves through the pain of riding in a public vehicle in Nepal

These are just a few examples among many around us where legislation have led us to far worse outcomes than the ones it set out to address. Truth is, we want infinite number of good outcomes for our society – quality education, health, better living standards and so much more. But these things do not just grow on a tree if we come up with legislation. They have to be created and have to be paid for, by someone. Do we want to earn and pay for what we need or desire or want to look at another person’s pocket to do get there? The tricky thing with legislation is that, it can be easily used as a means to plunder, as we have seen in several instances. How can we ask more of something that benefits a small (special interest) group at the expense of the larger group through the use of law (which is basically force)? If the trend continues, we will not be a society that adheres to Rule of Law but the one where there is Rule by law and the interchange of those two lettered words in those phrases will determine if we live in a just and forward looking society.

Photo taken from: http://www.offthereservation.net/2013_05_01_archive.html

Photo taken from: http://www.offthereservation.net/2013_05_01_archive.html

Sarita Sapkota

About Sarita Sapkota

Ms. Sapkota is the Coordinator of Communication and Development at Samriddhi Foundation and was previously engaged with the Foundation as a Research Associate for more than three years. She is a graduate of political science and also contributes articles for Samriddhi's column at The Himalayan Times' Perspectives supplement.

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Economic Policies in Emerging Markets

Samriddhi, The Prosperity Foundation organized a Nepal Leaders’ Circle meet on the topic “Economic Policies in Emerging Markets.” Rt. Hon. Hugo Swire, MP, MInister of State, Foreign and Commonwealth Office, UK was the speaker for the event. While Nepal is looking to graduate into the status of Developing Country by the year 2022, this program sought to bring out valuable inputs from the participants on how Nepal can benefit from the global trends of cross-border investments by setting the right kind of policy environment that offers profitable prospects to the investors.

Attendees discussing Economic Policies for Nepal

Attendees discussing Economic Policies for Nepal

The event was organized at Hotel Himalaya, Kupondole on the 3rd of June, 2014. The meeting was attended by senior bureaucrats, experts, business community leaders, economists, editors & columnists and foreign investors. The following is a summary of the entire session:

Rt. Hon. Hugo Swire

Rt. Hon. Hugo Swire commenced the session by talking about why, despite all natural, geographical and human endowments, Nepal has not been able to transform itself into one of the major players in the global economy. He acknowledged how Nepal has been a land of peace in the past and reinstated the same peace in the present, albeit having gone through a period of insurgency in the last decade. He then went on to iterating how Nepal cannot afford to be complacent in being a least developed country in the pretext of the same old civil war and waste its resources like hydropower and tourism, and killing the entrepreneurial spirit in the people in the meantime. He expressed how Nepal needs to acknowledge the need of FDI to uplift itself from the Least Developed Country status. There seems to have been discussions over whether Nepal intends to be under aid and assistance all the time, or change it and shift its focus towards bringing in investments. However, not much action has been done in this regard. Similarly, constitution drafting has taken too long a time already. While Nepal is spending much of its time debating and discussing its political and economic agendas, Nepal has utterly failed to reap the benefits of it resources; the opportunities they provide for attaining Nepal’s economic transformation.

The speaker then went on to justifying his statements by giving examples from international experiences. In India, BJP overthrew the ten-year reign of Congress and UPA by selling hopes of economic reforms. Narendra Modi’s Gujarat reforms were the building blocks of BJP coming to power. In China, despite the communist roots, they have liberalized their economy because they realize that they have to allow economic freedom to the people to protect their own political dominance. Currently, they are planning building hundreds of newer cities. Similarly, in the UK itself, they have acknowledged the fact that in order to keep the pace with globalization and international investments, they have to become more and more inward investment friendly. They need to revamp their infrastructures like the airports, the energy sector and more. For this they need capital investments and they are turning to more international investments in these regards.

