Jul 1, 2013

Penchant for legislation

Nepal’s list of socio-economic problems is never ending. All three actors — government, civil society and the private sector — have a crucial role to play in solving these problems. How do they intend to solve these problems? The usual answer is through vision and planning. In reality, however, Nepal’s favourite way of solving or at least responding to such problems is through making new legislation.

Numerous examples can be found in recent legislative activity. Educational institutions are spending ‘excessive’ amounts of money on advertising? Put a ceiling on educational institutions´ advertisement spending. Nepal is not receiving foreign direct investment in so-called priority sectors? Enforce a price floor on foreign direct investment in all sectors. Nepali workers are not making enough money? Raise the minimum wage level. There is a high unemployment rate? Add ‘right to employment’ to the Constitution. People smoke in public places? Ban public smoking. Online news portals are proliferating and some are publishing misleading news? Regulate them. Some private educational institutions are charging high fees? Put a price ceiling on the fees. The price of commodities get hiked during festive seasons? Price ceiling, of course. And the list continues.

In Nepal’s context, legislation is dangerous not only because the government uses it as an easily digestible yet not well researched response to troublesome public issues, but also because legislation has become an ally for crooked private sector entrepreneurs and organisations. Many, if not all of Nepal’s business houses rely on favorable legislation to survive and grow. The proposal to put a USD 200,000 price floor on foreign direct investment is one such example. Such a provision will help only large business houses and large scale entrepreneurs who can swallow that sort of money. Such a price floor will eliminate smaller competitors in growing businesses from the market, perpetuating big business dominance. Similarly, by closing registration to new private schools in the name of preventing unhealthy competition (unhealthy for whom, by the way?), which was tacitly endorsed by the existing private educational institutions and their associations, is a barrier to entry for new players.

The negative results are numerous. If new players provide better education, other educational institutions in the market will have to increase their quality of education as well, therefore increasing the overall quality of education in Nepal. Without allowing new players to enter, innovation cannot occur, and the market will not change. Additionally, with barriers to entry, existing educational institutions can not only stagnate, yet they can charge a premium price. A final example is the case of ‘excessive’ price hikes during festive seasons, where the government passed maximum retail price legislation, accepting the easy way out instead of solving the core issues that underlie such problems, such as infrastructure gaps and supply side constraints.

Our penchant for legislation is not only at odds with the so-called commitment to a free-market economy but it also frequently exacerbates the problems we are already facing. Without any doubt, price hikes during festive seasons will continue in the coming years, the price of private education will surge higher, and Nepal’s meagre performance in attracting foreign investment will continue to be a pillar for cronyism and market degradation. It will only be few months before labour unions demand another rise in the minimum wage. It is leading to a state where government presence is everywhere but effective nowhere. The exact opposite is required, a limited government that is effective and efficient.

It is time that our policymakers as well as public intellectuals decide whether legislating is the really the way to solve problems in a society, especially the economic problems. These officials need to ask if the legislation has actually been accomplishing anything, or if it is just a red herring distracting from the government’s incompetency. If legislation can really defy the universal principles of economics, why stop at current legislation? If minimum wage laws can ensure economic prosperity of the workers without the need for an increase in their productivity why not set the wage levels as high as Rs. 30,000 a month? If through legislation itself we can ensure more and better foreign direct investment, rather than by creating an investor friendly environment, why not raise the ceiling to half a million dollars? Why not outlaw unemployment so that we can have universal employment? If fixing a maximum retail price solves the problem of excessive price hikes during festival season, why not fix prices for every product indefinitely? Why not ban educational institutions from advertising at all so that no money is wasted on ‘frivolous’ activities like advertising and ‘unhealthy’ competition is eliminated.

Half-baked interventions in the economy neither ensure a good-functioning market nor ensure government control over the economy. Instead, citizens of Nepal will end up with what we have now, a market economy in theory with government present everywhere but effective nowhere. Such an approach will undermine the credibility of government itself. It will lead to a situation where government has numerous laws but no one takes them seriously as the chances of them being implemented are slim. And as suggested by Nobel Laureate Economist, Douglass North, legislating to counter problems ignores and undermines the role of social norms and values upheld by the society. As evidence of prosperity in developing nations throughout the world suggests, the government is better off ensuring the freedom of the markets.

(Published in The Himalayan Times-Perspectives of 30 June, 2013)