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Apr 25, 2011

Do we really have a free market economy?

-Surath Giri

Around the world, the growing consensus is that free markets and entrepreneurship are the most effective tools for tackling poverty and bringing growth and innovation to every nation. They are the primary sources of prosperity. In Nepal, however, free markets don’t seem to enjoy the same kind of respect like they do in other parts of the world. The general notion is that Nepal is a free market economy and the sorry state of affairs is largely due to markets being too free. Anything that could go wrong and that has gone wrong is being blamed upon free markets. Political speeches invariably eulogize central planning and authoritarian state. Newspapers are rife with articles condemning free markets. Talk shows conclude with demanding more regulations and expanded role of the government.  Ideological rhetoric rather than the facts or logic reign in the public debates. A foreigner would surely have the impression that, Nepal must be the epitome of failure of free markets.

So, are free markets and liberalization the most pertinent aspects of Nepalese economy? Hardly so. Economic Freedom of the World report, an annual report prepared by Fraser Institute, an independent Canadian think tank with collaboration of more than 80 other think tanks around the world ranks Nepal as 125th most economically free nation out of the 141 nations the survey is carried out in. The report uses only secondary and objective data rather than rhetoric to formulate the rankings which makes it difficult to refute its findings. Contrary to the prevailing opinions, Nepalese economy is miles away from being a free market and the miserable performance until now, can largely attributed to the lack of free markets.

It could come as a surprise to the critics of free markets in Nepal that even China, the so called communist country ranks at 82nd position in the report way ahead of us, the so called liberal economy. Another neighbor of ours, India who has written socialism as the only tolerable political ideology in the constitution ranks at 87th in terms of economically free nation.

Free Market: What does it look like?

Free market is a summary term used to refer to all the voluntary exchanges that take place in a society. The existence of free market implies that the exchanges in a society take place voluntary without the use of any force or tools of coercion.

Image Source: www.demotix.com
When translated into policies, free markets mean lack of price controls, lack of subsidies to one group at the expense of other, security of property and lives of every citizen, easy and affordable mechanism to enter into a business , run it and close it down if needed, enforcement of rules and regulations that encourage competition and discouragement of market distorting forces like monopoly and cartels, presence of necessary regulations to save people from fraud and theft but lack of over-burdening regulations that prevent people from making their own choices without harming anyone else, proper enforcements of contracts between people, fast, affordable and independent judiciary system, low inflation rates and lack of deficit budgeting, promotion of free trade and foreign investment, transparency in government policies and expenditures, flexible labor laws, low tax rates among other things.

Freeing Nepal’s Market

Nepal’s economy with more than 70 percent of work force still employed in traditional and subsistence farming and informal sector as the dominant sector of the economy and absence of any major industries can be classified as ‘pre capitalistic’ economy. A pre capitalist economy is typically very poor with few if any of the institutions associated with free markets.  The late advent of democracy, more than 3 decade’s long autocracy, the dominance of left leaning political parties has hardly done anything that could develop Nepal into a well functioning free market economy. The bulk of the power and wealth is held by the state and a small group of individuals and families which is the characteristics of feudalism or oligarchic capitalism at best.

Lack of stable policies, security of property rights, wide spread corruption, irresponsible government spending and lack of rule of law plague Nepalese economy. The state has continuously suppressed private sector development and politically instability has left the country devoid of any economic reform plans or strategies. Lack of infrastructure development and protectionist approach to handling economy has resulted in Nepal’s economy lacking the entrepreneurial dynamism that would propel economic growth and long-term economic development.

Government created monopolies like Nepal Oil Corporation and Nepal electricity authority continue to be a drain in the economy. State owned enterprises such as Janakpur cigarette factory have accumulated billions of rupees as losses and debts. Almost all of the state owned enterprises are suffering losses and mismanagement of properties. Monopoly of Nepal electricity authority, mismanagement, corruption in hydropower license distribution has resulted in country suffering for more than 14 hours of power cuts and whatever industries that are left are being crippled by the power crisis.

Anti-employer labor laws and politicization of labor unions have made Nepal one of the most difficult countries to fire an incompetent worker. Dominance of political agendas within the industries and the militant labor unions let businesses run not more than 6 months in a year. Nepotism and favoritism in distribution of licenses and promotion of industries had resulted in oligarchy in almost every sector of the economy.

Anti-competitive practices like price fixing, syndicates and cartels in every sector have driven the costs of goods and services to general public tremendously and have made formal sectors of the economy virtually inaccessible to the poorer and less powerful segment of the populace. Burdensome and costly regulations to start up, run or close down a business has forced the majority of the population to remain within the informal or extralegal sector.

The policies allowing and empowering the politicians and government bureaucrats to make decisions as per their discretion has created such an avenue for corruption that corruption is the norm rather than the exception in any government procedures. Nepal ranks 146th in the Transparency International’s Corruption Perception Index making it one of the most corrupt countries in the world.

Similarly, Nepal ranks 100th out of 129 countries in International Property Rights Index which can provide a glimpse of how insecure the lives and properties of Nepalese citizens are. Property stealing and grabbing culture spearheaded by the political parties themselves has instilled fear and insecurity among people discouraging investment and entrepreneurship. In such a scenario, calling Nepalese economy a free market economy and blaming free markets for the sorry state of affairs is not just naivety but outright lie.

Image Source: http://www.wagle.com.np
Critics of free markets or liberal economy tend to forget that the very newspaper that publishes their opinions or the very television channel that airs their views is the outcome of the limited liberalization of the early 1990s. Proponents of central planning tend to forget that more and more rural population is entering is being absorbed by the expanding informal sector and helping them realize their own dreams. The ardent supporters of collectivism and nationalization forget the fact that Nepalese now have access to latest banking facilities such as ATM and electronic banking and yet are forced to spend 14 hours a day without lights or electricity.

The worshippers of state owned enterprises don’t realize the fact that had it not been for the competition between different telecommunication service providers, they would still have to wait half a decade to get a telephone line and wouldn’t have been able to afford a cell phones at all. Perhaps these people take these benefits for granted or perhaps they are too busy in the historical debate to notice that the debate has already ended and free markets are changing the lives of both rich and poor people around the world except for some few still dark corners of the world such as Nepal.

(Published in The Himalayan Times-Perspectives of 24th April 2011.)