Edited by Akash Shrestha

Editor’s Note
Editor:
Akash Shrestha

Authors:
Anjila Shrestha
Ayushma Maharjan
Navneet Jha
Nishant Khanal
Prakash Maharjan
Prience Shrestha
Shreya Subedi
Shuvangi Khadka
Surath Giri
Yatindra K.C

Design & Layout:

Roshan Dhwoj Basnet

Published by
Samriddhi Foundation
664, Bhimsengola Marga,
Kathmandu, Nepal
Tel. : (+977)-1-446-4616
E-mail: [email protected]
Economic Freedom Website: www.samriddhi.org

I
n Nepal, concepts like economic freedom, liberalisation © Samriddhi Foundation
and deregulation have historically been tied up with,
and followed by periods of economic tensions. In the late
1980s, these were brought into deliberation in the aftermath All rights reserved. No
of economic downturn. Reforms of the 1990s gave these part of this publication
deliberations life and the reforms in turn uplifted the may be reproduced, stored
economy and people. After a hiatus in reforms owing to civil in a retrieval system, or
war and transitional period lasting a total of two decades, transmitted, in any form
the government hinted at some form of affinity towards these or by any means, without
concepts again in the aftermath of COVID-19 (and after prior permission. Enquiries
long periods of nation-wide lockdowns). Some regulations concerning reproduction
concerning trade and doing business were immediately should be sent to Samriddhi
relaxed to battle shortages of protective equipment. But Foundation at the address
economic freedom and liberalisatioin do not need periods above. You must not circulate
of economic shocks and downturns to make sense. These this book in any other binding
concepts are important in and of themselves because they cover and you must impose
create opportunities for the people to help themselves – in this same condition to any
case of Nepal, to lift them out of poverty ... acquirer.
In contemporary public discourses, one gets a Authors in the second half of the compendium
sense that these ideas are thought of as western further offer economic freedom and markets
concepts and do not suit the realities and needs as the pathway for tomorrow, delving into
of Nepal. Problems of the day are used as a potential major discourses of the future viz.
pretext to substantiate the need of government resource management in the federal context
and state interventions over markets. In this and development priorities and policies for a
compendium, authors try to dissect this notion. middle-income Nepal.

Ayushma Maharjan delves into the evolution In the final piece, Prakash Maharjan examines
of housing in the capital city of Kathmandu the state-led social security programs and
and finds that concepts like markets and highlights the importance of competition –
spontaneous order are indigenous to Nepal. another key component of the market – between
Historically, fellow denizens, through their products offered by the state as well such that
individual actions, were capable of creating citizens benefit from ensuing choice, until those
efficient and sustainable solutions to problems are replaced by the market.
in a society.

Surath Giri dissects Nepal’s vulnerability to

economic shocks and shows that they stem from
two perennial problems of the Nepali economy
– high unemployment rates and a high level
of the informal economy. Borrowing lessons
from Hernando De Soto’s works in Peru, he Akash Shrestha
concludes that enhancing economic freedom
and reforming business environment should be
the top priority if Nepal is to make a significant
dent on its endeavour to prosperity.

Against this backdrop, our other authors then

dissect Nepal’s existing legislative regime and
practicalities within some of the key sectors of
the economy like agriculture, trade, transport
and remittance. They find that our archaic,
stringent and excessive legislations have
deprived many individuals of their right to earn
a decent livelihood through self-enterprising.
Revisiting key economic sectors reveals that
in many instances, our priorities have been
misplaced and authors offer insights into how
market-friendly approaches could assist more
in the national endeavour for prosperity. They
also stress that legislators need to acknowledge
the fact that legislations can trail innovation
and enterpreneurship, esp. in the current day
and age where technologies evolve rapidly.
 Inside...

1 Spontaneous Order
By Ayushma Maharjan

5 De Soto’s Lessons for Nepal

By Surath Giri

11 Nepalese Agriculture: Time for a New Departure

By Ayushma Maharjan & Shreya Subedi

33 Converting Remittance to Saving and Investment

By Prience Shrestha

41 Nepal’s Trade and Comparative Advantage

By Nishant Khanal

53 Rethinking Industrial Enterprise Act

By Ayushma Maharjan

61 Ride-sharing Businesses: Nature and Regulation

By Yatindra K.C
Markets for Dispute Resolution: A case of
79 Melamchi Drinking Water Project
By Prience Shrestha
Economic Freedom: Nepal’s Guide to prosperity after LDC
89 graduation
By Anjila Shrestha, Navneet Jha, Prakash Maharjan and Shuvangi Khadka

101 Faultlines in Nepal’s Social Security

By Prakash Maharjan
 stories of the houses were small in height for
heating purposes. All activities like bathing,
washing clothes and using the toilet were
conducted outside the house. One of the most
important features of the houses were that they
were built to accommodate a single family.
The families sometimes allowed travelers and
guests to spend the night but apartments for
the purpose of renting out were not available.
Over a period of time, the houses evolved, but
only in terms of beautification purposes. The
internal design remained intact.

However, this was soon to be changed after the

mid-1900s. People across Nepal realized the
enormous economic opportunities available in
Kathmandu Valley and thus started migrating.

Spontaneous Additionally, threat of different conflicts like the

Maoist Insurgency led many people to leave

Order
their hometown and migrate to Kathmandu. As
a result, the population in Kathmandu Valley,
which increased only gradually prior to 1950,
- Ayushma Maharjan increased drastically by 95 percent from 1950
to 1970, and by 238 percent from 1970 to
2011.

T wo centuries ago, Kathmandu Valley was

mostly an agrarian society; the population
was small; and people mostly used in joint
With increase in population from mere 0.6
million in 1970 to astounding 2.09 million
in 2011, the need for housing in Kathmandu
families. Valley increased rapidly. Additionally, there
was a need to supply housing for people
Houses in Kathmandu had a peculiar feature. belonging to different economic backgrounds,
The ground floor always consisted of a shop, different cultural backgrounds, and different
store-room or a cow-shed, as the weather was tastes and preferences. One can imagine that
very cold and it would be impossible to spend in a valley with all houses being built for a
the nights there. The first floor comprised of single family, accommodating millions of new
bedrooms with small windows. With people inhabitants and satisfying each one of them
spending their entire day at the fields, lights was a far too complex problem to resolve.
in the bedrooms were not very valuable. The
living room in the second floor was huge However, the problem seemed to have resolved
and could accommodate quite a number of effortlessly and in real time. The people living
guests. Lastly, the kitchen was always at the in Kathmandu viewed the migration as an
top as cooking at the uppermost story would economic opportunity and since late 1900s
prevent smoke from spreading throughout the started building modern houses consisting
house. The roofs of the house were sloped on multiple apartments with attached kitchens
both sides to allow rainwater to drain and the and toilets for the purpose of renting out.

1
ECONOMIC FREEDOM
A Compendium of Essays

Additionally, they created diverse houses that languages were not consciously designed
managed to satisfy the needs of diverse people. by any authorities but naturally evolved over
time with the need of efficient communication.
One might be surprised to realize that Any central planner or government institutions
individual human actions unintentionally led could not create rules of such complexity, subtly
to resolving what could have been a daunting and effectively.
problem for millions of people migrating to
Kathmandu without any planning and a central Another spectacular example is the evolution
authority asking individuals to do what needed of mail delivery system. Traditionally, the task
to be done. This is a proof that human beings of mail delivery was conducted by trained
through their actions are capable of creating birds, which were later replaced by postmen
efficient and sustainable solutions to problems as undertaking the activity was economically
in a society. All that people in Kathmandu beneficial to the men. Today, it is gradually
had in the mid-1900s was freedom to pursue being replaced by a more efficient mechanism
their self-interest – economically benefit by – the internet. This phenomenal achievement
renting out apartments. While doing so, was the result of experimentation by individuals
they unintentionally ended up creating a in an attempt to resolve the inefficiencies that
tremendously beneficial residential, and social they experienced in the society.
system.
Ideas generated by individuals that are guided
This phenomenon in economic and social by their tradition, culture or experience, have
science is known as spontaneous order. The proven to be more creative and adaptive.
idea of a spontaneous society emerged from This is because human societies are complex
the realization that the regularities and order as they consist of different individuals with
in the society that we live in were actually the different taste, preference, culture, attitude and
product of individual human actions and not opinions. This simply implies that it is impossible
of deliberate human planning, design, and for authorities to deliberately plan the workings
intention. Social orders which seems to be of a human society in order to satisfy each
created by an omniscient designing mind, are and every individual. The information of
actually the outcome of actions of millions of problems and needs in a society is held by
individuals pursuing their self-interest without millions of individuals as they experience in
any intention of creating overall societal norms. their everyday lives and it is unmanageable for
a few individuals in the government to have
If we scrutinize on our daily lives, we will all the required knowledge. Thus, while the
realize that there are abundant of examples government authorities try to make decisions
which depict the spontaneous order at play. for everyone in the society based on limited
One of the most prominent ones is the human knowledge, they can never come up with the
language - most marvelous discovery of human most optimal solution.
civilization. There are thousands of different
languages in the world which have been For instance, what if the government had
assisting billions of people to communicate. to come up with the solution of providing
The pronunciations and rules of grammar of accommodation to millions of people migrating
each language are equally complex that one to Kathmandu Valley? They would have no choice
cannot even describe all the rules perfectly. Yet, but to make same apartments for everyone to
each individual is flawless in their respective ensure equity. The Bhutanese experience can
language. It is astonishing that the many help understand its consequences. In Bhutan,

2
 Spontaneous Order
- Ayushma Maharjan

the building rules and regulations makes it of few minds imposing what they think is best
mandatory for everyone to build houses that are for everyone, and has higher risk of failure.
consistent with the architectural guidelines that As government projects run on taxpayer’s
aims to preserve the traditions of Bhutan. The money, its failure often ends up risking the lives
decisions regarding location and design of the and fortunes of everyone. Many a times, the
building is thus taken by the local government. ineffective solutions imposed by the government
However, the decision led to all individuals have resulted in more chaos.
– both rich and poor - having to pay equal
amount of money for building houses which is One of the most recent examples of the
quite expensive. This has resulted in shortage aforementioned argument is the development
of houses and the rent has sky-rocketed – of ride sharing businesses like Tootle and
people pay at least 40 percent of their income Pathao in Nepal. While these companies
on house rent. Moreover, as the urban areas were successful in eliminating the problem
of Bhutan are being congested and increasing of crowded and ineffective public vehicles in
housing supply is impossible to reduce cost, Kathmandu and were able to create jobs for
the government is planning to expand housing multitude of people, there was a time when they
colonies to the outskirts of the city and has were banned in light of different issues like low
imposed a limit on rent. Again, with freedom sales of taxi service, protection of consumers
on individual human action, Kathmandu Valley from accident, legal barriers on private vehicles
experienced an easy urban shift. to provide public service, risked conflict, loss of
jobs and loss of investment. More importantly,
If we track our evolution, solving our problems the problem of public transport remained.
have often come from within the society – in
the form of entrepreneurial ventures. Problems The solution of the government for resolving
that arises within a society always brings the public vehicle problem in the valley was
along an economic opportunity and if we introducing Metro. However, the government
allow individuals to work freely, they would failed to realize two things: (i) private ride
have enough incentive to come up with most sharing business could resolve the problem
appropriate and innovative solutions. Unlike more efficiently, (ii) building Metro requires
the government authorities, it is not mandatory huge financing. Thus, instead of adapting to
for free individuals to satisfy everyone in the efficient and effective system, which could not
society. Thus, they conduct small experiments only resolve the existing problem but also could
and provide solutions to specific groups. Given enrich the lives of many people employed by the
the availability of millions of minds, such small business, the government planning proposes
experiments are conducted by thousands of wasting of taxpayers’ money. Government
individuals and even a few successful ones end intervention seems to be easy and attractive,
up benefitting majority of individuals in the but it is not prudent to always rely on it to
society. The beauty of this process is that even resolve the many complex problems of human
if the experiment fails, the society has nothing societies.
to lose as the entrepreneurs bear the entire risk
While saying so, it does not imply that
of failure. However, it is a gradual and slow
spontaneous society is a perfect society. Human
process which constantly evolves and adapts to
dynamic changes in the society. beings are prone to making mistakes. However,
in a free society, they are also at liberty to come
On the other hand, solutions provided by up with innovative solutions to the problems.
government authorities are simply a product The errors can be resolved gradually as the

3
ECONOMIC FREEDOM
A Compendium of Essays

societies are ever evolving and many individuals

are constantly in pursuance of resolving the
problem. For instance, industrial revolution
was a remarkable achievement which helped
countries achieve prosperity and reduce
mass poverty – at a scale that no government
planned programs have ever been able to
achieve. Nonetheless, if the photographs of
the then industries are viewed, one can notice
excessive smoke coming out of the industry or
the industries polluting the environment in one
way or the other. While industrial revolution
solved the prominent problem of the time, it
also created much damage to the environment.
With realization of the same, people today have
been sensitive about the environment and thus
industries as well as individuals have started
using environment friendly technologies.

Spontaneous order is not a perfect solution

because human beings themselves are not
perfect. Going back to the same example of the
housing evolution of Kathmandu valley, many
will readily point out today that in the process,
Kathmandu valley lost in terms of its beauty.
But these are privileges that we have today
because the bigger problems were solved in
the past. The enrichment of the human lives that
was made possible due to spontaneous order
also allows us to now invest in addressing these
other problems of externalities.

4
 economic disruption has been even visible from
space with nighttime light intensity declining
in more than three-quarters of South Asia’s
districts during the period between March and
August 2020.1

The vulnerability to economic shocks in Nepal

stems from two perennial problems of the
Nepali economy – high unemployment rates
and a high level of the informal economy.

Perennial Problems
It is estimated that over 400,000 youths enter
the Nepali job market annually. Many of them

De Soto’s do not get jobs, at least within the country.

According to the Report on the Nepal Labor

Lessons for Force Survey 2017/18, 71.5 percent of the

total population of Nepal is of working age

Nepal
(15+) and the current unemployment rate is
around 11.4 percent. What is more concerning
is that the unemployment rate is highest among
- Surath Giri young people aged 15-24 and 25-34 years.

As a result, labor migration has been a

prominent source of employment opportunities

A s the COVID-19 engulfed Nepal starting

in March 2020, Nepal’s already flailing
economy took a serious hit. Needless to
for the Nepali workforce. In the FY 2019/20
alone, the Department of Foreign Employment
issued 236,208 labor approvals to Nepali
say, the pandemic has further exposed our citizens seeking foreign employment which
broken economy. There is hardly an economy gives an inkling of labor migration volume.
across the world that has not been affected The trend had reached its peak in FY 2013/14
by the pandemic. Some economies like when 519,639 labor approvals were issued.
that of Nepal, however, have been affected The volume of labor migration to India through
disproportionately. The countries where the the land is expected to be several times this
informal economy is the predominant sector number although the exact records are not
have witnessed a significant portion of the kept.
population fall back into the poverty line. Due
to the restrictive measures adopted for the Secondly, the Nepali economy is predominantly
containment of the pandemic, the economies informal. The majority of the employment
have come to a standstill. World Bank has opportunities are still in the agricultural sector
reported that in the South Asian countries the or seasonal employment. According to the

1 https://openknowledge.worldbank.org/bitstream/handle/10986/34517/9781464816406.pdf

5
ECONOMIC FREEDOM
A Compendium of Essays

Nepal Labour Force Survey 2017/18, 62.2 against violent insurgents from the other side
percent of employments are in the informal of the globe may provide us some insights on
sector which offers little to no social protection this matter.
making the workers vulnerable to economic
shocks like the pandemic. Similarly, the World
Bank estimates that informal businesses make
De Soto’s Crusade
up around 50 percent of enterprises in Nepal.2
Moreover, because of the very nature of the The socio-economic conditions of the Latin
informal sector, there is little to no growth. The
American nation Peru in the 1980s and of
lack of growth of the enterprises in the informal
Nepal in the 1990s were comparable. Both
sector means that the income of the workers the nations were facing widespread poverty,
engaged in those sectors does not rise enough lackluster economic growth, and corruption that
to uplift them from the poverty line sustainably.
pervaded every sector of the governance and
They remain just an economic shock away from economy. And both the nations were grappling
falling back into the poverty line. with a violent Maoist insurgency that had killed
thousands of people, displaced many more,
To date, the government’s response to high
and brought the economy to a standstill.
unemployment rates has been programmatic in
nature. Two of the most renowned government Started in the 1970s, Sendero (The Shining
initiatives in this regard, the Youth Self- Path), the Maoist insurgent group aimed to
Employment Fund, and the Prime Minister overthrow the government and establish a
Employment Program are focusing on creating proletariat dictatorship it had termed the New
direct employment through government Democracy. Starting in 1980 the group started
funds. The Youth Self-Employment Fund, for violent warfare that included indiscriminate
instance, has been able to create around killings, assassinations, and bombings. Widely
78,000 self-employed youths in its total 12 condemned for its brutality and violence against
years of existence (around 6,500 annually)3, its opponents which included peasants, elected
which barely makes a dent when we have an officials, intellectuals, journalists, judges, and
estimated 400 thousand youth entering the even other Marxist groups, by the 1980s the
labor force each year. These programs have group had killed thousands of Peruvians and
been responding to the symptoms rather than displaced over 2 million of them. A million
the cause, i.e. why is not the economy creating more were forced into voluntary displacement.
more and decent jobs. One can also argue Any kind of opposition or disagreement was
whether these programs will have any positive bullied into silence and the establishment of
impact since they are merely transferring the dictatorship of the proletariat was stated
resources from taxpayers to certain groups of as the only means of achieving prosperity for
people rather than creating lasting solutions. the millions of poor Peruvians who as per the
Shining Path were naturally disposed against
Therefore, the crux of the problem here is why is
markets and democracy.
our economy, especially our informal economy
not growing and therefore, not creating more Hernando De Soto, a prominent economist of
and decent jobs. An economist and his crusade

2 https://www.worldbank.org/en/news/press-release/2020/10/08/covid-19-impact-on-nepals-economy-hits-hard-
est-informal-sector
3 http://www.ysef.gov.np/employed-details.html

6
 De Soto’s Lessons for Nepal
- Surath Giri

the country who had started a think tank called could afford to invest. And the cost of all
Institute for Liberty and Democracy (ILD) had this process? Over 1200 USD – 30 times the
different views though. Based on his research monthly minimum wage.5 But this was just
findings, he argued that the lack of property the tip of the iceberg, the team’s subsequent
rights and access to legal protection for the research unearthed several examples that
poor are the root causes behind the poor showed how the bureaucratic labyrinth made
being unable to prosper. He and his team it impossible for small-scale entrepreneurs to
carried out an elaborate study of the problems achieve formality. Following are some of those
faced by the informal enterprises and the examples:
barriers that prevented them from growing
and escaping the vicious cycle of poverty. He • For an entrepreneur to get out of the
published his findings in his book, The Other street and build a formal retail market
Path: The Economic Answer to Terrorism with for food, it would take thirteen years to
the title alluding to an alternative to the path complete the legal and administrative
taken by the Shining Path. The book argued requirements.
that most Peruvians were not proletarians who
were ready to rise against the business. They • It would take 26 months to operate a
were instead small-scale entrepreneurs who new bus route.
were struggling in the informal sector because
of a lack of access to the formal legal system. • It would take 21 years to build a legally
These entrepreneurs who had migrated from recognized building on a wasteland.
rural areas to cities in search of employment
opportunities were engaged in micro, small, The book went on to become a national and
and medium enterprises and were working in an international bestseller and its central
the informal or in De Soto’s word “extralegal” arguments were picked up by the major media
sector where they neither had access to formal in the country. From tabloids publishing the
property titles nor the legal protection required summarized version of the book to television
for their businesses to grow. Lack of formal channels broadcasting the major arguments
property titles meant that the entrepreneurs did and findings of the book, De Soto’s idea
not have access to affordable finance because reached every nook and corner of the country
their assets could not be used as collateral. and to the chagrin of the Shining Path
Additionally, these entrepreneurs in the were acknowledged and embraced by the
extralegal sector were not a small or marginal policymakers as well as the target population.
sector of the then Peruvian economy.
The wide popularity of the book and De
De Soto’s team carried out action research Soto’s intellectual crusade against the violent
where they tried to set up a small garment prescription of the Shining Path led to a deadly
enterprise outside of the city of Lima following attack against the Institute for Liberty and
all the rules and getting all the permits required Democracy by the latter. On July 20, 1992,
by the law. They found out that it would take the Shining Path detonated a car bomb on
almost a year, 289 days4, a period only the premises of the ILD killing 3 people and
very few entrepreneurs in the informal sector wounding 19 more.

4 https://www.ild.org.pe/ild-in-the-news/174-2015/1176-de-soto-recognized-by-the-world-bank-in-the-2017-doing-
business-report
5 https://www.elibrary.imf.org/view/journals/023/0029/021/article-A005-en.xml

7
ECONOMIC FREEDOM
A Compendium of Essays

Despite this, De Soto’s ideas of facilitating primarily by the poor people but lacking the
small-scale entrepreneurs to transition into formal recognition and the potential use.
the formal economy as a solution to poverty
and unemployment were well-received not
only by the Peruvian government but also Ease of Doing Business
received international attention, especially
of the other similar developing countries. De Subsequently, the hurdles to doing business
Soto’s prescription of simplifying legal and and its impact on economic growth and
administrative hurdles to business, granting employment have received considerable
property titles to poor people, and providing attention, especially by the World Bank which
legal protection to the informal businesses starting in 2002 has been publishing the Ease
was absorbed enthusiastically by various of Doing Business Index. Created jointly by
developing nations of the world. Simeon Djankov, Michael Klein, and Caralee
McLeish, three leading economists at the World
Bank Group, the index ranks the countries
An International Problem covered by the index based on the ease of
doing business in the country. Basically, the
The labyrinth of legal and administrative hurdles index measures whether business regulations
that the general public, especially the micro are simple and accessible, whether contract
and small entrepreneurs have to face are not enforcements are cost-effective and enforced,
endemic to Peru. The obstacles the poor across and whether property rights are protected and
the world face while trying to enter the legal/ respected.
formal economy are daunting. The hurdles
come not only in the form of cumbersome and The Index has received considerable attention
costly legal and administrative requirements and success. Doing Business Report has
but also come in the form of anti-competitive been widely used by academics as well as
practices which are often protected by the state policymakers around the world to reform their
such as the syndicates and cartels. business environment. For example, the number
of economies where it is possible to start a
In his second, internationally-oriented book business in less than 20 days after fulfilling
titled The Mystery of Capital: Why Capitalism all the legal requirements has grown to 130
Triumphs in the West and Fails Everywhere in 2016 as compared to just 41 economies in
Else, De Soto has unearthed shocking obstacles 2005.6
faced by entrepreneurs across the world.
Rwanda is one of the stellar examples of
For example, it was found that in Haiti, to countries that have taken their performance in
get a lease on government land takes around the index seriously and have set out to improve
two years. In the Philippines, formalizing an their regulatory environment. Rwanda has
informal property in an urban area takes managed to become one of the top reformers
around 13 to 25 years and 168 steps need to in the world having climbed up 112 positions
be completed. from 150th position in the Doing Business
Report of 2008 to 38th position in the Doing
According to De Soto, such state of affairs has Business Report of 2020. Table 1 highlights
resulted in $9.3 trillion worth of ‘dead capital’, some of the major reforms carried out in
properties that are inhabited and being used Rwanda in this regard.
6 https://www.ild.org.pe/ild-in-the-news/174-2015/1176-de-soto-recognized-by-the-world-bank-in-the-2017-doing-
business-report

8
 De Soto’s Lessons for Nepal
- Surath Giri

Even complex economies have managed to

Table 1: achieve significant reforms in their business
Doing Business Reforms by Rwanda environments. Our southern neighbor India
is another country that is making systematic
Starting a business: Reduced registration
efforts to improve its rankings in the Doing
fees; made it possible to register a business Business Report by reforming the regulatory
online; consolidated name-checking, registration environment. India has remained among the
fee payment, tax registration, and company top ten improvers for the last three years and is
registration procedures; reduced time required to currently placed at 63rd position in the report.
obtain a registration certificate; made the online
registration one-stop-shop and streamlined post- Nepal to date, however, has not done much to
registration procedures. improve the performance in the Doing Business
Report.
Registering a property: Replaced the 6%
registration fee with a flat rate, regardless of
the property value; created a centralized service
in the tax authority to speed up the issuance of Nepal and the Doing
the certificate of good standing; eliminated the
requirement to obtain a tax clearance certificate Business Report
for property transfer and implemented the web-
based Land Administration Information System Nepal currently ranks 94th out of the 190
for processing land transactions. economies studied with an overall score of
63.2. This is the highest rank Nepal has
Getting credit: Strengthened its secured achieved in the report to date and is a marginal
transactions system by allowing a wider range
improvement from its rank of 111th in 2008.
of assets to be used as collateral, permitting a
The following table presents the ranking of
general description of debts and obligations in
the security agreement, allowing out-of-court Nepal in the various components of the Ease of
enforcement of collateral, granting secured Doing Business Index:
creditors absolute priority within the bankruptcy,
and creating a new collateral registry. Component Rank Score
Trading across borders: Expedited the Starting a business 135 81.7
acceptance of customs declarations; liberalized
the warehouse services market; reduced the time Dealing with construction
107 67.3
for exporting and importing by extending the permits
opening hours of customs points, implementing Getting electricity 135 60.9
or improving electronic data interchange and Registering property 97 63.6
risk-based inspection systems, and making
improvements in the transport sector. Getting credit 37 75
Protecting minority
Enforcing contracts: Launched 3 commercial 79 58
investors
courts—in Kigali, in Northern Province, and
Southern Province; implemented an electronic Paying taxes 175 47.1
filing system for initial complaints; introduced an Trading across borders 60 85.1
electronic case management system for judges
Enforcing contracts 151 46.0
and lawyers.
Resolving insolvency 87 47.2
Source: https://www.doingbusiness.org/en/reforms/
overview/economy/rwanda Source: Doing Business Report 2020

9
ECONOMIC FREEDOM
A Compendium of Essays

If Nepal is to promote entrepreneurship, help

small businesses in the informal sector grow,
and create decent employment opportunities,
it is imperative to improve the doing business
environment. Currently, entrepreneurs have to
pay thousands of rupees and spend weeks to Way Forward
just get their businesses registered. Moreover,
the process and cost to shut down a company Nepal should make improving the business
are prohibitively expensive and full of red tape. environment a top priority in its economic
Contract enforcement, especially for small plans. The Doing Business Report rankings
businesses is equally inaccessible and costly. can be used as a yardstick to measure the
There have, however, been some initiatives reforms. Similarly, while making the reforms,
to streamline the regulatory process. For the perspectives of the most marginalized
example, the Companies (First Amendment) group of entrepreneurs should be taken into
Act, 2074 (2017) made a provision allowing consideration. It is important to remember
companies that have been inoperative for years that a regulation that may sound reasonable
to shut down after paying a fee equivalent and affordable for an entrepreneur from the
to 0.5 percent of their paid-up capital to the city could be prohibitively expensive and
government. It was a welcome move. The burdensome for someone from the rural
provision was, however, made available only area. Additionally, while approaching the
for two years since the commencement of the regulatory streamlining and reform, the
amended Act and made available to only policymakers should not think that they are
companies that have not commenced business. making a compromise in a tug of war between
The government has also set a roadmap to them and the entrepreneurs. Moreover, as
improve the investment climate . The initiative we can see from the experience of Rwanda,
is yet to bring any significant change though. business environment reform is not a one-
There have also been initiatives to digitalize the time event but rather an ongoing process.
company registration process. The simpler and the more accessible we can
make them the better for the entrepreneurs.
Despite these minor initiatives, the major policy And finally, business environment reform,
thrust of the governments so far has been to per se, should not be taken as a panacea
create direct employment programs rather for the economic problems for Nepal. Other
than improving the business environment. The economic reforms play an equally important
immediate output of such programs which can role in contributing to the economic growth
be used for attracting voters could have been of the country.
the motivation behind such programs. Not
reforming the business environment is not an
option though. Without reforming the business
environment and making it easier for the
general public to engage in entrepreneurship,
unemployment, and lack of decent jobs are
going to remain a perennial problem for
Nepal.

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 Nepalese Agriculture:
Time for a New Departure
- Ayushma Maharjan & Shreya Subedi

Background

A griculture sector is one of the dominant

sectors of the Nepalese economy. As
of 2011, 60.4 percent of people in Nepal
In the past five years, on an average, NPR
37.94 billion has been allocated annually for
carrying forth different plans and programs in
were involved in agriculture. 21 percent of the sector (Ministry of Finance, 2021). In FY
land in Nepal is used for cultivation. With 2021/22 alone, the government allocated
a contribution of 25.83 percent to GDP, NPR 45 billion for the same. The fund is
the prominence of the agriculture sector in utilized in implementation of a plethora of
the economy signals towards the need for plans and programs and subsidy distribution
conducive policies and intervention which aimed at increasing overall and crop specific
can facilitate significant growth in the sector. agricultural production.
Given the potential of a positive spillover effect,
development in the agriculture sector can lead Despite the prioritization, sectoral performance
to growth in different economic sectors like of agriculture in the national economy is
industries and trade. Development of this sector abysmal. In the past decade, the contribution
has been given precedence in Nepal since the of the agricultural sector to GDP declined by
1950s. Till date, it is viewed as a harbinger of almost 10 percent, and the average annual
employment, food security and prosperity. growth of gross value added (GVA) was

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ECONOMIC FREEDOM
A Compendium of Essays

merely 3 percent (Central Bureau of Statistics, The underperformance of the sector is despite
2021). The average GVA of the manufacturing the initiation of plethora of agriculture
and service sector during the same period was development programs in the country. Nepal
8.83 percent and 10.37 percent respectively. prioritized agriculture development since the
Likewise, the trade deficit in the agriculture sector fifth five-year plan in the 1970s. Since then, the
also increased to 27.26 percent. Besides, in FY country has witnessed different strategies and
2018/19, given the deteriorating condition programs like the Agriculture Perspective Plan
of the agriculture sector, the government (APP), Agriculture Development Strategy (ADS),
waived all loans of farmers which reflects the Nepal Trade Integration Strategy (NTIS), Prime
abysmal performance of past projects to help Minister Agriculture Modernization Program
boost agriculture production and attain the (PMAMP), and several annual and five year
desired goals of poverty alleviation (Ministry plans, including crop specific programs. Despite
of Finance, 2019). the programs rooting for commercialization

Figure 1: Comparison of Cereal Crop Yield with Neighboring Countries

Source: World Bank, 2018

Currently, the performance of agriculture and modernization of agriculture to attain self-

sector of Nepal is substandard as depicted sufficiency, it is apparent that the very problems
by its low productivity when compared to the exist till date in Nepal.
neighboring countries.

