Economy & Policy (Business Age)

Economy & Policy

Poverty Alleviation A Layman’s View

By Prakash Dahal

There were time when rulers in Nepal invented variety of tactics to keep the gullible Nepalis on tenterhooks. In those thirty-two years under Monarchy's active leadership, the Nepalis people, largely fatalistic, guided by belief that nothing can erase what is etched on their foreheads, were fed with endless hopes and promises. People were charmed by slogans which said so many things but meant nothing. They said, ‘Nepal will soon reach Asian standard and when the magic of slogan waned, they climbed down the ladder to say,’ Every Nepali will have a South Asian standard, at least’. And when that too lost power to hold them around, they came down to the lowest rung of the ladder and said, ‘ Every Nepali will have basic standard of living’ and, it went on that way. That is how they ran the statecraft during the pre-multi-party days casting a shadow of hope over the ruins of hopelessness.

Then, those, now in power, were the fallen Satans with their jaundiced eye seeing yellow everywhere in Panchayat. In other words, their starving eyes couldn’t see anything beyond the ills of the uni-party Panchayat regime. Panchas wanted people to believe in what they say, and the pro multi-party fighters urged them to disbelieve everything they said. They told people that the uni-party Panchayat could do no good and multi-party democracy would do no bad. Many of those utopian stories still lie fresh in people’s memory. Now they come to understand how they roll the wheel of the state or what amount of deceit and betrayal is necessary to run it. There have been no change in the ploys or the maneuverability employed in running the state. One who tells lies and still keeps people rallying behind him; they pinning hopes on him by suspending any thing called reasoning; is a successful politician.

The multi-party political operators envious of uni-party Panchas’ mastery in deceit learnt the knack of the trade from them. Over the past 12 years, they adroitly put them in use to run the statecraft. The Panchas, the fallen guys, however, prove smarter than the multi-party wallahs in making promises which the people then unquestionably swallowed. They could do it effectively because they imbibed elements of dynamism in it which helped keep freshening the promises. In 32 years, they changed slogans every ten years and cut a swathe across the country. Sometimes, they said they would dig out the hole and make development pop out of it. All they did in a strategic way. Had the Berlin wall not fallen or former Soviet Union not crumbled, they could still hold a sway over Nepalis playing several other cards up their sleeve.

On contrary, the yesterday’s fallen Satan turned today’s power-sitters have borrowed tricks and tactics from the uni-party Panchas however, they haven’t been able to do the job ‘professionally’. With the uni-party Panchas, they could successfully throw one after the other baits for the country’s 23 million people to swallow, however, the multi-party wallahs lacked both dynamism and professionalism in statecraft.

Right from eighth five year plan through ninth and now tenth, they are harping on one and the same string- poverty alleviation. Whether the plan over the past one decade has impoverished or depoverished Nepalis! Either of the two authorities must know it - one who sits at the border check posts and the other who sits at Singhdurbar’s Planning Commission.

The men in the border check posts may be able to tell how many skeletal figures in dirty rags descend down and go across the border to eke out living every season, and the men in mayalposh suruwal covering the protruding belly at Singhdurbar or at the Ministry of Finance might lay open the figures borrowed from some expert’s reports tucked away in those iron shelves and blabber about their achievement. Neither of them would possibly tell you how many skeletal hill folks died on way while making it to Muglan. Views may conflict over indicators to judge achievements. Should the rise in number of cross-border migrants be taken as indicators to judge the prosperity vis a-vis poverty in Nepal’s rural hills and terai or the figures in papers laser-printed and spiral-binded!

Should the little resource distributed among farmers for vegetable production under small income-generation scheme be taken as indicators or their ability to compete in the available market that is flooded with Indian vegetables selling cheaper than the Nepal’s cost price! Should a small chunk of land given to landless squatters be taken as indicators for poverty alleviation or the investment needed to grow, harvest and access to market? Well, the men at the Finance Ministry or the Planning Commission suppose to better fathom how deep poverty runs in the country and to what extent have they been able to lower it? Their sophisticated techniques, high-tech methods and what they call scientific ways and means to extract actual situation lay behind the figures they produce. And therefore, no matter how many skeletal figures in rags die of starvation or how many thousands escape starvation by crossing the border, its the figure they produce that matters. For the layman, the figures either go off their mind or go down the drain. They fail to understand how those figures have any relation to their wretched poverty and destitution.

