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Dec 13, 2011

Occupy Wall Street movement: Good Capitalism, Bad Capitalism

Image Source: watchdocumentary.tv
Occupy Wall Street movement which started as a series of demonstrations in New York City based in Zuccotti Park in the Wall Street financial district has gained worldwide momentum. Over 900 major cities of the world are reported to be buzzing with replica protests of Occupy Wall Street currently. Nepal didn’t remain untouched by the wave. Nepalese intellectuals paid their tribute in their usual way, declaring it an end of capitalism, blaming capitalism for anything and everything that has gone wrong in this country and calling for similar protests. 

The shallowness of their understanding is evident by the way every major disturbances in the West is heralded as the ultimate endpoint of capitalism, and a vague alternative system promising utopia is promised. It is very unfortunate that while spewing hairsplitting criticisms of capitalism most usually the income inequality, critics forget to acknowledge that capitalism as compared to every other political and economic system so far known is better at creating wealth and lifting millions of people out of abject poverty. It is surprising that advocates of social justice and equitable distribution of wealth find that capitalism is the only system that creates enormous wealth, so indigestible. To understand the Occupy Wall Street movement objectively and its relevance to Nepal, it is necessary to understand what exactly gave rise to the protests and also that, rather than a monolithic form as described by its critics, capitalism has different forms. It is imperative to understand that there is good capitalism and bad capitalism, and the distinction between them is the first step towards solving the aforementioned problems.

Crony capitalism, which is the form of capitalism where wealthy corporations and politicians tie up in a “you-scratch-my-back-I scratch-yours” fashion to abuse power and wealth for each other’s vested interests, is bad and is one of the true causes of discontent among the protesters. Two of the major issues raised in the Occupy Wall Street movement are bailing-out failing banks with the taxpayers’ money and rising income disparity among the citizens. If one digs deeper, both of these are results of crony capitalism. The banks having close ties with the politicians are rescued with the taxpayers’ money instead of letting them face the consequences of their mistakes. Similarly, income disparities rise because of governments providing special privileges to those wealthy corporations through various means such as subsidies, tax-rebates, special licenses, and favorable policies.

Free market capitalism that rewards entrepreneurship, risk-taking and innovation, and at the same time provides easy universal access to economic activities to all citizens is a blessing. There are enough evidences that when allowed to work, the market has lifted more people out of the mud and misery of poverty than any government. And it has been true regardless of the culture, tradition, religion, economic base, and civilization of the society practicing it. The most prevalent myth about free market capitalism in Nepal is that in free market capitalism the economy is dominated by cartels and syndicates. 

Source: Facebook
Whatever little degree of capitalism Nepal has practiced so far has been riddled with practices of crony capitalism. The majority of the wealthy class of Nepal were either born rich or became so by political and bureaucratic connections. Why do few business houses thrive whereas majority of the populace languishes in poverty? Why do few industrialists dominate the economy? Not because they provide quality goods and services to satisfy the customers but because they happen to have political and bureaucratic connections. License permit regime has been a key factor in sustaining and fostering the close ties between politicians and businessmen. The few people who supposedly control the majority of the wealth of the nation do so because they are politically powerful and well-connected. But, despite this, there are also entrepreneurs in Nepal who came from a humble background and made a fortune by providing goods and services to the hundreds of thousands of satisfied customers. If we criticize capitalism blindly, we are also criticizing these people who risked everything they had and provided something useful to the society and made fortunes. It would be mere foolishness to criticize these ‘job creators’ for the unemployment problems in the country. Even our neighbors -socialist India and Communist China, who didn’t look at capitalism with favor in the past have embraced it after realizing their folly. It would be a hug mistake for Nepal to take the already abandoned path.

Fights against capitalism have already become the war of the past. Today’s interconnected and globalized world begs for a different fight. A fight to ensure the benefits and privileges of capitalism to even the poorest of the poor. A fight to eliminate close ties between politicians and large corporations and let the markets work freely. The debate for the future is not whether to have capitalism or not, but what kind of capitalism to have- the crony capitalism that plagues the economy of Nepal or a free market capitalism that ensures equal access to economic activities and equal respect of rights of every individual citizen.

-Surath Giri

Dec 12, 2011

The Rise and Fall of Dr. Bhattarai's Popularity and lessons learned

Image Source: Wikimedia

When Dr. Bhattarai was elected the prime minister of the current coalition government, many people breathed a sigh of relief and raised their hopes high. His ardent supporters went crazy with joy and excitement. For a while it seemed Nepal had finally got it's messiah who had cures for all the ills of this nation, who could bring everyone together and get the country on track. Those few who thought it better to control their excitement and contain their expectations were labeled too cynical and pessimists. Some jubilant populace even initiated campaigns demanding the new Prime Minister be allowed to work. When the new Prime Minister decided to use a Nepal assembled Mustang as his vehicle and set a precedent for other politicians to follow the suit, general people’s excitement went up through the ceiling. The trend continued when Dr. Bhattarai declared government relief packages and other several populist moves. However, in the euphoria people forgot few small details, the generosity of PM was solely based on 'Other People's Money' rather than deep convictions for really helping the poor and whether a leader is good or evil has little bearing on a nation's well-being than the system and policies that are in place.

