Majority of hydropower projects in Nepal have not gone under construction due to the absence of transmission lines and thus it is one of the key constraints that has been keeping the country from realizing its enormous hydro potential and easing the prevailing electricity crisis. Nepal Electricity Authority, the state owned monopoly has a practical monopoly in the construction and ownership of transmission lines in Nepal. Since Nepal Electricity Authority is mired with corruption and inefficiency, it has been acting as a bottleneck for the development of hydro-power development in Nepal. How can we solve this problem? What can be a better policy option for improving the transmission line system in Nepal? I have co-authored a paper titled "Policy Options for Improved Electricity Transmission System in Nepal" with my colleagues at Samriddhi, The Prosperity Foundation. You can read it or download it below:
Please let me know if you have any comments or feedback on this paper.
Just stumbled up on this interview of Dr. Swarnim Wagle who is currently one of the members of the National Planning Commission of Nepal. Dr. Wagle had an impressive career so far. Born in a remote village of Gorkha district, he got educated in the prestigious Budhanilkantha School and then attended London School of Economics, and Harvard University before finally getting his PHD from Australian National University. Having worked for international institutions like World Bank and UNDP in several countries, his decision to return to Nepal and take up a job at National Planning Commission that pays about 1/40 of his previous salary is truly appreciable. I am more impressed by the fact that he seems to be committed to promote the role of private sector in the economy and does not shy away from making his views clear although he is regularly swamped by leftist intellectuals and their centuries old rhetoric whenever he presents his views regarding the economy. I hope he will be able to make the changes he wishes to make before his willpower and motivation in engulfed by the corrupt Nepalese bureaucracy and politics. We need more people like him. My only fear, though, is that he may start patronizing and may end up making the state mechanism more efficient at repressive entrepreneurial aspirations of the citizens. I hope that does not happen.
I have recently started writing for The Global Entrepreneur which is Sweden based online magazine that focuses on issues related to globalization and entrepreneurship. As the first write-up for The Global Entrepreneur, I wrote about the migration for foreign employment trend in Nepal. Well, that is not exactly a novel topic in our case, is it? However, in the article, I have tried to explain how foreign employment is helping Nepal and why it is not that bad to be dependent on foreign employment and the remittances it brings. My argument is what else can a rational person do when the rulers and government have created an environment where a person cannot hope to flourish through hard work and enterprise.
Below is an excerpt from the article:
Image Source: http://www.nepalmountainnews.com
Every day more than 1,500 able-bodied Nepalese citizens leave their abodes, seeking better lives and better opportunities in foreign countries. Many of them end up in the Middle East as construction workers, building stadiums for the World Cup in Qatar, and infrastructure in other gulf countries.
If Qatar hosts the FIFA World Cup in 2022 successfully, Nepal will be among the nations it will have to be thankful to.
Some of the workers have to be content with working menial jobs in different industries. Uddhab Danuwar, 28, is one of them. A native of Panchkhal Village of Kavrepalanchok District, he first migrated to Kathmandu and worked for a pashmina manufacturer for a few years. Uddhab was employed in the coloring and dying process there, and earned Rs. 15,000 a month (USD 154). Last October, he flew to Saudi Arabia for an employment opportunity at a hotel where he currently earns 1,200 Saudi Riyals (USD 320) a month.
“With my meager income back home, I and my family could hardly survive. Here, not only have I been able to cover my expenses, but also save some money to send back to my family,” Danuwar tells The Global Entrepreneur.
“The work is very tough here. I still find it difficult to adjust with the culture and climate, and I miss my family a lot, but I think it’s worth the struggle.”
Paradoxically, their sacrifices didn’t come in the form of sweat and labor alone; in the last year alone, 862 Nepalese lost their lives while being engaged in employment abroad, many of who were building the skyscrapers and stadiums.
As immigrant workers, they are not treated properly as domestic workers would have been. The horrible working environments these migrant workers have had to face in the host countries have made headlines in international media. Some reports have gone to the extent of alleging that foreign workers in Qatar are being treated like cattle.
Yet, the line of emigrant workers waiting for their flights at Nepal’s only international airport keeps getting longer and longer. Care to wonder why?