The cries of the hungry belly hardly reach Singhdurbar and they surely never enter the thought process of planners and the ministers because these people are too much occupied with the figures that expatriate experts have produced for them. Anyway, uni-party Panchas knew that figures alone in American way would not placate those creatures living in Nepal’s rugged terrain. They need to be heeded and the slogans made to make them feel that things are underway.

With the multi-party veterans, they obsequiously let the western ‘development experts’ enter their mind and do the planning.

No doubt, poverty alleviation remains a sexiest slogan both at home and abroad. With terrorism linked to it after September 11, it’s potential in attracting foreign money has increased. The only problem is that the slogan has eroded its power to keep people from disenchanting. One slogan no matter how tactfully coined cannot hang all the people around for long. There should be a change. People seem to have had enough of poverty and they no longer enjoy the hackneyed slogan. Either the multi-party wallah should change it or the people would change them. Mind you, its only a layman’s view.

Economic considerations of Intellectual Property Rights

- By Rudra Sharma

It was hotel Bluestar and there was a cloudy evening outside. A host of intellectuals including some secretaries of reputed ministries were glued to the Sarangi of Tirtha Bahadur Gandarva and songs of Kumar Basnet. Aaimai Jati Budi Bhaini...Tirtha Bahadur and Kumar Dai were not performing a charity there, nor it was a sponsored program, rather they were celebrating their own annual festival, The world Intellectual Property Day ( IP Day). Seeing that all, a gentleman next to me whispered, "Can Tirtha Bahadur be an intellectual to celebrate IP Day ? That’s all.

I pondered that it is that what reveals the level of understanding of our so called intellectuals in tie-suit who frown upon others to regard as intellectual especially to those who seldom present themselves in tie- suits. Tirtha Bahadur may not be an intellectual if someone compares him to an university professor.

However, he is definitely an intellectual property holder or he is an owner of intellectual property. Then, why not he is an intellectual. And, his intellectual property is his Sarangi. Sarangai not exactly as the wooden instrument but as the creation created out of the Sarangi. Mind it, his right is not an airy-fairy, nonsense upon stilts. But the rights of Tirtha Bahadur are promoted and protected by national and international laws like Copyright Act, Berne Convention, Paris Convention so on and so forth. Further, once nations enter into World Trade Organisation (WTO), the compliance of IP Rights is a must. During the tea, I talked in brief with the gentleman and apprised him about intellectual property to the extent of my capacity. Considering that it may be useful to gentleman like him, I have jotted down here something what I talked to the gentleman.

We traditionally mean intellectual property rights as the right that relates to educated people and their literary creations. But it has quite broad meaning in practice. Intellectual Property Rights (IPR) is generally defined as the rights given to the person over the creation of their mind. In other word, Intellectual property are the rights given to the creators to prevent others from using their inventions, designs or other creations. But, what is the creation of mind is not easy to define. There are wide range of things that are included under IPR.

Traditionally only things like copyright comes up to in the sphere of intellectual property rights. But now it includes a varieties of rights like trademark, patents, industrial designs etc. The latter one like trademark and patent right are known as industrial rights which have more to do with economic considerations of intellectual property rights.

Films, music recording, books, computer software and on-line services are bought and sold because of the information and creativity they contain, not because of the plastic, metal or paper used to make them. This intangible property which is sold or bought out of their value of the tangible goods may be perceived as an intellectual property.

Roughly speaking, intellectual property and trade seem to be two sides of rivers as if the former has nothing to do with the latter and vice versa. Gone are those days. Now, intellectual property is not only a part and parcel of World Trade Organization (WTO) but also one of the most contentious part of the multilateral global trading body. Intellectual property does have its scope of work and considerations in varieties of spheres. But its scope of work and considerations are switched to be economic once it has occupied a strong position in WTO under the Trade Related Aspects of Intellectual Property Rights (TRIPS).