Only when the new PM's cabinet made history by being the largest one till date, designated convicts as ministers and convicted people as ministers and the media started reporting the gross discrepancy between PM's commitments and the reality- were the people shaken out of their illusion. The popularity of PM Bhattarai is declining with the same speed as it rose during early days of his premiership. The ardent and faithful are utterly disappointed, the skeptics are in glee with “I told you so” mood and the vast majority of the populace is as apathetic as ever. So, why did Nepal's “messiah” dash the hopes of so many of his fans? What proved the skeptics right? And how long will the Nepali idiom “Jun Jogi Aaye Pani Kanai Chireko” hold true?

It's the system

Centuries of patronization from the state, short lived experience with democracy, massive poverty and illiteracy resulting in the political discourse being overwhelmingly dominated by political parties and their puppet intellectuals and a decade long bloody communist uprising has turned majority of us into political romanticists. Discourses about development of any field predictably end with “lack of a genuine leader with a vision” and fantasy of a true patriotic leader with cure for all ills of our society is rampant. This person centric approach is confirmed by our interpretation of history too. Nepal's political system has too many heroes or villains rather than values and systems. Nepal's political and social institutions have been predominantly feudalistic in nature which allowed an individual/family/party to wield much influence in the society. Therefore, much of a society's progress has depended upon that leader's whim. In reality, however, the kind of political system a society adopts and the values and norms it upholds are much more instrumental in driving the society forward rather than the goodness or evilness or a political leader.

Dev Shumsher might have been a relatively liberal Rana Prime Minister but his generosity failed to extend beyond his term. King Birendra might have been a generous King but Nepal under his rule was no way better than Nepal under the rule of King Mahendra. The political leaders of parties like Nepali Congress and UML who have become the epitome of ineffective and corrupt leaders now were once the ideal revolutionaries whose sole purpose in life had been the nation's interest. Similarly, Maoists who waged a decade long war in the name of the poor are nowadays in constant controversies ranging from criminal activities to institutional corruption dashing out any hopes that they would provide a better alternative to the major political parties of pre-2006 era. 

International experiences illuminate us more about this principle. Citizens of democratic and liberal countries of Europe and North America can rationally hope that despite of any leader coming into power to be not outrageously corrupt unlike them, citizens of Pakistan and Bangladesh can be pretty much sure about corruption, ineffectiveness and controversies no matter who came into power. Similarly, it is also noteworthy that every country that has ever tried communism found a ruthless dictator who really hated free speech and dissenting views among other things. What chances are there that all the leaders of similar political and economic systems be equally ruthless unless the system itself made them to act that way?

Image Source: Nepalnews
In this context, Nepali citizens would really be better off in the longer run if they placed their hopes on having a good system rather than a good leader and it would be a folly on our part to assume a single leader through his/her personal choice would be able to change the system for better. That said, it is imperative that we venture beyond the usual rhetoric of blaming the system and figure out what actually is wrong with the system. We have had leaders competing with each other to promise us loftier dreams. From transforming Nepal to Switzerland, to making a Singapore out of it to generating 10000 Megawatts of electricity, we have heard it all. However, our political discourse has severely failed to address the “How” part of the question.  There is a dearth of opinion on the “how” part of the question except for some self contradictory ideas regarding the development of the country. On one hand, people are furious over the ineffectiveness and blatant hypocrisy of the political leaders and the ruin their actions have brought to the country whereas on the other hand, the mere suggestion that government should not be extensively involved in the economic activities as well as other aspects of people's lives raises many eyebrows and such suggestions are looked upon with ridicule. Suggesting people that if a nation wants to progress, it is essential to separate the government and the economy as far as possible draws many sighs of disbelief.

Constitution and Prosperity

The constitution is being written and hopefully will be completed this time. The kind of constitution we will have will set a system that will shape the politicians and the political behavior in the future, thereby determining in part what level of prosperity we will achieve. Hence, figuring out the what kind of system do we want to have in country-the one that bequeaths the politicians with extensive power to shape and influence our lives or the one that puts its faith in general people - is the best thing we can do for the sake of the country than getting overzealous about a leader or a political party for that matter.

-Surath Giri

Dec 5, 2011

Flat Tax System for Nepal?