Since the economic reforms started in 1980s under the Structural Adjustment Program of IMF and World Bank, Nepal has endeavoured to follow an open and export-oriented economic model. Many restrictions on imports have been removed and custom duties have been reduced, the controls on foreign exchange also have been relaxed. Industrial licensing system has been reformed and foreign investment has been allowed in the country. Private sector has been recognized as one of the major pillars of the Nepalese economy.
One of the major characteristics of a market economy is the freedom to enterprise which requires that there are no excessive regulations from the government. Studies have found that poor countries regulate their business the most and heavier regulations usually result in more inefficiency in public institutions with longer delays and higher costs along with higher unemployment, higher rates of corruption and less investment and productivity (World Bank, 2004). Nepal is not an exception despite adopting market friendly economic regime in the framework of economic liberalization with the objective of improving the competition and doing business scenario.
In the Doing Business 2014: Understanding Regulations for Small and Medium-Size Enterprises report, Nepal has been ranked 105th out 189 countries with regards to ease of doing business. Nepalese enterprises seem to face additional problems and hurdles that are not covered in the report. Under the guidance of Dr. Dileep K. Adhikary, I have co-written a paper titled "Doing Business in Nepal: Ground Realities" with my colleague at Samriddhi, The Prosperity Foundation. I have tried to find out what kind of additional hurdles do business enterprises in Nepal face and what can be done about it. I would love your comments and feedback on the paper.
Foreign Direct Investment (FDI) is being recognized as one of the key drivers of rapid economic growth and prosperity around the world. Cases of China, India and many other South East Asian nations show that attracting foreign direct investment and sustaining it can lead to unprecedented economic prosperity catapulting developing countries into middle-income countries. During the economic reforms of early 1990s, our policy-makers had enough sense to open up the economy and open doors for foreign investment. However, the process of economic reforms has stalled since long ago. Although foreign direct investment is on the rise, the growth is miles away from satisfactory.
This paper on foreign direct investment written by my colleagues at Samriddhi, The Prosperity Foundation under the guidance of Dr. Bhola Nath Chalise looks at what is the current scenario of foreign direct investment in Nepal, what hurdles are preventing its growth and what the second generation of reforms would look life for attracting more foreign investment in Nepal. Please check it out and provide us with your comments and feedback.
Despite the almost universal acceptance of free markets as the most superior system for economic growth and prosperity around the world, the concept does not resonate well with policymakers and public intellectuals of Nepal.In this context, free market as a means of social transformation may sound like a paradox but that is precisely what it is. An example from Nepal can shed light on this phenomenon.
Going by the law
Caste-based discrimination is arguably the worst social evil facing Nepali society today. Although it was officially abolished in 1963, the problem persists and is prevalent across the nation, especially in remote parts. Oppressed castes have been historically denied access to decision-making as well as power sharing. The untouchable castes are estimated to be around 15 per cent of the total population and almost half of them are below the poverty line, which is much higher when compared to the national poverty rate of 25.16 per cent. The government has passed the Caste-based Discrimination and Unaccountability Act 2011 to prohibit caste-based discrimination in both public and private spheres but the effectiveness of the law to prevent such practices is yet to be seen.
As long as these people languish in poverty and are economically dependent on people of 'higher castes', people of lower castes will have a hard time trusting legal remedies as a recourse for their ailments. Letting the socially oppressed economically empower themselves by encouraging them to participate in the market process, however, can be an effective way of discouraging discrimination. As Nobel Laureate Economist, Milton Friedman once said, “The great virtue of a free market system is that it does not care what colour people are; it does not care what their religion is; it only cares whether they can produce something you want to buy. It is the most effective system we have discovered to enable people who hate one another to deal with one another and help one another.” Thus free market is an antidote to discrimination based on caste or other ascribed values rather than merit.
