Surath Giri's Blog

Dec 12, 2011

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

December 12, 2011 Surath Giri— min read

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

( Published in The Reporter Weekly on 12 December, 2011 )

Flat Tax System for Nepal?

December 05, 2011 Surath Giri— min read

-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!

A new way of looking at Taxes!

December 01, 2011 Surath Giri— min read

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.

Youth Employment: Prospects in Nepali Scenario

November 12, 2011 Surath Giri— min read

Yesterday, I presented a paper on "Youth Employment: Prospects in Nepali Scenario" in a program organized by YUWA. Below is the abstract of the paper and the download link to the PDF file.

ABSTRACT

Like every other developing countries of the world, high youth unemployment rates pose a serious threat to stability and economic growth of Nepal. Underemployment is more severe a problem than unemployment in Nepal’s scenario. Due to lack of growth in the country, majority of youth are seeking foreign employment opportunities which has resulted in a significant reduction of absolute poverty rates of the nation and a major source of foreign exchange. The trend, although beneficial in the short run poses a serious threat to long term development of Nepal. Agriculture, tourism, small and cottage industries, information technology and outsourcing and foreign employment itself are the major sectors that have potential to solve the youth unemployment problem. This paper highlights the present situation of these sectors and highlights the growth potential of these sectors to absorb the unemployed mass of youth. The paper concludes by arguing that, if we are serious about solving youth unemployment problem of Nepal, we should focus more on the major sectors of the economy and their growth rather than trying to solve youth unemployment problem through direct government intervention.

Download link: http://bit.ly/vLFq0R

Do let me know if you have any feedback and comments!

केही लिबेर्टेरियन भनाइहरु -७

November 07, 2011 Surath Giri— min read

केन्द्रिक्रित शक्ती जहिले पनि स्वतन्त्रताको शत्रु हुँदै आएको छ । -Ronald Reagan
स्वतन्त्रता बिनाको जीवन आत्मा बिनाको शरीर जस्तै हुन्छ । - Khalil Gibran
कानूनव्यवस्था बिनाको स्वतन्त्रता र स्वतन्त्रता बिनाको कानूनव्यवस्था दुवै उत्तिकै घातक हुन्छन । -Theodore Roosevelt
आर्थिक स्वतन्त्रता बिना साँच्चैको स्वतन्त्रता सम्भव छैन । - Margaret Thatcher
कुनै पनि सरकारको मुख्य उदेश्य देशको आत्मारक्षा हो , साम्राज्य बनाउनु होइन । -Joseph Sobran
पूँजीवादको अन्तर्निहित खराब पक्ष भनेको धनको असमान बितरण हो । तेसै गरी समाजवादको अन्तर्निहित असल पक्ष भनेको गरीबीको समान बितरण हो । -Winston Churchill
अर्थतन्त्रप्रतिको सरकारको धारणालाई केही वाक्यमा समेट्न सकिन्छ : चलिराखेको छ भने कर लगाउ , अझै चलिराख्यो भने नियमन गर । अनी जब चल्न छोड्छ अनुदान दिन थाल । - Ronald Reagan
हामीलाई सरकार चाहिन्छ तर सधैं बाजले सरह तेस्लाई निरिक्षण गरिराख्नु पर्छ । -Millicent Fenwick
जहाँ नैतीकता हुन्छ , त्यहाँ कानून को आवश्यकता नै पर्दैन, जहाँ नैतीकता हुँदैन, त्यहाँ कानून बनाएर पनि काम लाग्दैन । -Anonymous
समाजवादीहरु तेस्ता व्यक्ती हुन जो आफुलाई अरु मानिसहरुको ऋणी सम्झन्छन र त्यो ऋण चै सरकारले अर्काको पैसा बाट तिरिदेओस भन्ने चाहन्छन । -Gordon Liddy

Nepal's Economic Reforms- are there any stakeholders left?

November 06, 2011 Surath Giri— min read

Image Source: http://prarthanag.umwblogs.org

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)

10 Reasons to Invest in Nepal

November 04, 2011 Surath Giri— min read

Source: http://business.gather.com

Today I found a promotional promotional booklet FNCCI (Federation of Nepalese Chambers of Commerce and Industries) has prepared to promote foreign direct investment in Nepal. It has a section called "Why Invest in Nepal?" where following 10 reasons have been outlined. Accompanying the reasons are my comments.

1. Located in between two emerging economic giants, India and China, and preferential access to their market: That's a huge advantage for us but it is also necessary to consider the question: If two emerging economic giants are our neighbors, why should an investor invest in Nepal? What additional incentives can we offer them to make us more appealing than our neighbors?

2. Huge potential of growth and untapped natural resources: I would say that's a prime reason why investors should be interested in Nepal. The potential for growth and amount of natural resources we have is amazing!

3. Liberal rules for investment including foreign investment: Well, not exactly. In the Index of Economic Freedom, which ranks countries around the world based on their friendliness to entrepreneurs and economic activities, Nepal scores 5 out of 100 in the Investment Freedom criteria.

Here is what Heritage Foundation has to say about it:

Most new foreign investment must be approved by the government. Bureaucracy and regulatory administration are burdensome, non-transparent, inconsistently implemented, and inefficient. Political instability, pervasive corruption, and inadequate infrastructure and administrative capacity also inhibit investment. Residents may hold foreign exchange accounts in specific instances; most non-residents also may hold such accounts. Convertibility is difficult and not guaranteed. Most payments and transfers require prior approval by the government. There are restrictions on most capital transactions, and real estate transactions are subject to controls. Foreign investors may acquire real estate only for business use.

4. Ease in repatriation of foreign exchange

5. Comparatively lower tax rates especially for industries: That's an advantage we can capitalize on. But despite the low taxes, the cost of doing business in Nepal is relatively high due to militant labor unions, lack of infrastructures, small scale market, corruption etc. This factor has to be considered as well.

6. One Window Policy: Well, it could be encouraging to the investors. However, this policy is not new to Nepal. In theory, one window policy has existed in Nepal since the Panchayat Era but we are yet to see its effective implementation.

7. Relatively small and accessible government: Although our leaders have very little, if any, interest towards national economic issues, they are relatively accessible , at least for the foreign investors and that's another advantage we could capitalize on.

8. Open and liberal export/import rules: Compared to India, maybe. But there is too huge a room for improvement in this area before it can really work to our advantage.

9. Hardworking people: Really?? What about our militant labor unions who are slowly but steadily destroying whatever little industries we have? What about the excessive politics that goes on with these unions?

10. Many sector-specific incentives

So what do you think about these reasons? Are these the right reasons for investing in Nepal? Are there any additional reasons? Share your views below!