12
 Nepalese Agriculture: Time for a New Departure
- Ayushma Maharjan & Shreya Subedi

• the existence of countless inconsistent

The Inefficiencies of PMAMP programs and the perplexities in its
implementation,
In FY 2016/17 Nepal initiated PMAMP with
the aim to increase agriculture productivity • overarching but unattainable goals,
and attain self-sufficiency in crop and • one-size-fits-all nature of programs
livestock within a decade. The major plans of
the project included expanding agricultural • failure to create a linkage between the
zones, and providing cash grant, subsidies, goals and comparative advantage and
and technical assistance to the farmers. capacity of Nepalese agriculture, and
• lack of research and development and
While a total of approximately NPR 41
adequate discussions while building the
billion has been allocated for the program in
programs
the past five years, the program has hardly
been able to achieve any results. Till date,
Apart from the aforementioned, Nepal has
the government has been able to spend only
witnessed the introduction of populist rather
48 percent of the allocated budget due to
than practical agriculture programs annually.
constraints in implementation which includes
These programs have absorbed a lot of
lack of coordination, lack of human resources,
financial resources of the country without any
inefficient use of resources and other
significant return or realization of tangible
organizational constraints. Additionally,
benefits for farmers.
the program neglected the past failures of
distributive and grant based agriculture The lackluster performance of the existing
projects which was reflected in an internal programs indicates a need for Nepal to revise
review by project officials which stated that the current programs and concentrate its
politicization was rampant in the program, effort in areas that Nepal could truly benefit
such that, the targeted groups were unable to from. For instance, Nepal Trade Integration
get the intended benefits. It also disregarded Strategy (NTIS) 2016 has listed potential
the federal governance structure and mostly agricultural products that Nepal could benefit
relied on centralist approach. immensely from exporting (MoICS, 2016).
However, Nepal has not paid much attention
Consequently, the program has not been
to leveraging the same. In fact, Nepal has
able to achieve its targets. For instance,
been concentrating much of its resources and
one of its major targets was to attain self-
energy to attain self-sufficiency in cereal crops
sufficiency in wheat and vegetable within one
- which is practically impossible given the low
year, rice and potato within two years, and
yield and high international competition. Thus,
maize within three years. However, after five
shifting focus from cereal crop production
years of its implementation, Nepal has only
to facilitating growth of high-value crops,
experienced a rise in import of the mentioned
agriculture export, and processing industry
crops with cereal imports reaching as high as
by rethinking the current strategies would help
NPR 17 billion in FY 2020/21.
Nepal unleash the potential opportunities and
growth in the agricultural sector.
The failure of agricultural programs to attain
desired results are mostly attributable to:

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ECONOMIC FREEDOM
A Compendium of Essays

Shifting from Cereal Crop to agriculture. The desired goal of food security
High Value Cash Crop attained through self-sufficiency continues to
remain unfulfilled. The 76th rank of Nepal
The agricultural production in Nepal is mostly amongst 135 countries as reported by Global
dominated by cereal crops which comprises Hunger Index (GHI) portrays that the growth
37.58 percent of agricultural GDP in Nepal. in agriculture has failed to keep pace with the
Promotion of cereal crop production has increasing demand for food. In 2015, it was
received much limelight in the past decades, as reported that 32 out of the then 75 districts in
it is considered vital for ensuring food security the country were food deficient.
in the country. With regards to the same, Nepal
Consequently, the cereal import of Nepal has
has dedicated numerous plans, programs, and
increased dramatically, especially after 2009.
policies to increasing productivity of staple
crops like rice, wheat, maize, millet, among As reported by Sharma (2019) between 2009
others. and 2013 alone, the import of rice, maize, and
wheat increased by 39 percent, 26 percent,
Paddy (rice), wheat, and maize are the three and 126 percent per annum respectively. The
most prominent crops produced in Nepal which import of cereal crops in Nepal continues to
represent about 15.35 percent, 8.85 percent, grow till date, which is one of the major causes
and 6.34 percent of Agricultural GDP (AGDP) of rising trade deficit in the agricultural sector
respectively in the country (MoALD, 2021). It of the country.
also occupies the highest portion of cultivated
agricultural land.

Figure 2: Total Cultivated Agriculture Land Area Under Major Crops

in 000 hectare

Source: Statistical Information on Nepalese Agriculture, MoALD, 2020

Despite the concentration of resources

towards enhancing cereal crop production in
Nepal, the sector has not demonstrated itself
to be promising for the future of Nepalese

14
 Nepalese Agriculture: Time for a New Departure
- Ayushma Maharjan & Shreya Subedi

Figure 3: Import of Cereal Crops in Nepal

(NPR million)

Source: Nepal Trade Information Portal (2014 – 2021), Trade and Export Promotion Center

The import figures of cereal crops in Nepal Additionally, crop situation update as reported
has grown exponentially from the 2000s. In FY by Food and Agriculture Organization of
2021, Nepal imported 1 million ton rice worth United Nations (FAO), Government of Nepal
NPR. 50.48 billion, which was a 51.4 percent and World Food Program (WFP) (2016) show
increase from the previous year. The import of that total production of summer crops (paddy,
rice as a percentage of domestic production maize, millet and buckwheat) was estimated
is approximately 18 percent. The figure was to decrease by 5.63 percent compared to
14 percent in FY 2013 (Giri, et al. 2017). In 2014/15 and by 5.3 percent compared to the
their research Giri, et al. (2017) suggested that preceding five-year average. The production
Nepal needs to increase rice production up to of paddy alone decreased by 9.95 percent
14 percent in order to attain self-sufficiency in compared to the five-year average and
the sector. However, it has been reported that decreased by 10.22 percent compared to
Nepal has lost an estimated 100,000 hectare of 2014/15.
agricultural land dedicated to paddy cultivation.

Figure 4: Cereal Yield per Hectare in Neighboring Countries

Source: World Bank

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ECONOMIC FREEDOM
A Compendium of Essays

This scenario is attributable to the poor producing paddy, maize, and wheat whilst
performance of cereal crop production in using the land to produce more of high value
Nepal. The import figures and declining use agricultural products, the agricultural GDP
of agricultural land in cereal crop production of Nepal could grow exponentially. In other
portray that it is more affordable and easy words, Nepal would economically benefit by
to import such products. This is evidenced by replacing cereal crops with high value crops.
the fact that Nepal’s performance in cereal
production is poorest when compared to its The shift from cereal crops to high value cash
neighbors. crops would also help Nepal unleash new
opportunities in the agricultural sector that
Despite the appalling performance, the have been witnessed due to consumption of
allocation of excessive resources in cereal crop food patterns to high value products like meat,
production has barred Nepal from leveraging fish, egg, fruits, and vegetables. One positive
benefits by producing other high value cash aspect is that the high value commodities have
crops which have high export potential in the experienced faster growth when compared to
international market. cereal crops in Nepal, and today Nepal is self-

Table 1: Area of Production and Total Contribution to GDP (Cereal Crops vs. High Value Cash Crops)

Area of Contribution Hypothetical Scenario

Crop Production to GDP
Area of Contribution to
(000 hectare) (percentage)
Production GDP
Paddy 1458 15.35 1458 15.35
Maize 957 8.85 1458 13.48
Wheat 707 6.34 1458 13.07
Vegetable 281 11.92 1458 61.84
Potato 188 5.96 1458 46.22
Ginger (raw) 235 1.88 1458 11.67
Sugarcane 68 1.81 1458 38.81
Lentil 212.8 1.71 1458 11.71
Cardamom and
16.5 0.37 1458 33.72
Nutmeg
Tea 16.9 0.15 1458 12.94

Source: Selected Indicators of Nepalese Agriculture (pocket book), MoALD, 2021

The above table portrays the total contribution sufficient in dairy and egg. The shift would thus
to GDP of major cereal and cash crops in Nepal generate opportunities for farmers, including
against the area utilized in its production. The small and marginal, to increase their income
table reflects that despite fewer land dedicated level.
to production of vegetables, potato, sugarcane,
cardamom, among others their contribution However, given the backwardness of Nepal
to GDP is relatively significant. This implies when compared to its Asian counterparts in
that, given the scenario whereby Nepal stops agricultural development, Nepal needs to

16
 Nepalese Agriculture: Time for a New Departure
- Ayushma Maharjan & Shreya Subedi

devise a comprehensive strategy to help the broad plans or strategies that try to overachieve
country take a significant leap in development by covering every aspect that could contribute
of agriculture from traditional, subsistence to some developments. Plans that have
farming, and cereal crop production to modern, specific targets that are crop specific or are
commercial and high value crop production. geographically specific have worked better.

Recommendations Thus, Nepal needs to develop an agriculture

transformation strategy that differentially
1. Shift from cereal crop production targets crops and geographies by introducing
to high value cash crop production tailored programs. Additionally, while
introducing such a strategy the policy makers
International Food Policy Research Institute need to understand the importance of trade
(2019) published a paper ‘Agriculture offs - distributing resources to both cereal crop
Development in CAREC Member Countries: production and high value crops might not be
Review of Trends, Challenges, and Opportunities’ the best viable option and Nepal might have to
which highlighted that, 11 member countries1 of leave one behind.
Central Asia Regional Economic Cooperation
(CAREC) undertook significant institutional Since the establishment of Agriculture
reform that shifted its policy priority from food Perspective Plan (APP) in 1995, Nepal has
security to diversification strategy towards high witnessed initiation of a plethora of agriculture
value agriculture. The institutional reform not specific plans and programs. Currently, some of
only helped the countries to promote market- the active agriculture sector programs include
oriented agriculture but also contributed to Agriculture Development Strategy (ADS)
significant improvements in their respective (2015 - 2035), Prime Minister Agriculture
agricultural sectors. Modernization Program (PMAMP), Nepal
Trade Integration Strategy, among others.
In order to compete in the world market, However, none of the strategies and plans
Nepal should also venture into transforming have generated desired results. Some of the
its agriculture sector towards high value major problems behind the scenario is that
crop production, which would not only allow the programs are overly ambitious, cover too
farming households to earn higher income but many value chains and fail to prioritize specific
also facilitate economic growth of the entire resources and sectors. Additionally, the plans
country. For the same, Boettiger, Denis, and are inconsistent to one another and thus fail to
Sanghvi (2017) have highlighted strategies set clear goals. The focus on almost all types of
that countries can adopt to ensure successful goals from ensuring food security to exporting
transformation to high value agriculture. The high value products are not integrated and
recommendations are discussed below: compete with one another, which is likely
to enhance the chances of underdelivery.
Improve the quality of national plan Additionally, the budget speech of different
or agriculture strategy years in Nepal portrays the lack of clarity from
the government’s perspective as the priority
Agriculture transformations have failed to strategy changes every year. For instance,
succeed in countries that have complex and plans and programs of FY 2018/19 focused

1 Afghanistan, China, Uzbekistan, Pakistan, Tajikistan, Azerbaijan, Georgia, Kazakhstan, Kyrgyz Republic, Mongolia,
Turkmenistan

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ECONOMIC FREEDOM
A Compendium of Essays

on export promotion and boosting agriculture and India have established offices at local
processing industries as envisioned by ADS, units that focus on successful transformation
however, subsequent plans and programs of rural agriculture, where the officers visit
have shifted the focus towards achieving food the farmlands and talk to farmers and help
sufficiency under PMAMP. address their problems wherever possible. It
has become one of the widely popular delivery
Nepal thus needs to build a comprehensive mechanisms of governments to bring on the
and attainable strategy with specific goals. ground impact.
Additionally, crop specific and geography
specific plans and implementation strategies Parallel Developments
should also be built, which can be tracked by
respective local units. One-size-fits-all model Developing an agricultural system requires focus
in agriculture will not help attain significant on multiple cross-cutting issues from reforming
progress in the sector. hundreds of policies to making investment in
multiple sectors from infrastructure to value
Identification and Mobilization of chain development. Some of the fundamental
Change Agent issues that Nepal needs to swiftly address are
pertaining to infrastructure, seed and fertilizer,
Creating a shift from cereal crop production entering international markets, and providing
to high-value crop production would require farmers greater access to finance.
encouraging millions of farmers spread across
the country to change their farming practices For the same, Nepal needs to amend restrictive
swiftly and effectively. For the same, a number and complex laws related to agriculture. One
of factors come into play like willingness of the most important ones is to allow Foreign
of the farmer, risk, investment, market, and Direct Investment (FDI) in the sector to ensure
infrastructure. The factor might vary depending higher investment in the area. Likewise, Nepal
on the crop involved, geographic location, has recently announced that private sector
culture among others. Thus, identification of participants can engage in production, import
the same and selecting appropriate change and distribution of fertilizers and seeds -
agents is critical. which was previously under the control of the
government. However, the same should be
Change agents can be spread across different amended in legal documents as well as a sense
sectors from farm experts, financial experts, of stability should be provided to the private
animal health experts, among others. However, sector.
a common attribute of all change agents are that
they are such individuals that the local farmers Continuation of investments in building
trust and thus would readily be motivated by the agriculture roads, storage facilities,
individuals’ proposal of modifying agricultural warehouses, and markets should also be a
practices. At the same time, the change agent priority. At the same time, in order to enable
should also be able to practically help the smooth transformation, the government needs
farmers shift their agricultural practices from to coordinate its efforts with the many players in
seed procurement to marketing. According to the market like civil society and private sector to
Boettiger, Denis, and Sanghvi (2017), change encourage greater private sector engagement.
agents can help farmers make the transition
from growing cereal crops to more complicated
and high value crops. Countries like Morocco,

18
 Nepalese Agriculture: Time for a New Departure
- Ayushma Maharjan & Shreya Subedi

High Value Agriculture Project in Hill and Mountain Areas

In 2011, Nepal implemented the High Value Agriculture Project in Hill and Mountain Areas
which was co-financed by the International Fund for Agricultural Development (IFAD), the
Government of Nepal (GoN), and the SNV Netherlands Development Organization. The
project aimed at reducing rural poverty and social inequality in challenging rural hilly areas
of Nepal through developing high value agriculture value chains and markets to improve
their income and develop the ability to respond to market dynamics. The project was
executed by Ministry of Agriculture and Livestock Development (MoALD) with implementing
partners such as Netherlands Development Organization (SNV) , Agro- Enterprise Center
(AEC) of FNCCI District based partners, selected national/local NGOs; district agricultural
development offices (DADOs); agribusinesses; producers’ groups; and cooperatives.

The project leveraged the demand of the private sector for 18 high value crops and livestock
which were not well processed or marketed. Targeting through existing and new producer
organizations (POs) which engaged local marginalized farmers the project strengthened
farmers skills and capacity to produce market-oriented high value agriculture commodities,
strengthened their access to market, output market and service market. The project involved
the local people and worked on improving producer organization and establishing
contractual agreement with local traders for supply of farm input and agri-business for
sale of crops and livestock. In order to enhance the capacity of targeted beneficiaries the
project provided training on credit mobilization and business literacy to farmers, traders
and agribusiness. Through its unique feature of inclusive value chain development and
strengthening of agriculture service delivery the project trained 456 POs reached a total of
107,860 beneficiaries and increased their total income per year by 37 percent. Through
a 7 year project period the project reduced poverty in the region by 8 percent, increased
asset growth of productive assets by 6.5%, increased income through increase in crop
income by 49.9% and livestock income through 92.9% along with better market access.
The project was able to create such a vast impact through its focused approach on a
concentrated small number of interlinked value chains and focused work with a small and
cohesive group of farmers that allowed monitoring of activities and accommodating needs.
This along with a mixed approach of top-down approach and bottom up approach for
linking traders, government agencies, commerce and finance departments, and scientists
to address the absence of product and input markets, marketing facilities, credit, and policy
support.

Source: Selected Indicators of Nepalese Agriculture (pocket book), MoALD, 2021

19
ECONOMIC FREEDOM
A Compendium of Essays

2. Ensure Food Security through agri-business.

Bilateral Trade Agreement
Despite the concentration of a significant
Nepal while venturing into export-based high amount of the agriculture budget towards
value crop oriented agriculture must also build subsidies, the results generated are abysmal.
strategies in ensuring food security in the The most apparent problem in the sector is the
country. While the option is to import cereal weak governance that has instigated challenges
crops from surrounding countries at prices attributable to frequent misutilization of funds
cheaper than those produced in Nepal, Nepal by both bureaucrats as well as the farmers.
can still leverage bilateral agreements amongst
different nations to ensure continuous supply of Given the distribution of subsidies under a
staple food. plethora of sub-sectors in agriculture, the
figures portraying the accurate subsidy amount
Indonesia, for example, in February 2020, in the federal budget is not easily accessible.
signed the Indonesia-Australia Comprehensive The mere fact provides ample room for the
Economic Partnership Agreement (IA-CEPA) government to counterfeit the program budget.
which implies that goods including agriculture Consequently, misutilization of subsidies is
from Australia will get preferential access entrenched in the agriculture sector of Nepal.
into Indonesia and vice versa. Indonesia has
agreed to: The subsidy programs were introduced with the
intention to help small and marginal farmers
i. provide a market of 500,000 tons of to earn decent livelihood and climb out of
wheat, sorghum and barley each year, poverty. However, numerous reports and news
increasing at five percent per annum, have revealed that small and marginal farmers
ii. eliminate outstanding tariffs on most have limited to no access to subsidies. From
cereals and grains, fertilizers to modern tools and technology, to
iii. reduce tariffs on oats, fruits, nuts, loans on agri-business are often granted to
vegetables and animal products. large farmers or those with political influence.
On the other hand, small and marginal farmers
iv. Meanwhile, indonesia has shifted its depend on traditional tools and high-priced
focus towards export of items like palm fertilizers imported from informal markets.
oil, rubber, coconut oil and its other This undue support to large farms has ensued
advantageous sector and at the same time greater disadvantage to the small farmers.
has enhanced food security in its nation
Additionally, the funds granted on the basis of
favoritism has failed to generate the desired
Rethinking Subsidy results. It has been witnessed that the funds are
Agricultural subsidy is one of the oldest not invested in productive uses. For instance,
programs in Nepal which has endured for in Pyuthan Municipality of Lumbini Province,
more than four decades. It is reported that NPR. 400,000 was granted for the purpose of
annually approximately NPR. 18 billion is pig farming. However, it was reported that the
directed towards subsidizing different segments grant money was never used for pig farming
of the sector - seeds and fertilizers, agriculture but was directed towards a private Resort. Such
insurance, interest on agriculture loans, occurrences are quite frequent2 throughout
modern tools and equipment, and grants for Nepal.

2 For more information read ‘Why agricultural subsidies have failed to benefit needy farmers’ available at
https://kathmandupost.com/29/2020/02/20/why-agricultural-subsidies-have-failed-to-benefit-needy-farmers

20
 Nepalese Agriculture: Time for a New Departure
- Ayushma Maharjan & Shreya Subedi

Despite the recurrent misuse, the government are provided to the target group in the form of
has not used prudence in allocating subsidy loans at subsidized interest rate. This method
budgets. helps to curb fraudulent practices arising from
both the bureaucracy as well as the beneficiary.
In order to control such fraudulent practices, Given the requirement to pay back the interest
Nepal introduced Subsidy Management amount in some future stipulated time, the
Procedure 2019. However, its efficacy is beneficiaries cannot misuse the subsidy and
questionable as, three years down the line, the need to diligently work towards attaining the
improper use of subsidy is still widespread. desired goals. The beneficiaries ensure that
the loan amount is used judiciously such that
Thus, Nepal needs to rethink its subsidy it would help generate higher income in the
distribution strategy, such that the adopted future, thus increasing agricultural activity as
measure will not only generate preferred well as productivity. Also, given the distribution
results but also will help mitigate the fraudulent of such subsidies through bank and financial
practices in the sector. institutions (BFIs), it is difficult to exploit the
same for any other use.

Recommendation 3. Sales-based Subsidy Program/

It is high time for Nepal to rethink its current Output-based Subsidy Program
subsidy program. Some of the strategies - based
As per the current practices, Nepal distributes
on academic studies pertaining to agriculture
subsidy to the beneficiaries prior to the
subsidy in Nepal and successful international
initiation of a program. For instance, subsidy
subsidy programs – that Nepal can adopt are
for agricultural equipment is distributed without
discussed below:
any prior commitment towards productivity.
1. Transparency Such practice has often led towards
misutilization of agricultural funds. In some
Ensuring transparency in subsidy allocation is instances, despite using subsidy for purchasing
one of the key steps towards controlling corrupt agricultural equipment, desired results could
practices in the sector. For the same, all three not be generated as the beneficiaries were
tiers of government in Nepal need to publicly unable to use the equipment due to lack of
disclose the total amount of agriculture subsidy technical knowledge.
and its allocation on different programs.
Readily available information on the same can Thus, Nepal should shift towards providing
increase civic awareness which would act as sales-based subsidy or output-based subsidy
a tool to hold the respective government and over direct subsidies. In such a scenario, the
implementers accountable. beneficiaries can accumulate capital from
cooperatives or from BFIs and commence their
2. Interest based subsidy over grant production activities. After a desired level of
output or sales is reached, the beneficiaries can
It has been identified that interest-based redeem the capital from government in the form
subsidies3 are more effective than grants. of subsidy. Such practice ensures the attainment
Interest based subsidies are those subsidies that of desired level of productivity and growth and
limits the chances of fund misutilization. One

3 The study was conducted by MoALD in 2019 by a committee led by Tej Bahadur Subedi, then Joint Secretary at
MoALD

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ECONOMIC FREEDOM
A Compendium of Essays

such program deemed exceptionally successful 4. Indirect Subsidy

was conducted by Heifer Nepal4.
The government of Nepal can also provide
indirect agricultural subsidy to the farmers
Sales- based subsidy program by and agriculture enterprises. Instead of directly
Heifer Nepal providing grants to the beneficiaries, this
method diverts the capital in infrastructure
Heifer Nepal’s Sales-based subsidy program
and other relevant developments that would
remunerates farmers through grants based on
ensure greater productivity, market access, and
their sales figures. This new approach applied by
Heifer Nepal has incentivized farmers towards sales, or reduces price of products that would
better production, increased competition and reduce the cost of production of goods. One
improved food security. In this approach Heifer sector whereby the government can channel
Nepal collaborates with local municipality the subsidy money is in quality testing lab and
leaders to manage grants through cooperatives, certification that would increase the value and
mostly women- led. Small scale farmers who salability of the product in both domestic and
are involved with the cooperatives are trained international market. Likewise, price reduction
in diligent record keeping of their livestock and in electricity for agriculture processing units,
sales to improve their accounting skills as well customs reduction in agricultural equipment
as to make them eligible for public subsidy.
including tractor, reduction of taxes in land,
These farmers are then remunerated by the
improvement in storage services, improvement
cooperatives on the basis of their sales after
an auditing process. Till date Heifer Nepal has in agriculture transportation, are some areas
collaborated with 24 municipalities to disburse that would indirectly provide high benefits to
approximately NPR 30 million (USD 273,000) the farmers.
through fifty farmer owned businesses. Heifer
Nepal is currently working with 30 municipalities Neighboring India spends about 2 percent
to expand the model and the government of of the GDP on indirect subsidies and utilizes
Nepal has set aside approximately NPR 800 the fund on irrigation subsidy, power subsidy,
million (USD 7.5 million) for future investment of credit subsidy, and farmer education (Union
the project in 25 municipalities. Public Service Commission, 2020).
This approach has also helped small scale
farmers grow their agribusiness and earn
income. The training on bookkeeping and Export Promotion
record keeping has also encouraged farmers to
In FY 2021, the import of agriculture goods
adopt formal bookkeeping practices, and has
in Nepal reached approximately NPR 325.29
motivated residents to take up agriculture based
entrepreneurship. According to a farmer this billion, a stark increase of more than 30 percent.
provision of subsidy through cooperatives based The share of agriculture products in the import
on their sales has been a great motivating factor bill witnessed a drastic rise to 21 percent. On
for their work. The same farmer has earned the contrary, the export of agricultural products
$5,800 through sales and through the grants. was merely NPR 46.30 billion, a fall from
NPR 55.19 billion in FY 2019/20 (Ministry of
Nepal can replicate similar models throughout Finance, 2021).
the country.

4 For more information read ‘Subsidy Success Holds Promise for Nepalli Farmers’ by Knight (2021) available at
https://www.heifer.org/blog/subsidy-sucess-holds-promise-for-nepali-farmers.html

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 Nepalese Agriculture: Time for a New Departure
- Ayushma Maharjan & Shreya Subedi

The inability of Nepal to increase its cardamom – the second and fourth most traded
agricultural export is highly attributable to the spices in the world. However, given the lack of
fact that while Nepal’s comparative advantage priority in such sub-sectors, Nepal experienced
lies in high value cash crops, the agriculture an abrupt fall in ginger exports from being the
sector is dominated by cereal crops. Since the top 5 exporter5 in the world market prior to
formulation of APP in 1995 till date, majority 2013/14 to 17th top exporter in 2019. While
of programs introduced for the agricultural Nepal remains amongst the top 20 ginger
sector is targeted at cereal crops. While the per exporters and top 56 cardamom exporters, the
capita expenditure on agricultural products has inability to divert attention and policy to these
increased by 80% in the past two decades, its sectors might result in Nepal losing these key
productivity is insufficient to meet the domestic markets.
demand itself and exporting the same is a far
fledged dream. Nepal has a comparative advantage on
production of high value cash crops, mainly
The current focus of effort and resources jute, cotton, tea, cardamom, medicinal herbs,
towards the less lucrative cereal crops is and ginger. These crops also have huge
hindering the usage of agricultural resources in export potential and account for majority of
the most optimal manner. It has been witnessed agricultural exports.
that the trade-off between the production
and marketing of cereal crop and high-value
crops in Nepal is high. For instance, Nepal
has comparative advantage in ginger and

Figure 5: Export Trend of Major High Value Crops in Nepal

Source: Nepal Trade Information Portal, Trade and Export Promotion Center

5 http://www.tepc.gov.np/tepc_pub/2017_Ginger%20Factsheet.pdf
6 https://moics.gov.np/public/uploads/shares/strategy/Large_Cardamom_1508652892_compressed.pdf

23
ECONOMIC FREEDOM
A Compendium of Essays

Table 2 Export Trend of Major High Value Crops in Nepal

Product 2015 2016 2017 2018 2019 2020 2021

Cardamom 4725.28 3902.06 4515.25 4136.85 5001.56 5532.86 5579.40
Tea 2046.12 2787.12 2874.81 3439.75 2660.27 3919.61 2843.47
Ginger 499.66 561.19 413.87 764.96 471.72 457.02 374.79
Cotton
Sacks and 483.50 521.08 420.92 413.31 464.91 283.48 630.00
Bags
Jute 3628.01 4027.58 4635.71 5078.32 6313.01 6123.24 8113.74

Source: Nepal Trade Information Portal, Trade and Export Promotion Center

The above figure depicts the inability of Nepal leading to a fall in tea export by 24 percent
to realize steady and stable growth in export due to inability of farmers and industries to
of these sectors. While the potential to export even break-even. This decrease was attributed
these items remain high, substantial effort to the lack of institutions that provided organic
towards ensuring the same is absent. World certification to the tea produced in Nepal,
Bank (2019) published a report, ‘Enabling which made farmers reluctant to trade in
Business of Agriculture’ which depicted that price determined by Indian traders which was
Nepal scores merely 48.97 points out of significantly lower than the true value of the
hundred implying that the government has not tea. Nepal also experienced significant barrier
made it easier for Nepali farmers to operate in ginger export as the shipment was blocked
their business. citing adulteration and chemical residue along
with the order to obtain a separate license for the
Export of Nepali agricultural products indeed import authority, increasing the cost of trading
adhere to many drawbacks. ginger. Likewise, in the case of cardamom,
it is mandatory for Nepali exporters to get
Firstly, the agricultural products of Nepal are a certificate from Indian laboratory prior to
incompetent in terms of quality and price exporting. These certification process requires
when compared to that of foreign countries. exporters to visit Indian border with numerous
While factors like use of advanced technology, documents every 6 to 1 year for renewal. The
considerable economies of sale and entire process has certainly added the burden
government subsidies in foreign nation has and cost of exporting cardamom to India.
abridged Nepal’s potential to export cheaper
agricultural products, quality of the products
While Nepal already has a lower hand in the
have been undermined due to unavailability international competitiveness, complexities in
of quality testing, standardization, and the form of export compliance have made it
certification services in the country, making
more difficult for Nepalese farmers to supply
products less competitive in the global market.
products in the international markets at lower
rates. The exporters of agricultural products
For instance, in FY 2019/20 the price of must issue a phytosanitary certificate prior to
both Crush, Tear Curl (CTC) and Orthodox exporting. In the case of Nepal, exporters have
Tea decreased substantially by almost 50%, to physically visit the Ministry of Agriculture

24
 Nepalese Agriculture: Time for a New Departure
- Ayushma Maharjan & Shreya Subedi

and Livestock Development (MoALD) to issue and requirements pertaining to the same. As a
a phytosanitary certificate which includes result, Nepal still faces non-tariff barriers while
excessive bureaucratic compliance. According exporting products.
to World Bank (2019), it takes an exporter 48
hours (which is equivalent to 6 working days)7
to obtain agriculture specific export documents.
Nepal scored 4 out of 7 in the trading food Recommendations
index which measures points on license and
membership requirements and phytosanitary 1. Quality Testing Laboratory and
certification procedures. In majority countries Certification
the time required to meet export compliance
is 24 hours and in most European and other Investment on quality testing laboratory is
developed nations, it is less than 1 hour. of utmost importance for Nepal to produce
quality agricultural products that have potential
Another major setback in agriculture export is to compete in the international market. Nepal
the lack of adequate research and development also needs to invest in certification agencies
services that not only identify new and exportable and establish credibility in both domestic and
products but also analyze the market trends international market and expand the reach of
in the international market. Many countries certification and standard testing measures.
leverage research laboratories to build quality One way to achieve the same can be to permit
agriculture products at less cost. If Nepal fails private sector to open certification agencies,
to keep up with the development, agriculture who can establish such organizations in
export will face a significant downfall. For collaboration with foreign companies.
instance, in the case of large cardamom,
countries like Guatemala, China, Pakistan and 2. Digitalization of Export
Vietnam have leveraged their research and Compliance Process
development skills to create a modified black
cardamom with similar taste and feel at lower It is apparent that Nepal needs to introduce
cost. This has declined the export of Nepali measures to improve its export procedure.
cardamom in the global market, especially One of the most effective method applied by
Pakistan, the largest importer. different developing and developed nation is
to digitalize the export procedure. Countries
While Nepal is a member of World Trade like Bangladesh and Dominican Republic have
Organization (WTO) and the South Asian made their trading process easier by publishing
Free Trade Area (SAFTA), the country has not certificate fees online and introducing online
been able to leverage the same8 to realize applications for phytosanitary certificates.
greater benefits. One of the major hinderance Nepal can take an example and digitalize its
is the presence of plethora of agreements with process of applying and submitting quality test
different and often conflicting compliance. certificates online, this can reduce the cost and
Nepali exporters are unaware of the existence time for an exporter to obtain certification for
of such a variety of agreements and the rules export.

7 Calculated by considering 8 working hour per day

8 Nepal has seventeen trade agreements; two transit treaties with India and Bangladesh; and a transit treaty with
China. Other than Asian nations it has trade agreements with the EU for duty free and quota free export in certain
items.