Changing scenario
In fact, this transformation is in progress in many rural parts of the country. Foreign employment, which is estimated to be engaging more than three million Nepali workers already, has been a popular source of economic empowerment for people of oppressed castes who find little or no employment opportunities outside their traditional jobs in the current social system of Nepal. “As dalits have started to go abroad, they have started getting richer and more confident about their rights. And in many cases, people of higher castes have started to become financially dependent on them for loans and borrowings. In such a scenario, it is undesirable and difficult to discriminate against dalits,” a school teacher from Hodaa village of Kalikot district told this scribe during a visit to the region.
Such economic empowerment can be a more sustainable solution to the problem of caste-based discrimination than enactment of new laws or use of force to change people’s behaviours. Similarly, development of entrepreneurship among dalits within the country is also contributing significantly in their empowerment. A study titled Social Inclusion of Dalits through Micro-enterprise included in Micro-enterprises Development for Poverty Alleviation report by Ministry of Industry notes that 83 per cent of dalits engaged in entrepreneurial activities in Nawalparasi district have started getting respect from non-dalits, whereas 28 per cent of them have started approaching police, courts, local groups and government offices as compared to just nine per cent in the past.
Practical and effective
The idea that free markets are beneficial to oppressed castes has been corroborated by India’s experience since the economic reforms of 1991. Chandrabhan Prasad, a well known anthropologist and dalit activist in India, has termed the transformation of dalit people of India after the economic reform as ‘dalit capitalism’. In his study titled Market and Manu: Economic Reforms and its Impact on Caste in India, he argues, “The market has the potential for neutralizing caste in India’s public life and finally leading India into a caste-free zone. Unlike the State, the market operates from within caste society, as an internal force, and hence has the inherent capacity to rip apart the very fabric of the caste order.” And much to the credit of his hypothesis, Dalit Indian Chamber of Commerce and Industry which was formed in 2005, now boasts of more than 1,000 dalit entrepreneurs as members, majority of whom were able to embark on their entrepreneurial journey after the economic reforms of the early 1990s.
Hence, liberalization and market-oriented economic reforms could be a more practical and effective solution to one of our worst social evils. Unlike the picture painted by politicians and public intellectuals about markets, as demonstrated by the case of India, free market whose main value system is merit rather than caste, can be a perfect antidote to the unfair value system created by the caste system.
The recently released Economic Freedom of the World Report 2012 by Fraser Institute, a prominent think tank in Canada, shows a bleak picture of economic freedom in Nepal. Nepal’s economic freedom, albeit slightly better than the previous year, still has a long way to go. In the study which uses a measure of 42 economic and political components, Nepal is categorized among the least free economies in the world, ranking 110th among 144 countries. Nepal has scored 6.33 out of 10 which is below the world average of 6.83. So much for the notion that Nepal has adopted an open economy since the political changes of 1990s.
For one, the key to most of our economic ailments may lie in the absence of economic freedom. The prolonged transition and the resulting escalation of chaos, anarchy and corruption have thrown Nepal into a turmoil. The people’s movement of 2006 and doing away with monarchy has failed to live up to the promise of better economic opportunities and better living standards. It is time that our discourse brings the hitherto ignored but most essential component for economic prosperity?economic freedom, from fringe to focus.
Empirical studies have shown that societies with higher degree of economic freedom enjoy higher living standards, higher per capita income, higher economic growth rates, higher life expectancy, cleaner environments, lower unemployment rates and lower infant mortality rates. Moreover, the poorest 10% of the population of economically free societies are better off than the poorest 10% living in economically not free societies.
The importance of a free economy is also heightened by the fact that countries like Hong Kong, Singapore, Estonia, which are relatively small and have limited resources, are among the freest economies in the world and have living standards much higher than resourceful countries like Nepal, Congo, and Venezuela. Contrary to the arguments that economies like Nepal are too small to open up and adopt free market, the sample of freest economies in the world suggests that it is the relatively small countries like Nepal that need economic freedom the most. It is so because countries like these have only one thing to count on for development and prosperity: human ingenuity and entrepreneurship that can flourish only under a system that allows economic freedom to individuals.