-Surath Giri

About a month ago, Ministry of Finance under the landmark direction by the National Information Commission (NIC) exposed the massive VAT evade scams by the private sector of Nepal. The incident sent out ripples all over the private business community. As in the past, the incident was treated as a vindication that private sector is overwhelmingly fraud and cannot be trusted. Many accusations were hurled at the private sector which compelled major  business houses involved in the scam to rush in to save their ass*s. Amid all the hue and cry, a small fact was overlooked. Almost every business house in Nepal is evading taxes. Casinos, Super Markets, Large Scale Industries, Retailers and almost every significant business that comes within the realm of formal economy of Nepal have been found time and again to evade taxes. So, an interesting question to ask would be "Why does everyone try to evade taxes in Nepal?" 

The most obvious answer you would get if you ask a citizen in Nepal is : "The private sector is corrupt, unpatriotic and too profit-focused." Well, let's put on our thinking cap and venture beyond the usual leftist rhetoric. If they had a choice, I am sure very few Nepalese citizens would willingly pay taxes to fill in the treasury of our corrupt politicians and encourage them to ruin the country even more. Could our overly bureaucratic and unfair progressive taxation system have anything to do with the tax evasion trends?

Doing Business Report states "On average, firms make 34 tax payments a year, spend 326 hours a year filing, preparing and paying taxes and pay total taxes amounting to 17.2% of profit in Nepal" which when compared to other South Asian Countries is a much better situation. But again, with all the numerous reasons for an individual or business not to pay taxes, simplifying the taxation system could surely improve the scenario.  Besides simplifying the procedures, adopting a more fair taxation system (one that doesn't penalize business or individuals for being more productive or working harder) could be beneficial to us.

Many people around the world believe adopting a flat tax system would help mitigate such problems because flat tax system while simplifying the procedures and making it easy for people to understand and pay taxes also makes taxation fair and equal for everyone.  So what is flat tax system?

A flat tax is a fiscal system with only one tax rate for all levels of income (whatever your level of income you just pay a certain percentage of your income as tax and that's all), in which all income is taxed once and only once. Countries around the world, such as Hong Kong, the Channel Islands, Estonia, Lithuania, Latvia, Russia, Serbia, Ukraine and Slovakia have seen remarkable results after adopting flat tax system. Tax evasion has decreased whereas the collection of tax revenues has increased over the longer period of time. Similarly, the total number of hours spent on administering the taxes (which is a very non-productive usage of time) has decreased significantly. Additionally, the low rate of taxes and the equal taxation for everyone has prompted many multinationals to seek solace in countries with flat tax system.

And contrary to what critics of flat tax predicted, countries adopting flat taxes have seen increase in the share of taxes paid by the rich. How? First, taxpayers in the highest brackets shifted money from consumption or tax-sheltered investments into more productive, taxable investments. Second, taxpayers became more honest as evasion became less rewarding. Third, some taxpayers, rewarded by higher after-tax returns, worked harder. (Source: http://bit.ly/vq5aCl )

Hong Kong is one of the famous success stories of flat tax system. It maintains a dual taxation system where taxpayers can choose between a progressive taxation system that ranges fro 2 percent to 20 percent or a flat tax of 16 percent. However, flat taxation has been the most popular choice among the tax payers so far. Notably, the flat tax has generated a high enough level of government revenue such that, between 1950 and 1981, fiscal surpluses have been recorded in no less than 27 years. (Source: http://bit.ly/vq5aCl )

Similarly, Estonia, an ex-communist country has also been successfully implementing the flat tax system with remarkable results which has inspired Russia not only to adopt a similar system but also to compete with the flat taxers with the lowest rates of taxes in Eastern Europe.

Nepal has a flat tax rate of 25 percent for corporations whereas individuals are subject to a progressive taxation system. Despite this, one of the principle of flat taxation: "tax an income only once" is yet to followed in Nepalese scenario.

Note: A paper on flat tax entitled "Flat Tax-The British Case" by Romanian Economist Andrei Grecu can be found at: http://bit.ly/vq5aCl . The paper explains the concept in more details.

Do you think a complete flat tax system would help Nepal minimize its tax evasion woes? Would such system be suitable for Nepal? Why ? Why not? Is the current rate of taxation of 25% too high or just enough? 
Please share your views!

Dec 1, 2011

A new way of looking at Taxes!

Recently when Prime Minister Dr. Baburam Bhattarai announced extensive relief packages, people went gaga over his generosity. The question "Relief packages for what? And who pays for it?" was neither asked nor dealt upon. A few people (including some newspapers) who dared to ask the bitter questions were quickly drowned by the ferocious attacks from Dr. Bhattarai supporters. This tendency, however, is not associated with Dr. Bhattarai only. Any politician promising benefits to people are received with praised and gratitude in Nepal. In this context, I think the following video could present a new way of looking at taxes and government benefits. 

So what do you think about the views presented in the video? Feel free to agree or disagree.