The speaker concluded his opening remarks by reiterating how there is no alternative to being open to foreign investments to boost the Nepalese economy. The private steers the market while the public sector caters to the needs of the most vulnerable groups in the society. But he also mentioned that foreigners will not come in just by debating in favor of Foreign Investments (FIs). Investors are mobile these days. They create job opportunities and contribute to economic growth; but in the mean time they look for certain pre-conditions before making investments abroad. Some of such necessary pre-conditions that Nepal needs to be guarantee the foreign investors, as highlighted by Rt. Hon. Hugo Swire were,

  • Clarity in economic polices
  • Certainty in terms of being free of risks that a host country can impose; like nationalization, change in rules of engagement in a retrospective manner
  • Accountability in government
  • Transparency
  • Predictability in the markets
  • Rule of law
  • Fair tax environment

General Discussion

After the speaker concluded his deliberation, the floor was set open for interaction among the participants. Some of the key issues discussed during the interaction session are:

  • A functioning government is a must for allowing the private sector to grow. Government should encourage private sector. When there is wealth creation, that is which can then be redistributed by the government by delivering public services. But if the government hamstrings the private sector, it is not beneficial for any group.
  • Capitalism is being redefined globally. After the 2007/08 economic recession, capitalism has had a bad reputation. The key issue is to get the right balance between regulation and promotion of private sector.
  • The domestic market of Nepal is being over-protected in the fear of its resources being exploited by foreigners and Nepal being converted into a dumping-ground. But the reality is that with foreign investments, the economic sectors of Nepal will be modernized, made more productive and will create more job opportunities. Then Nepal will in fact be able to supply its goods and services to the international market.
  • Nepal needs to send out signals to the rest of the world that it is welcoming FDI. International giants already have lots of places to go to. So Nepal should go to other countries and promote its own market. The foreigners need to be convinced that there is a demand and substantial market for foreign products in Nepal. For example, Oxford University could be lured by selling the prospects of great market by selling the idea of Nepal’s geographical proximity with India and China, both of which are going out for higher studies.
  • Nepal has a minimum threshold on the amount of permissible FDI. Then there is corruption, which in turn creates unpredictability for investors. Things like these discourage investors. Peru, Chile, Brazil, they are all going to London, promoting their markets and negotiating terms of doing business in their respective countries.
  • In the UK, government tries to make sure that the taxpayers’ money is used wisely and optimally. If there is something that the private sector can do better than the government can, the government pulls out.
  • The presence of donor agencies like USAID, DFID, Gtz and many more have turned Neal into a welfare state itself. There seems to be no shame in asking for aids and assistance when seeking the same to support the people who need help, but the idea of FDI is suddenly perceived as a threat to national sovereignty. This needs to change. No country will colonize Nepal. Nepal should open up its markets.
  • Nepal faces severe challenges in terms of having high numbers of rural population and low human capital. But this is not a unique problem in the world. Mongolia a faced similar challenge. But they have found a way around it by using there mineral resources. In Nepal, there is high potential of hydropower generation. This should be tapped in.
  • Political parties need to come together for a economic transformation of Nepal.

Hon. Minendra Rijal, Minister of Information and Communication, GoN

After general discussions Minister of Information and Communication, Hon. Minendra Rijal delivered concluding remarks to formally end the session. Some of the highlights of his deliberation were:

  • Competition is the pre-requisite for economic growth. He used the example of NTC and NCell, one 92% government owned company while the other, an over 80% foreign investment have been competing with each other, delivering better and cheaper services to the consumers than in the days when NTC had a monopoly in the telecommunication sector of Nepal. NTC is even looking for foreign strategic partner and a process of divesting 30% of government ownership has already begun. These activities, he believes, will serve the Nepalese consumers even better in the days to come.
  • Investment Board of Nepal (IBN) is working with foreign investors in the hydropower sector of Nepal.
  • Nepal Telecom, Nepal Army Welfare Fund, Pension Fund and others have huge pools of unused funds. Nepal still needs to work on creating an investment-friendly climate for these domestic institutions. These funds can then be mobilized as investments.
  • Overall, government should realize that there might be times when certain sectors need to be protected from foreign investors, but Nepal should never protect inefficiency.

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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