25
ECONOMIC FREEDOM
A Compendium of Essays

3. Trade Agreements contributions, for example, in some African

countries such as Kenya, Tanzania, Ghana,
Nepal exports the majority of its agricultural and more recently Cameroon. They offer
products to India, due to the presence of trade opportunities to different agencies, in the
agreements Nepal does not have to pay high private and public sector, to propose research
tariffs for export. While exporting to India programs and to bid for the public funds
is a good possibility for Nepal, it should available to finance approved programs.
start developing a market chain with other
countries that can provide them with higher Nepal can also work towards promoting joint
economic return on export. For instance, in ventures with international companies so that
terms of cardamom Nepal can make direct it enables technology transfer to domestic
arrangements with major importers like Pakistan companies thereby capacitating them to lead
instead of providing India an opportunity to act major projects in the future.
as a middleman. It would be beneficial for both
Nepal and the importing country. 5. Development of Agriculture
Marketing
Nepal can also work towards simplifying and
harmonizing trade agreements with multiple Nepal should simultaneously design, develop
countries. The agreement should consist of and implement packaging, marketing
measures to avoid tariff and non-tariff barriers and branding strategies for the Nepalese
in cross border trade. The issues on taxes agricultural products that have a comparative
on imports have important implications for advantage in the world market.
the trade negotiators as the policies must not
only include the frameworks on the matters of In Sri Lanka, the authority and responsibility
reducing custom duty, the agreement has to of marketing and branding of Ceylon Tea, a
also eliminate or substantially reduce the para- globally respected brand, is delegated to Sri
tariffs so that a level playing field is created. Lanka Tea Board. The board currently has a
Likewise, a major step in tapping the lucrative chairperson who has extensive experience in
market for Nepali products could be with a marketing and management and has been
trade agreement that eliminates or substantially successfully able to provide new markets to
reduces the tariffs and para-tariffs levied on the tea industry of Sri Lanka. Initiatives that
meticulously chosen potential Nepali exports uplift the image of plantation workers, regains
and committing to address the major non-tariff lost markets while venturing into the new and
barriers. positions Ceylon Tea as the premium tea brand
in the world are given priority by the board.
4. Research and Development The board operates as an enterprise in itself.

Nepal Agriculture Research Council (NARC), Likewise, investment in the entire value chain
as an institution, focuses mostly on cereal – input, production, storage, transport,
crops. Due to the ineffectiveness of NARC and processing, and distribution should be
lack of participation from Nepal’s Agriculture continued.
University, it is necessary to increase the
participation of private sector research on
agricultural products. To this end, several
agricultural research funds (ARF) have been
established, often with substantial World Bank

26
 Nepalese Agriculture: Time for a New Departure
- Ayushma Maharjan & Shreya Subedi

Stimulating Agro-processing a large quantity of ginger the value received

from the export is smaller when compared to
In recent years, high-value cash crops have other nations.
been deemed to show great promise for
export-oriented agriculture in Nepal. However, The above table depicts that the value received
the export of such products is constrained by Nepal for ginger export is the smallest when
by a number of factors, amongst which lack compared to selected top exporters of ginger
of value addition service - which comprises in the world market. This is attributable to the
processing, packaging, and preserving - is the lack of value addition service in the sector.
most eminent. Nepal exports most of the raw ginger to India,
which converts them into processed ginger and
further exports to the world. Only 25 percent
Table 3: Quantity and Value of Ginger Export
of ginger is exported in processed form of
Among Top Ginger Exporters in the World Sutho (traditionally dried ginger) or powdered
ginger (GIZ, 2017). Likewise, Nepal exports
almost 99 percent of its cardamom to India.
Value India, which is one of the largest exporters of
Quantity Value per cardamom, re-packets these products and sells
Country
(Kg) (USD) 1000 Kg them to other countries like Pakistan, which is
(USD) one of the largest importers of cardamom.

Thailand 71678000 55771.8 0.78 It was estimated that more than 25 percent of
UAE 29369700 29047.32 0.99 agricultural exports are without processing in
India 26863700 44554.56 1.66 Nepal, due to which Nepal has not been able
to leverage the advantage that Nepal would
Brazil 22091400 22164.41 1.00
enjoy by producing and exporting high value
European crops. On the other hand, countries with better
12480300 25830.53 2.07
Union
agro-processing sectors have been enjoying
Nepal 10656100 4189.31 0.39 greater profit by processing raw materials
Indonesia 4444940 4933.16 1.11 from Nepal, whereas Nepal’s income has been
Vietnam 3854570 10560.77 2.74 limited.
Other
1819400 6102.65 3.35 Processing plants in Nepal are mainly confined
Asia
Nigeria 2324090 1922.6 0.83
to processing of cereals like rice and wheat;

Source: World Bank, 2019 processing of crops like tea and coffee; the
processing of animal products (especially dairy
The inability of Nepal to enhance value and meat); sugar; production of confectionery
addition services that would ensure both items; and, processing of poultry feed. Despite
backward and forward linkages in agriculture the presence of numerous agro-processing
has huge economic implications, as it becomes plants, processing plants of high value crops
impossible to compete in the world market. like cardamom, ginger, herbs, and others still
For instance, Nepal is the fourth largest ginger are limited. The largest food processing firms
producer in the world after India and falls in Nepal produce noodles, sugar, and biscuits.
amongst the top 20 ginger exporters in the
world market. However, while Nepal exports In the case of cereals, total production is

27
ECONOMIC FREEDOM
A Compendium of Essays

insufficient to meet the domestic demand, and processing industries in other sectors which
Nepal has been a net importer of cereals for can provide higher benefit to the economy.
most of the past three decades. A reversal of
the scenario is deemed unlikely in the near The goal of promoting value addition service

Figure 6: Gross Value Added of Agriculture Products and their Intermediate Consumption

Source: Central Bureau of Statistics, 2020/21

foreseeable future. Therefore, continuation of in agriculture to enhance competitive edge

domination of cereal crop processing might of Nepal was introduced by the Agriculture
not seem as lucrative as other products where Development Strategy (2015) in Nepal. With
Nepal has a comparative advantage in the the aim to increase value addition service,
long term. the strategy aimed to strengthen value chain
linkages and increase PPP investments. The
The data pertaining to intermediate government promised to be actively involved
consumption of agricultural goods by industries in building infrastructure such as cold storage
shows sluggish growth when compared to the and processing units to promote value chain
Gross Value Added by the agricultural sector and access to markets.
in the economy. This implies that the majority
of agricultural produce are either consumed However, today in 2022, the goals remain
directly or are wasted. unmet. Some of the fundamental challenges
contributing to slow growth in agro-processing
Amidst limited processing plants and lack of and factors that has disincentivized investment
linkage between agricultural produce and in the sector are discussed below:
industries, it has been reported that about
40 percent of Nepalese agricultural goods i. Lack of information and knowledge amongst
are wasted. Thus, Nepal needs to promote human resources regarding the operation

28
 Nepalese Agriculture: Time for a New Departure
- Ayushma Maharjan & Shreya Subedi

of new technologies. One of the problems A study conducted among 126 organizations
identified by the Prime Minister Agriculture scattered across Bangladesh, Kenya, Senegal,
Modernization Program (PMAMP) was Tanzania and Zambia identified that involvement
associated with utilized modern machinery of the private sector in technology transfer
provided by the government due to limited helped the agricultural sector realize most new
skills of human resource. technologies for pesticides, machinery, poultry,
fertilizers, and processing (Gisselquist et. al,
ii. Excessive standardization but lack of 2013) . The technology transfer from private
quality testing labs to determine the quality and international agencies helped Bangladesh
and safety of agricultural produce. enhance productivity of hybrid rice and new
iii. Lack of proper linkage with the agriculture vegetable cultivators. Private technology
sector. transfer also led to and supported private
research.
iv. Lack of accreditation services to compete in
the international market. 2. Strengthen Quality
Standardization Services
v. Compliance related to both importing raw
materials and machineries, and exporting. Nepal should focus on strengthening its
vi. Lack of infrastructure and power supply. quality standardization services like testing
and certification of agricultural products.
A successful transition from farm to market
requires rigorous quality control measures.
Recommendations Given the limited capacity in Nepal for
certification and quality control, increasing
1. Foreign Direct Investment investment in this aspect of the value chain
is an important agenda. In line with the
Permitting Foreign Direct Investment (FDI) in same, promulgation and implementation of
agriculture would not only promote agro- appropriate food safety guidelines should
processing industries but also would allow be introduced. Establishment of our own
private companies in Nepal to benefit from accreditation service, and promotion of good
modern technology and knowledge transfer. manufacturing practices can substantially help
The government should thus remove the reduce the cost of production.
agriculture sector from the negative list of FITTA
and should also refrain from incorporating 3. Invest in Infrastructural Facilities
any provision of minimum investment in the
agriculture sector in case of foreign investment. Value addition and chain development also
require investment in infrastructural facilities
In Brazil, the government initiated a liberal such as access to roads, access to electricity,
policy for agriculture allowing foreign cold storage, customized vehicles for the
companies to operate wholly owned transportation of livestock, small market
subsidiaries in the country and acquire places, etc. This is an area that can achieve
domestic companies. As a result, Brazil is one its potential by attracting the private sector
of the fastest growing markets for agricultural and development partners in the form of
inputs and an agricultural research hub for public-private partnerships. To enhance
several multinational companies. competitiveness in specific value chains
through development of improved production

29
ECONOMIC FREEDOM
A Compendium of Essays

and post-harvest management skills Indonesia, Reference

Colombia, and Kenya had introduced the
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this network while strengthening it with furtherPray, C., Spielman, D., Rashid, H. A., Sene, L.,
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c9a0-50bd290eef17?t=1554795473000

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Khatiwada, D. (2020, February 20). Why Ministry of Finance. (2021). Economic Survey
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A Compendium of Essays

Welt Hunger Life, & Concern Worldwide.

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32
 R emittance inflows to Nepal decreased by
1.7 percent to NRs.631.19 billion in the
first eight months of the fiscal year (FY) 2021-
221. In comparison, the remittance inflow for
the first eight months of the last FY (2020-21)
had increased by 8.7 percent(NRB, 2022).
This incident depicting a downwards trend
in remittance earnings has compromised the
macroeconomic wellbeing of the country as it
witnesses ballooning international payments
or Balance of Payments (BoP) deficits and

Converting shrinking gross foreign exchange reserve

status (NRB, 2022). Presently, BoP deficit for
the first-eight month of the FY 2021-22 stands
Remittance to at NRs 258.64 billion compared to the surplus
of NRs 68 billion for the first eight months of
Saving and the FY 2020-21. Foreign exchange reserves
for the first eight months of the FY 2021-22, on
Investment the other hand, stands at NRs 1171 billion as
against NRs 1436.5 billion in the same period
- Prience Shrestha in the FY 2020-21. That signifies 18.4 percent
loss in foreign exchange reserve (NRB, 2022).

Figure 1: Remittances, Foreign Exchange Reserves and Balance of Payments

Source: (NRB, 2022) *For FY 2021/22, the data is limited to first eight months

1 Figure for the review period ending first eight month is applied for consistency as such is only available for FY
2021/22

33
ECONOMIC FREEDOM
A Compendium of Essays

Figure 1 depicts the significance of remittances on remittance income also based on the
to Nepal. Inward remittance figure tallies to proportion of households that depend on it.
more than 60 percent of the foreign exchange Studies indicate that almost half of all Nepalese
reserves and represented around 22 percent of households have at least one migrant family
the Gross Domestic Product (GDP) of the country member currently living abroad. In migrant
between FY 2016/17 and FY 2021/22. Also, households, remittances form a significant
remittance has accounted for more than 65 percentage (as high as 60%) of total migrant
percent of the total current account receipts household income (Sah, 2019). In terms of
entering the country in the last two fiscal years. application of received remittance income, the
Therefore, remittance, presently and until the Nepal Living Standard Survey 2011 found
foreseeable future, can be considered to be that significant proportion of the remittance
a fundamental element to stabilize foreign incomes are used for meeting household daily
exchange reserves and balance of payments consumption needs and to repay debts, and
surplus. that only a fraction (<2%) of remittance inflow is
saved for investment in the productive sectors.
Furthermore, remittances are regarded as one It is often stressed that a higher proportion
of the important sources of external financing of remittances is spent on food, education,
in general as they score more than three times and healthcare, but these can be considered
the size of the Official Development Assistance to be essential for building human capital, a
(ODA) and higher than Foreign Direct prerequisite for development (CBS, 2011).
Investment (FDI) for low- and middle-income
countries (Barne & Pirela, 2019). Furthermore, Figure 2: Distribution of Remittance by use
remittances are also one of the essential
components of sustainable economic growth
as they touch upon the Goal 8 (Decent Work
and Economic Growth) and Goal 9 (Industry,
Innovation and Infrastructure) of the Sustainable
Development Goals (SDGs). Thus, remittances
are also a foundation for sustainable economic
growth.

Livelihood Realities of
Remittances Source: (CBS, 2011)

Remittances also generate a positive effect on From the above figure, it can be easily
the economy by boosting household savings, observed that the lowest proportion (i.e., 0.6
investment, growth, consumption, and income percent) of the remittance income is saved and
distribution. By promoting productive use at the contributes towards the Gross National Savings
local level, remittances can potentially generate of the economy. While literature argues that
income and employment opportunities, and remittance-driven expenses are often rational,
spur new economic and social infrastructure and that remittance recipients manage to save
and services (Maharjan & Dhakal, 2018). after dealing with expenses, there is a crucial
need to look at other factors that lead to low
Studies identify Nepal to be heavily dependent

34
 Converting Remittance to Saving and Investment
- Prience Shrestha

savings, and ultimately low investment of 2006. Meanwhile, foreign employment and
remittance income. Studies nevertheless identifyremittances in Nepal are regulated by the
• lack of policy and institutions promoting Foreign Employment Act 2064 [2007] and
remittance investment Foreign Regulations 2064 [2007]. Furthermore,
exercising the power conferred by clause
• lack of products for investment, 12 of the Foreign Exchange (Regulation) Act
• lack of knowledge and skills of migrant 2019, the NRB has framed and executed
families regarding availability of NRB Remittance Regulations 2067 [2010] for
existing investment products and an individual, firm, company, or institutions
• lack of promotion of the existing authorized for remittance business under a
investment products foreign exchange transactions license. The
regulations detail procedures such as eligibility
to have suppressed conversion of rural criteria, supporting document required, and
remittances into savings and investments. the conditions for inward remittance business.
However, remittance-receiving households
save and invest more on average than those Current priority is to adequately channel
households who do not receive remittances remittance income into savings and investment
(Maharjan & Dhakal, 2018), (Sah, 2019), and through formalization of remittance money
(Pant, 2019). Hence, better access to financial and integration of returnee migrant laborers
products from BFI can give additional incentive in the domestic economy in the form
to transform remittances into savings and entrepreneurs and small business owners.
investments. Remittance is acknowledged as a tool that can
enable sustainable economic development and
growth. The question that Nepal grapples with
at the moment is how to ensure that the policies,
Current Plans, Policies, and priorities and objectives materialize.
Regulations
The importance of foreign employment and
remittance flow was increasingly realized in Formalization of Remittance
the Three-Year Interim Plan (FY 2007–08 to
FY 2009–10). The subsequent Three-Year Plan The Government of Nepal has introduced
(FY 2010–11 to 2012–13) further reinforced various plans, policies, strategies, and
the role of remittances in foreign exchange approaches to direct remittances through
and balance of payments. The two Three Year legal channels. On such front, the NRB began
Plans (2013–14 to 2015–16) and (2016–17 granting licenses to private sector organizations
to 2018–19) increasingly reinforced the role interested in remittance-transfer business from
of remittances in foreign exchange, balance 2002. In 2016, more than 50 firms, excluding
of payments, and the need to promote the commercial banks, were undertaking money-
productive use of remittances. transfer business. Today, multiple remittance
services such as IME, CG Remit, and City
On the policy and regulation front, issues Express are serving formal transfer of hard-
related to remittances are dealt under Foreign earned money earned by foreign migrant
Employment Policy 2068 [2012], which is a labors. The extensions of such remittance
subset of the Labor and Employment Policy, services at every nook and corner of the country
have heavily incentivized and eased remittance

35
ECONOMIC FREEDOM
A Compendium of Essays

of money from formal channels (Maharjan & through such special bank accounts offering
Dhakal, 2018). Regardless, informal medium attractive repayment options that can ease and
of remittance (also known as Hundi) remains lower the debt burden of remittance dependent
a large source of remitting foreign earned households (Sah, 2019).
money into the country although statistically
unrecognized (Maharjan & Dhakal, 2018). Importantly, such deposit accounts can also
be coupled with life and non-life insurance
Literatures identify that the level of financial schemes and other monthly contribution plans
development within the banking and financial that can function as a pension and social
sector is crucial to determine the choice between security scheme (Maharjan & Dhakal, 2018).
transferring funds through formal, transparent On the latter case, discussions are ongoing
channels or through informal channels not about the creation of an Overseas Employees’
recorded in official statistics (Maharjan & Pension Benefits Fund in collaboration with the
Dhakal, 2018). Financial development and Employees’ Provident Fund. Apart from that,
institutional framework are thus very important premium interest rates on the remittance funds
to incentivize transfer of remittance through by the BFI can be organized to incentivize
official mediums. As international case the flow of remittance from formal channels.
studies show, financial, monetary, and social Experience of south Asian countries reveal
motivations have remained widely successful that provision of premium interest rates on
in incentivizing remittance through formal the remittance funds by the BFI has remained
channels. Thus, quantity of remittance flow effective in increasing the amount of remittance
through formal channels could be increased flow from formal channels (Pant, 2019).
significantly if remittances are linked with
financial products that pertain to domestic Meanwhile, studies show imposing tax on
& business credit and insurance schemes remittances greatly disincentivizes migrants to
(Maharjan & Dhakal, 2018). remit through formal channels and resort to
informal channels (Maharjan & Dhakal, 2018).
On such note, the provision of special deposit However, given that current regulation already
account targeting remittance income and avoids tax on remittance, the government needs
foreign migrant laborers need to be established to take a step further by initiating schemes
in BFIs to enable innovative and incentivizing that provides tax breaks on channelization of
financial products that serve the interest of formally remitted income into savings accounts
the migrant laborers and their families (Sah, or on the purchase of capital machinery or
2019). Cooperation between the regulating equipment for starting an enterprise. Tax break
agencies and BFIs is essential to develop such schemes are also observed by the literatures to
deposit accounts connecting with remittance be an effective medium to incentivize remittance
money sent through formal/official channels. through formal channels (Pant, 2019).
Amongst many other things, credit schemes
such as educational loan, mortgage loan,
and personal withdraw facilities to support Converting Remittances to
immediate expenditure needs can be facilitated
Savings and Investments
with such accounts that support the immediate
priorities of the migrant workers and their As current data suggests, the use of remittance
families (Sah, 2019). Loans, mortgages, and money for productive investment, proxied by
foreign employment related debt repayment capital formation, savings, and business is
schemes can be linked with remittances minimal. As such, the total use of remittance

36
 Converting Remittance to Saving and Investment
- Prience Shrestha

for productive purposes stands at a meagre investment. At present, the current trend or
3.5 percentage (calculations based on Figure obligation of the remittance recipients to utilize
2 above). major chunk of remittance for consumption
purpose might not motivate recipients to take
Studies mention that an essential component benefit of tax breaks on savings and investment
for the investment of remittances is to increase activities concerning remittance.
the financial literacy of migrants, returnees,
and migrant-sending households. It is essential
to enhance the financial skills of both receivers
and senders with the knowledge and skills
From Remittance to
to evaluate their options on sending through
formal channels, choosing the most suitable Entrepreneurship
financial products to employ their remittance
savings on, and using remittance income It is important to note that propagation
to meet their financial goals (Maharjan of entrepreneurship and small business
& Dhakal, 2018). However, reaching the development is crucial to establish a strong
individual migrants and remittance recipients foundation of economic growth in any developing
and improving their financial literacy is a country including Nepal. Meanwhile, given the
daunting task, and it is important to build the significance of remittance sector to the national
capacities of the financial institutions such as economy, the ability to transition remittance
Microfinance Institutions (MFIs) that can begin income into entrepreneurship and small
such awareness campaigns at a larger scale business development can play synergistic role
(Maharjan & Dhakal, 2018). in helping Nepal reach its optimal growth solely
as a result of quality capital formation. Hence,
Likewise, Foreign Employment Savings Bonds it can be asserted that policies and approaches
(FESBs) could play a role in securing remittance to link remittance with entrepreneurship and
income into gross savings and investment of small business development is crucial in the
the economy. FESBs target Nepali migrant context of Nepal.
workers with the objective of channeling
their remittances into investment in national First and foremost, to create synchronization
development infrastructure and programs. between remittance income and
However, past experiments of the Nepal entrepreneurship, it is important to recognize
government trying to secure remittance money that returnee migrants, apart from their
by issuing FESBs have not borne promising investable remittance income, are a vital source
results. Despite having an attractive annual of human capital, which could profitably be
interest rate of 9%–10%, the bonds were not a used to support the growth and development
success as can be seen from their performance of micro and small enterprises. Therefore, it
over the years. Reasons given for such poor is important to provide sufficient knowledge
performance include lack of awareness, and training to enable returnee migrants to
complicated procedures, and concerns about productively use the skills and knowledge
exchange rate risk, as payments are made acquired during their stay abroad and to
as per the interest/return rate at the time of provide on-the-job technical backstopping
subscription (Maharjan & Dhakal, 2018). support to enable them to open a small
The success of this approach highly depends business back home (Sah, 2019). The primary
on the purpose of the remittance in terms of thrust of the training support should revolve
its application for consumptions, savings, or around building the confidence of the migrant

37
ECONOMIC FREEDOM
A Compendium of Essays

workers and their families to start an enterprise o Life and non-life insurance schemes
for generating self-employment opportunities and other monthly contribution
(Sah, 2019). On such front, Nepalese MFIs can plans that can function as a pension
intervene by developing business development and social security scheme can be
services such as training, business advice, coupled with the special deposit
marketing assistance, and skill development accounts
specifically targeting returnee migrant laborers
and their families. o Premium interest rates on the special
deposit account can be provided to
Apart from nonfinancial incentives to incentivize the flow of remittance
lure remittance money into small business from formal channels.
development, Nepal can learn from the
successful examples of Mexico and El Salvador • Tax breaks on interest on savings
to establish matching fund programs to account and on the purchase of capital
bridge any financing gap – in the form of machinery or equipment for starting an
equity or loan - suffered by returnee migrants enterprise can be provided on purchases
attempting to invest formally remitted money made using the formally remitted money.
into business ventures (Maharjan & Dhakal,
2018). Collaborations with BFIs and alternative • Financial literacy of migrants, returnees,
financing communities can be sought for such and migrant-sending households can
purposes. be increased to enable them to realize
how remittances can be used to meet
the financial goals, and to understand
how product features differ, to calculate
and compare costs, and to determine
Conclusion what they can afford and what products
are best suited to their requirements
• Special deposit accounts targeting
and choose the most suitable financial
remittances and foreign migrant laborers
product/s.
need to be established and promoted by
BFIs. The products need to be innovative
• Trainings and on-the-job technical
and serve the interest of the migrant
backstopping support can be provided
laborers and their families.
to returnee migrants to enable them to
productively use the skills and knowledge
o Credit schemes such as educational
acquired during their stay abroad and
loan, mortgage loan, and personal
to enable them to open a small business
withdraw facilities to support
back home respectively
immediate expenditure needs can
be facilitated with such accounts
• Individual matching funds through the
means of BFIs and alternative financing
o Loans, mortgages, and foreign
community in the form of equity or
employment related debt
debt to bridge any financial gap faced
repayments can be linked with
by returnee migrant intending to pool
remittances through such special
sufficient capital from formally remitted
bank accounts offering attractive
money to start a business or enterprise
repayment options
can be provided.

38
 Converting Remittance to Saving and Investment
- Prience Shrestha

References
Barne, D., & Pirela, F. (2019). Data Blog. Retrieved from World Bank Blogs: https://blogs.
worldbank.org/opendata/money-sent-home-workers-now-largest-source-external-financing-
low-and-middle-income

CBS. (2011). Nepal Living Standard Survey 2010-11. Kathmandu: Central Bureau of Statistics.

Maharjan, A., & Dhakal, N. H. (2018). Approaches to the Productive Use of Remittance in
Nepal. Kathmandu: International Center for Integrated Mountain Development.

NRB. (2022). Current Macroeconomic and Financial Situation in Nepal. Kathmandu: Nepal
Rastra Bank.

Pant, B. (2019). Harnessing Remittances for Productive Use in Nepal. Kathmandu: Nepal Rastra
Bank.

Sah, B. N. (2019). Remittance and Economic Development of Nepal. Patan Pragya.

39
 (World Bank, 2020). The population of the
country is expected to be 30 million by the
year 2021 and the median age is 24, Nepal’s
ratio of working to non-working population
will remain high in the years to come.

Structurally, Nepal’s GDP is reliant on

agriculture. However, the service sector in the
country is the largest contributor to the GDP.
Agriculture, which used to account for over
half of the GDP until a decade ago now only
accounts for 2.75 percent of the GDP and
65.7 percent of the domestic employment. The
industrial sector—whose largest sub-sectors
consist of manufacturing and construction—
contributes 15.1 percent of GDP. The Services
sector—whose largest sub-sectors include real
estate, trade, transport, communications, and
education—contributes 57.4 percent of GDP
(Nepal Rastra Bank, 2020).
Over the years, Nepal’s economy is gradually
shifting away from traditional agriculture;
a significant number of Nepali people are
migrating to primarily Gulf nations, Malaysia,
India and Europe in search of employment
opportunities. An estimated four to six million
Nepal’s Nepali people are outside Nepal (ILO 2019)
and the remittance they send back is the lifeline

Trade and of the Nepali economy. Nepal received $8.12

billion in remittance in 2019 which is 26.5% of

Comparative the GDP (Nepal Rastra Bank,2019). Despite a

yearlong pandemic in 2020, Nepali’s abroad

Advantage
sent over $9 billion remittance in the year
2020. This is almost 28% of the GDP (Ministry
of Finance, 2019). Hence, a significant amount
- Nishant Khanal of wealth in Nepal is created abroad through
the export of the labor, as opposed to the
export of goods and services produced within
the Nepali economy. This proves that Nepal’s
Introduction consumer market is import driven.

In the year 2026, Nepal will graduate from

a low-income least developed nation to a
developing nation. Nepal’s estimated GDP is
Until recently, Nepal’s long-standing trade
deficit was balanced by sufficient inflows of
remittance, which helped balance current
$30.64 billion and GDP per capita is $1236.61 account. The increase in trade deficit has
outpaced the remittance inflows since FY

41
ECONOMIC FREEDOM
A Compendium of Essays

2016/17 when the current account had a billets), gold, construction equipment and
deficit of $95.4 million. In the year 2018 cement clinkers, rice, and telecommunications
the current account deficit ballooned to $2.3 equipment.
billion; however this was contained in the
following year in 2019. In the year 2020, There is a growing concern over Nepal’s trade
as the pandemic disrupted imports, Nepal’s trend and pattern, as the country is import
current account went into surplus (Nepal Rastra reliant. There have been several efforts to
Bank 2020). increase Nepal’s export, however there has not
been any significant impact on Nepal’s trade
India accounts for 65 percent of Nepal’s trade, performance. At the outset, this essay aims to
China 14 percent and the rest of the world for look into Nepal’s trade pattern, analyse the
the remaining 22 percent. China’s share of total trend of the trade in the country and identify
trade to Nepal has grown from 10 percent in the reasons for such a trend. This essay has
the year 2014 to 14 percent in the year 2019. identified the features of Nepal’s foreign trade
Nepal imports more than it exports. In the year and gives an argument on why there is a need
2019, Nepal imported $14.6 for every dollar for better trade openness in Nepal, by using
exported (World Bank 2020). Nepal mainly the augmented benchmark gravity model
exports woolen carpets, polyester yarn, juices, of trade. The data for this study are from
tea and spices (cardamom), textiles, jute goods, various secondary sources like Nepal’s Trade
readymade garments and other apparel items and Export Promotion Center (TEPC), World
and mainly imports petroleum products (diesel, Integrated Trade Solution (WITS), Central Bank
petrol, LPG), industrial use items (mainly steel of Nepal (NRB) and UN COMTRADE.

Nepal’s Trade Pattern

This section gives an overview of Nepal’s trade trend, the goods and services Nepal imports and
exports and Nepal’s major trading partners. As Nepal is an import-oriented economy, Nepal
has been importing more than exporting. The table below helps us understand Nepal’s trade
pattern on goods and services for the last 5 years.

Table 1: Overview of Nepal’s Trade

Year 2015 2016 2017 2018 2019
Imports of Goods (million USD) 6,380 9,650 10,345 12,712 12,340
Exports of Goods (million USD) 720 740 742 786 968
Imports of Services (million USD) 1,225 1,250 1,591 1,774 1,691
Exports of Services (million USD) 1,139 1,282 1,383 1,477 1,512
Imports of Goods and Services (Annual % Change) 10 3 27 16 8
Exports of Goods and Services (Annual % Change) 7 -14 11 6 5
Trade Balance (million USD) -5,698 -8,002 -9,365 -11,916 -11,370
Foreign Trade (in % of GDP) 53 49 51 55 55
Imports of Goods and Services (in % of GDP) 41 39 42 46 46
Exports of Goods and Services (in % of GDP) 12 9 9 9 9

Source: Trade and export promotion center

42
 Nepal’s Trade and Comparative Advantage
- Nishant Khanal

Figure 1: Nepal’s Import vs Export

Figure 1 above shows that Nepal’s export has been almost consistent over the last 5 years,
whereas the imports are increasing.

Table 2: Nepal’s Trade in Product Categories

Exports Imports
Export (US$ m) Share (%) Import (US$ m) Share (%)
Raw materials 44 5.92 945 9.42
Intermediate goods 273 36.89 3,497 34.83
Consumer goods 409 55.27 3,259 32.46
Capital goods 14 1.92 2,299 22.90

Source: WITS 2019

For a long time, Nepal’s foreign trade has largely been confined to India primarily owing to close
proximity, similar socio-economic conditions and availability of transport facilities (Pant and
Panta 2019). The volume of Nepal’s foreign trade with India in terms of both exports and imports
has been rising due to the increasing demand of different types of industrial raw materials,
machinery and petroleum products in order to undertake various types of developmental works
and consumer goods to meet the requirements of the growing population.

Nepal’s exports are led by Palm Oil (20.1% of all exports in 2019), Non-Retail Synthetic Staple
Fibers Yarn, Knotted Carpets, Soybean Oil and Flavored Water. The leading export partners of
Nepal have been India, USA, Germany, People’s Republic of China, United Kingdom, France,
Italy, Canada, Japan and Bangladesh. This is illustrated in figure 2 which depicts that India, and
China constituted about three-fourths of Nepal’s total exports in 2019/2020.