It is time that we stop blaming countless factors and actors for our poverty and stagnant economy. For too long, Nepalese have been revolting against one or other political agendas and political changes have come frequently too. From autocratic Rana regime, absolute monarchy, constitutional monarchy and parliamentary democracy to republic, the political journey has been long and eventful. Unfortunately, the economic journey has not been equally dynamic. The basic characteristics of the economic system, although slightly changed with political changes, remain largely the same. Contrary to the limited but effective government required for economic freedom, we have unlimited but a pathetically ineffective government. Virtually no sector of the economy has remained untouched by political interference. From decision of where roads will be built to how an educational institution will be directed are fraught with political wrangling.
Similarly, citizen’s equal access to economic opportunities remains a distant dream because of the nepotist tendency of political leaders to hand out favors to their near and dear ones. The access has not been able to go beyond the small circle of elites with close connections to the leaders. The nepotism in political decision making, even in economic matters is far too evident in the way licenses are awarded ranging from hydro-power projects to new transportation routes. Non-competitive practices plaguing the economy, which political leaders and intellectuals often blame on the market economy, are in fact the result of the government’s inability to provide security of life and property of people daring to go against cartels and syndicates. Even more unfortunate is the fact that such practices are still prevalent mainly because they are backed up by the vested interest of political parties.
Politicization of labor in Nepal has become exemplary in the world. Very few places in the world are so anti-investor and anti-entrepreneur. Very few places in the world have labor and trade unions so intent on killing the golden goose called “entrepreneur”. Nepal has scored 3.33 in the Hiring and Minimum Wage regulations, 4.13 in hiring and firing regulations and 2.05 in the mandated cost of worker dismissal. This is definitely not an encouraging scenario for attracting foreign investment and technology in a country with a serious deficiency of capital. Similarly, Nepal has scored 3.22 in the extra payments/bribe/favoritism category making it one of the most corrupt countries in the world.
Hence, economic freedom, the prerequisite for prosperity, remains absolutely ignored in the current political and economic discourse of Nepal. This will not only diminish our prospects of prosperity but also undermine the promises of the countless revolutions we have had so far.
Whenever I get engaged in a debate where I argue that mixed economies, although very promising in theory, get too mixed up too work, I invariably face a statement similar to this: "But look at the Scandinavian countries, especially Sweden. Mixed economy and welfare state is working so well there and in fact doing better than the free market economies."
Well, Sweden seems to be the ultimate example of the promise of welfare state. But is it really? When a well-functioning and sustainable welfare state seems to elude every nation around the world, Sweden seems to have turned into reality all the rosy promises offered by socialists. What's the secret of the successful socialist Sweden?
Sweden did not become wealthy through social democracy, big government and a large welfare state. It developed economically by adopting free-market policies in the late 19th century and early 20th century. It also benefited from positive cultural norms, including a strong work ethic and high levels of trust.
As late as 1950, Swedish tax revenues were still only around 21 per cent of GDP. The policy shift towards a big state and higher taxes occurred mainly during the next thirty years, as taxes increased by almost one per cent of GDP annually.
The rapid growth of the state in the late 1960s and 1970s led to a large decline in Sweden’s relative economic performance. In 1975, Sweden was the 4th richest industrialized country in terms of GDP per head. By 1993, it had fallen to 14th.
Big government had a devastating impact on entrepreneurship. After 1970, the establishment of new firms dropped significantly. Among the 100 firms with the highest revenues in Sweden in 2004, only two were entrepreneurial Swedish firms founded after 1970, compared with 21 founded before 1913.
Since the economic crisis of the early 1990s, Swedish governments have rolled back the state and introduced market reforms in sectors such as education, health and pensions. Economic freedom has increased in Sweden while it has declined in the UK and USA. Sweden’s relative economic performance has improved accordingly.
Sweden was a poor nation before the 1870s. As a capitalist system evolved out of the agrarian society, the country grew richer. Property rights, free markets and the rule of law, in combination with large numbers of well-educated engineers and entrepreneurs, created an environment in which Sweden enjoyed an unprecedented period of sustained and rapid economic development. In the hundred years following the market liberalization of the late 19th century and the onset of industrialization, Sweden experienced phenomenal economic development (Maddison, 1982).
Sir Roger Douglas, the Finance Minister of New Zealand during the initial reforms.