In recent years, the topic of intellectual property rights and its protection has been the subject of intensive debate in academic and policy circles. The problem has been highly politicized, with the result that the basic issues are almost forgotten. It has taken the shape of North- South confrontation, and it has become an instrument in the hands of economically powerful segments of the world economy to blackmail the less powerful, helpless and dependent segments of world economic community. The debate has been submerged on the borderline of ethics, politics and economics. Both sides seem to have valid arguments to support their stand. However, the more powerful have more powerful say, apparently.

Since 1970s the availability and enforcement of intellectual property rights have become major issue in international economic issues. There are some reasons behind this development. First, technology is increasingly recognized as a key factor affecting competitiveness, particularly in research in production of trade in technology -intensive goods and services. Research and Development (R& D) expenditure have shown steady increase since 1970s in industrialized countries.

Second, the US led leadership in manufacturing and technology was challenged by the catching up of Japan and a few other countries including the Newly Industrialized countries (NICs), which became aggressive competitors in consumer electronics, micro-electronics, robotics as well as in various services (e. g in engineering and construction). The monopoly position conferred by strengthened intellectual property rights were seen as an instrument for neutralizing it, in part, and even reversing, the relative loss in competitiveness of US products and services and for preventing further catching up based imitative paths of industrialization.

Therefore, developed nations invested more and more on R & D over the years basically in lure of the monopoly rights that could be claimed under intellectual property rights. That’s why, intellectual property, which was once a matter of academic consideration turned out to be a matter of economic considerations.

Besides, developing nations also became more conscious over the issues of intellectual property rights though they do not invest so much in R & D. They are also gaining currency in the field of copyright and other related rights.

The economic consideration of intellectual property has soared up since compliance of Intellectual Property Rights (IPRs) is one of the main pre-requisite for the accession of Nepal to the World Trade Organization. Least developed countries like Nepal which are seeking WTO membership also have to comply with the intellectual property rights once they acquire WTO membership. Though the Doha ministerial conference has extended the time for compliance of the Trade Related Aspects of Intellectual Property Rights (TRIPS), its compliance will be compulsory once the concession period exhausts. Therefore, it can be concluded whatever copyright may have rested upon the pasts, the primary goals of copyright are now economic considerations.

But in Nepal legal infrastructure for the protection of intellectual property are very poor and the practice to protect intellectual property are worse one. Though, there are some laws like Copyrights Act and an Act about patents and trademarks to regulate matters relating to intellectual property, they are seldom enforced nor complete. We people do not care so much about the compliance of intellectual property rights.

The first substantial evolution of IP rights in Nepal dates back to the Patent, Design and Trademark Act,1937 which was enacted some 65 years ago. Later, the Act was replaced with another Act with the same name some 30 years ago. The Act Which was amended after 22 years, still in force and regulates the present industrial property system of the kingdom. it was amended in 1987. Besides, there is Copyright Act, 1965 that governs the copyright aspect of the country. Recently a new Bill named Copyright Act, 2058 has been passed by the both houses of the parliament. It is awaiting or Royal Seal of Assent. The new Act is expected to be more comprehensive.

There is not an umbrella organization to deal about both the copy rights and industrial property rights. The Ministry of Culture, Tourism and Civil Aviation of looks after the matter relating to copyright while the policy level works relating to industrial property falls under the Ministry of Industry.

Department of Industries (DoI) undertakes the responsibility of implementing and executing the policies and regulations of the Industry Ministry. For copy right, the National Library under the Ministry of Education works as a copyright office. Anyone who wants to register copyright has to approach to the National Library. The penalties are inadequate to deter the infringement. There are no custom measures to protect IP rights. And, there is no provision of criminal procedure.

Therefore, Nepal has more to reap the fruit of the economic consideration of intellectual property rights provided laws and practices are to be made compatible to TRIPS. Thanks God, the gentleman finally agreed that both Tirtha Bahadur Gandarva and Kumar Basnet were intellectuals duly holding intellectual property with them.

The Public-Private Clashing Partnership

- By Bhaskar Sharma

The private sector has played a vital role in the country’s development, especially in the post democracy era. It was in the early 90s that the government resorted to open and free market policies with a view to promote the private sector as the engine of growth. Undoubtedly, in line with its vision, the government formulated policies that were conducive to the growth of the private sector. And the positive impact of such open policies is evident from the statistics of the past decade.