43
ECONOMIC FREEDOM
A Compendium of Essays

Figure 2: Nepal’s top exporting countries in 2019

Top 5 countries Nepal exports

to (%)

Source: WITS 2019

Figure 3: Nepal’s Top Export destination

Figure 3 above is obtained from data by the customs department and using R graphics to see
the pattern of Nepal’s top 10 exporting countries. India, USA and Germany remain Nepal’s
consistent trading partner for the last decade. Trend shows that Nepal’s export to China has
been increasing after 2014. The cumulative export from the last 10 years of export shows that
following are the top 10 products Nepal has been exporting.

44
 Nepal’s Trade and Comparative Advantage
- Nishant Khanal

Table 3: Nepal’s top export items

S.N. Product S.N. Product

1 Soyabean oil 6 Woven fabric of jute or bast fibers
2 Carpet, knotted of wool or fine animal hair 7 Woven fabric obtained from strip or the
like
3 Palm oil 8 Felt
4 Big Cardamo, neither crushed nor ground 9 Mixture of juices
5 Black tea fermented 10 Jute bags and sacks

As discussed earlier, Nepal has been importing over 14 dollars for every dollar of export. The
major import for Nepal is petroleum and the country that Nepal exports to the most is India. The
tables and figures below are the glimpses of Nepal’s major importing countries and products.
These are also obtained from the data by Nepal customs and Trade and export promotion center.
As shown in the figure below over the last 10 years, Nepal imported most from India; imports
from China are growing; Argentina, USA, Canada, UAE and Indonesia are Nepal’s major
import sources. Nepal’s major import items as are listed in table 4.

Figure 4 : Nepal’s top importing countries

Table 4: Nepal’s top imports

S.N. Products S.N. Products

1 High Speed Diesel 6 Coal
2 M.S Billet 7 Flat rolled product of iron of a thickness less
than 3mm
3 Crude soyabean oil 8 Gold, semi-manufactured forms
4 Telephone used for cellular or cordless 9 Semi-milled or wholly milled rice, whether or
networking not polished or glazed
5 Motor Spirit (Petrol) 10 Liquidified Petrolium Gas (LPG)

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ECONOMIC FREEDOM
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While looking into the data and trade trends for Nepal for the past one decade, the following
characteristics of Nepal’s trade can be observed. First, the commodity pattern of imports and
exports indicate that Nepal’s foreign trade confirms the comparative advantage theory of
international trade. The country’s comparative advantage lies in labor intensive manufacturing
and agricultural products (MoICS, 2016). This type of trade illustrates traditional theory of trade
also known as ‘inter industry trade.’ Second, Nepal’s foreign trade is India dependent. About
two-thirds of Nepal’s trade is with India. Third, there is a continuous deficit in Nepalese foreign
trade. The volume of trade deficit is continuously increasing. Fourth, Nepal’s share in total world
trade has been declining. Fifth, Nepal remains dependent on a relatively small basket of exports
and a few destination markets. These findings also align with the findings from Pant and Panta,
2019 & Thapa, 2019.

Furthermore, being a least developed country, Nepal enjoys the preferential market access under
the WTO’s enabling clause. This is a clause that most developed countries grant concessional
and/or complete duty free, quota free market access to countries like Nepal under the General
System of Preferences (GSP) scheme. This is one of the major reasons for Nepal’s exporting to
the US and European markets like France and Germany.

Comparative Advantage and Nepal’s trade.

Nepal’s export import data for over a decade shows that Nepal has been exporting a small basket
of goods and services. This confirms that Nepal’s trade is based on comparative advantage. The
Nepal trade integration strategy 2010 and 2016 also confirm that the top 10 export items listed
above belong to the group of commodities that Nepal has comparative advantage.

Comparative advantage is an economic theory first developed by 19th-century British economist

David Ricardo that attributed the cause and benefits of international trade to the differences in
the relative opportunity cost of producing the same commodities among countries. The (NTIS
2016) identifies that Nepal has a comparative advantage on fabric yarn, tea, cardamom, ginger
and coffee in South Asia. However, the country has not been able to fully utilize its potential.
Adhikari (2021)’s calculation of Revealed Comparative Advantage (RCA) shows that Nepal has
comparative advantage in the production of 169 out of the 1,021 products, taken from WTO’s
HS 4-digit category.

Nepal enjoys comparative advantage in more products than the average countries. The products
exported by Nepal are, on average, less ubiquitous than the products exported by most countries.
The average ubiquity of the 169 products of Nepal’s comparative advantage was found to be
about 27.15. This implies that 26 other countries, on average, also enjoy comparative advantage
in the products that Nepal exports with comparative advantage (Adhikari 2021). Yet Nepal is
far behind on technology and the country’s current productive structure is not competent as
compared to its competitors.

In 2026, the United Nations Committee for Development Policy (CDP) will graduate Nepal from
the least developed country to developing country, which means that Nepal would not be eligible
for the LDC benefits. Consequently, the implications could broadly arise from (i) preference

46
 Nepal’s Trade and Comparative Advantage
- Nishant Khanal

erosion in international trade potentially affecting export competitiveness, (ii) reduced policy
space, tightening the scope of supporting exporters and domestic market-oriented industries
(Razzaque, 2020). There is a need for an export strategy for Nepal in order to keep its export
maker growing and unleash its competitiveness. The section below, is an attempt to see whether
the free trade agreements would rescue Nepal’s international trade after losing the GSP facility
once graduated.

Free Trade Agreement and Nepal’s Comparative Advantage

After its graduation to a developing country, Nepal needs to still secure the market for its
export items. Literatures argue that free trade agreements would result in better market access
for the products with comparative advantage. Gallardo (2005) confirms that specialization
according to comparative advantage would indeed benefit a country. He also argues that free
trade agreements are instrumental for a country to unleash the full potential of its comparative
advantage. Furthermore, (IDB, 2003) confirms that free trade agreements eliminate the rule
of origin tensions and also reduces the non-tariff measures for the goods with comparative
advantage.

To estimate the role of FTA on Nepal’s export, this study has used panel data of 10 major export
destinations of Nepal between 2010 and 2019, as derived in figure 3. The study also included
the top ten major export items of Nepal, derived from table 3, these products are also identified
as the products Nepal has a comparative advantage in by (NTIS 2016). The data on export
items are retrieved from the portal of Trade and Export Promotion Center (TEPC) of Nepal.
Similarly, the data on Macroeconomic indicators—GDP, Inflation, population—are extracted
from the World Bank database. Data on exchange rate are taken from the IMF database. The
dummy variable Free Trade Dummy is taken from the estimation done by (Cepii—Database). The
data on distance are extracted from (Pt. Bali info iklanindo semesta, 2019).

Methodology
The Gravity model of trade pioneered in the literature of international trade by Tinbergen (1962)
is used to analyze the impact of FTA on imports. The model states that the size of the economies
positively contributes to bilateral trade while their distance affects negatively. In addition, this
study has employed the augmented gravity model of trade. As suggested by the literature, the
model is further estimated using the Poisson Pseudo Maximum likelihood method (PPML). As PPML
estimator function remedial measure to two particular issues in panel data of international trade:
Non-homoscedasticity and zero trade values. (Silva & Tenreyro, 2006). The model estimated as;

47
ECONOMIC FREEDOM
A Compendium of Essays

where,

Findings and Discussion

(1) (2) (3)
VARIABLES OLS (FE) (PPML)
Log of GDP of exporter in USD 4.341 2.309*
(3.330) (1.328)
Log of GDP of importer in USD -3.820*** -3.910*** -0.269
(1.096) (1.197) (0.659)
Log of population of exporter -28.824 -23.16**
(20.666) (9.375)
Log of population of importer 4.905*** 4.983*** 0.975
(1.004) (1.092) (0.631)
Distance to capital cities 3.844*** 3.920*** 1.763***
(1.057) (1.148) (0.604)
Governance index of exporter 3.943*** 3.979*** 2.236*

48
 Nepal’s Trade and Comparative Advantage
- Nishant Khanal

(0.574) (0.604) (1.192)

Governance index of importer 2.199 1.455***
(3.765) (0.382)
inflation (CPI) of exporter 0.118 0.0671**
(0.153) (0.0332)
inflation (CPI) of importer -0.008 -0.013 0.00931
(0.091) (0.101) (0.0433)
1 if both partners are member of common FTA 5.275***
(0.949)
FTA_Governance_exporter -1.394
(1.136)
FTA_Governance_importer 3.359***
(0.784)
Constant 392.483 1.908 335.4**
(301.530) (6.858) (135.0)
95 95
Observations 0.558 0.545 100
R-squared 0.941
Standard errors are in parenthesis

*** p<0.01, ** p<0.05, * p<0.1

Column 1 is the ordinary least square regression, column 2 is the time fixed effect and column 3
is the PPML estimator regression used to eliminate the effect of Non-homoscedasticity and zero
trade values in panel data. The main variable of interest here was the free trade agreement, which
is statistically significant for the export of 10 products that Nepal has comparative advantage
on, to the countries that Nepal has been exporting in the last one decade. Among the list of the
countries presented Nepal has a free trade agreement only with India, Nepal’s exports to other
countries are currently under the GSP quota, which will be eliminated as Nepal graduates to a
developing country. The evidence from this regression shows that free trade agreement with its
trading partner is statistically significant for Nepal.

Conclusion
This research shows that in the last 10 years, Nepal traded with almost 190 countries. The
imported commodities ranged from basic goods to luxurious goods as well as labor intensive
goods to capital intensive goods. Despite being an agriculture intensive economy and having
comparative advantage on the agricultural products Nepal imported large amounts of agricultural
goods from India and China. Such goods included meat, milk, rice, vegetables from India and
onion, fish, butter, garlic, apples from China.

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ECONOMIC FREEDOM
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The import list did not show any input type commodities, it mostly shows that the country has been
focusing on the consumer goods only; this also shows that there is very less production and value
creation happening in the economy. In the exported items there is an overwhelming domination
of woolen goods (carpets, woolen shawls, scarves, mufflers) and cotton goods (cotton dresses,
suits) as well as agricultural products such as (cardamom, juice, tea, ginger and coffee). After
graduating as a developing country, Nepal will lose its preferential market access and quotas to
export which would result in increasing the cost of Nepali export and the demand for those items
might not be as usual.

On the bright side as pointed out by Adhikari (2021), Nepal has a comparative advantage over
169 products; Nepal should focus on increasing competitiveness in light manufactured goods.
Xu and Hager (2017) further confirm that Nepal can excel on light manufactured goods and
handicrafts. Furthermore, to sustain and increase the current trade pattern on the exporting
commodities with the comparative advantages Nepal should join the FTA with its current trade
partners.

References:
Acharya, K. R. (2019). Nepalese Foreign Trade: Growth, Composition, and Direction. NCC
Journal, 4(1), 91-96. ()

Adhikari, S. (2021). Addressing Trade Deficit of Nepal: Nepal’s Productive Structure and Avenues
for Diversification. Policy Research Institute. (10.13140/RG.2.2.23695.51366)

Cepii—Database. Retrieved April 27, 2021, from http://www.cepii.fr/cepii/en/bdd_modele/

bdd.asp

Gallardo, J. L. (2005). Comparative advantage, economic growth and free trade. Revista
de Economia Contemporânea, 9(2), 313–335. https://doi.org/10.1590/S1415-
98482005000200004

(IDB, 2003), The impact of Free Trade Agreements on the Pattern of Trade, eeting of the Trade
and Integration Network Inter - American Development Bank, Washington, D.C. MAY , 29 -
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Impact-of-Free-Trade-Agreements-on-the-Pattern-of-Trade.pdf )

Ministry of Finance (2019). Annual economic survey May 2019, Research unit, Ministry of
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Economic%20Survey%202019_20201125024153.pdf )

MoICS, (2016). Review of Nepal Trade Integration Strategy (2010),

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quarterly-economic-bulletin/)

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quarterly-economic-bulletin/)

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NRB Economic Review, 21, 52-78.

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88(4), 641-658.

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Nepal-Development-Update-Harnessing-Export-Potential-for-a-Green-Inclusive-and-Resilient-
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51
 people around the globe to exit poverty,
significant barriers to enterprising have barred
Nepalese from realizing the same. Over the
past few years, many countries have taken
phenomenal steps to improve their enterprising
environment by reforming their policies to
catch-up with the rapid advancements around
the globe. On the contrary, all that Nepal
has experienced is lack of interest on part of
bureaucrats to move beyond what has been
practiced for countless number of years.

For over many years now, Nepal has been

a victim of archaic, stringent and excessive
legislations that have created significant barriers
for individuals to pursue their entrepreneurial
Rethinking ideas. For instance, the Industrial Enterprise
Act (IEA), which has been abated or obsolete
the Industrial in many countries including neighboring
India, has still been creating obstacles for
Enterprise Act entrepreneurship and innovation in Nepal.
With each passing year, the scope of the act
has only broadened, making the regulatory
environment more stringent and restrictive.
- Ayushma Maharjan
It cannot be denied that during the liberalization
era (1990s) of Nepal, the introduction of the
IEA was a phenomenal achievement which

N epal has a long history of being amongst

the poorest countries in the world. Even
today, about 39 percent of the population
provided opportunities for numerous people
to establish and operate their enterprise by
registering themselves at the Department of
in Nepal are either extremely poor or are at Industry (DoI). But today, the world is moving
the risk of being one. With about 5.7 million from the concept of industries to companies,
people in the country being employed in the and from companies to platforms, and the
informal sector, the incidence of poor who earn regulatory environment needs to incorporate
mere $1.9 to $3.2 a day is exceptionally high these advancements. This implies that the
in Nepal. Additionally, the per capita income continuation of archaic policies would
of Nepal (US$1090) is amongst the lowest in contribute to creating more inadequacies and
South Asia. bottlenecks towards enterprising. Given that,
the IEA of Nepal is perhaps a legislation that
One of the major reasons behind this desolated warrants some form of discussion and possibly
outlook of the general Nepalese is stringent requires a different approach.
policies that has deprived many individuals
of their right to earn a decent livelihood For the same, analyzing the intentions of the
through self-enterprising. While pursuance of act and exploring alternatives that cater to the
entrepreneurial endeavors has helped many objective is just as important.

53
ECONOMIC FREEDOM
A Compendium of Essays

Understanding the Industrial A crucial reform for Nepal during the 1990s,
Enterprise Act of Nepal which obliterated one of the most prevalent
economic orthodoxies of the time, was the
Nepal, in the mid-1950s, embraced a enactment of new industrial policy which was
state-led development strategy where the introduced with a vision to abolish license
government undertook the responsibility to run raj and facilitate the participation of private
economic activities and provide employment sector in the economy and to attract foreign
to the general people. This phenomenon was investment. It was followed by the enactment
explained by Rodrik (2004) by stating that the of the Industrial Enterprise Act on November
general belief during the earlier periods of the 1992 to enforce the vision (Pradhananga,
20th century was one of skepticism as to the 2007).
potential of markets. This belief was especially
relevant in least developed and developing The act proved to be one of the most important
nations of the global south where the general legislations on business and investment in Nepal
norm for escaping poverty traps for a larger which expanded economic opportunities to
part of the 20th century had been prolonged individuals other than those that were, or were
stages of government intervention or a system related to the ruling class. It made possible for
of planned economic affairs - to the extent that countless number of people to establish and
public enterprises were plenty and private sector operate an industry based on a registration
participation in any economic affairs minimal. requirement at either the Department of
Such structure of governance had visible Industries or Department of Small Cottage and
results in terms of increased poverty, balance Small Industries based on the nature of the
of payment deficits, growing unemployment business activity (Pradhananga, 2007). The
rates, among others which gave rise to a new Industrial Enterprise Act in Nepal was thus
era; one propelled by a fundamental belief that introduced to enable individuals to participate
government failure is a bigger evil than market in economic activities and to contribute to
failures (Rodrik, 2004). Privatization, private economic growth of the nation with the
sector participation, deregulation in terms of realization that the state is not omnipotent and
both doing away with unwanted legislation private sector participation is imperative to
and from regulatory capture, and opening of attain economic prosperity.
boarders became the new norm post second
During this period, attributable to the absence
half of the 20th century (Kessides, 2004).
of legislations regarding limited liability
Nepal’s own experience conforms to this companies, the IEA classified industries based
phenomenon, with reforms particularly in on the nature of operation, and capital of the
terms of deregulation and greater private entity. It served as an essential tool for providing
sector participation beginning only as far back legal status to entities and for availing any facility
as 1989. This first generation of economic and concessions accorded by the government
reforms in Nepal was propelled by the of Nepal. In order to provide specific incentives
lackluster performance of public enterprise and to industries that were deemed as important
the overall state of the economy (Khatiwada for employment generation, like tax and credit
& Acharya, 2003). During the time, some concessions and relaxation of compliance
sweeping reforms were instituted and different requirements, the act provided an exhaustive
acts and policies were promulgated to ensure list of businesses based on their nature of
greater private sector participation in the operation. The incentives and concessions
economy. provided by the IEA were specifically designed

54
 Rethinking Industrial Enterprise Act
- Ayushma Maharjan

as per the nature of operation of businesses. The current provision of company registration
For instance, manufacturing industries were in Nepal as per the Companies Act requires
provided the facility of input tax credits all companies to be registered at the Office
upon export of products, while many of the of Company Registrar for legal recognition.
regulatory compliance requirements were However, in order to acquire operating license,
relaxed for small and cottage industries. The the companies need to be re-registered at the DoI
act also consisted of a list of businesses that under the IEA. The IEA has classified 8 broad
required additional approval from Department sectoral categories and 167 sub-categories
of Industries before registration, like business under which these companies need to be
activities that were deemed of national registered. This diverges into two implications
importance such as production of weapon, – all companies that fall under the sectoral
and defense projects. classification need to re-register themselves at
the DoI and need to comply with the legislation
The clauses mentioned in the then Industrial and only those companies that fall under the
Enterprise Act facilitated the then entrepreneurial sub-categories are acknowledged. Both can be
environment and was necessarily a step in the regarded as a primary barrier for enterprising
right direction pre-supposed on the belief that and innovation in Nepal.
necessary changes would be made in light of
the changes to come in the future. This implied The intention behind the classification of
that after the advent of different relevant policies companies in the IEA at the moment seems to
like the Companies Act, the scope of IEA be to follow in the footsteps of the erstwhile
should have been reduced. On the contrary, IEA, 1992, that is, to provide incentives and
today, the act regulates almost all types of concessions based on certain regulatory
businesses in Nepal. The broadened scope compliance. However, IEA has failed to
of industrial enterprise act and its existence comprehend that specifically detailing out the
amongst a plethora of other legislation means businesses that require industry registration
that the compliance and cost for registering undeniably sends a signal to regulatory
and operating an enterprise in Nepal has only agencies and bureaucrats that any business or
increased over time. The barriers that IEA has venture not mentioned in the sub-category is a
been creating towards enterprising is against non-permitted activity.
the notion on which the act was first established.
Given that, all companies, from ferocious metal
producers to food stalls and beauty salons need
to be registered as an industry in Nepal, and
need to comply with the same complex and
The Current Impact of
costly registration procedure, which can take
Industrial Enterprise Act in indefinite period of time. There are instances
Nepal where it has taken more than 30 days for
industrial registration alone. Meeting all
Three decades have passed after the enactment compliances - company registration, acquiring
of the first Industrial Enterprise Act in 1992. special permits, licensing and tax registration
In the given time, the act has been replaced imply that it takes six to seven months on
twice, but with each subsequent amendment its average for a business idea to materialize
scope has become broader – the number of in Nepal. Citizens from all corners of the
companies regulated by the act has expanded. country need to travel to the federal capital for
a majority of these processes. However, this

55
ECONOMIC FREEDOM
A Compendium of Essays

still does not guarantee success. For instance, It is apparent that the broadened scope of
founders of a potential company ‘XYZ’ (name IEA is obstructing innovation in Nepal. It
not revealed on purpose) wanted to create a is especially difficult for small and medium
platform for tourism enterprises to connect with enterprises and start-ups to comply with the
their customers. But such a platform had never legislation. Should an aspiring entrepreneur
been seen before, and were not classified under get past these legislative barriers, all is still
the IEA. Despite visiting multiple agencies and not rosy. Semi-annual reporting to the DoI,
hiring eleven lawyers, the company failed to mandatory Corporate Social Responsibility,
get registered. With no guarantee of success, additional permissions for expansion or
as seen in the case of company ‘XYZ’, that is change in nature are some more burdens that
too high a degree of uncertainty and forgone await the entrepreneur. Ironically, a policy that
opportunity for an average Nepali that makes was first enacted as Nepal entered a period of
a mere $3 a day. For them, the security of a liberalization now poses a threat to innovation.
menial job, however little it pays, far exceeds
the cost of uncertainty. Consequently, Nepal has seen an upsurge
in informal enterprises, which accounts to
In another case, Lorik Prasad Yadav, a local approximately 60 percent of the economy.
of one of the poorest regions in Nepal where Many others opt for partial legality – registering
everybody engages in subsistence agriculture, only under Companies Act. As such, they try
came up with an innovative idea to free up time to avoid falling under the government’s radar.
for his fellow villagers. Where women walk However, this has its own implications.
four hours every day just to make it to the mill
and back, he purchased a tractor and installed The companies that fail to register at DoI under
a mill on it to offer door-to-door service. IEA are not eligible to receive many of the
Faced with a disruptive competition, stationary facilities that are granted to Industries1, like
mill operators colluded and lobbied with the income tax exemption for certain years from
government to shut down Lorik’s enterprise. the date of operation, facility to receive tax
Their weapon of choice – the mandatory credits on input costs, and land acquisition
provision of having to produce a business’s facility, to name a few. This practice of
permanent address to the Department of providing concessions to only those businesses
Industries (DoI) before it can be deemed as a registered as industry, in essence, provides
lawful enterprise. As a mobile mill operator, an unfair advantage to existing industries.
Lorik could not comply with the legislation. In While the existing and established industries
a world that is fast changing with unforeseen will be subject to additional benefits, the new
levels of advancements in technology, the IEA companies will have no support to compete
in Nepal is creating hindrances as the people and sustain. As a result, in the absence of
try to lead a prosperous life. The IEA completely any concessions and facilities for innovative
disregards the fact that innovations can move practices, existing industries can shield
faster than legislators. themselves from a much-needed competition,
which can decrease their incentive to innovate.

1 The general consensus now is that enterprises need not register themselves as an industry even if they as mentioned
as an industry in the Industrial Enterprise Act, however it is merely a practice adopted by the Department of Industries
as concerns with regards to the time taken for registration of industries and post registration compliances were raised
by the private sector and not explicitly stated in the IEA. IEA requires business activities mentioned in the Annexes of
the act to be registered as Industries.

56
 Rethinking Industrial Enterprise Act
- Ayushma Maharjan

Also, innovative businesses after failing to Fundamentally, the rationale for industry
register themselves as an industry have limited registration stems from the need for a higher
avenues of finance. The informal or partial degree of standard for safeguarding public
legal status of the companies will make it health. Consider the following example, a
difficult for them to access finance through business that manufactures ferocious metals
formal channels. Additionally, in order to bring must have in place some mechanism that
in foreign investment in Nepal, it is mandatory ensures (i) protection of the workers from
for companies to be registered under IEA2. potential hazards during the manufacturing
Essentially, with restrictions in accessing capital phase (ii) protection of the environment from
for enterprising, these companies have no possible emissions and (iii) protection from
prospect of scaling up. any hazards that a consumer of such product
may face. In such a circumstance, some form
The aforementioned arguments indicates that of standard would indeed be required which
IEA is creating significant barrier towards a) requires adherence by the business and b)
enterprising in Nepal, especially for small imposes a duty on part of the regulatory agency
and medium enterprises. Furthermore, its role to ensure that such standards are followed.
in contributing to factors like discouraging Not all businesses however would require such
innovation, limiting competition, increasing higher degree of standards, for instance, a
informality, and limiting access to finance has beauty salon. What follows thus is quite simple
hindered the growth of both the nation and its – only those businesses that manufacture
people. products that would require a higher degree of
standard for public and environmental safety
require registration as an industry. Other
businesses can, in-fact, proceed only with the
Rethinking the Industrial remaining registration requirements.
Enterprise Act An argument for the removal of such redundant
provision of industry registration can also be
Given the inflexible and unbending nature of
made based on the fact that sectoral licensing
the IEA towards the most recent needs of the
requirements distinct from the industry
general Nepalese, amendment of the existing
registration process are already present in
provisions to limit its scope seems to be the
Nepal. This connotes that the goal of ensuring
most prudent alternative.
the imperative safeguards for companies that
actually need to be registered as an industry
A familiar system of industry registration also
is already put in place and other form of
exists in India. However, the Indian practice
companies should be allowed to do away with
is visibly simpler with only five categories of
the industrial registration.
industry requiring registration. This number
has steadily decreased since 19913 with mere
For the same, the current IEA needs to be
18 businesses requiring industry registration
amended by the Ministry of Industry. Section
instead of all companies.4
2 of the act which mandates registration of all
companies at the DoI needs to be reformed such

2 See Foreign Investment and Technology Transfer Act, 2019

3 See Industrial Development Regulation Act, 1951 of India and its subsequent amendments and notification
4 Amendments in Industrial Development Regulation Act, 1951 in India were part of a series of reforms that were
initiated in 1990s as part of the liberalization process.

57
ECONOMIC FREEDOM
A Compendium of Essays

that this registration is optional. The annexure providing opportunities for youngminds to
which consists of the 167 sub-categories of experiment, learn and work towards earning
enterprises should also be reformed into a much decent livelihoods in their homeland.
shorter list of enterprises that have implications
on public and environmental safety. Enterprises
that are not specifically covered in this annexure
should be acknowledged as not requiring DoI Bibliography
registration altogether. Furthermore, the tax
and concessions should be based on the size Evans, P. (1995), Embedded Autonomy: States
of capital of the business rather than the proof and Industrial Transformation, Princeton, NJ:
of industry registration. This would require, Princeton University Press
tax and concessions to be provided through
the Income Tax Act and Finance Act of Nepal Stigler, G. (1971), The Theory of Economic
rather than the IEA. Regulation. The Bell Journal of Economics
and Management Science, 2(1), 3-21.
The amendment will also have another doi:10.2307/3003160
significant implication. Currently, the local and
provincial governments of Nepal are preparing Kessides, I. (2004). Reforming Infrastructure
their own IEAs. However, there are limited : Privatization, Regulation, and Competition.
options on part of sub-national governments Washington DC: World Bank and Oxford
to address issues pertaining to industrial University Press.
development within their own territory, as their
legislation cannot contradict with the federal Kharel, P., & Dahal, K. (2020). Small and
law.5 A limitation therefore, to the scope of Medium-Sized Enterprises in Nepal: Examining
the IEA, could act as a catalyst for the sub- Constraints on Exporting. Manilla: Asian
national governments to come up with their Development Bank.
own policies, paving way for a healthy policy
Khatiwada, Y., & Acharya, M. (2003).
competition among local governments. There
Structural Adjustment Policies and Poverty
is also a greater chance for inter-governmental
Eradication. Kathmandu: Institute for
learning and knowledge transfer through the
Integrarted Development Studies (IIDS).
possibility of seven unique policies and inter-
linkages to be formed between provincial Ministry of Commerce and Industry. (1951).
governments and business sector.6 Industrial Development Regulation Act.
Government of India.
Should the said reforms materialize, the huge
capital and energy that would otherwise be Ministry of Industry, Commerce and Supplies.
consumed for registration procedure could be (1991). Industrial Enterprise Act. Government
utilized to putting innovation and ideas to test. of Nepal.
In a country where, 1500 young people go to
the gulf region every day in search of economic Ministry of Industry, Commerce and Supplies.
opportunities, such will be a sign of a country (1992). Industrial Enterprise Act. Government
of Nepal.
5 See Constitution of Nepal. Bagamati Province, Gandaki Province and Province 1 have enacted Industrial Enterprise
Act, however, the act is identical to the Federal Law.
6 This is crucial in terms of creating an industrial policy that is embedded with a network of private enterprises. See
for instance Evans, P, Embedded Autonomy: States and Industrial Transformation, Princeton, NJ, Princeton University
Press, 1995.

58
 Rethinking Industrial Enterprise Act
- Ayushma Maharjan

Ministry of Industry, Commerce and Supplies.

(2020). Industrial Enterprise Act. Government
of Nepal.

Ministry of Industry, Commerce and Supplies.

(2019). Foreign Investment and Technology
Transfer Act. Government of Nepal.

Ministry of Law, Justice and Parliamentary

Affairs. (2015). Constitution of Nepal.
Government of Nepal.

Pradhananga, M. (2007). A Review of Trade

and Industrial Policy in Nepal. Kathmandu:
South Asia Watch on Trade, Economics &
Environment (SWATEE).

Rodrik, D. (2004). Industrial Policy for

the Twenty-First Century. Cambridge,
Massachusetts: Harvard University.

59
 with sharing ( (Lobel, 2018). Nevertheless,
despite its nature, it has indeed facilitated
exchanges, reduced fixed costs, transaction
costs and resulted in consumer surplus. All
businesses that operate under this model fall
under the category of sharing economy.

Till date, two distinct business practices can be

said to have gained the most success through the
emergence of sharing economy. One pertains
to the provision of short-term lodging offered
by house-owners in a manner akin to hotels/
motels while the other pertains to provision
of transportation services by private vehicle
owners. In both cases, an external firm often
termed as aggregator exists which facilitates
Ride-sharing transactions between potential suppliers
and consumers for a small percentage of the
Businesses: transaction (commission).

Nature and Despite the misnomer it carries, sharing

economy nonetheless has proven itself to have a
Regulation range of efficiencies. More specifically, sharing
economy is efficient on three fronts: i) reducing
transaction costs ii) efficient pricing mechanism
and iii) efficient allocation of resources. These
- Yatindra K.C efficiencies have been well documented and
even tested to say the least. To that extent it
need not be reiterated.

I. Introduction The emergence of such marketplace however

has been met with differing practices across

T he concept of sharing economy revolves

around turning used or underutilized assets
into productive resources facilitated through
several jurisdictions. While some have
sought to facilitate it, others have simply
applied pre-existing regulations to the newly-
peer-to-peer marketplace over the internet formed marketplaces1. The latter case seems
(Ducci, 2020). Naturally, a great deal of firms to have been fueled by political opposition
have found success in what has somewhat from established competitors. Critics of the
been wrongly termed as “sharing economy”. marketplace and incumbents of the current
Sharing, connotes a romantic ideal of marketplace cite numerous issues such as
collaborative and anti-corporatist exchanges. taxes, rights of third parties and safety of the
In reality however, the sharing economy is consumers as a justification for imposition of
controlled by multibillion dollar corporations regulation. Indeed, some regulation may be
with profit minded goals that have little to do required despite the efficiencies accorded by

1 Case in point being the use of taxi regulations in the ride sharing marketplace.

61
ECONOMIC FREEDOM
A Compendium of Essays

the newly-formed market. However, the crucial businesses have been met with opposition
question remains as to the design. The answer from the market players of the traditional
to such question remains the fundamental goal transport industry. There has been greater call
of this paper. More specifically, in the sections for application of the regulation of traditional
to follow, only one business i.e. ride sharing transportation industry (fare and quantity) to
under the broader gamut of the sharing ride-sharing businesses given the similarity in
economy will be analysed in this endeavor. services accorded.