I just watched a documentary about the economic reforms and the transformation of New Zealand from one of the most heavily regulated economies until 1984 to one of the freest economies in the world today.
New Zealand is one of the freest economies in the world making it a prime example of how free markets can make create competitive economies and prosperous societies. However, New Zealand didn't always use to be so. In fact, until 1984 it used to be a paradise of the welfare statists as it used to be one of the most heavily regulated economies among the advanced countries in the world. It was also among the first developed countries to introduce welfare programs when Labour government introduced welfare programs in 1930s.
By 1984, however, decades of heavy-handed state interference in the economy and excesses of Prime Minister Muldoon had taken its toll pushing the Kiwi economy to the brink of bankruptcy.
In an ironic twist of events, the Labour government that came to power in the 1984 elections initiated sweeping economic reforms towards a free economy. The reforms were pushed even further by Nationalist government that came into power in 1988 continued it until 1991 transforming New Zealand into what it is today. The reforms, no matter how beneficial, were very painful though. But I was very surprised by the way Kiwi people accepted the reforms and the way both National party and Labour party put aside their ideological agendas and pushed for reforms and even pushed further reforms initiated by the other party.
Here is the documentary in four parts in You Tube. It is a must watch for anyone interested in economic reforms and free market economics.
First episode: Fortress New Zealand
Second episode: The Grand Illusion
Third Episode: The Great Divide
Final episode: The New Country
Happy watching! By the way, what do you think about the economic transformation of New Zealand? Feel free to share your opinions in the comments.
In the political and economic discourse of Nepal, liberalisation might sound like a popular word but it is also one of the most derided. From the critics who blame it for everything that has and can go wrong to the apologists, liberalisation rarely finds a voice in its support. For politicians and planners, it is the perfect scapegoat for their own wrongdoings, whereas for left leaning intellectuals it is the thing to bash when-ever they have an urge to pour out their frustration and hatred. Many also hold a mythical notion that liberalisation is a panacea to every economic evil.
This was well reflected when a prominent economist of Nepal recently wrote an opinion piece saying, “Despite liberalisation, more than 50 per cent of children are unable to attain secondary level of education and 15 districts are yet to be connected by roads.” Unfortunately, liberalisation in itself does not do these things. It just allows a platform for all of these things to be done by the individuals in a free society. It would be beneficial for any rational economic discourse to analyse if Nepal has truly liberalised its economy and if liberalisation has any contribution in keeping the poverty levels where it is.
The myth about liberalisation
One of the greatest myths regarding liberalisation in Nepal is that after reforms of 1990s, Nepal is a fully liberalised free-market economy and an epitome of free-wheeling capitalism. Critics love to assert that despite all attempts, the promised utopia of liberalisation not only seems elusive but unattainable. However, nothing can be further from the truth.
Liberalisation in its essence means an economy free of interference from the government (or politics for that matter). Though government has done so in paper, it is not in practice. From agriculture to transport and health, every sector reeks from the heavy hand of government control or sponsored distortions. The best example is the government approved cartels in the transport sector which have wrecked havoc on the overall economy through monopoly.Energy, one important prerequisite for economic growth, is still in the grips
of the government. Nepal Electricity Authority, the sole authority on electricity in Nepal fails to provide power even for 12 hours a day and has negative net worth. Petroleum products are also in the government’s grip. Frequent disruptions in fuel supply have become common now.
Infrastructure is also mostly controlled by the government. Although concepts of Public Private Partnership and Build-Own-Operate-Transfer have been discussed for a while, we are yet to see any significant progress in implementation. The fact that 15 district headquarters are not yet connected by roads, begs a deeper question: Whose fault is it? If we expect liberalisation to work miracles, should we not first free the sector from state’s monopoly?
Labour market is miles away from liberalisation. Politically backed militant trade unions have monopolised the labour market but slapped any liberalisation attempts in Nepal. State-owned enterprises whose losses and quality of service are inversely proportional, such as Janakpur Cigarette Factory, Nepal Airlines Corporation and Nepal Oil Corporation are a drain on the economy. Liberalisation has been unable to spread to these darkest corners of the state.