As a testimony to the contribution of the private sector, the real Gross Domestic Product (GDP) at factor cost jumped from Rs 145 billion in 1991 to over Rs 392 billion in 2001. Likewise exports surged from around Rs 13.7 billion to Rs 57.2 billion in the same period. Similarly, the number of joint venture industries, primarily as a result of private sector initiation, has surged remarkably. Over 250 joint ventures are operating today, with almost 50 under construction. Such rise in foreign trade and the number of industries during the ten-year period shows a satisfactory picture of the Nepali economy. And the main reason for an upsurge in economic activities to such an extent may be attributed to the liberal economic policies adopted by the government.

Unfortunately, the last ten years’ achievements are at risk with the ongoing Maoist insurgency. Repeated attacks on infrastructure and business houses are deterring investors from making productive investment. Though a host of international events too have impacted Nepal lately, the worsening law and order situation has become an overriding concern. The escalated Maoist violence against business establishments in recent years, including Dabur Nepal, Nepal Lever, Shah Distillery, and a host others, has dealt a serious blow to business confidence, pulling down the morale of the so-called ‘engine of growth’ to its lowest. And this partly explains the latest fiasco that the economy is faced with. Exports in the first half of 2001/02 declined by 6 per cent, which is the first time in twelve years. Total imports too slumped by 8 per cent during the period, indicating a decline in industrial activities. However, the business community is still hopeful that a solution to the current crisis would be found, and which they believe should pave way for further development.

While the containment of the increased violence is the topmost priority of the private sector, their concern are also on a number of other areas, which can see drastic improvement if sincere thoughts are given. One of the most important challenges faced by the private sector is the implementation of the business friendly policies that the government has formulated. Weak implementation of the high-sounding policies and poor participation of the private sector in policy formulation can constrained the extent to which the private-sector-led-growth takes place.

Most of the past policies formulated by the government were done without soliciting the recommendations of the private sector. Even some of the recent decisions reflect its indifference and lack of sincerity in heeding to the warnings of the private sector. The government should truly incorporate the suggestions of the private sector before taking any major policy decisions. Nevertheless, of late, there seems a remarkable shift in the government attitude, which was clearly reflected during the meet of the Nepal Development Forum held recently in Kathmandu and Pokhara. The government, prior to the meet, held a series of consultations to solicit the views of the private sector entrepreneurs for the policies that the government would be adopting for the next few years. If sincerely implemented, incorporating the genuine recommendations of the private sector, the upcoming policies can be expected to be more encouraging to the private sector. Only then can true public-private partnership can take place, and the consultative bodies formed in the past can function more efficiently and effectively. For instance, most of such consultative bodies are not operating in line with the earlier vision. For example, the role of the Environment Council, Industrial Promotion Board, Revenue Consultative Committee and Export Promotion Committee, among a host others, is hardly laudable. They have remained largely dysfunctional, plagued by high degree of government intervention. Only the Nepal Tourism Board, which has a greater private participation, is functioning as per initial expectations.

The growth of the private sector depends to a large extent on the policies that the government formulates, and the legal framework that guides the private sector. For the efficient functioning of market-oriented economies and for the growth of private sector enterprises, the legal framework needs to be simple, unambiguous, transparent and consistent to the needs of the private sector. Unfortunately, while the government talks of liberalisation and open market policies, the laws are not congruous to its intentions. Formulation of the Industrial Policy and the Foreign Investment Promotion Policy in 1992 to promote industrialisation and greater investment in the industrial sector was one of the many notable steps taken by the government. Much has been achieved due to the policies of the 90s, but there still lacks sincere implementation, and much more could have been achieved had it not been for the corrupt state-machinery. Furthermore, with core competence as the buzzword in the economic world today, the government must embark on taking steps to ensure that Nepal survives the threats globalisation would bring. This calls for revision in past plans and policies, including the regulatory and legal framework, making it WTO compatible that aims to enhance the competitiveness of Nepali businesses, failing which they would not survive the global competition. The government now must take bold decisions – which may be challenged in the near future, but beneficial to the economy in a fairly long time. And perhaps the right beginning must be by introducing more flexibility in the labour laws, which has traditionally been biased in favour of the workers. Without conducive labour laws, even if cheap labour is abundantly available, private sector cannot flourish in a competitive environment.