For decades transport regulations, specifically

taxi regulations, have sought to regulate
prices as a justification for correcting market
II. Ride-sharing and
imperfections i.e. information asymmetry and
traditional transportation anti-competitive practices, and the quantity
industry supplied as a justification for limiting negative
externalities i.e. congestion and pollution
It must be stated at the very outset that the term (Cetin & Deakin, 2017). Empirical evidence,
ride-sharing is also a misnomer. While in its however, points to the ineffectiveness of such
strictest sense, ride-sharing would connote a regulations and yet they continue to exist in
business which simply acts as an intermediary many jurisdictions. Perhaps, such existence
to facilitate individuals travelling on the same is affirmation of the claim, “regulation is a
route by allowing them to share the costs of product of the marketplace like any other, and
the travel and/or the vehicle in question, the it is acquired by industries and is designed
current model however is more akin to sourcing and operated solely for their benefits” made
of rides and hailing of rides through the use of by George J Stigler in his seminal work, “The
the intermediary for a certain fee in the form Theory of Economic Regulation (1971)”.
of commission. In that sense, companies such Interestingly, regulations are often justified
as Uber, Pathao, Tootle can be appropriately for the purpose of advancing public interest
termed as e-hailing services or ride-sourcing and correcting market imperfections, yet their
services. However, given its prelevant use, the effects to a larger degree have been solely the
term ride-sharing is used throughout the paper. opposite.

The emergence of such companies has proven In an ideal situation, the exchange between buyers
to be disruptive to the transportation industry. and sellers would lead to optimum allocation of
On average, the cost of travel has reduced the resources central to the exchange and its
as traditional transportation services have price. However, inherent imperfections often
been forced to lower their fares owing to the lead to less than optimum allocation. Indeed,
growing popularity of ride-sharing businesses. correction of such imperfection can also arise
Additionally, the use of private vehicles to through the marketplace. But the risk of such
accord transportation services has also meant correction not happening or being delayed is
reduced fares in comparison to traditional so tantamount that some form of intervention is
transportation services as there are no fixed often sought. Such intervention is sought from
costs associated with ride-sharing which is an entity that has coercive power to enforce the
the defining feature of a sharing economy. said intervention i.e. government. Nonetheless,
Moreover, the efficiencies existent in the many instance of the recent past point towards
sharing economy has also resulted in increased the failure of said interventions in correcting
consumer surplus. However, ride-sharing imperfection. Part of the reason why the said

62
 Ride-sharing Businesses: Nature and Regulation
- Yatindra K.C

occurs is the relative lack of knowledge on is the private vehicle (Ducci, 2020). The role
part of the intervening force in understanding of the platform is facilitating the exchange
the marketplace. In other words, this is the between buyers and sellers through the use of
information asymmetry between the regulated technology.
and the regulator (Beesley & Glaister, 1983).
As such, a “one size fits all” regulation leads The platform can take one of three structures
to a less-than-ideal situation. As one would – one-sided model, hybrid model or a pure
expect, regulation of the sharing economy and two-sided model. Each structure has its own
more specifically regulation of firms providing implication regarding regulation owing to
transportation network facilities as part of the its fundamental characteristics. What will be
sharing economy, must not envision application clearer through further deliberation is that
of pre-existing transportation regulation. It most ride-sharing businesses take the form a
therefore becomes essential to first understand hybrid model distinct from one-sided model
the nature of the market place in order to and a pure two-sided model and additionally
regulate it for the purposes of limiting its characterized by a centralized pricing
imperfections. mechanism.

In a pure two-sided model, the platform’s role

is limited to an intermediary. Independent
III. The design of ride-sharing drivers, through the use of platforms, are
businesses matched with the consumers, and many of the
crucial decisions are made by the drivers and
Ride-sharing businesses center around three consumers themselves. In a pure two-sided
principal players – the platform, which provides model, the drivers set the parameters of price
the marketplace, and the buyers and sellers to be charged and in theory, multiple drivers
who transact on it (Einav, Farronato & Levin, could have multiple parameters. The platform in
2016). In addition to this, it facilitates the use this instance performs the function of matching
of underutilized asset in a productive manner. drivers to the consumers, and the efficiency of
In case of ride-sharing, the underutilized asset the platform will depend upon the thickness of

Alternative structures in ride-sharing business

One-Sided Model Hybrid Model Pure Two-Sided Model

Vertical integration through Hybrid contractual A competitive marketplace
employment of drivers or arrangements on the supply for independent drivers
autonomous vehicles side including centralized and passengers
pricing with independent
drivers; forms of employment
based on commissions;
partial vertical integration
(competition between
independent drivers and
employed drivers or
autonomous vehicles)

Source: Ducci (2020)

63
ECONOMIC FREEDOM
A Compendium of Essays

the platform itself. In that sense, a major role of placed on the users of the platform. While in a
the platform is creating thick networks to take pure two-sided model the platform would only
benefit of the indirect network externalities. act as a facilitator, in the prevailing hybrid
structure, some form of control is retained by
the platform in the form of pricing mechanism
which is determined by a complex algorithm.
As Ducci (2020) appropriately stated, the pure Additionally, unlike the one-sided model, the
two-sided model was not feasible in case of the drivers are not employed by the platform; they
traditional taxi industries owing to information are as is in the case of two-sided model, free to
asymmetries and large transactions. However, work in any number of platforms they choose.
the model of sharing economy has changed Pricing mechanism is retained by the platform,
many of these assumptions. The decrease in and it can even be argued that platform is
search and bargaining costs has resulted in better suited to determine the equilibrium fare
lesser transaction costs while there exists greater because of its enormous capacity to process
asymmetries in information owing to the use of large amounts of data pertaining to rides
technology. The platform can earn its fees as a requested and available drivers. This hybrid
facilitator by charging an annual subscription structure is crucial for designing regulations.
fee. The central feature of this model remains
the delegation of key powers to the drivers and Traditional transportation regulations have,
consumers, especially the power to set prices to a varying degree, sought to eliminate
which often leads to competition between particular imperfections. Price fixing and
drivers. licensing requirements are among the chief
tools used to regulate the said industry (Joskow
The one-sided model is characterized by and Rose, 1989). Although a ride-sharing
vertical integration between the platform business indirectly offers transportation
and the drivers. Additionally, the drivers are services, their design is such that they have
employees of the platform. This model is closer eliminated imperfections that would otherwise
to the authorized online retail businesses such arise in the traditional transportation industry.
as the Apple store. The sections that will follow will discuss
more on the imperfections of the traditional
Hybrid marketplace is distinct from a single- transportation industry, the regulations sought
sided platform. It allows parties having and the elimination of such imperfections in the
unused asset to transact with potential buyers ride-sharing business.
as opposed to facilitation of retail business
through the use of platforms. Additionally, it is
also distinct from a pure-multi-sided platform
where the platform only acts as a marketplace IV. Information asymmetry
having minimal role in matching buyers and
sellers (Ducci, 2020). Ride-sharing businesses
and the call for price
as Ducci (2020) correctly pointed out, operate regulation
on a hybrid model of platform which is
characterized by contractual agreements George Akerlof’s paper, “A market for lemons:
between the platform and the driver, the Quality Uncertainty and the Market Mechanism
platform and the rider, and the driver and the (1970)” was a revolutionary scholarly work
rider. As opposed to a pure two-sided model, that examined the effect of limited information
in the hybrid model, certain restrictions are on part of one party to the transaction over the

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entirety of the market for such good. Markets vehicle. Only the rider can know about
function better when both parties have sufficient the quality of their vehicle and absent any
relevant information. However, it is rarely the mechanism for inspection or quality control, a
case. Often, the seller has more information, situation akin to one presented by Akerlof can
which leads to problems of adverse selection possibly exist. Additionally, the unique structure
where the incentives in the market favor low of the sharing economy creates a multisided
quality; if the problem is severe enough, the informational asymmetry i.e. the driver does
market itself may dissolve (Akerlof, 1970). not know of the passenger and vice versa.

Information asymmetry is also a problem of Sharing platforms vis-à-vis ride-sharing

the transportation industry. The driver has businesses rely largely on building thick
more information about the route of travel networks i.e. large number of buyers and
and the actual cost of travel. Absent the same sellers and maintaining the thickness of the
information on part of the customer, the driver network in order to gain network externalities.
can overcharge. A correction of this measure To that extent, trust among buyers and sellers
is sought through a predetermined fare is an essential part of the business model. As
system. The rationale that follows thus is that opposed to the traditional model, in case of
predetermined price gives more information ride-sharing very little opportunity to inspect
about the cost of the ride to the customer (Cetin the quality of the vehicle exists. Therefore,
& Deakin, 2017). trust becomes an essential factor in facilitating
exchanges. Although the existence of
The problem of information asymmetry that information asymmetries cannot be denied in
pertains to the transportation industry is the sharing economy and many of its business
not applicable in its entirety to ride-sharing models, the success of such businesses also
businesses. While one would expect information points towards amelioration of asymmetries.
asymmetries to exist in the sharing economy Businesses such as ride-sharing have been
vis-à-vis the ride-sharing business, the growth quick to make use of technology as a means
of sharing economy clearly points otherwise. to establish mechanisms that establish trust and
To a larger degree, there is more information create greater information for both the riders
available to both the driver and the customer. and consumers to access.
This has happened because ride sharing
platforms over the years have made use of the The mechanisms used are of two types. To the
available technology to make information as first category belongs the use of rating system,
symmetrical as possible. In the current scenario, where both the rider and the customer can rate
both the driver and the customer know before- each other on a variety of parameters. These
hand the cost of the trip which is displayed ratings in-turn showcase the desirability of a
in the application software developed by the particular rider or a customer based on an
platform. Moreover, pricing models reflect the average of ratings and reviews received and
demand and supply of the particular moment, assignment of number ranging from 1 to 5
which serves as an essential tool for matching with 1 being the least and 5 being the most
potential buyers and sellers. desirable. Platforms and its users can also
make use of third-party rating agencies, which
Aside for the asymmetry in relation to the price can offer an unbiased review. Moreover, as the
of travel, a further asymmetry also exists in ratings themselves can reflect on the desirability
terms of the quality of the product itself; in case of the platforms, there exists a greater incentive
of ride-sharing, the quality of the transportation for platforms to act on the basis of the feedback

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received in order to maintain its thickness. certain minimum standards to be existent in

the vehicles. The latter requirement does very
To the second category belongs the use of little harm; in reality minimum standards often
minimum standards to be fulfilled before send out a signal of safety to the consumers.
entry. Platforms themselves can impose some The same however is not true with regards to
minimum criteria which can include proper limiting the supply of vehicles.
vehicle condition, no known criminal history,
credit history etc. These are more direct Restrictions on entry to the transportation market
interventions which seek to promote trust by have been found to increase the monopoly
buyers and sellers by sending a signal about rents gained by the pre-existing players of the
the quality of the platform. In that sense, the marketplace (Çetin and Eryigit, 2013; Koehler,
platform substitutes the reputation of buyers 2005; Eckert, 1973). Moreover, the structure of
and sellers for its own reputation (Federal the market itself becomes monopolistic in nature
Trade Commission, 2016). because entry restrictions themselves increase
the cost of licenses required. In addition to this,
While rating systems do not eliminate the rent seeking results in distortionary effect of
information asymmetries existent, they seem the regulation itself. Naturally, it also leads to
to ameliorate asymmetries to such a degree pre-existing licensee lobbying to protect their
that markets tend to function better and more interests.
efficiently. In fact, a large number of empirical
researches also suggest that rating systems Sharing economy however, as stated earlier,
influence buying behavior and weed out revolves around the use of underutilized asset. In
potentially fraudulent activities. To that extent, other words, in case of ride-sharing, the existing
price regulation as a justification for limiting vehicle finds a newer use i.e. private vehicle
information asymmetry cannot be envisioned being used to offer transportation services or
in the making of any policy concerned with the for commercial purposes. In contrast to the
regulation of ride sharing businesses. Likewise, traditional transportation industry, the owner
maintaining the current system of price of the vehicle uses the vehicle for both private
description before-hand and rating system purpose and public purpose, as opposed to
must be given continuation or even deemed to the use of vehicle in the transportation industry
be mandatory. for only public purpose. The resulting effect is
such that, an additional vehicle is not added,
but rather the same vehicle is used for two
purposes. Moreover the problem of congestion
V. Negative externalities and is reduced, albeit not eliminated altogether. To
that extent, a certain charge for congestion can
the call for limiting supply be levied which will lead to proper allocation;
restrictions on supply nonetheless must be
Negative externalities generated by
avoided altogether.
transportation vehicles are of two kinds. The
first pertains to the level of congestion created The underlying feature of the sharing economy
by an additional vehicle and the second relates vis-à-vis ride-sharing also leads to reduced
to additional pollution, both air and noise. To fixed costs which are the central basis for
tackle such externalities, regulatory agencies offering of services at a competitive price. More
have used licensing mechanisms that a) limit so, when the fixed costs are reduced in addition
the supply of the vehicles and b) require to ease in entry, the monopoly rents charged

66
 Ride-sharing Businesses: Nature and Regulation
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also get reduced, leading to greater consumer justified for limiting anti-competitive practices
surplus. It therefore seems only essential and and furthering consumer interests.
logical to allow multiple uses of the same asset,
i.e. use of private vehicles for public purposes, Acquisition of monopoly power is perhaps
something which is outright prohibited in most the most extreme form of anticompetitive
jurisdictions. power; naturally regulations often seek to limit
it. Nonetheless, the measures used may be
While licensing requirements lead to reduced inefficient to the extent that it limits competition
consumer surplus and monopolistic nature of altogether rather than promoting it. Regulations
the marketplace, it also serves a key function in therefore have been justified in the transport
the form of collection of data as to the number industry specifically where firms operate a
of operators. The importance of such data dispatch system for transport2 owing to the
cannot be denied; it may range from taxation assumptions of existence of natural monopolies3
for congestion or levying of certain fees, as a form of market failure. The tool used is
to ensuring a form of check in cases of any price regulation/fare regulation. However,
criminal activities. To the aforesaid extent of such assumption has been proven to be wrong.
such use, an enlistment certificate can be given
out as is practiced in Bangladesh. Regulations It might therefore be of crucial importance
however must ensure the balance between, the also to determine whether or not natural
collection of data and the relative procedural monopolies in the sharing economy vis-à-vis
hassle in providing such information, with ride-sharing business can exist. Undeniably, a
special focus on reducing the latter. platform for sharing economy such as the ride-
sharing platform creates an indirect network
externality, i.e. change in benefit or surplus,
that an agent derives from a good when the
VI. Anti-competitive practices, number of other agents consuming the same
good changes. In the case of ride-sharing,
consumer protection and the addition of one driver would reduce the
regulations waiting time for customer, while the addition of
one customer reduces the idle time for drivers.
Innovation that is disruptive, greatly benefits If such externalities are strong and continue to
consumers, yet many regulations have come that add value even at a large network size, the
burden innovation and become a formidable dominant platform will be the one with larger
barrier to entry and entrepreneurship. On the network and eventually, such platform may be
other hand, any business cannot be permitted the only one efficient to provider of the good,
to carry out or engage in deceptive and unfair thereby creating a natural monopoly (Ducci,
practices for the sole reason that they foster 2020).
innovation (Federal Trade Commission, 2016).
Regulations therefore need to protect consumer However, the continuation of positive network
interests while also being able to foster innovative externality giving rise to natural monopoly is
practices. Against this backdrop, regulation is implausible. Although it may be required to
2 Firms that operate radio taxi services, with a large fleet under their ownership.
3 A natural monopoly arises when average costs are declining over the range of production that satisfies market
demand. This typically happens when fixed costs are large relative to variable costs. As a result, one firm is able to
supply the total quantity demanded in the market at lower cost than two or more firms—so splitting up the natural
monopoly would raise the average cost of production and force customers to pay more (Principles of Economics,
2016).

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scale operations during the initial phases of VII. The common area
operation where increasing the number of of regulation of
consumers and drivers both help build reliable
network and reduce waiting times, after a transportation industry
certain point the network externalities become and sharing economy
negligible such that they will not give rise to
4

natural monopolies (Ducci, 2020). Despite the differences between the

transportation industry and sharing economy
A key feature of the sharing economy is non platforms offering matching services, there
exclusivity i.e. the users of the platform can are nonetheless some similarities between
interchange between platforms. This applies the two that call for application of similar
to both the supplier and the consumer. For regulations in both industries. In fact, relevant
instance, in case of a ridesharing business, the experts in the field of sharing economy
driver is free to operate on multiple platforms, will agree that ride-sharing businesses and
while the consumer is also free to choose their traditional transportation industry offer similar
service from multiple platforms. The benefit that services, which calls into question the common
accrues from this mechanism is that it promotes applicability of regulations concerning the
competition which inevitably leads to lower safety of the passengers/consumers. Specific
fares charged. However, it is also in the best regulation such as passenger liability insurance,
interest of the platform to promote exclusivity background checks of the drivers will therefore
because platforms rely on developing large be applicable in both cases.
and reliable networks for their revenues. Given
that positive network externality is generated However, sharing economy often blurs the line
as the size of the network expands, platform between personal services and professional
may pursue mechanism to maintain exclusivity services accorded and therefore it becomes
which makes the market less competitive. harder to apply regulations based on personal
Regulations therefore have a great role to play safety which was largely designed for
in fostering competition by outright prohibiting professional services i.e. taxis to a marketplace
any form of mechanism that leads to exclusivity. that provides personal services i.e. private car
owners providing taxi services in their personal
With regards to protection of consumers, many capacity (Federal Trade Commission, 2016).
jurisdictions have mechanisms in place. These Tailoring of regulations in this light therefore
mechanisms relate to legislations pertaining to becomes important, an approach that can be
contractual obligations and tortuous liability in taken will focus around using the platforms
case of any harm or injury. Such mechanisms own rating system coupled with the specifically
can indeed be given continuity, and to a larger designed safeguards for consumer protection
degree, will be applicable to ride-sharing that reflect the personal nature of services
businesses after all the business is signified by accorded.
a contractual relation between all parties.

4 For instance having three vehicles that could match a single passenger’s request or having fifteen vehicle match a
passenger’s request does not create any substantial difference.

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VIII. Specific area for IX: Concerns for Level playing

regulation Field and Regulatory
capture
Sharing economy platforms operate over
the medium of internet, and as part of their Misguided government regulation can often be
operations, they require collection of large a burden to innovative practices. The model in
amounts of data pertaining to all participants which ride-sharing businesses operate is one
of the marketplace. This gives rise to justified of sharing economy. Many of the aspects in
concerns regarding a person’s privacy. To what relation to regulation of the sharing economy
extent should data be collected, the purposes vis-à-vis ride-sharing businesses are yet to
for which it can be used, confidentiality of data be carved out. The situation is a result of the
collected, are all crucial questions that are evolving nature of the business itself and the
fundamental to the operation of the platform initial and the nascent stage of the model in
itself. Concerns about privacy are however not which the business operates. A natural threat in
unique to platforms. They are, as a matter of this instance is incumbent seeking protectionist
fact, applicable to all entities working over the measures in order to protect their own markets.
internet and to entities that require some form The threat of regulatory capture and entrants
of information to carry out any transaction. into the ride-sharing business lacking resources
As such, platforms can be seen as having to fight back can lead to consumers not being
fiduciary relationships with the users which able to reap the benefits of disruptive innovation
includes duty to act in the best interest of the (Federal Trade Commission, 2016).
users established through a relationship based
on trust on economic dependency (Federal In jurisdictions where the transportation industry
Trade Commission, 2016). However, some is heavily regulated in terms of entry and fares,
form of safeguard despite the establishment of a natural concern regarding the competitive
fiduciary relationship is required. advantage accorded to ride-sharing businesses
through non-applicability of pre-existing
Several researches (see for instance Xi et al, regulation arises. Ride-sharing businesses may
2014; Sweeney, 2002; Niels et al, 2012; gain an unfair competitive advantage derived
Sanchez et al, 2015) have provided models that not from superior foresight, skill, or business
can address privacy concerns while ensuring acumen, but from unequal regulatory treatment
that matching of users of the platform remains or from application of separate set of rules or
intact. Although, such models can increase costs spontaneous private deregulation (Federal
incurred on part of the platform, not ensuring Trade Commission, 2016). It is even suggested
concerns relating to privacy can result in loss that all competitors within a market should face
of revenue given the competitive nature of the the same regulatory circumstances. However,
market and non-exclusivity of users. Regardless the key differences between the two industries
of such incentive to adopt mechanisms for make it difficult for application of similar rules.
maintaining privacy, some form of minimum Moreover, applications of similar rules can
standard that balances concerns of privacy in reality take away the distinctiveness of the
and the need for information by platforms to marketplace itself. The excessive regulation
operate efficiently is also required. placed on the traditional transportation industry
has undoubtedly led to massive entry costs. In
light of such costs, a concern is often raised
by the incumbents of traditional transportation

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industry in relation to the remuneration of lobbying from the incumbents of taxi industry
such costs and the unfairness resulting from and calls for equal treatment between both
the absence of such costs in the transportation businesses have meant that ride-sharing
industry. In that case, regulators could indeed businesses have had to operate in jurisdictions
tone down on the regulations imposed on the that have recognized the distinct characteristics
traditional transportation industry as a means of business model.
to create a level playing field. It has been
widely recognized and proven that regulation When regulatory regimes have accommodated
of the transportation industry only leads to ride-sharing business, they have often included
reduction in consumer surplus and acquisition substantial reductions in the extent of regulation
of monopoly rents. applicable to traditional taxi industries in order
to establish an equal footing. Moreover, a
Incumbents will indeed suffer significant losses fundamental question that most regimes face in
owing to their high fixed costs. However, the regulating ride-sharing businesses is whether it
potential economic benefits to all the parties is best to establish a single regulatory regime
involved is substantially high enough to warrant for taxis and ride-sharing business or whether
doing away with regulatory measures of an two different regimes should be established.
era bygone (Deighton, 2018). Regulations While the nature of services accorded clearly
should focus on preserving the uniqueness of establish arguments for a single regulatory
the newly-formed market instead of seeking regime, the nature of business points otherwise.
to establish fairness and equal treatment. Geradin (2017) argues that some fundamental
Alternatively, it has been suggested that if the differences between taxis and ride-hailing
question is equity more than equal treatment, make it difficult to design a single regime
some partial form of compensation can be that efficiently addresses both. He suggests
given out through non regulatory measures that different regulatory requirements may be
(Deighton, 2018). Such an approach will needed but argues that consistent approaches
take the form a levy on all rides accorded for should be adopted as far as possible. An
a certain period of time (see for instance the example of this approach is that of India,
practice in Melbourne and Sydney) which identifies several categories of public
transportation under the Motor Vehicles and
Transportation Act 1998, with aggregators
being one of them.
X: International practices in
In almost all jurisdictions with regulations in
relation to regulation of
place for ride-sharing, the common theme has
ride-sharing businesses been the application of similar rules to both the
traditional transportation services and ride-
Practices relating to ride-sharing have varied sharing in areas that would require common
across jurisdictions. While countries like Estonia regulations. These pertain to the application
and Finland have established facilitative of minimum vehicle standard, mandatory
regulations, at the other spectrum lies France insurance coverage and appropriate license.
that has outright banned the operation of such While some jurisdictions have left these rules to
businesses. These varying practices have, be enforced by the platform themselves others
to a larger degree, resulted from difficulty in have followed a licensing regime.
establishing rules of operation distinct from the
traditional transportation industry. Extensive

70
 Ride-sharing Businesses: Nature and Regulation
- Yatindra K.C

Under a federal structure, sub-national Motor Vehicles Act 1988. Given the federal
governments have taken charge in regulating nature of India and the fact that transportation
ride-sharing businesses. Federal governments falls under the concurrent list, states are bound
have assumed the responsibility of providing by the 1988 Act but are free to formulate their
guidance to sub-national governments in order own rules without deviating from the federal
to ensure a consistent approach. The case for Act. Naturally, the committee report followed
regulation through sub-national governments a non-binding guideline being published by
remains very strong given the varying needs the Ministry of Road Transport and Highways,
of states can be better addressed by state which was adopted verbatim by many states of
governments. India. Interestingly, all vehicles to be used within
the platform of aggregators are vehicles that
Some key practices of Asian states in relation must be registered for commercial purposes
to ride-sharing businesses i.e., under the subcategory of vehicles for
transportation. The committee report also
acknowledges bike-sharing as a valid option
and proposes fostering them. Quite a few
India states have taken note of this and allow bikes
to provide taxi-like services provided they are
The Motor Vehicles Act of India broadly registered as contract carriages under the
classifies vehicles into two categories: Motor Vehicles Act and follow other criteria
which include proper license plate number,
1. Vehicles for transportation which includes
separate attire for identification and following
subcategories
of minimum standards. The following table
a) Public Use Vehicle provides a summary of aggregator adopted
b) Private Use Vehicle: can be used for by states.
commercial purposes in so far as it is
related with immediate business of the
owner but is not allowed to be used on
hire
c) Contract carriages
2. Vehicles not for transportation which
includes vehicle registered for personal
private use. Such vehicle cannot be used
for commercial purposes.

Ride sharing businesses are termed as

aggregator which is defined as a digital
intermediary or marketplace for a passenger
to connect with a driver for the purpose of
transportation. Prior to 2016, most aggregators
were operating under the Information
Technology Act 2000. In 2016 however, the
committee comprised to review existing taxi
policy recommended aggregators also be
registered as agents or canvasser under the

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Summary of key rules adopted by states in relation to ride sourcing applicable for four wheelers

Key Policy/Regulation
Title of Licence Driver Driver’s Data
State Opera- Fare Reg-
Act/Rule Require- Permit Qualifica- Working Sharing/ Others
tions ulations
ments tion Hours Storing
Karnata- The Kar- Minimum Covered Have a As Maintain Permitted Shall not Maintain
ka nataka 100 with a valid stipulated records to be a call
(Transport On-De- taxis with contract commer- by Motor of all the operate higher centre
Secretar- mand permit carriage cial Transport taxis on than and a
iat, Transpor- holders permit driving Workers regarding multiple the fare web por-
2016) tation licence Act 1961 trips platforms fixed tal with
Technol- to drive a made, by the all details
ogy taxi and pas- Govern- of own-
Aggre- have a sengers ment ership,
gators valid travelled services
Rules, PSV and offered,
2016 badge fare col- fare
lected structure,
Maha- Maha- Have reg- Shall be Copy of Shall not Fare cap control
rashtra rashtra istered operated the bills pick up applica- room
(Home City office in under should be passen- ble number,
Depart- Taxi the area “App- main- gers only for etc.
ment, Rules, of its op- Based tained for by street the
2017) 2017 erations City three hailing vehicles GPS/
Taxi months with GPRS-
Permit” engine based
capacity tracking
less service be
than fitted in
2000 cc vehicles
Annual
West Directives Minimum A valid Appropri- Permitted Data Permitted structured
Bengal for On 50 permit ately to log on stored on to training
(Transport Demand consent issued by registered and off at the server operate program
Depart- Transpor- letters the and their have to on
ment, tation from authority licensed discretion be shared multiple
2015) Technolo- permit with the platforms
gies holders of authority
Aggre- public as and
gators, service where re-
2015 vehicles quired in
the public
interest

Source: App Based Shared Mobility: An exploratory survey, 2020

Thailand amendment to the transport legislation was

made in 2005 which created a new category
Two-wheeler vehicles operated largely in the of vehicle i.e. public motorcycle which can be
informal sector providing taxi-like services. The used for transportation purposes. Ride sourcing
transport legislation of Thailand also restricted business however remains a gray area in
the use of private vehicle for commercial Thailand with regulations being proposed and
purposes. Since 2004 however, steps to plans for implementation within this year.
formalize the business have taken place. An

72
 Ride-sharing Businesses: Nature and Regulation
- Yatindra K.C

Bangladesh transportation services is obtaining a

commercial purpose license for the vehicle and
Like most countries, Bangladesh too restricts the meeting background check requirement (which
use of private vehicle for commercial purposes. is optional depending on the jurisdiction in
However, with the popularity in demand for ride question; most jurisdiction have delegated this
sourcing services particularly of two wheelers, authority to the platform itself), other regulations
regulations establishing the legality of the such as taxi operator license, route permit, fare
business have been made. The Ride-Sharing regulation are not applicable.
Service Guideline, 2017 (Date of enforcement,
2018-02-22) allows ride-sourcing services to
operate but they have to either be a public
limited company or a private limited company XI. Ridesharing in Nepal
and need to register with the Bangladesh Road
Transport Authority and obtain Ride-Sharing Ridesharing in Nepal has found a great deal
Service Company enlistment certificate, while of success in recent years. Much of it can
riders need to get a Ride-Sharing Motor Vehicle be attributed to the inadequacies present in
Enlistment Certificate. A VAT of 5 percent is the traditional transportation industry. It has
levied on the services and a license fee is also opened up new avenues of income for many
charged. and true to the nature of sharing economy,
ride sharing business (specifically motorbike
Almost in all instances where ride-sharing has sharing) in Nepal has allowed for a productive
found some legality in relation to their business use of underutilised asset in the form of two-
practices, regulations remain quite the same. wheeler vehicle. Additionally, such use is also
A private vehicle is not allowed to operate for conferred in a personal capacity rather than
commercial purposes. The justification is the a professional capacity. As was the case with
nature of commercial activity; which demands most jurisdictions, ridesharing was also met
certain additional requirements. These with some form of prohibition. Such prohibition
requirements as stated earlier are vehicle fitness pertained to the restrictions placed on the
since the services accorded to any passenger classification of vehicles and the use of vehicle
must not include the services of faulty vehicle beyond the scope of its classification5.
resulting in threat of bodily harm, coverage
of insurance and appropriate background This practice is however as seen above is
checks. To that extent, in many jurisdictions, the not unique to Nepal. In reality, in many
practice of using a specific category of vehicle jurisdictions, vehicles are classified according
as opposed to any private vehicle is prelevant. to their use. Inherent in such classification are
Identification of such vehicle is predominately some minimum standards required for the
done through the use of color coded number scope of work pertaining to the classification.
plates. Most jurisdictions however, have Indeed, such minimum standards are required
adopted a hybrid approach, allowing private in furtherance of the interests of the consumers.
vehicles to be registered for commercial Nonetheless, maintaining minimum standards
purposes provided they meet certain standards. themselves does not require changing the
In such instance, the requirement for providing category of vehicle. The standards that are
5 Motor vehicle and transport Management act of Nepal, classifies motor vehicles into different categories. One such
category is Private vehicle, as is the case with many of her South Asian Counterparts, identification of such vehicle is
done through a distinct number plate. A vehicle classified as private vehicle cannot offer transport services as per the
afore said act, in order to provide transport services, it must be registered as a Public vehicle.