The myth of failure of liberalisation
In this context, it is imperative to rethink Nepal’s liberalisation reforms or even call it a liberal market-oriented economy. Shifting the blame for underachieved development on liberalisation suggests that policy-makers are cynical and lack commitment to take reform efforts to conclusion. Liberalisation, in its limited form, has worked wonders, if not miracles. A common farmer in the remotest part of the country using a cell phone symbolises the success of liberalisation, wherever it has been done.
The thriving and vibrant media sector of Nepal is another example. The critics of liberalisation should consider that absolute poverty, a major problem of Nepal which decades of planning and government action could not solve, is being rapidly alleviated by a simple move towards liberalisation. Liberalisation in making passport has allowed mill-ions of poor Nepalis to find jobs abroad and raise their living standards. Critics are quick to point dependence on remittance is not desirable for the economy. But, are there any realistic and better alternatives? Relying on the government to fulfil the Nepali dream of prosperity is being naive.
Nepal’s liberalisation, despite many discussions, has remained a will-o-wisp till date. It is true that liberalisation has not been able to deliver to its fullest so far, but liberalisation itself is the last thing to be blamed for it.
While in Hong Kong for a summer course at the University of Hong kong in July 2010, a Chinese student asked me, "It really surprises me. How come you guys have Maoism so popular in Nepal when even we Chinese have largely abandoned his philosophy?"
I struggled for an answer. Jokingly, I said , "Come to Nepal. You would know for yourself." But on a serious note, I added "There is a widespread myth that China developed because of Maoism. Everyone knows Mao but very few know about Deng Xiao Peng and his reforms. The so called critical mass and public intellectuals never really bother to learn the truth or go beyond the popular rhetoric and propaganda."
And I believe it's really true. I have learned from my interactions with people that very few out the many who eulogize China's communism tend to know about Deng Xiao Peng and his reforms. Had it not been for Deng's reforms, China would still be languishing in poverty and millions of more Chinese farmers would have perished. I recently discovered an interesting documentary depicting Deng Xiao Peng's role in the economic transformation of China. I hope watching this documentary will help viewers enhance their understanding of China's economic transformation from a poverty ridden Third world country into an economic powerhouse.
The question that bothers me now is: We have more than enough Maos in Nepal. Mohan Baidhya, alone would be more than enough for that purpose. But do we have or can we expect to have any Deng in Nepal?
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?
Initiating and sustaining the economic reform process is one of the major challenges being faced by the least developed countries around the world. With globalization permeating every corner of the world, no country can remain impervious to the global trends which change too frequently to be conducive for economic reforms. As evidenced by the experience many countries attempting reforms, reforms rarely enjoy broad public support. Economic reforms are generally initiated by crisis, driven by pressures and sustained by the support of few committed politicians or bureaucrats who feel a stake in the reforms. And it's no wonder that some of the major transformations of economies in the world have been under some forms of dictatorship. From Deng's China to Pinochet's Chile to Thatcher's Britain, economic reforms had to be carried out with an iron fist or as in New Zealand where major political parties has a consensus regarding the reforms. Added to this, political instability and communist uprisings in least developed countries like Nepal push economic reforms to almost impossibility.
Nepal's brief flirting with liberalization and other economic reforms were thwarted by the Maoist uprising and political infighting within the then ruling party -Nepali Congress which not only undermined the benefits of liberalization but also helped smear the process itself. Post 2006 era has been even more depressing for Nepal's economic reform process. Political agendas have pushed back economic agendas further behind. Political bargaining have pervaded every national issues and economic perspectives on issues are missing. Besides political parties, other supposed stakeholders of the reforms such as private sector, bureaucracy, civil society and even the general public are also too busy in their own affairs to care about them. In this context, it would be interesting to analyze what are these stakeholders doing regarding the process and if there is any real stakeholder left?
Private Sector
As economic reforms bolster private sector through more freedom as well as competition, private sectors have a stake in the economic reforms. Nepal's private sector, however, except for paying lip-service, has contributed very little in pushing economic reforms forward. The anti-competitive practices present across all the sectors of the economy such as syndicates, cartels, collusive agreements not only undermine people's support for private sector but also generates hostility towards governments attempts to allow private sector a greater role in the economy. Nepalese private sector currently too divided and too engaged in crony capitalism, to be excited or supportive about the economic reform process. Status quo ensures the survival and profit of the major actors in private sector which translates into lukewarm, if any, support to economic reform process.