The present global economic experiences reaffirm the notion that market forces play a paramount role in accelerated development. Whatever economic achievements have been in the past decade is due to the private sector. The government’s role in the economic activities has to be minimised to promote private involvement to bring efficiency and effectiveness in production and quality of goods and services. Though the private sector may not be much interested to put their hands in the sick state-owned enterprises, yet the government must sincerely speed up the privatisation process. But it may be recalled that some of the state-enterprises passed on to the private sector did not flourish. That is because of the unproductive labour in state enterprises. The government’s decision to lay off all workers before placing Hetauda Textiles Industry is a decision that must be welcomed. However, the industry is yet to attract a single bidder. Moreover, as of yet only 18 enterprises have been handed over to private hands, while around 39 enterprises continue to fare hopelessly under the government bureaucracy. One of the glaring examples of sluggish privatisation of state owned enterprises was that of the Butwal Power Company, one of the few profit making state-ventures, which took over three years of controversy before finally being settled.

There is no argument that the government’s main thrust in the post-90s was on the private-sector-led-growth. Nevertheless, in a country like Nepal, the government really cannot afford to transfer each and every role to the private sector, which has also proved its incapacity time and again. A number of areas in which private sector was allowed by the government has performed hopelessly. Nepal’s entrepreneurs are seen to be running for more short term profits rather than long term returns. A glaring proof to the failure of the private sector in achieving virtually nothing is the hydropower sector. The government adopted liberal hydro-policies to attract private investment. However, the interest shown by the private sector has been negligible. Similar was the case in fertilisers whose supply did not improve despite its deregulation in 1999. Likewise, the private sector failure is also seen in the banking system, where huge amounts of loans and advances have been granted against the central bank’s regulation.

Whatsoever the present standing of the private sector is, it responded to the policy reform initiatives in the 1990s dramatically. However, the impetus was not sustainable, especially after 1996 when the real average GDP declined, manufacturing value addition and employment fell back, and real investment stagnated. While the Asian crisis, unfavourable weather and changes in the policies in the key export markets for Nepal may partly be blamed, the major blame goes to domestic factors: poor implementation capabilities, increasing resource gap, lack of legislative framework and miserable bureaucracy. The government now must take concrete steps to reverse the current trend. And for true private-sector-led-growth to occur, the government must be liberal, while at the same time, the private sector must maintain the ethics and norms of business and remain within the periphery of the government regulations.

Ineffectiveness of Capital Controls

- By Tula Raj Basyal

Capital controls refer to restrictions on asset (capital) movements across the countries. This means limits on foreign investment in financial markets, on direct investment by foreigners in domestic businesses or property, and on domestic residents’ investments abroad. While restrictions on the use of foreign currency for trade have now been almost minimum even among the developing countries, capital controls, in contrast, are still popular. Despite controls on outside investment and prevalence of over-regulated international financial market transactions, the general trend has been toward fewer capital controls. This tendency grew as capital controls did not work well and produced undesirable consequences. And as governments have gradually liberalized domestic financial markets, restricting access to foreign markets has become increasingly inefficient and ineffective.

Controls would do little to keep money at home but a lot to deter foreign investment. Controls help to feed corruption, as bureaucracies are empowered to determine who would be exempted from them. Capital controls, though they become less effective over time, can still inhibit or heavily "tax" certain classes of external financial transactions, limit the access of some individuals or institutions to international financial markets, restrict competition in domestic financial markets, and discourage the repatriation of capital flight. Capital controls can thereby create inefficiencies in the domestic financial system and inhibit risk diversification which can, in turn, weaken the competitive position of the economy and increase the vulnerability to domestic financial shocks. When opportunities for moving funds abroad widen, the costs of enforcing capital controls, investigating suspected violations of the controls, and prosecuting violators of the capital controls code would rise. As the effectiveness of capital controls erodes, inappropriate macroeconomic policies can be sustained only if capital controls are further tightened, thereby increasing the distortions and inefficiencies they can potentially create and sustain.