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meant for furtherance of consumer protection underlying conditions of the states themselves.
can be called to be applicable for vehicles Furthermore, motor-vehicle taxation is the
participating in the ride sharing business greatest source of revenue of states, and
without having to change from one category to motor vehicle regulation also falls under the
another. A hybrid approach can be followed in jurisdiction of states. Naturally, regulatory
this regard – one that requires the existence of supervision of ridesharing businesses must also
minimum service standard for engagement with fall under the purview of states.
any platform offering ride-sharing services. In
essence, the platform can be delegated the The issue of employment is also of critical
responsibility to ensure service standards. importance. Given the nature of the
After all, it is in their best interest to ensure that sharing economy and the non-exclusivity of
vehicles on their platform meet safety checks. participants, it becomes very hard to classify
the participants at the supply side of the ride-
Changing of the category of vehicle will in sharing business as employees. It has long been
reality go against the idea that connotes the contested that the drivers that participate in the
sharing economy, for after categorization, ride-sharing business are not employees for
the underlying vehicle becomes a specific the sole reason that the assets are the driver’s
purpose asset as opposed to an underutilized own and that they are free to work for multiple
asset and the service rendered itself becomes platforms. Naturally, many obligations in case
a professional service. Moreover, the services of traditional employer-employee relationship
rendered by the participants of ride sharing do not arise. There has been a greater call
business are on a part-time basis which points in recent years, to do away with the 20th
to the fact that a majority of participants have century classification of employee-employer
other avenues of income and further their income relationship as we move towards an era of
by associating with ride-sharing platforms. As reduced transaction costs. Growing consensus
such, a crucial question to answer is whether among experts exist in relation to the difficulty
ride-sharing businesses will attract the same in application of older regulations to newer
amount of participants on the supply side when economic models. Nonetheless, the issue of
the vehicles used are subject to identification employment also highlights the importance
based on number-plates. The answer will of context in deciding how to regulate6. The
depend on the number of people who would question why statutory protection is needed
want to identify as professional transportation and for impositions of what rights and duties
service provider and see ride-sharing as a full is it needed become relevant. Consequently in
time opportunity. If the number of such people answering these questions, it may benefit from
is low, the supply will be restricted and prices delinking them with the 20th century model of
charged will be higher. single employer (Lobel, 2018). For instance,
if the goal is appropriate remuneration, the
Additionally, under a federal structure, the participant will have first-hand information
negative externalities generated by ridesharing of remuneration of each trip and such
services may not be uniform across all seven remuneration will only reflect the dynamics of
states. It will depend on the total volume of demand and supply. If the question is about
paved roads, the total number of vehicles, and social protection, the question is whether it is
the purchasing power of the consumers. As such applicable for part-time services or do they
regulatory approach will vary according to the need to be rendered full time. Some policies

6 See for instance the case of O’Connor V Uber Techs. Inc

74
 Ride-sharing Businesses: Nature and Regulation
- Yatindra K.C

should, regardless of the economic model, The concern for a level playing field between
extend to all workplaces regardless of the status the taxi industry and ride-sharing business
of those offering their labour, for instance anti- has been gaining traction in the recent times.
discrimination laws (Lobel, 2018). Multiple protests from the taxi-entrepreneur’s
association raises a crucial question as
A key issue that is linked with ride-sharing to whether regulators should focus on
scenario in Nepal and other jurisdictions is the preserving the uniqueness of the market
heavy regulations placed on the taxi industry. place or whether among competitors a level
The regulations like most taxi regulations are playing must be established. In case the
fare regulation and supply restrictions. The regulators seek to do both, the taxi industry
result of such has been the decrease in producer will need to be deregulated. Additionally, if
and consumer surplus and the charging of the concern regarding the higher fixed costs
monopoly rents. Additionally, it has also of the incumbents is serious enough, a form
meant that the cost of acquiring the license a transitionary mechanism can be used. Such
for taxi has been very high and so has fixed a mechanism will allow only licensed taxis to
costs of offering taxi services. Naturally, taxi offer four-wheeler ride-sharing services for a
entrepreneurs have resisted the legalization of certain period of time7. However, the risk of
ride-sharing businesses, and have called for regulatory capture will be existent.
the application of similar regulations.

An interesting thing to note here is that taxi

operators do-not face competition from four-
wheeler ride-share services. The Nepalese
XII. Concluding observations
market place has instead seen a surge in two-
In his seminal work, “What have we Learned
wheeler ride shares, partly due to higher fares
from Market Design?” Alvin E Roth (2009)
in the taxi industry and partly due to the relative
identified three crucial characteristics of an
ease with which two-wheelers can navigate
efficient market, a) they must be thick i.e.
through the intense traffic obstructions during
substantial number of participants must exist
peak hours. The two-wheelers used are private
on both sides, b) must able to overcome the
vehicles and rides are offered on a part-time
congestion thickness it brings i.e., it must
basis by the owners of the vehicles. The model
be possible to consider enough alternative
of the platform is hybrid. The laws of Nepal,
transactions to arrive at good ones, and c) it
however, restrict the use of private vehicles for
must be safe and simple to transact. Sharing
commercial purposes. Commercial purpose
economy vis-à-vis ride-sharing businesses
vehicles have a distinct identification system
reflect these characteristics to a varying
and have stricter requirements in addition
degree. The current players in Nepal have
to heavy regulation being placed which
been able to attract substantial number of
has naturally made the cost of entry higher.
participants while daily transactions are
Naturally, incumbents have resisted the newly
substantial enough to suggest low congestion,
established competitors, some because they
safety and simplicity in transacting. As efficient
want to continue charging monopoly rents,
as they may be, their operation until a few
others because they want to cover their fixed
months ago was deemed to be unlawful. With
costs.
the recent high court (15th march 2022) ruling
however, ridesharing businesses have received
7 Two wheeler services will continue to be in operation, however private four wheeler vehicle can be restricted for a
certain period of time to offer ride-share services.

75
ECONOMIC FREEDOM
A Compendium of Essays

some form of legal validation. The ruling also Cetin, T., & Deakin, E. (2017). Regulation of
calls for implementation of proper policy that Taxis and the rise of Ridesharing. Transport
enables the business. As such, the structure of Policy: http://dx.doi.org/10.1016/j.
the marketplace that is to be regulated becomes tranpol.2017.09.002
of utmost importance for it is the structure that
will shed light into some imperfections that may Cetin, T., & Eryigit, K.Y. (2013). The economic
arise and whose corrections might be required. effects of government regulations. Transport
Policy, 25(1), 167-177

Ducci, F. (2020). Ride-Hailing Platforms:

Within the current structure, the ride sharing Natural Monopolies in Digital Platform Markets.
business is efficient; regulation of the industry Global Competition Law and Economics Policy,
therefore should focus on preserving such 97-125.
efficiency which will require a newer approach,
one that is distinct from the current approach Eckert, R.D., (1973), On the Incentives of
of regulation of transportation industry, Regulators: The case of taxicabs, Public Choice,
regardless of the similarities that may exist 14, 83-99
between the two industries. Nevertheless, some
common area of regulation will also exist as Federal Trade Commission. (2016). The Sharing
was discussed earlier. On other instances, the Economy: Issues facing Platforms. Participants
intention behind old methods of regulation will and Regulators. Federal Trade Commission.
be needed to be ascertained. On a related
note, the question of changing the category Joskow, P.L., Rose, N.L., (1989), Economic
of vehicle, congestion taxes, other related fees Regulation and its effects, In: Schmalensee,
will also require careful evaluation. The entity R., Willig, R.D. (Eds), Handbook of Industrial
best suited for such evaluation under a federal Organization, Elsevir, 1450-1505
structure will undeniably be the provinces.
Koehler, B. (2005). License Values in taxi
Markets. Econ Aff, 25, 52-54

Lobel, O. (2018). Coase and the Platform

Works Cited Economy. In N. M. Davidson, M. Finck, & J.
J. Infraca, The Cambridge Handbook of the
Agatz, N., Erera, A., Savelsbergh., M., & Law of the Sharing Economy (pp. 67-77).
Wang, X. (2012). Optimization for dynamic Cambridge: Cambridge University Press.
ride-sharing: A review. European Journal of
Operational Research, 223(2), 295–303. OpenStax Economics, Principles of Economics.
OpenStax CNX. May 18, 2016, http://cnx.
Akerlof, G. (1970). The Market for “Lemons”: org/contents/69619d2b-68f0-44b0-b074-
Quality Uncertainty and the Market Mechanism. [email protected].
The Quarterly Journal of Economics, 84(3),
488-500. Retrieved July 10, 2020, from www. Roth, A. (2009). What Have We Learned from
jstor.org/stable/1879431 Market Design?, Economic Journal, Royal
Economic Society, 118(527), 285-310
Beesley, M. E., &. Glaister, S.(1983).
Information for Regulating: The Case of Taxis, Sánchez, D., Martínez, S., & Domingo,
The Economic Journal, 93(371), 594–615

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- Yatindra K.C

J.F., (2016). Co-utile P2P ridesharing via

decentralization and reputation management.
Transportation Research Part C: Emerging
Technologies, 73, 147–166

Stigler, G. (1971). The Theory of Economic

Regulation. The Bell Journal of Economics and
Management Science, 2(1), 3-21.

Xi, Y., Schwiebert, L., & Shi. W. (2014).

Privacy preserving shortest path routing with
an application to navigation. Pervasive and
Mobile Computing, 13, 142 – 149

77
 Drinking Water Project. The project that took
about three decades to complete after its
inauguration currently pledges to supply 17
million liters of drinking water per day (ml/d)
to denizens of Kathmandu city through bulk
and retail distribution infrastructure that fall
within the scope of subproject – 2 (distribution
aspect) of the Project (MWSDB, 2021).
Meanwhile, the second phase of the subproject
– 1 pledges to divert water from other river
systems originating from the Langtang glacier
to transmit an additional 34 ml/d of water
for further distribution in Kathmandu City
(MWSDB, 2021).

The current construct of the Melamchi Drinking

Markets Water Project draws a significant proportion of
stream water from the Melamchi river through
for Dispute 26 kilometers (km) tunnel originating and
diverting the river from a small locality called
Resolution: Riverma (also named Ambathan) located at
Ward No. 1 of Helambu Rural Municipality
A case of (RM) (MWSDB, 2021). In regards to this, the
local residents and the representatives of the
Melamchi Helambu RM grieve over their perception that
the project undertaken under the authority of

Drinking Water the federal government has failed to solicit

representation of the local community hosting

Project the river system while also undermining the

effect of the river diversion over the socio-
economy of the downstream local water users
(Sherpa, 2021). In short, the residents and
the representatives of Helambu RM complain
- Prience Shrestha about the federal government unrecognizing
the customary rights of the local people over
the water flowing through the Melamchi river.
In return or for compensation for the water
Melamchi Drinking Water being diverted from the Melamchi River, the
local government of Helambu RM demands
Project and the Dispute certain fees or royalty in proportion to the sale
Unfolding of water that is being diverted daily from the
Melamchi River (Sherpa, 2021).

O nly recently, Melamchi Water Supply

Development Board (MWSDB) has
completed the first phase of the subproject
– 1 (transmission aspect) of the Melamchi

79
ECONOMIC FREEDOM
A Compendium of Essays

such provision remains inexistent regarding

reallocation or diversion of water resource for
irrigation and drinking water supply (NNRFC,
2020).

As such, it is ironic that there remains the

provision of royalty-based compensation
for non-consumptive diversion of water
resources for hydroelectricity generation that
technically allows sufficient return flow of water
downstream while no provision for reward or
compensation exists for consumptive diversion
of water resources for irrigation and drinking
water supply with least to no arrangement for
return flow.

This case makes a typical representation of an

awaiting dispute concerning the reallocation Adjudication of Water Rights
of water resources through the construction as the resolution
of tunnel infrastructure. The case represents
a single instance of a probable dispute The prevailing case concerning grievance
concerning water resource ownership or rights of the residents of Helambu RM and other
in a locality that may be observed nationally in likely disputes that may arise as the result of
the future amid the operation of multiple water water diversion projects affecting perceived
diversion infrastructures around the country. ownership and rights of local community over
a body of water can be effectively addressed
At present, the federal government has pledged or precluded by justifiable apportionment or
to construct large-scale infrastructure projects adjudication of a particular body of water
to secure drinking water needs for growing among prior users of water, local community,
urban centers and furnish specific irrigation and sovereign authority based on the doctrines
and electricity projects. Not to mention, eight of water right aspired or adopted. This resolution
of Nepal’s 21 national pride projects directly appears particularly suitable for diverting
concern water infrastructure that attempts to water bodies other than for hydroelectricity
divert the natural course of river systems and generation as there is no royalty provision for
is ultimately likely to affect water availability compensating local communities from diverting
for prior local water users (National Planning water resources for such purposes.
Commission, 2021). In the meantime, there
exist provisions of royalty payments, revenue However, it is important to note that the
sharing, and redistributions for reallocation proposed resolution does not address fair
of water resources of a given water body for compensation for environmental damage,
hydroelectricity generation to compensate relocation/resettlement need, and other
the prior users of such water resources1. But socio-cultural and economic damages

1 See schedule- 4 of Intergovernmental Fiscal Arrangement (IGFA) Act, 2017

80
 Markets for Dispute Resolution: A case of Melamchi Drinking Water Project
- Prience Shrestha

directly attributable to the installation of water on the grounds that the individuals and
infrastructure projects. Instead, the resolution is community living adjacent or over the
specific to protecting the assumed ownership body of water are often the traditional
of concerned stakeholders over a body of users of water, and therefore are implied
water and guaranteeing compensation or with the customary ownership or rights
reward whenever such rights are assumed over the water.
to be infringed. Meanwhile, certain clauses
accompanied with the specific doctrine of However, the evolution of laws in modern
water rights adopted can also effectively times has required rights over a particular
preclude the amount of water diversion that can body of water at a certain quantity and
damage instream services to preserve the local proportion based on the Riparian doctrine
ecosystem and sustain recreational benefits. to be justified by the reasonability of
the water use. As such, individuals and
communities who are qualified to claim
rights on a certain body of water based on
the Riparian doctrine also need to justify
Introducing Water Rights
the water’s use for a perceived beneficial
Prescription for adjudication of water rights purpose. The evidence of it can be referred
of water bodies among the concerned to when the erstwhile Republic of Texas, in
stakeholders or contesting parties is dependent 1840 AD, embraced the English common
on the particular doctrine of rights adopted/ law that gave all landowners adjacent to
aspired along with certain clauses that can streams the right to use surface water as
accompany the adopted doctrine – other than long as their diversions were reasonable
if the federal or provincial governments choose (Griffin, 1998).
to allocate water rights unilaterally. However,
• The doctrine of Prior Appropriation
such unilateral arrangements can be inefficient
and might garner retaliation from multiple
In contrast to the Riparian doctrine,
concerned stakeholders (Saleth, 1998).
the doctrine of Prior appropriation (or
occupancy) establishes claims or rights
On such grounds, literatures guide towards two
on a certain body of water based on
primary and important water rights doctrines
the earliest use of water. This doctrine
known as (I) Riparian doctrine and (II) doctrine
that grants first call on available water
of Prior appropriation.
to earliest water users despite not being
• Riparian doctrine adjacent (or relatively distant) to the body
water was first adopted in England from
Riparian doctrine links ownership of or Roman Law (Howe, 1998). This doctrine
reasonable water use (i.e., usufructuary to establish water rights was later widely
rights) of the adjacent or overlying lands adopted in the Western United States of
(Rosegrant & Binswanger, 1994). As such, America (USA) to resolve conflicts over
rights to water use are granted to the water between miners and farmers during
individuals or community whose land is the gold-rush era as miners were already
located adjacent to the particular body of transferring a significant amount of water
water (i.e., lakes, ponds, or river streams). to minefields afar from the water bodies
The justification for the Riparian doctrine (Colby, 1998).
could have been primitively established

81
ECONOMIC FREEDOM
A Compendium of Essays

While the modern interpretation of prior Role of Organizations and

appropriation doctrine is also based on the Institutions in establishing
date of the first use, the initial appropriation
and subsequent transfer of water from a water Water Rights
body must be proven to have been used for
beneficial purposes. And, the number of water It requires a legitimate institution to establish a
rights to be adjudicated either volumetrically particular water rights doctrine at the national,
or proportionally (recognized in terms of the provincial, or basin level. Such institutions
number of shares of water rights) is often facilitate the adoption of a specific water rights
based on various scientific considerations. For doctrine accompanied by certain clauses and
instance, the standard of Practically Irrigable facilitate equitable & justifiable allocation of
Acreage (PIA)2 has been famously deployed in water rights across the contesting parties either
multiple water-related dispute settlements and volumetrically or proportionally. Furthermore,
inscribed in water laws across Pan America they also establish the classification of rights
to adjudicate water rights for agriculture and facilitate the establishment of other user-
producers (Howe, 1998). According to the based associations to carry out functions
standard, farmers are provided with sufficient concerning water reallocation and trading.
water rights equivalent to the water needed
The chronological evolution of water rights in the
to grow crops on every irrigable acre of their
State of Texas3 during the early nineteenth and
farms (Howe, 1998).
mid-twentieth century exemplifies the prominent
Likewise, the prior appropriation doctrine role of government authority in adopting water
should also be accompanied by the ‘loss doctrines followed by adjudication of water
doctrine’ or ‘sleeper doctrine’ (Livingston, rights among the concerned stakeholders.
1998). Particularly in the system of loss However, the initiative undertaken a century
doctrine, the water rights must be continually earlier needs to be absorbed with caution as
used to be valid as nonuse shall be interpreted the modern democratic culture of the society
as “abandonment” or “forfeiture” of rights. For may not support unquestioned federal or
example, the Mexican water law requires water State/provincial allocation of water-based
rights to be always exercised within three years property rights. But it cannot be disregarded
to avoid automatic forfeiture (Thobani, 1998). that adjudication of water rights of a particular
Whereas the ‘sleeper doctrine’ preserves water body or river basin can effectively begin
passive ownership of water rights that have not via a legitimate, capable, and sufficiently
come to consumptive or non-consumptive use representative institution or organization.
(Livingston, 1998).

While the idea of sleeper rights appears

counterintuitive in the pretext of doctrine Reallocation of water
privileging the rights to water based on through the process of Water
productive usage, it is essential to note that Markets
such rights often represent undisturbed water
useful to fulfill instream services and maintain The earlier section of the study discussed the
the local ecosystem (Livingston, 1998). idea of justifiably allocating rights to water
2 See Weldon (2000) to learn about the limitation of the use of PIA standard in Indian Reservations of THE Western
USA
3 See Griffin (1998) to learn the historical details of evolution of water rights in the State of Texas

82
 Markets for Dispute Resolution: A case of Melamchi Drinking Water Project
- Prience Shrestha

among the concerned stakeholders and Benefits of Water Markets

contesting parties based on the reasoning
of the adopted water doctrine and clauses While the benefit of water markets to facilitate
accompanying it. Such is recognized to protect the reallocation of water rights to achieve
the allocated ownership of the beneficial water maximum economic benefit and user surplus
users regarding a particular water body from has been hinted, literatures discuss myriad
diversions that may infringe such ownership benefits of water markets for efficient and
rights. In subsequence, this section shall dwell effective reallocation of water.
upon the process of water markets or water
trading to facilitate reallocation or leasing of Rosegrant & Binswanger (1994) have
such water rights to optimize the beneficial use suggested that efficient water allocation can
of the water resources present in a water body be achieved by creating incentives that support
or river basin. the effort to reallocate water or the delivery
of water rights. Such appears imperative in
The idea of optimizing the use of water areas observing scarce water supply where
resources through water markets appears literatures suggest that significant potential
counterintuitive in respect to the earlier economic efficiency can be achieved from
argument that the establishment of water rights voluntary reallocation of water or water rights
already enables the beneficial allocation of among the users (Easter, Dinar, & Rosegrant,
water resources. But it is important to note that 1998). Such voluntary reallocation is ultimately
the optimal allocation or the most beneficial use achieved by the medium of water markets
of water is frequently changing, and even the that guarantee voluntary trade of water rights
most senior rights4 attributed for a particular via the mechanism of price and negotiation.
purpose do not guarantee the greatest net Technically, water markets incentivize water
economic benefit (Livingston, 1998). As such, rights owners to conserve water and sell the
through the medium of water markets and the surplus to those willing to pay a satisfactory
water trading process, it can guarantee the price, thereby allowing water to be reallocated
tendency towards the maximum beneficial to higher-valued uses (Thobani, 1998). The
use of water, assuring the highest user surplus establishment of water markets ensures the
even by enabling the provision for senior water reallocation of water through the medium of
rights to be traded (Livingston, 1998). trade to achieve the maximum user surplus
possible (Hearne, 1998). Meanwhile, potential
In our particular case of brewing dispute in buyers of water rights also have a strong
regards to diversion of Melamchi river for incentive to conserve water to keep their costs
fulfilling drinking water needs of Kathmandu to a minimum (Thobani, 1998).
city between the local community of Helambu
RM and federal drinking water authorities, Furthermore, water markets are also known to
the establishment of water rights based on a accelerate the economic growth of developing
particular doctrine and clauses can facilitate and underdeveloped economies (Thobani,
diverse ownership of the water resource 1998). By incentivizing the allocation of scarce
between contesting parties. At the same time, water resources to be redeployed for more
the provision of water markets can facilitate the productive purposes, they increase output and
reallocation of such rights between irrigation employment (Thobani, 1998). Meinzen-Dick
use, commercial use, and drinking water use (1996) found that water markets increased
when necessary. the availability of water and the reliability
4 See Livingston (1998) to learn about the classification of rights based on seniority

83
ECONOMIC FREEDOM
A Compendium of Essays

of supplies. Hence, they can encourage new However, this approach to water markets
investment in activities requiring large water holds crucial limitations as accurate
quantities (Thobani, 1998). For instance, an measurement of the opportunity cost
investor willing to start a water bottling plant of water use is laden with tremendous
using deep tube wells by buying water rights in difficulties since it varies according to
the same aquifer from a farmer can generate location, water quality, season, year,
revenue for the farmers with surplus water reliability, and use (Thobani, 1998). For
and generate employment for plant workers instance, the opportunity cost of water
(Thobani, 1998). On a similar note, many use across the diverse sectors is far lower
small farmers in Durango/Coahila of Mexico during normal years than during drought
are known to take advantage of their ability years.
to sell their water rights to generate alternate
revenue streams (Thobani, 1998). • Formal market approach

The formal market approach facilitates legal

enforcement of water trading by ensuring
The process of Water Market that the tradable water rights registered
in the public registries are traded at the
Applying water markets in the local contexts capacity of contract enforcement. Hence,
would require proper acquaintance with the it is important to note that the facility of
idea and process of water markets in general. legal contract enforcement for the sale,
Thobani (1998) identifies the process of water purchase, or lease of water rights observed
markets characterized by either price fixation, in the formal market approach is only made
formal, or informal market approaches. possible through the official adjudication
of water rights. Such adjudication is made
• Pricing (price fixation) approach individually or collectively among Water
User Associations (WUAs)5 followed by
This approach recommends that public registration of adjudicated water rights in
authorities unilaterally fix the price of an official public record (i.e., a prerequisite
water rights to reflect its actual scarcity or for water markets) (Easter, Dinar, &
opportunity cost, thereby inducing water Rosegrant, 1998). In simple words, it is
conservation and making more water essential to officially establish and allocate
available for higher-value uses (World all water rights of a water body before
Bank, 1993). For instance, this approach formal water markets for trading the rights
of water markets insists on the argument to the use of the water body can function.
that if the price of water rights held by a (Thobani, 1998).
farmer near a city could be fixed at what
a drinking water corporation would be For instance, adjudication of water
willing to pay for the crude water, some rights in Chile requires the rights to be
farmers would give up farming or choose officially recorded in a public registry as
more efficient irrigation technique so that either consumptive or non-consumptive,
the surplus amount of water can be sold permanent or temporary (contingent)
for higher prices (Thobani, 1998). (Thobani, 1998). As such, the registered
rights can be either leased, sold, or
even used as collateral (Thobani, 1998).
5 See Hearne (1998) to learn about functions and role of WUAs

84
 Markets for Dispute Resolution: A case of Melamchi Drinking Water Project
- Prience Shrestha

Technically, the adjudication of rights that if third-party challenges are common

can be facilitated for exchange via formal and result in high transaction costs for
water markets approach in Chile begins formal water markets. In countries with
either by petition for obtaining water rights numerous small-scale water users, it may
on the grounds of prior appropriation or be better to encourage the procreation
through auction when multiple petitions of informal markets as many of the costs
are solicited for the same rights (Thobani, of establishing and enforcing water
1998). rights can be avoided (Easter, Dinar, &
Rosegrant, 1998). However, the informal
Additionally, to fulfill the formal trade of market approach of water trading is
officially registered water rights in the known to have contributed to the depletion
form of sale or lease, the process can also of aquifers in parts of South Asia and
require the trade to be facilitated by a Mexico as the market approach does not
legitimate public institution. For instance, feature “absence of damage doctrine”
in the State of Utah and New Mexico of the whereby the sale of water cannot disturb
USA, applications for new appropriations instream uses of water or sustainable use
or permanent transfer of water rights of water.
require approval from the Office of the
State Engineer (Howe, 1998). In contrast,
the State of Colorado requires proposed
transfer to be advertised, challenged by Application of the resolution
parties that perceive themselves to be
for grievance concerning
injured by the transfer if applicable before
the water court system approves the trade Melamchi Drinking Water
(Howe, 1998). Project
• Informal market approach The entire claim on the Melamchi river flowing
downstream from Riverma (Ambathan) by
In contrast to the formal market approach, the local community users of Helambu as
the informal market approach features implied by the Mayor of Helambu RM cannot
contract enforcement regarding the trade be granted based on either of the doctrines
of water rights not by the legal system but discussed to adjudicate water rights. Given the
based on reputation, general morality, fact that the prior local users of the river water
and personal trust within social networks mostly adjacent to the river banks are/were
(Easter, Dinar, & Rosegrant, 1998). This not utilizing the water resources of Melamchi
creates limitations in the scope of water river at its full capacity, rights representing
trading as exchanges between members the entire waters flowing downstream prior to
of different communities cannot occur as tunnel diversion cannot be adjudicated as each
social ties and personal trust is only found share of water rights needs to be justified with
within a small community. Also, informal the clause of beneficial prior use as directed by
market approaches are featured during the modern interpretation of doctrines of water
the trade of implied water rights that rights. And, amid only a minor proportion
have not been well-defined or recorded of the flowing river stream estimated to have
(Easter, Dinar, & Rosegrant, 1998). been used for irrigation purposes, fish farming,
Easter, Dinar, & Rosegrant (1998) identify and other beneficial consumptive and non-
informal water markets as a good option consumptive purposes, water rights for the

85
ECONOMIC FREEDOM
A Compendium of Essays

entire water being diverted from the Melamchi entire process of right adjudication of the
tunnel cannot be established for prior local Melamchi river shall require the participation
users of Helambu RM. In fact, rights upon the of diverse stakeholders from the local
amount of water in the Melamchi river other government representing the local community,
than that can be reasonably adjudicated to officials from MWSDB, agencies representing
the local prior water users of Helambu RM can the Federal Ministry of Water Supply (MWS),
be justifiably adjudicated to federal project and agencies representing the provincial
implementors of the Melamchi Drinking Water government and private experts. Meanwhile,
Project. Using or diverting a water body for the local government of Helambu RM or a WUA
drinking water purposes is also prioritized representing prior local users of the Melamchi
over using water for irrigation or fishery by the river of Helambu RM can be established to
current Water Resource Act, 1992 of Nepal. hold custody of any rights adjudicated to local
In fact, water resources for drinking purposes water users.
are prioritized over the use of water resources
for any other purpose listed in section – 7 Following the adjudication of sufficient water
of the Water Resource Act, 1992. Hence, it rights of Melamchi river to the local water
establishes sufficient premises to deny stipulated users of Helambu RM, any payment to the local
payment for each liter of water diverted from government of Helambu RM should only occur
the Melamchi Tunnel to the local government of for the volumetric or proportional quantity of
Helambu RM as publicly demanded (Sherpa, water that the local water users are obliged
2021). to give up (in the present or future) to satisfy
the stipulated amount of water to be diverted
However, a justifiable amount of water rights from the Melamchi tunnel. For instance, if
to the prior local users of the Melamchi river Melamchi river is measured to flow 20 ml/d
flowing downstream from Ambathan adit must of water uninterrupted whereby local prior
be adjudicated volumetrically or proportionally beneficiaries of Melamchi river is collectively
to ensure that the Melamchi diversion has not adjudicated with water rights measuring
infringed their water rights. As such, the rights five ml/d of water for consumptive and non-
ought to be adjudicated not only based on consumptive uses, diversion of 17 ml/d of
current beneficial use of water but also based water through the Melamchi tunnel will require
on maximum potential beneficial use of water MWSDB to purchase water rights measuring
by the local community living adjacent, or far two ml/d of water or lease the specified
from the river in terms of irrigation, trout fish quantity of water from the local water users to
farming, industrial, and other consumptive and satisfy its daily water requirement6. However,
non-consumptive household uses in future. The no such payment shall be required if it would
standard of PIA may be referred to determine not be necessary to divert the proportion of
the maximum potential use of water to furnish water adjudicated to the local water users of
specific purposes that need to be adjudicated Melamchi river in Helambu RM. After all, the
with communal or private water rights. Also, amount of water diverted by the Melamchi
additional water rights to sufficiently fulfill tunnel would be within the volumetric quantity
instream water services, recreational services, of water apportioned based on the water rights
and preserve the local ecosystem need to be adjudicated to the implementor of the federal
adjudicated and handed over to the local drinking water project.
government of Helambu RM. Of course, the
6 The following assumption omits the adjudication of non-tradable water rights required to fulfill instream water uses,
preserve local ecosystem, and sustain recreational purposes

86
 Markets for Dispute Resolution: A case of Melamchi Drinking Water Project
- Prience Shrestha

The trade of water between the monopsonistic As such, water markets can be established to
purchaser (i.e., MWSDB) of additional compensate localities and local water users
Melamchi water rights and the monopoly likely to be affected by grand irrigation and
seller (i.e., local water users of Melamchi river water-related multipurpose projects as Sikta
downstream of Ambathan Adit) of the very Irrigation Project, Bheri-Babai Diversion
water rights requires the process of water Multipurpose Project, Rani Jamariya-Kuleria
markets. Given the involvement of a legitimate Irrigation Project, Sunkoshi Marine, and
federal agency and the local government in Kaligandaki Tinau Irrigation Project projected
the trading process, the trade approach must to irrigate about 42000-51000 hectares of
be formally followed by official adjudication irrigable lands through approaches featuring
of rights, as discussed earlier. Hence, proper inter-basin water transfers (Risal, 2021).
infrastructure to legitimatize the trade of water
rights in terms of sale or lease at the capacity of
contract enforcement needs to be established.
References
Likewise, the pricing of water rights traded can
be negotiated between the parties involved Archibald, S. O., & Renwick, M. E. (1998).
during the adjudication of the water rights Expected Transaction Costs and Incentives for
of the Melamchi river, although the price Water Market Development. In K. W. Easter,
fixation approach of water markets is known M. W. Rosegrant, & A. Dinar, Markets for
to hold certain limitations7. However, sufficient Water: Potential and Performance (pp. 95-
consideration for (if not limited to) end-user 118). Boston: Kluwer Academic Publishers.
sales price per unit of water, operation and
capital cost relating to the project, and the Characklis, G. W., Griffin, R. C., & Bedient,
marginal value of additionally purchased/sold P. B. (1997). Improving the Ability of a Water
water for the local water users of Helambu RM Market to more Efficiently Manage Drought in
and denizens of Kathmandu city needs to be lower Rio Grande. In Sustainable Development:
made while making the pricing decisions. Most Managing the Transition, De Lange Woodlands
importantly, the success of the pricing decision Conference (pp. 317-336). Houston: Energy
of Melamchi water rights shall be measured and Environmental Systems Institute, Rice
by its ability to voluntarily incentivize the trade University.
for both parties as a competitive market-based
pricing mechanism would. Colby, B. G. (1998). Negotiated Transactions
as Conflict Resolution Mechanisms: Water. In
A. Dinar, M. W. Rosegrant, & K. W. Easter,
Markets for Water: Potential and Performance
Conclusion (pp. 77-94). Boston: Kluwer Academic
Publishers.
Apart from Melamchi Drinking Water
Project, resolution of the water market can be Easter, K. W., Dinar, A., & Rosegrant, M. W.
established for the benefit of all stakeholders (1998). Warket Markets: Transactional Costs
involved and affected by government pledged and Institutional options. In K. W. Easter, A.
marine/water diversion projects for irrigation Dinar, & M. W. Rosegrant, Markets for Water:
and drinking water purposes across the country. Potential and Performance (pp. 1-19). Boston:
Kluwer Academic Publishers.
7 See Saleth (1998) to learn about the limitation of price-fixation approach in water trading

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Griffin, R. C. (1998). The Application of Water Risal, B. (2021, May 16). नेपालको पानीमा भारतको
Market Doctrines in Texas. In K. W. Easter, M. आँखा. Himal Khabar. Retrieved from https://
W. Rosegrant, & A. Dinar, Markets for Water: www.himalkhabar.com/ news/123512
Potential and Performance (pp. 51-65). Boston: ?fbclid=IwAR1MuRJ4rvhNN
Kluwer Academic Publishers. pPBWfLBtXQvMH17hO_75JFt4Mw
FytW91qrFHd6oST5Mul0
Hearne, R. R. (1998). Institutional and
Organizational Arrangements for Water Rosegrant, M. W., & Binswanger, H. P. (1994).
Markets in Chile. In K. W. Easter, M. W. Markets in Tradable Water Rights: Potential for
Rosegrant, & A. Dinar, Markets for Water: Efficiency Gains in Developing Country Water
Potential and Performance (pp. 141-158). Resource Allocation. World Development,
Boston: Kluwer Academic Publishers. 1613-1625.