Political Parties
Nepal is yet to see a political party that truly advocates free markets and economic freedom out of principle. Most of the political parties see supporting some aspects of economic freedom as a compromise rather than political agendas. Giving leeway to private sector is seen as a compromise on party principles and generates criticisms from within and outside the party. A look at the top five major political parties of Nepal would present this miserable state. Two of the largest political parties are principally against liberalization and other economic reforms, another two thrive on purely ethnic agendas and haven't yet shown any clear stand or interest on national economic issues. Another one doesn't seem so much happy about the economic reforms it initiated and has once again brought forward anti-market agendas in its political principles. Nepalese political parties seem to be on a “populist” race where everyone is trying to be more popular at the expense of the economy.
The Bureaucracy
A country's bureaucracy plays a vital role in directing and sustaining the economic reforms as seen by the economic reforms of Indonesia and Singapore. In case like ours where the political leadership doesn't seem to have any stake in economic reforms, bureaucracy's role becomes even more important. Nepalese bureaucracy, however, seems too busy in finding avenues for short-term gains and instant gratifications to have a stake in economic reforms. Very few bureaucrats intend to live in Nepal after their retirements and those who do are either disorganized or busy consulting the development industry. The higher level bureaucracy which can have a serious impact in the national policies, is either already too well-off or get so by the time of retirement and has less incentive to push for the economic reforms.
Civil Society
In the post 2006 era, like every other sector, civil society too has fallen victim to excessive politicization. Excessive politicization and political affiliations erode the very essence of independent civil society in a country. Our civil society is found carrying the same agendas the political parties are pushing forward and hence provide little or no contribution in pushing the economic reforms forward. An independent civil society is essential to the success of the reform process because it can actively promote equal access of every sector and class of the society to the benefit of the reforms. However, our civil society, due to its politicization is failing to act as a uniting force. Agendas picked up by civil society currently are less of national priorities than ideological agendas.
The General Public
Source: http://www.nepalmountainnews.com
Poor and middle classes of the society are another major stakeholders in the economic reform process. As seen in countries like India and China, liberalization and increased access to economic activities reduce absolute poverty rates significantly. Since they consist the majority of voters, they also can exert pressures on political parties to initiate reforms in the country. Benefited by the limited liberalization o the early 1990s, this segment of population is overwhelmingly engaged in foreign employment and improving living standards through remittance income. In fact there has been significant reduction in absolute poverty rates in the country , whose credit, in large part, goes to foreign employment and remittance incomes. This has encouraged even more people to opt for foreign employment. Nepal's over-dependence in remittance has begun showing the signs of what has been termed “Dutch Disease” in which a country goes through vicious cycle of running economy through remittance incomes which in turn lifts off the pressure to make economic reforms, which results in poor investment environment and little economic opportunities. Little economic opportunities force even more people to opt for foreign employment and brings in more remittances to run the economy. The findings of recent Nepal Living Standard Survey report suggests amid the political chaos and instability, poor are lifting themselves out of poverty. Poor are hence, slowing having less stake at the economic reforms.
In this context, any attempts at economic reform process, should take into consideration the question, if there are any stakeholders left for such reforms and who exactly is the stakeholder. Measures to hold all these actors for the reform is another necessary step that needs to be taken for a long term development of Nepal. Free, fair and regular elections would be very useful in making the political parties feel more stake in economic reforms whereas better mechanisms to curb corruption and devising a mechanism to tie up bureaucracy's remuneration with nation's economic performance could be an option for bureaucracy's stake in the reforms. More aware and demanding consumers could pressurize private sector to be more responsible and supportive of economic reforms. Meanwhile, emergence of an strong independent, non-political civil society could be the major milestone in energizing all these actors for economic reforms.
-Surath Giri
(Published in The Himalayan Times- Perspectives of November 6, 2011)