Capital controls also create an implicit market value for the permits approved for restricted capital account transactions. These permits are usually allocated to individuals and institutions according to a set of rules administered by the capital controls bureaucracy. These arrangements, therefore, often provide a strong incentive for individuals to attempt to capture the "rent" inherent in these permits through bribery, corruption, and political influence. Rent-seeking activities may be viewed as highly profitable from an individual’s perspective. They are, however, an important source of economic inefficiency in the economy with extensive controls on financial transactions. In addition, the techniques used to evade capital controls and move funds to a parallel exchange market or abroad could often be used to evade taxes and restrictions on other types of activities as well. Exchange controls provide an impetus for the expansion of the underground economy.

With the reduced ability of capital controls to insulate domestic financial market conditions from those in external markets, the explicit and implicit costs of using controls as well as the effectiveness of capital controls would thus rise. Notwithstanding the differentials created by capital controls between domestic and international interest rates, there would be general inefficiency of such controls in maintaining an unsustainable exchange rate. In situations where exchange rate pressures result from capital flight induced by inefficient policies, there are considerable incentives to circumvent regulations through alternative mechanisms, thereby diminishing the effectiveness of controls. When the effectiveness of capital controls erodes, the formulation of macroeconomic and structural policies may be further constrained. An increasing willingness and ability of domestic residents to evade capital controls implies that unstable domestic monetary and financial policies that create a large differential between the expected real returns on domestic and external assets typically lead to increased capital flight and smaller domestic monetary system.

The reduced effectiveness of capital controls can make it more difficult for the authorities to tax financial income, transactions, and wealth. As the domestic financial system shrinks, the revenues that the authorities can obtain from an inflation tax (at a given rate of inflation) will also be reduced. Similarly, high taxes on financial income and wealth can create a strong incentive for domestic residents to hold a significant proportion of their wealth as external assets. As a result, new taxes and/or cuts in government spending will be needed as the effectiveness of capital controls erodes and leads to a decline in real tax revenues. Hence, capital controls are viewed by markets as additional risk factors, and their prolonged use has often been associated with capital flight. So, countries that retain controls should seek to refine them and remove those controls that cause the greatest distortions, perhaps replacing them with less distortionary controls— just as tariffs often replace quotas at the start of trade liberalization. However, prudential controls on foreign capital that are intended to reduce the vulnerability of domestic institutions and financial system to shifts in foreign capital flows could well form part of internationally accepted prudential standards.

Some Lessons

Although capital controls could reduce fluctuations and provide some stability to the market participants, controls are generally inefficient and costly for the economy. They are additional cost to the market and their prolonged use is often associated with general economic inefficiency. For example, foreign exchange controls produce official and black rates whereas interest rate controls produce large interest rate differentials between the formal and informal financial markets. Controls, therefore, are distortionary and have larger costs than benefits. It is also assumed that capital account convertibility (CAC) will raise the foreign exchange earnings and foreign/domestic investment at a greater level due to the investors’ increased confidence in the economy. CAC increases the financialization of saving, improves financial intermediation, reduces the cost of capital to the borrower, enhances the rate of return on capital, attracts more foreign investment, and thus leads to sustained growth. Numerous countries in the world have liberalized capital movements precisely because capital controls led to economic stagnation and poverty whereas capital openness resulted in economic soundness. Capital including other resources should be put to their maximum use for achieving sustained high rate of growth, for which CAC would be a valuable instrument.

After the successful completion of the current account convertibility in FY 1992/93 since its initiation in FY 1991/92, the obvious step following this has been the introduction of CAC in Nepal. Accordingly, the budget speeches for various years and the development plan documents have highlighted the necessity of making the capital account transactions fully convertible. The policy measure contemplated has been achieving gradual progress toward full convertibility in the capital account transactions in the process of making the economy more competitive. But for convertibility to be useful to the economy, the economic fundamentals should be made stronger through pursuance of prudent fiscal, financial and monetary discipline. The financial sector should be strengthened by institutionalizing the ideals of corporate governance reducing the volume of non-performing loans and narrowing down the spread between the deposit and lending rates. The credibility of economic policies should be enhanced and the confidence in the economy raised through fostering a conducive economic and related environments. The capital market needs to be promoted for enhancing financial resource generation and mobilizations in a competitive framework. The necessary homeworks for CAC should thus be put into sound footing by pursuing appropriate measures aimed at ensuring and improving the macroeconomic fundamentals and other important financial and corporate sector prerequisites.