Howe, C. W. (1998). Water Markets in Saleth, R. M. (1998). Water Markets in India:

Colorado: Past Performance and Needed Economic and Institutional Aspects. In K. W.
Changes. In K. W. Easter, M. W. Rosegrant, Easter, M. W. Rosegrant, & A. Dinar, Markets
& A. Dinar, Markets for Water: Potential and for Water: Potential and Performance (pp. 187-
Performance (pp. 65-76). Boston : Kluwer 206). Boston: Kluwer Academic Publishers.
Academic Publishers.
Sherpa, N. G. (2021, April 4). Melamchi
Livingston, M. L. (1998). Institutional Requisites Dispute. (M. Joshi, Interviewer)
for Efficient Water Markets. In K. W. Easter, A.
Dinar, & M. W. Rosegrant, Markets for Water: Skillern, F. F. (1988). Texas Water Law (Vol. I).
Potential and Performance (pp. 19-34). Boston: San Antonio, Texas, United States of America:
Kluwer Academic Publishers. Sterling Press.

Meinzen-Dick, R. (1996). Groundwater Thobani, M. (1998). Meeting Water Needs

Markets in Pakistan: Participation and in Developing Countries: Resolving Issues in
Productivity. Washington DC: International Establishing Tradable Water Rights. In K. W.
Food Policy Research Institute. Easter, M. W. Rosegrant, & A. Dinar, Markets
for Water: Potential and Performance (pp. 35-
MWSDB. (2021). Melamchi WSP - An 50). Boston: Kluwer Academic Publishers.
Introduction. Kathmandu: Melamchi Water
Supply Development Board. Retrieved from Weldon, E. (2000, October). Practically
MelamchI Water Supply Development Board. Irrigable Acreage Standard: A Poor partner
for the West’s water future. Water Rights
National Planning Commission. (2021, May and Watershed Management: Planning for
18). National Pride Projects. Retrieved from the future, 25 (2000-2001)(1), pp. 203-
National Planning Commission: https:// 231. Retrieved from https://scholarship.law.
www.npc.gov.np/en/page/74/visualing_ wm.edu/wmelpr/vol25/iss1/7
development/data/national_pride_projects
World Bank. (1993). Water Resource
NNRFC. (2020). NNRFC Information Book. Management, A World Bank policy paper.
Kathmandu: National Natural Resource Fiscal Washington DC: World Bank.
Commission.

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 Economic Freedom:
Nepal’s Guide to prosperity after LDC graduation
Anjila Shrestha | Navneet Jha | Prakash Maharjan | Shuvangi Khadka

Introduction marks a move from economic dependence to a

state of greater self-reliance. Any LDC becomes

L east Developed Countries (LDCs) are often eligible to graduate if they meet two of the three
trapped in vicious circles (United Nations criteria set by the United Nations (United Nations
Conference on Trade and Development, Office of the High Representative for the Least
2017). Many LDCs suffer from a poverty trap, Developed Countries, Landlocked Developing
with low income and limited economic growth Countries and Small Island Developing States,
giving rise to high levels of poverty, which in n.d.). Nepal met the graduation criteria in
turn put a brake on economic growth. Two 2015 and fulfills two of the required three
thirds of the labor force of LDCs work in mostly graduation criteria, namely Human Assets
smallholder agriculture, a sector suffering Index (HAI) and Economic Vulnerability Index
from chronically low labor productivity. Other (EVI) (United Nations Department of Economic
contributing factors are weak productive bases and Social Affairs Economic Analysis, n.d.).
and limited export diversification which give As of 2021, the Gross National Income (GNI)
rise to a very high import content in production Per Capita Income of Nepal, however, is only
and consumption, and chronic current account $1090 according to the United Nations and
deficits. the minimum threshold for graduation needs to
be at least $1222.
In principle, graduation implies having risen
sufficiently above these vicious circles and Nepal requested to delay its graduation citing
the setbacks on Nepalese economy due to

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the earthquake in 2015 and other natural 2017, is less than one-third of the potential of
calamities over the years. Currently, Nepal $2.31 billion. The largest difference between
faces a similar situation when the economy is actual and predicted exports is with India, that
severely impacted by the Covid-19 pandemic is, Nepal can potentially earn an additional $
and it can be expected that income growth 1 billion from India. Similarly, Nepal’s export
will be equal to zero or none. Sapkota (2018) to China is almost half a billion dollars less
quotes the then Finance Minister Yubraj than what is predicted. Amongst others, Nepal
Khatiwada saying that, “we’ll first boost our Per is under-exporting by about $50 million to
Capita Income (PCI) to the required level by the Bangladesh, $24 million to Pakistan, and $18
2021 review. Then we’ll be ready to graduate million to Japan. In countries such as Australia,
to a developing country but it’s too early now.” Canada, Germany, Italy, Turkey, the United
Nepal is yet to reach the required PCI threshold Kingdom, and the United States, Nepal’s
in 2021. Prasain (2020) in his article quotes export volumes are higher than what can be
Bishwanbher Pyakuryal, “despite the successful predicted from the global countries’ experience.
and rapid reduction in poverty, due to the These are the countries where Nepal also gets
low-growth trap even before the Covid-19 preferential market access as an LDC.
pandemic, Nepal was not in a position to
become a lower-middle-income country before The European Union is the second-largest
2030. With growth stalling for a few years due destination of Nepal’s exports after India
to the pandemic, graduating to a lower-middle- accounting for 13.5 percent of its total export.
income country before 2030 has now become Woven garments and knitwears are major
a distant dream”. However, the Committee for items exported to the EU countries from Nepal.
Development policy (CDP) recommends Nepal Currently, Nepal enjoys a preference under
to graduate in 2026 in its triennial review of the Everything But Arms category in exporting
2021. Though a preparatory period of 5 years to EU countries. Under the preference, all
is provided, the debate still remains for Nepal sensitive as well as non-sensitive goods are
to choose graduation or not. exempt from duty charges. A change in this
preference policy after Nepal’s graduation will
mean that exports will be subjected to the terms
of Nepal’s new category-either a standard
Generalised Scheme of Preferences (GSP) or
What is at Risk?
GSP+. A country in these two categories has
Apart from a sluggish growth rate over the a Duty reduction of only 66% of all EU tariff
past three decades, Nepal lags behind in lines compared to the previous full-waiver for
merchandise export performance, partly non-sensitive goods. In the case of sensitive
because it is a landlocked country. In 2017, its goods, Nepal may enjoy either a full waiver
exports of goods stood at $741 million – down on the tariff line or will be subjected to a duty
from its highest-ever receipts of $900 million reduction that entails 30% of the specific duty
in 2011. India, the United States of America, and upto 3.5 percentage point on ad-volume
and a handful of European countries comprise duty.
Nepal’s major export destinations.
In either case, there could be up to a 60%
Razzaque (2020) uses a gravity model to draw increase on the threshold of minimum local
significant observations in terms of Nepal’s value-added for Nepal to qualify for export to
export product space and suggests that the EU countries. Apparel stands out as the most
realized export of Nepal, $741 million in important export item and under the revised

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 Economic Freedom: Nepal’s Guide to prosperity after LDC graduation
- Anjila Shrestha, Navneet Jha, Prakash Maharjan & Shuvangi Khadka

circumstances, Nepal may see a duty reduction Measures, on Trade Related Aspects of
of up to 30%. Intellectual Property Rights (TRIPS), Trade
Facilitation Agreements, etc. Hence, the
Various international treaties and agreements promotion of Nepal from a Least Developed
make supportive provisions for the least Country would harm us in exports. The country
developed countries such as agreements will be losing its preferential access to major
on agriculture, on Trade Related Investment markets (Razzaque, 2020) as mentioned
Measures, on Subsidies and Countervailing below:

Preferential Market Access for Goods-Tariffs

Duty free tariff line coverage
Market Description
and major exclusions
Duty-free, quota-free entry (DFQF) for
Australia LDCs 100 percent
Entry into force: 1 July 2003
Generalized System of Preference
(GSP) Least Developed country Tariff 98.6 percent (Exclusion: dairy and
Canada Programme(LDCT) other animal products, meat, meat
Entry into force: 1 January 2000 preparation, cereal products)
Extended until 31 December 2024
DFQF scheme for the LDCs 99.5 percent (Exclusion: cereals, sugar,
Chile
Entry into force: 28 Feb 2014 milling products)
96.6 percent (Exclusion: chemicals,
Duty free treatment for LDCs transport vehicles, machinery and
China
Entry into force: 1 July 2010 mechanical appliances, electrical
machinery, paper)
GSP-Everything But Arms (EBA
99.8 percent ( Exclusion: arms and
European Union Initiative
ammunition)
Entry into force: 5 March 2001
GSP-Tariff preference for world’s 91.8 percent (Exclusion: meat, food
Iceland poorest countries preparation, vegetables, dairy and
Entry into force: 29 January 2002 other animal products, plants and trees)
94.1 percent (Exclusion: plastics, coffee
Duty Free Tariff Scheme (DFTP)
India and tea, alcoholic beverages, tobacco,
Entry into force: 13 Aug 2008
food residues)
GSP-Enhanced duty and quota free
97.9 percent (Exclusion: fish and
market access
Japan crustaceans, footwear, milling products,
Entry into force: 1 April 2007
cereal products, sugar)
Extended until 31 March 2012
89.9 percent (Exclusion: fish and
Presidential
crustaceans, mineral fuels, oil seeds
Korea, Republic of Decree on Preferential Tariff for LDCs
and oleaginous fruits, wood products,
Entry into force: 1 January 2000
vegetables)
GSP-Tariff Treatment for LDCs
Zealand 100 percent
Entry into force: 1 July 2001

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ECONOMIC FREEDOM
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GSP-DFQF market access

Norway 100 percent
Entry into force: 1 July 2002
GSP scheme in the context of the
37.1 percent (Exclusion: machinery
Customs Union between Belarus,
and mechanical appliances, chemicals,
Russian Federation Kazakhstan and the Russian
electrical machinery, iron and steel
Federation
products, transport vehicles)
Entry into force: 13 Aug 2008
GSP-Revised Preferential Tariff
Switzerland Ordinance 100 percent
Entry into force: 1 April 2007
30.8 percent (Exclusion: machinery
Duty-free treatment for LDCs LDCs and mechanical appliances, chemicals,
Chinese Taipei
Entry into force: 17 December 2003 electrical machinery, fish and
crustaceans, plastics)
Duty free treatment for LDC since
Thailand 70.4 percent
2015

Source: Nepal Human Development Report, 2020

Preferential Market Access for Goods-Rules of Origin

Country Origin criteria Requirements Percentage level

Allowable factory cost

Last manufacturing
should be at least 50%
process performed Minimum amount of allowable factory
Australia of the total factory cost;
in LDC; product cost
For LDC 75% with
specific rules
cumulation
One single rule
across the board,
Maximum non-
for all products
Maximum amount of non-originating originating materials
Canada except textile and
inputs 60%; for LDC, 80% with
apparel articles
cumulation
where product
specific rules apply
Maximum amount of
Change of HS heading with or no-originating material
without exemptions, specific working does not exceed
European Product specific
or processing requirements and/or 70%. Exception under
Union rules for all products
maximum percentage of imported chapter 63: 25%, 40%,
inputs or combinations of requirements 50% where used in the
single list
Change in tariff sub-heading (CTSH) Maximum amount
One single rule for
India and maximum percentage of non- of non-originating
all products
originating materials materials 70%

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 Economic Freedom: Nepal’s Guide to prosperity after LDC graduation
- Anjila Shrestha, Navneet Jha, Prakash Maharjan & Shuvangi Khadka

Change of HS heading with or

CTH as a general
without exemptions, specific working Maximum amount
rule and Single List
Japan or processing requirements and/or of non-originating
of product specific
maximum percentage of imported materials 40%
rules
inputs or combinations of requirements
CTH, product
Norway Maximum local content requirement At least 50%
specific rules
Product specific Maximum value of non-originating
Switzerland Maximum 70%
rules materials
Last manufacturing Maximum amount
maximum amount of non-originating
Thailand process performed of non-originating
inputs
in LDC materials 50%
One single
Minimum 35%, exact
percentage (35%)
percentage must be
USA rule across the Minimum local content requirement
written in certificate of
board for all
origin
products

Source: Nepal Human Development Report, 2020

But a point to be noted is that in spite of the the membership fees of such countries will
preferential market access given to Nepal, the not increase, so that countries do not fear
country has not been able to use the facilities graduating and don’t graduate due to greed
provided for the least developed countries. for convenience or fear of increasing liabilities
Paudel (2021) citing a WTO study, mentions and responsibilities. Also, there is a question
that only 10-20 percent of our exports have of increase in the cost of domestic production.
used the facilities provided to Least Developed For example, there is a concern that the
Countries and the World Bank’s Gravity Model pharmaceutical industry may be negatively
reveals that Nepal needs to export products affected as it is one of the fastest growing
worth $2.31 billion, but has not been able industries in Nepal and has used some of the
to do even half of that. As per Nepal Trade facilities under the TRIPS. It is to be noted that
Information Portal, in 2020, 73 percent of our the TRIPS facility will not be affected till 2033
exports went to India, 10 percent to the United even after graduation. Similarly, the TRIPS
States and 3 percent to the U.K. Graduating agreement - which sets local content limits -
from the least developed countries is expected is not implemented immediately even after it
to reduce Nepal’s exports by 2.5 percent but has been graduated from a least developed
Nepal Human Development Report 2020 country. The WTO Special and Differential
reveals that no larger impact is foreseen. (S&D) provisions remain in force even after
graduating.
Apart from exports, there is a fear that
graduating will cut off all facilities immediately As for financial grants, the World Bank does
which will not be the case. For example, the not use LDC’s preference in grants and soft
assistance of the United Nations Technology loans. Under the International Development
Bank will be available for five years after the Association (IDA), we get low-interest loans
upgrade. The United Nations or the World (for example, NPR 1.4 billion for the current
Trade Organization (WTO) has said that three years) until per capita income is $1,175.

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ECONOMIC FREEDOM
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It supports middle-income countries through Lundstrom (2002) used a random effect model
IBRD. The Asian Development Bank (ADB) also to decompose time series data between 1975
does not base its decision on LDCs in countries; and 2000 for 74 countries to examine the
it bases its decision on the basis of lower significance of economic freedom to grow. The
incomes than the minimum threshold. model used components of the freedom indices
- personal choice, protection of property, and
Apart from these two important institutions, freedom of exchange - from Economic Freedom
economic grants from countries like India and of the World: 2000 Annual Report and further
China have little to do with whether we are an categorized them into three broader indices
LDC or not. Countries still support their strategic with different weightings using a principal
partners. Developed countries now spend only component analysis. The findings suggested
0.10 percent of their GDP on foreign aid. In that four of the significant economic freedom
such a situation, the bilateral assistance and variables are positively related to growth;
grants received by the very poor countries however, two are, at all or some index values,
like Nepal are less. On top of that, the grants negatively related to increased freedom. In
coming through multilateral organizations terms of lower government consumption
are also less. Therefore, with the increase in and transfers decreases the growth rate (see
our capacity to mobilize internal revenue and the findings from the research in the table
increase the volume of remittances, we will below). Among the robust categories, size of
not require much financial assistance from the Government, Legal Structure, and Freedom to
UN, which is said to be lost when it comes to Trade with Foreigners have the largest effect on
graduating from the least developed countries. the growth rate, and the estimates were robust
overall.

The findings from Carlson & Lundstrom are

Implementing Changes also consistent with a swath of other empirical
studies. Sala-i-Martin (1997 a,b) suggests that
To not only graduate but sustain, countries several economic freedom measures have a
should prioritize a structural transformation significant and sizable effect on the growth of
of economy and development of productive GDP.
capacities, including shifting production and
exports to higher-value-added products and The economic freedom indicators are necessary
sectors, upgrading technology, diversifying for assessing the government’s efficacy. Nepal
the economy and raising productivity. The can gain from pouring its resources to build
Nepal Human Development Report (2020) an infrastructure that supports free-market
recommends Nepal to prepare a transition operations. In addition, a meticulous rethinking
strategy to avoid adverse impacts from the exercise on how to bolster domestic capacity
country’s graduation from an LDC. The best for export can benefit from rethinking contract
way to avoid any adverse impact to the country enforcement practices within the country, and
is to increase freedom in terms of economic with a focus on stable monetary policy. Evident
activities. A wide range of empirical studies in the wake of Bangladesh’s graduation from the
has shown a positive relationship between LDC category, Nepal can expect a remarkable
economic growth and economic freedom, erosion of preference that it currently enjoys in
a premise Nepal must adhere to with high international trade.
regard if it is to make a meaningful stride after
it graduates from the LDC category. Carlson &

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 Economic Freedom: Nepal’s Guide to prosperity after LDC graduation
- Anjila Shrestha, Navneet Jha, Prakash Maharjan & Shuvangi Khadka

Utilizing export potential to Treaty of Transit between Nepal and India

the fullest guarantees the freedom of transit across their
respective territories through mutually agreed
Nepal, currently, is underutilizing its export upon routes. Despite all procedures neatly
potential, and with an export market penetration laid down, the processing time at the port of
rate of just 2.4 percent, the lowest amongst Kolkata normally is 3 to 5 days for transit goods
other Asian LDCs of Afghanistan, Bangladesh, even with all of the required transit documents
Maldives, and Myanmar, is yet to attempt and the one time lock system of containers
to tap the vast potential that lies ahead. The (Rajkarnikar, 2006). Nepalese traders also
World Bank (2021) estimates that Nepal could face issues such as double submission of
create an additional 38 jobs in agriculture physical copies of documents to both Indian
and 13 additional jobs in manufacturing for and Nepalese custom authorities. The absence
every $1 million worth of new exports and of proper implementation of the Electronic
also mentions that the country’s untapped Data Interchange System (EDIS) has compelled
potential is equivalent to 12 times its actual the traders to face inefficiency and delay (New
annual merchandise exports. Additionally, the Business Age, 2020). Traders complain of the
report also mentions that the growing imports compliance process increasing the custom
in the countries geographically close to Nepal clearance days after the implementation of
corresponds to Nepal’s export potential. EDIS (ibid.).

Nepal must tap into these opportunities Inland Clearance Depots (ICDs) have been
available especially when the country is in a established in Birgunj, Biratnagar and
transition for graduating to a middle-income Bhairahawa. The Birgunj ICD which handles
country. The country must focus on addressing cargo movement carried out through railway
service via Indian seaports in Kolkata, Haldiya
policy barriers, missing infrastructure linkages,
and administrative hurdles to facilitate ease ofand Visakhapatnam is inefficiently managed
trading across borders. The absence of proper and recently has been facing a problem with
trade related and other infrastructures has beenexcess cargo traffic. Limited infrastructure and
the biggest constraint for growth of Nepalese failure of traders to clear the containers on time
trade (Ghimire, 2016). Lack of access to seas are among the major underlying problems at
add around 15 p.c. transit related costs in the dry port (TKP). Despite the importance
export (ibid.) and in addition to the absence of dry ports and ongoing construction of
of proper road networks and storage facilities other additional dry ports, Nepal has still not
Nepalese exports face difficulties in being ratified “Intergovernmental Agreement on Dry
competitive. Ports’. Also, the facility of dry port is not yet
available at Kathmandu, which is the major
Nepal mainly uses two Indian ports as a transit traffic-generating center in Nepal, to facilitate
point: the Kolkata port and the Vishakhapatnam intermodal container movement (Rajkarnikar,
port because of its ease compared to the ports 2006).
accessible via China. The distance to the
nearest Chinese port in Tianjin is 3276 km from Despite the challenges, in absence of access to
the Nepal border (Giri, 2019) and besides the the Indian ports, Nepalese trade will be highly
distance Nepalese traders have to face other impacted. In the recent times of crisis in the
technical barriers while conducting via China. South Asian regions, ship liners are hesitant to
use Indian ports citing risks which has added
to Nepal’s inefficiency in conducting trade with

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ECONOMIC FREEDOM
A Compendium of Essays

foreign countries (Ale, 2021). It may take time Creating a conducive

to solve issues like one mentioned above as an environment for businesses
external catalyst is the reason for inefficiency in
Nepalese trade but the majority of the problems Similarly, the macro-economic indicators
have also aroused internally. It is necessary to from within the country’s economy depict a
look inwards to solve the trade related problems stagnation in economic activities i.e. the gross
as such can be solved promptly. value added of the manufacturing sector to
the GDP for FY 2019/20 was 5.09% and is
Internally, Nepal must look at the problems projected to decline by 2.29 percent due to the
that have hampered the trade competitiveness Covid-19 pandemic. The growth of industrial
of industries exporting in foreign lands. World output has a significant effect on the growth
Bank (2021) mentions that Nepalese border rate of the product of the economy as a
crossings are congested due to inadequate whole. The Kaldor-Verdoorn law establishes
infrastructure and lack of streamlined a deterministic relation between the growth
procedures and processes and have increased of manufacturing productivity and output
product losses as well as logistics costs. One growth in the manufacturing sector (Kaldor,
such policy is the duty drawback policy. 1966[1966]).
Though the motive behind such policy is
plausible, its implementation has been dismal. With Nepal’s graduation slated for 2026, its
Many exporters claim that the process of duty past performances on economic indicators
drawback is cumbersome and takes a long need to be reflected. The index published
time to get the refund approved (Ghimire, in Economic Freedom of the World by the
2016). Likewise, the lack of technology Fraser Institute measures the degree to which
implementation in custom clearances has the policies and institutions of countries are
been a major hassle for the traders. Nepal supportive of economic freedom using 42
can start by implementing technologies in the data points across five broader areas for 163
implementation of protocols and processing countries. The areas covered are the size of
related to customs to increase efficiency and the government, legal system & property rights,
transparency as well as reduce redundancy. sound money, freedom to trade internationally,
For instance, Nepal can implement scanners and regulations.
at custom points to scan the containers rather
than make a manual inspection (Himalayan Nepal’s rank for the year 2020 was 109th
News Service, 2019) and invest in digitization with an overall score of 6.48 on a (1-10)
of trade to provide more opportunities for ascending scale; 1 being the lowest and 10
traders to link with the global value chains. being the highest. Nepal’s freedom to trade
There is also a need to invest in infrastructure internationally was ranked 111th and had
to test the product standards to make exports a score of 4.6 for non-tariff barriers. These
competitive. Ghimire (2016) mentions the rankings are indicative of a state of affairs that
need of quarantine labs adhering to the needs fixing.
guidelines of Codex Alimentarius Commission
that formulates international food standards, The World Bank ranks Nepal at 94 out of
guidelines and codes of practice. Similarly, 190 economies in the Doing Business Report
World Bank (2021) suggests adopting a risk 2020. Nepal improved in the overall index
based Sanitary and Phytosanitary system when compared to previous years but its
and shifting attention from routine controls to performance in the individual indicator does
prevention and targeted controls. not look satisfactory. Removing barriers for

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 Economic Freedom: Nepal’s Guide to prosperity after LDC graduation
- Anjila Shrestha, Navneet Jha, Prakash Maharjan & Shuvangi Khadka

private sector led development is a prerequisite The current practices of multiple submissions of
for Nepal which will ultimately help in realizing documents to different government institutions
the goal of increased per capita income as in and to present both soft and hard copies of
the case of Bangladesh. As per Basu (2018), the documents has only added to the layer
Bangladesh achieved this feat by providing of compliances that needs to be followed by
manufacturing firms a better environment businesses.
to achieve economies of scale and create a
large number of jobs. Nepal also needs to Likewise, the government should also ease up
initiate changes to the policies that regulate the procedures for companies to make an exit.
the business environment in the country and Companies that are planning and have to exit
facilitate their growth. the market require to expend a huge amount
of time to officially shut their businesses down.
World Bank Ease of Doing Business Ranking of Say, if a company files for insolvency, the court
Nepal appoints an investigating officer and on his/
her recommendation, either a liquidator or
Rank (Out a restructuring manager is hired to close the
Indicators of 190 process. The need for an investigation officer
countries) seems to add little to the procedure of company
Starting a Business 135 exit and the time taken to investigate the matter
Paying Taxes 175 will only extend the bankruptcy proceedings.
Dealing with Construction Permits 107
Government should also make policy changes
Getting Electricity 135
to ensure smooth operation of businesses so
Registering Property 97 that the operating costs of businesses go down.
Getting Credit 37 For instance, the government needs to ease up
Protecting Minority Investors 79 procedures while filing taxes, while enforcing a
Trading Across Borders 60 contract during a dispute, etc. As per the data
Enforcing Contracts 151
of Doing Business (2020), in Nepal it takes
an average of 910 days or approximately
Resolving Insolvency 87
2.5 years to enforce a contract totaling costs
Source: World Bank, 2020 equal to 27.3% of the claim. Likewise, removal
of anti-competitive practices and amendment
For starters, Nepal needs to effectively to the legislation as the need of the market
decentralize the company registration is another step the government can take to
procedure which is currently centralized in the facilitate business operations. The absence
capital of the city. The functions of the Office of of a regulation to facilitate the growing trend
the company registrar needs to be devolved so of private vehicles serving as a means of
that new business owners do not need to face transportation has hampered the businesses
additional burden of traveling to the capital of various new companies. The constant
to register their businesses and also to extend dispute between the taxi riders and the private
the boundaries of the company registration vehicles owners attached with the unsupportive
among those businesses currently operating decisions of the government has put the future
in the shadow economy. Additionally, the of the startups and other innovative business
government needs to integrate Information and ideas into question.
Communication Technologies (ICTs) to bring
changes to the company registration process.

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The presence of syndicates and cartels in the provide business visas to foreign investors
Nepalese market has prevented the market may deter foreign investment in the country.
from expanding. The presence of lobbyists The Foreign Investment and Technological
demanding to put restrictions on import of Transfer Act, 2019 also includes an appendix
goods is another hindrance to Nepalese that discloses sectors where foreign investments
market. As a result, the goods that enter Nepal are not allowed. The reason behind a negative
are much more expensive than its actual prices. list is to protect the domestic industries in the
So, it is important for Nepal to necessitate the country; however, sectors such as tourism,
annulment of regulations that promote anti- trekking, mountaineering, etc. hold enormous
competitive practices. potential and will benefit highly from foreign
investments. The government must remove
Foreign Investments is another factor that such high potential sectors from the negative
should be equally considered when focusing on list so that the sector can be competitive and
developing conducive business environments. ultimately contribute to economic development.
While the Nepalese government focuses on
economic diplomacy (Ministry of Foreign
Affairs, 2020), the policies in the country are
not favorable to foreign investment. As per Conclusion
Nepal Rastra Bank (2021), there is a huge gap
between the FDI commitments and the actual After delaying its graduation since 2015,
FDI. While the commitments stood at Rs. 38 Nepal is planning to take the plunge in 2026.
billion, the actual investment was situated at Despite being given ample preferential access
Rs. 19.48 billion. Likewise, in order to invest in to major markets, Nepal has not been able
Nepal, an investor needs to obtain clearance to realize even half of its export potential.
from a multitude of government agencies along Compared to this, the drop in exports due
with bureaucratic hurdles and various red tape to graduation is insignificant. Furthermore,
barriers. For example, the delay of approval loans and economic grants acquired from
from the Ministry of Industries to Arghakhanchi organizations like the World Bank, ADB, or
Cement for issuing bonus shares with the even countries like India and China have little to
purpose of reinvestment led the company do with Nepal’s LDC status. Nepal’s graduation
to distribute cash dividends. In the similar from the least developed country list will be a
manner, Nigeria’s Dangote Cement, which significant achievement. Especially while facing
had received approval for the highest Foreign challenges brought forth by the COVID-19
Direct Investment of $550 million failed to get pandemic, graduating will signify the country’s
limestone mines for six years because of lack ability to maintain consistency in its economic
of facilitation from the government (Shrestha, growth. Of course, there is still more economic
2019). stability that is needed before the country can
significantly reduce its economic vulnerability
Similarly, when it comes to granting a business but graduating from LDC will give Nepal that
visa to foreign investors, the Foreign Investment much required confidence boost.
and Technological Transfer Act, 2019 holds a
provision of providing a business visa to only A transition strategy is imperative for a
two people once they express a commitment structural transformation of the economy in
of investing 100 million or more and invest light of graduation. For this, ensuring economic
25 percent of the commitment. The provision freedom is necessary more than ever before.
of putting a cap on the investment limit to Significant studies have found a positive

98
 Economic Freedom: Nepal’s Guide to prosperity after LDC graduation
- Anjila Shrestha, Navneet Jha, Prakash Maharjan & Shuvangi Khadka

correlation between economic freedom and nepal-needs-much-work-before-using-chinese-

GDP. In the meantime, domestic capacities have sea-and-land-ports
to be upgraded with major revision in policies
to facilitate trade and tap in the existing exportHimalayan News Service. (2019, January
possibilities. 26). DoC plans to instal advanced scanners.
Retrieved from The Himalayan Times: https://
To reap the fruits of labour, to gain affirmative thehimalayantimes.com/business/doc-plans-
validation, to see Nepal achieve such an to-instal-advanced-scanners
important development milestone is essential
as this boosts national sentiments. As this KALDOR, N. (1978[1966]). “Causes of the
graduation is taken as a sign of progress it will Slow Rate of Economic Growth in the United
amend Nepal’s reputation in the international Kingdom”, in KALDOR, N., Further Essays on
community. By using smooth transition plans Economic Theory, N. York: Holmes & Meier
and policies, careful management of the
graduation process with the help of consultative Ministry of Foreign Affairs. (2020). Foreign
mechanisms, Nepal can successfully transition Policy. Kathmandu.
to a lower middle-income country.
Ministry of Industry, Commerce and Supplies.
(n.d.). Nepal Trade Policy Review: 2018.
Government of Nepal.
References:
Ministry of Finance of Bangladesh. (2018).
Ale, P. (2021, May 20). Condition of Nepalese Bangladesh Economic Review 2017. Dhaka:
Trade. (P. Maharjan, Interviewer) Bangladesh Government Press.

Basu, K. (2018, April 23). Why is Nepal Rastra Bank. (2019). A Survey Report
Bangladesh Booming? Retrieved from Project on Foreign Direct Investment in Nepal. Nepal
Syndicate: https://www.project-syndicate. Rastra Bank.
org/commentary/bangladesh-sources-of-
economic-growth-by-kaushik-basu-2018- New Business Age. (2020, September 24).
04?barrier=accesspaylog EDI Expected to Speed up Customs Clearance
of Nepal Bound Goods. Retrieved from New
Carlsson, F., & Lundström, S. (2002). Economic Business Age: https://www.newbusinessage.
Freedom and Growth: Decomposing the com/Articles/view/12513
Effects. Public Choice, 112(3/4), 335-344.
Retrieved May 26, 2021, from http://www. Paudel B. (2021, January 31). “Should we
jstor.org/stable/30026309 graduate from Least Developed Country (In
Nepali)?” Kantipur Daily
Ghimire, L. S. (2016). Nepal’s Widening
Trade Deficit (Some Issues, Challenges and Prasain, S. (2020, July 03). Nepal moves up to
Recommendation). lower-middle-income country, says World Bank
report. From The Kathmandu Post: https://
Giri, A. (2019, May 07). Nepal needs much kathmandupost.com/money/2020/07/03/
work before using Chinese sea and land ports. nepal-is-now-of ficially-a-lower-middle-
Retrieved from The Kathmandu Post: https:// income-country-the-world-bank-says
kathmandupost.com/national/2019/05/07/

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Pushpa Raj Rajkarnikar, N. M. (2006). The World Bank. (n.d.). Doing Business 2020:
The Need for and Cost of Selected Trade Economic Profile Nepal.
Facilitation Measures Relevant to the WTO
Trade Facilitation Negotiation: A Case Study U.S. Department of State. (n.d.). 2020
of Nepal. Asia-Pacific Research and Training Investment Climate Statements.
Network.
United Nations Conference on Trade and
Razzaque, M. A. (2020). Nepal’s graduation Development. (2017). The Least Developed
from the least developed country group: Countries Report 2016: The Path to Graduation
Potential implications and issues for and Beyond - Making the Most of the Process.
consideration. UNESCAP.
United Nations Department of Economic and
Sala-i-Martin, X. (1997a). I just ran four million Social Affairs Economic Analysis. (n.d.). Least
regressions. Working Paper No. 6252, NBER. Developed Country Category: Nepal Profile.
From United Nations Department of Economic
Sala-i-Martin, X. (1997b). I just ran two million and Social Affairs Economic Analysis.
regressions. American Economic Review 87:
178-183. United Nations Office of the High Representative
for the Least Developed Countries, Landlocked
Sapkota, R. (2018, March 01). Govt wants Developing Countries and Small Island
Nepal to remain LDC. From The Himalayan Developing States. (n.d.). Criteria for LDCs.
Times: https://thehimalayantimes.com/ From UN-OHRLLS.
nepal/government-wants-nepal-remain-least-
develooped-countries

Shrestha, P. M. (2019, November 7). Why has

Nepal failed to attract enough foreign direct
investment? Retrieved from The Kathmandu
Post: https://kathmandupost.com/
money/2019/11/07/why-has-nepal-failed-
to-attract-enough-foreign-direct-investment

The Kathmandu Post. (2018, August 27). Birgunj

Inland Container Depot gets much needed
upgrade. From The Kathmandu Post: https://
kathmandupost.com/money/2018/08/27/
birgunj-inland-container-depot-gets-much-
needed-upgrade

The World Bank. (2021). Nepal Development

Update: Harnessing Export Potential for a
Green, Inclusive, and Resilient Recovery. World
Bank Group.

The World Bank. (n.d.). Bangladesh. Retrieved

from The World Bank: Data: https://data.
worldbank.org/country/bangladesh

100
 “
Social Security has been identified as
a human right by the international
community to protect the rights of the
individual to live with dignity and
justice. Nepal also provides space for
social security programs though the
institutionalisation of such programs has
not been long enough. However, the
number of programs that Nepal operates
are very high for a developing country
which has posed various challenges for
its financing, operation and delivery.
Faultlines in This paper describes the faultlines in

Nepal’s Social
Security
- Prakash Maharjan
“
operating social security programs in
Nepal and provides few measures to
address them.

Background

S ocial security schemes were first introduced

in Germany in 1883, when the then
Chancellor Otto von Bismarck introduced
based on contribution from both employees
and employers (Britannica Encyclopedia). Both
New Zealand and Denmark introduced social
sickness insurance that were paid out of the insurance schemes that were not contributory
contributions made by the employees and and financed by direct taxation using
employers. This was followed by an introduction means tested methods to identify the target
of law in 1884 that made accident insurance population. Later on, countries initiated their
compulsory. Finally, a law establishing a own social security schemes where security
pension for all workers in trade, industry, and was provided through a mixed method such
agriculture from the age of 70 was passed as non-contributory pensions and contribution-
in 1889. Later, Austria, Italy, Sweden and based sickness and unemployment insurances
the Netherlands followed in the footsteps in the United Kingdom.
of Germany and initiated their own social
security schemes. New Zealand and Denmark Social security protections got worldwide
however, introduced provisions for old age recognition after it was clearly defined in
without establishing social insurance schemes the International Labour Organization (ILO)
in contrast to Germany where the scheme was conventions and the United Nation (UN)

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ECONOMIC FREEDOM
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instruments as a basic human right. The ILO of the wages for the sick and leave of up to
defines social security protection as 15 days each year, and in case of physical
accidents and disability the employer was
“the protection that a society provides required to remunerate the employee for at
to individuals and households to ensure least a year (National Planning Commission,
access to health care and to guarantee 2012).
income security, particularly in cases
of old age, unemployment, sickness, Only in 1994, a non-contributory social security,
invalidity, work injury, maternity or loss the old-age allowance pension was introduced
of a breadwinner.” that promised a universal flat allowance of Rs.
100 to all elderly above 75 years and in 1996-
It is a basic human right broadly defined as 97, two additional social security programs
a system of contribution-based health, pension were added, one for the helpless widows
and unemployment protection, along with tax above the age of 60 and a disabled pension of
financed social benefits. Rs. 100 per month (Malakar, 2018).

History of Social Security in Current Scenario of Social

Nepal Security in Nepal
Nepal also provides different social security Social security in Nepal has grown to be
programs to its citizens. However, no proper a massive government project with the
historical evidence of the pension system in government operating seventy-six1 different
Nepal can be found but a system to provide programs that can be classified into two types
annual lump sums to wounded soldiers based on the method of their financing. One
returning during the First World War can be is the contribution-based social security and
identified as the first social security program the other is non-contributory social security
(National Planning Commission,2012). schemes. In the contribution-based scheme,
As per the report from National Planning contribution amount is deducted from an
Commission, 2012, social security systems in employee’s salary with additional contribution
Nepal officially commenced in 1934 A.D. after added by the employer for an employee’s
the establishment of the Military Money Fund protection whereas in the non-contributory
that promised one fifth of the salary as pension scheme, as the name suggests, beneficiaries are
for retired soldiers. After that, in 1942 A.D. not required to contribute for their protection.
a pension was provided to those completing
25 years of civil service through Land Revenue There are mainly three types of contribution-
Offices which was then distributed through based social security in Nepal – the Social
the Central Bank, Rastriya Banijya Bank, and Security Fund (SSF), the Employee Provident
Nepal Bank Limited since 1976 A.D. Maternity Fund (EPF) and the Citizen Investment Trust
leave for female government employees was
introduced after the introduction of Civil Servant
Act in 1992 and with the introduction of Labor
1 As identified in the Social Protection Budget Brief
Code in 1993, social security programs also
prepared by UNICEF referring to a draft paper
started to include the private sector. The private prepared by National Planning Commission of
sector employers were required to pay 50% Nepal.

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 Faultlines in Nepal’s Social Security
- Prakash Maharjan

(CIT)2. For EPF, 20 percent is contributed to the the past decade. The main reason being the
fund under which 10 percent is deducted from increase in the scope of the programs and
an employee’s salary and the rest is provided by the increase in the number of beneficiaries.
the employer. For SSF, 31% is contributed where A report on the income and expenses of
11 percent is deducted from the employee’s the government for the year 2020/21 from
salary while 20 percent is contributed by the the Office of Financial Comptroller General
employer3. In the case of the CIT, an employee discloses that the expenditure made under
can voluntarily choose to contribute money. social security is the third largest spending of
In Nepal, SSF has been made mandatory for the government, accounting for 16 percent of
private employees, meaning all employees and the government revenue and up to 4 percent
employers are required to enroll into the SSF of the Gross Domestic Product (GDP). The
except the permanent government employees4. average social expenditure for lower middle-
For permanent government employees, EPF is income countries was 3.9 percent of the GDP
mandatory. while that of South Asian countries was 2.7
percent in the year 2017 as mentioned by the
Likewise, non-contributory social security covers Asian Development Bank.
ample number of programs. The World Bank,
2021 identifies 26 different non-contributory
social security programs that include 21 social Contribution Based
assistance programs and 5 labour market • Ministry of Finance
programs currently provided through different • Ministry of Labor, Employment and Social
ministries. These programs are mainly directed Security
towards the vulnerable population such as the • Ministry of Health and Population
elderly, disabled, widowed, children and the • CIT
indigenous and are provided through banking
channels.

Non-Contributory

• Ministry of Home Affairs

Social Security in Nepal and • Ministry of Education, Science and Technology
the Ministries Involved • Ministry of Health and Population
• Ministry of Labour, Employment, and Social
Operating seventy-six different social security Security
programs has burdened the government • Ministry of Women, Children, and Social
as the social security expenditure of Nepal Welfare
government has been increasing rapidly since • Ministry of Land Management, Cooperatives,
and Poverty Alleviation
2 There are other contributory based funds as well • Ministry of Urban Development
such as the National Insurance Fund but the scope • Ministry of Industry, Commerce, and Supplies
of such funds is limited.
3 The total contribution to SSF is divided as: old-age
pensions (28.33 percent); accident and disability The majority of this expenditure is made under
(1.40 percent); dependent family security (0.27 the social security allowances provided by the
percent); and medical, health, and maternity (0.7 government. As per the data extracted from
percent on medical and 0.3 percent on maternity).
4 Those employees that have been appointed after Department of National ID and Civil Registration
graduating the nation-wide exams conducted by (DoNIDCR), the estimated government
Public Service Commission.

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ECONOMIC FREEDOM
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expenditures will be NRs. 105 billion for social

security allowances in the current fiscal year
alone while the budget allocated for the same
was NRs. 100 billion. This drastic increase in
the expenditure of social security allowances
is the result of the government increasing the
rate of allowances for senior citizens, single
women and the disabled by 33 percent from
NRs. 3000 per month to NRs. 4000 per month
(Shrestha, 2021). 5

Source: Ministry of Home Affairs, 2021

Types of Social Security Allowances in Nepal

Allowance
Allowance for
5
Composition
Number of
SSA Type Description rate in 2021/22 of Total SSA
Beneficiaries
NPR in NPR (in Expenditure
billions)
People that have
Old Age
reached 70 years 1316339 4000 63.18 59.98%
Allowance
of age
Widow Women from any
359365 2660 11.47 10.89%
Allowance age group
Unmarried
women, divorced
Old Age
or widowed
Allowance – 277408 2660 8.85 8.41%
women who have
Single Woman
reached 60 years
of age
People from Dalit
Old Age
group that have
Allowance – 191307 2660 6.11 5.797%
reached 60 years
Dalit
of age
Children from
Children from
specified 798364 532 5.10 4.838%
specified region
region
People who have
been provided
Highly
disability
Incapacitated
identification 127696 2128 3.26 3.095%
Disability
card of blue
Allowance
colour by the
government

5 Expected allowance calculated as per recent data

available from DoNIDCR.

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 Faultlines in Nepal’s Social Security
- Prakash Maharjan

People who have

been provided
disability
Full Disability
identification 63047 3990 3.02 2.865%
Allowance
card of red
colour by the
government
Children from
Dalit background
Dalit Children 406979 532 2.60 2.466%
under the age
of 5
Endangered
group such
as Kusunda,
Bankariya, Raute,
Surel, Hayu,
Endangered Raji, Kisan,
22688 3990 1.09 1.031%
Caste Lopcha, Meche
and Kuswadiya
(Pattharkatta,
Silkat,
Kushbadhiya,
Kuchbadhiya)
People from
Old Age Karnali region
Allowance - that have 21004 2660 0.67 0.636%
Karnali Region reached 60 years
of age
Total 3584197 105.35 100.00%

Source: Author’s own calculation based on the data available in DoNIDCR

Faultlines within Social Financing Social Security

Security Programs through Taxation
Social security as a human right helps Nepal, being a low-income country cannot
people live with dignity, equality, and justice afford to operate seventy-six different social
(Mathema, 2012). However, with the increasing security programs especially now that the
expenditure for the programs, there has been country is transitioning towards a lower-middle
a growing concern regarding the financing, income country. The transition to a lower
operation, and the delivery of such programs. middle-income country means that grants as
a source of financing budget is decreasing. In
this situation, Nepal needs to either finance its
social security budget through loans or through
taxation. The budget details for the fiscal year
2022/23 discloses that the government used

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NRs. 18 billion worth of loans to finance in the table, the Social Security Expenditure
social security expenditure in the fiscal year of Government over the Years, Nepalese
2020/21 which is significantly more than the government spent around 16 percent of its
loans required to finance social security the revenue for funding social security in the
year before. Now, social security being an fiscal year 2020/21 which is expected to
unproductive sector will not generate returns reach 20 percent of the government revenue
and financing it through loans will only add to in the fiscal year 2021/22 accounting 5
the debt burden of the country. percent of the GDP. Given that the government
revenue is increasing annually, social security
Similarly, the growing Tax/GDP ratio - 13.4 % expenditure’s share within the government
to 21.8 % since 2010 to 2020 (World Bank, revenue has also been increasing by 2 percent
2019) - of the country suggests that most of annually, implying that taxpayers are carrying
the taxation reflect increased financing for a substantial share of burden for funding social
social security programs of the country (United security programs of the country.
Nations Children Fund, 2020). As mentioned

Social Security Financing (in billions)

Source: Budget Speech, 2022/23

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 Faultlines in Nepal’s Social Security
- Prakash Maharjan

Social Security Expenditures of Nepal Government over the Years

Government Social
Government Social
Spending on Security to GDP (in
Years Revenue (in Security to
Social Security Government billions)
billions) GDP
(in billions) Revenue
2013/14 40.8023 410.8630 10% 1941.624 2%
2014/15 50.7578 411.8480 12% 2124.6498 2%
2015/16 56.7471 485.2390 12% 2248.691 3%
2016/17 87.2822 612.5975 14% 2599.234 3%
2017/18 98.9793 726.7176 14% 3031.034 3%
2018/19 116.654 839.6619 14% 3464.319 3%
2019/20 147.3039 841.3125 18% 3767.043 4%
2020/21 156.4930 976.3094 16% 4266.32 4%
2021/22 6
233.6708 1152.4246 20% 4277.302 5%

Source: Budget Speech, Ministry of Finance, Various Years

6

Lack of Policy Coherence

As mentioned before, the government operates provisions based on the type of employment.
different contribution based social security Permanent government employees do not need
programs along with the SSF. These programs to contribute to SSF and their contribution is
have similar target groups but different sent to the EPF while employees on contract are
policies. For instance, the national health required to contribute to the SSF. Employees
insurance program and the SSF both provide of public institutions can choose on their
insurance against medical emergencies but the behest until the government decides for them7.
amount of contribution for both these programs Moreover, the government for its permanent
are different. The national health insurance employees needs to contribute only 16 percent
covers up to NRs 100,000 for a contribution including the EPF (10%) and the pension fund
of NRs 3,500 for a household comprising of (6%) while private employers are required to
five members while the SSF covers up to NRs contribute 20 percent for their employees for
100,000 for a contribution of 0.7 percent of the SSF.
individual workers’ salary.
This lack of policy coherence has resulted in
Likewise, the provision for contribution-based biased treatment for the private sector by the
social security is different for the government government as the policy favors the government
employees and the private sector. The and public officials.
government has made it mandatory for the
private sector to enroll in the SSF while for
the government employees, there are different

6 Based on revised estimate of expenditure as per 7 Based on the conversation with the information
budget speech for the year 2022/23. officer of Social Security Fund.

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ECONOMIC FREEDOM
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No clear framework of (United Nations Children Fund, 2020). These

two programs can be operated through a single
operation
ministry rather than two different institutions.
Social security falls under the jurisdiction of
all three levels of government in Nepal. The
constitution of Nepal states social security to be Problem of multiple benefits
an exclusive power of the federal government
as well as concurrent function of the federal, Till date, the government is yet to verify the
provincial, and the local governments. The actual vulnerable group of people who require
absence of clear institutional mechanism and social security. Individuals already listed in
an integrated framework that sets clear roles one program are also listed as beneficiaries
for federal and sub-national governments in others which has increased the cost of
has created complications in achieving the delivering such programs. As per the Nepal
shared objective of protection especially when Multi-Dimensional Poverty Index report, 2020,
social security programs are mainly operated almost 17.4 percent of total population of the
through federal budget with little room for country is poor, meaning, the number of people
subnational governments (World Bank, 2021). that can be identified as poor is just over 5
In Nepal, while the majority of the budget for million where as social assistance programs
social security programs are allocated to the provide security to 6.8 million individuals
federal government, the delivery of most of and labour market programs cover about 0.2
these programs are done by the local levels million (World Bank, 2021). In total, the social
who rely on the guidelines issued by the security programs cover around 10.5 million
federal ministries. The local levels are limited individuals hinting that some individuals and
to maintaining statistics and monitoring households might be benefitting from multiple
compliance but are rarely involved in program programs (ibid.). The fifty-eighth report from
development even when they are close to the the Auditor General, 2021 also confirms that
target population. beneficiaries are receiving benefits from multiple
programs as it discloses that as many as 170
local levels registered the same beneficiary on
different programs and recorded expenditures
Spread of programs among
even of beneficiaries that are already dead.
multiple ministries
Number of Beneficiaries in EPF, SSF and SSA
The country provides social security through (in thousands)
multiple government ministries. United Nations
Children Fund (UNICEF), 2020 identifies 13
different ministries that provide key social
security programs in the country. Having
different institutions provide social security will
only impact the fiscal space as these programs
will incur high administrative cost for the
government and compromise efficiency in terms
of service delivery. For example, the Ministry
of Home Affairs (MoHA) provides scholarships
to the family of the martyrs while the Ministry
of Education, Science, and Technology also
provides scholarship opportunities to students
Source: Respective Website of each Program

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 Faultlines in Nepal’s Social Security
- Prakash Maharjan

Also, the report reveals that 38 local levels of each level of government regarding social
provided benefits to individuals that were not security programs that help in achieving its
listed in the information system thus questioning objective. With each government level having
the accountability of the government in terms clearly defined roles regarding social security
of social security allowances. programs, the country can then move towards
integrating and coordinating such programs
and data regarding it to avoid dual registration
of beneficiaries in multiple programs as well
Non-competitive programs as beneficiaries receiving multiple benefits. In
Brazil, clearly defined roles and responsibilities
In case of contribution-based social security between the provincial and local governments
programs, the three major programs are not with the implementation of policy instruments
competing among themselves even when they have helped create an integrated information
target the same group of the population. The and delivery system. Brazil implemented a
contribution-based social security is targeted Unified System of Social Assistance (SUAS)
towards the working population. However, that is operationalized through a single registry
the SSF has been made mandatory for private and the Index of Decentralized Management
sector (most from the private sector are yet (IGD). The single registry helps in avoiding
to enroll). As the government made SSF duplication while the IGD helps to estimate the
mandatory for private sector, EPF stopped transfer of resources (World Bank, 2021).
enrolling private sector contributors in the
fund limiting its services only for the public Nepal can also maintain an integrated
sector. However, the provision for receiving information system where data of each
benefits under EPF, CIT and SSF are different. beneficiary can be maintained and reporting
For instance, an employee enrolled in EPF can of the programs can be done through the
apply for loans after contributing for two years same system. Additionally, the information
in terms of personal loans, one year in terms regarding expenditures, budget, modality of
of educational loan and house loan whereas the programs can be made available to the
an employee enrolled in SSF can draw loans general public through the same system so that
only if they have contributed for three years. transparency of the social security program can
Similarly, an employee enrolled in CIT can be maintained and suggestions regarding any
draw loans after two years of contribution with program can be provided to the government.
regards to the loans mentioned. In this regard,
EPF and CIT seems lucrative for the employees Alternative methods of identifying
but SSF has been made mandatory for private the target group
employees making the programs offered by the
government non-competitive with each other. Likewise, the government must identify alternative
methods of mapping the target population for
social security programs. As mentioned above,
there are instances of beneficiaries receiving
Recommendations benefit from different programs along with
registration of beneficiaries that do not require
Setting clear roles
such protection. One such method to limit
existing issues is to implement a means tested
Nepal, first and foremost, must prepare a clear
or proxy means tested assistance program to
framework regarding roles and responsibilities
identify vulnerable population that requires

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ECONOMIC FREEDOM
A Compendium of Essays

social assistance. For this, certain criteria are Integrating similar programs and delivering
stated and data are collected, maintained, and it as one will help the government reduce the
analysed and only those who fall below the burden of allocating sources of financing which
said threshold will be provided with the social will ultimately lessen the burden on taxpayers
assistances. and make the government more accountable.

Nepal can implement such interventions for The ministry can then carry out evaluations
certain programs through local governments to analyze the effectiveness of social security
that share close proximity with the citizens. programs in the country and take decisions
Criteria specific to the targeted population and based on the revelation. For example, Armenia
the respective programs can be developed initiated different one-off assessments and
to better identify the individual requiring evaluations along with a Core Diagnostic
assistance. Proxy/Means testing as a method Instrument (CODI)8 assessment to map and
of identifying target population has been used analyze the overall social security system.
in many countries. For example, Colombia Similarly, in Moldova, the lead Ministry
implemented such programs for subsidized produces annual social reports which discloses
health insurance and with several programs information on the main programs, coverage
for conditional cash transfers, workfare, and and spending (Sammon, Attah, & Carraro,
scholarships for vocational training. Mexico 2020).
used such intervention for conditional cash
transfers. Similarly, in Armenia, such methods Voluntary and Competitive Programs
were used for humanitarian assistance and
cash transfers and Indonesia used it for Nepal has made the contribution based social
subsidized rice rations (Coady, Grosh, & security mandatory. The government made
Hoddinott, 2004). Implementing means tested provision of compulsion after two of the forced
or proxy means tested assistance will further saving schemes - EPF and CIT were already
make the government accountable towards
the taxpayers as it will help in controlling present in the market. Here, the government
the misuse of taxpayers’ money as the actual should provide the option of allowing
population that requires protection can be individuals to choose their own social security
identified through this method. scheme based on their preference and remove
the compulsion of being enrolled in SSF for the
Social Security Programs through a private sector and EPF for the public sector.
single ministry Separating two different funds for employees of
two different sector will deprive the employee
Nepal must bring all social security protection from their right to choose the best alternative
programs under one ministry, which in Nepal’s and also limit their option of choosing the best
case can be Ministry of Labour, Employment saving program available in the market.
and Social Security (MoLESS). MoLESS
acting as a focal ministry will make it easy Additionally, the government must make these
to harmonize the policies and legislations programs competitive and align the benefits
guiding different social security programs
ultimately reducing the cost of delivering such 8 CODI is a social protection analysis tool that
services. Moreover, identifying a focal ministry take a SYSTEM approach to the analysis. It helps
for spearheading the social security programs make an in-depth assessment regarding operation
of the program as well as looking into specific
will help in integrating different fragmented administration aspects of the program. For more:
programs with the same target group as well. https://ispatools.org/tools/CODI-English.pdf

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 Faultlines in Nepal’s Social Security
- Prakash Maharjan

these programs provide so that the dual Britannica Encyclopedia. (n.d.). Social
treatment of citizens regarding contributions Security. Retrieved from Britannica: https://
and the benefits can be omitted. Doing so will www.britannica.com/topic/social-security-
also reduce the costs incurred for the private government-program/Historical-evolution
sector as their cost of contribution is higher
than that of the government. Chaudhary, A. (2020). Contribution-Based
Social Security Act: Policy Brief. Kathmandu:
Samriddhi Foundation.

Conclusion Coady, D., Grosh, M., & Hoddinott, J. (2004).

Targeting of Transfers in Developing Countries:
Social security programs were brought forward Review of Lessons and Experience. Washington:
to protect the vulnerable population and ensure The International Bank for Reconstruction and
their right to live with dignity. Nepal provides Development.
social insurance programs, social assistance
programs and also labour market programs Department of National ID and Civil
to protect the vulnerable population. However, Registration. (n.d.). Retrieved from https://
these programs are fragmented among donidcr.gov.np/
different ministries and target similar group
of population which has only led to increase Employees Provident Fund. (n.d.). EPF Financials
in the government expenditure. Furthermore, at a Glance. Retrieved from Employees
the popularity of such programs has led the Provident Fund: https://site.epfnepal.com.np/
government to increase the budget allocation
and since social security programs in Nepal Government of Nepal. (n.d.). Social Security
are mostly funded through taxes, it raises the Allowance Rate. Retrieved from Department
question of optimum utilization of government of National ID and Civil Registration: https://
revenues. Also, the problems faced while donidcr.gov.np/Home/SocialSecurity
operating such programs and delivering
services out of those programs, raise the International Labour Organization. (n.d.).
question of transparency and accountability Facts on Social Security. Geneva: International
towards the government regarding the use Labour Office.
of public money. The government must work
towards making social security programs Kumar, R. (2019). Social Security Fund:
effective and efficient, so that the objective of Questions in Security (Samajik Surakshya
such programs can be achieved and the target Kosh: Surakshyamai Prashna). Himal Khabar
group of such programs can be well protected. Patrika, pp. 22-28.

Malakar, I. (2018). The Effectiveness and

Relevance of Social Security Allowance in
References Nepal. Tribhuvan University Journal, 51-64.
Asian Development Bank. (2019). The Social Mathema, P. (2012). National Social Security
Protection Indicator for Asia: Assessing Policy: A Reality Need for Nepal. Administrative
Progress. Asian Development Bank. Retrieved and Management Review, 56-63.
from https://www.adb.org/sites/default/
files/publication/516586/spi-asia-2019.pdf Ministry of Home Affairs. (n.d.). Progress

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Report for the year 2076/77. World Bank. (2021). Social Protection: Review
of Public Expenditure and Assessment of Social
National Planning Commission. (2012). Assistance Programs.
Assessment of Social Security Allowance
Program in Nepal. Kathmandu: Government
of Nepal.

Office of Auditor General. (2078). Summary

of Yearly Progress Report.

Office of Financial Comptroller General .

(n.d.). Yearly Report of Income and Expenses
of Government of Nepal, 2077/078.

Office of the Auditor General. (2021). 58th

Annual Report of the Auditor general.

Sammon, E. M., Attah, R., & Carraro, L.

(2020). Integrated Social Protection Systems
in Europe and Central Asia Region. Oxford
Policy Management and UNICEF.

Shrestha, P. M. (2021, August 26). Government

mulls options to ease growing burden of
social security allowances. Retrieved from
The Kathmandu Post: https://kathmandupost.
com/national/2021/08/26/government-
mulls-options-to-ease-growing-burden-of-
social-security-allowances#:~:text=The%20
allowances%20increased%20to%20
Rs68,from%20Rs3%2C000%20per%20month.

Social Security Administration. (n.d.).

Alternatives to Social Security.

United Nations Children Fund. (2020). Social

Protection Budget Brief.

Wagle, A. (2021, July 5). Making a mess

of social security. Retrieved from The
Kathmand Post: https://kathmandupost.com/
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social-security

World Bank. (2019). Tax revenue (% of GDP)

- Nepal.

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 Samriddhi, The Prosperity Foundation an introduction

Samriddhi, The Prosperity Foundation is an independent policy institute based in Kathmandu,

Nepal. It works with a vision of creating a free and prosperous Nepal.

Initiated in 2007, it formally started its operations in 2008. The specific areas on which the
organization works are:
i. Entrepreneurship development
ii. Improving business environment
iii. Economic policy reform
iv. Promoting discourse on democratic values

Centered on these four core areas, Samriddhi works with a three- pronged approach—Research
and Publication, Educational and Training, Advocacy and Public Outreach.

Samriddhi conducts several educational programs on public policy and entrepreneurship. It is

dedicated to researching Nepal’s economic realities and publishing alternative ideas to resolve
Nepal’s economic problems. Samriddhi is also known for creating a discourse on contemporary
political economic issues through discussions, interaction programs, and several advocacy and
outreach activities. With successful programs like “Last Thursdays with an entrepreneur” and
“Policy Talkies”, it also holds regular interaction programs bringing together entrepreneurs,
politicians, business people, bureaucrats, experts, journalists, and other groups and individuals
making an impact in the policy discourse. It also hosts the secretariat of the ‘Campaign for a
Livable Nepal’, popularly known as Gari Khana Deu.

One of Samriddhi’s award winning programs is a five day residential workshop on economics
and entrepreneurship named Arthalya, which intends to create a wave of entrepreneurship and
greater participation among young people in the current policy regime.

Samriddhi is also committed towards developing a resource center on political economic issues
in Nepal called Political Economic Resource Center (PERC) currently housed at Samriddhi office.
It also undertakes localization of international publications to enrich the political economy
discourse of Nepal. Samriddhi was the recipient of the Dorian & Antony Fisher Venture Grant
Award in 2009, the Templeton Freedom Award in 2011 and the CIPE Global Leading Practice
Award in 2012.

(For more information on the organization and its programs, please visit www.samriddhi.org)

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