Major political battle is over, and economic journey begins
Currently there is a hot political debate on whether Nepal can sustain new federalism. The debate mainly refers to a very high overhead cost incurred in operating three tiers of the government (Federal, Provincial & Municipal/Rural) in delivering services to public. In reality too, tensions among federal, provincial and local governemnts are growing.
In the mean time, the federal Minsitry of Finance has put pressure on provincial and municipal governments to broaden their revenue base. As a result, municipal governments decided to impose additional taxes on local agricultural produce and also increased land tax and local services fees on birth, death, and marriage registration. This move of local governments hit hard to a traditionally subsistent farming family.
These added tax burdens have elicited wider public criticism and reactions in the media, which in turn provoked rigorous political commentaries circulated through social networking sites. Despite fears that federalism is not suited to a small country like Nepal, there was overwhelming desire in the historic popular movement of 2006 for this political change, which ultimately took shape through the constitutional assembly. Finally a new constitution and federal form of governance has evolved, but this has come at a very high social, economic and time cost.
Prime Minister KP Oli has now announced that the political battle is over, and that it is now time to work towards prosperity of the nation. But how can prosperity be achieved? In this blog, I discuss the role of entrepreneurship in promoting prosperity.
Entrepreneurship can be a powerful tool to create jobs, generate revenue & sustain the federal structure, so that all Nepalese could equally prosper, as enshrined in the current Nepal constitution.
The following measures are critical to support the development of public enterprises & entrepreneurship for economically viable federal structures in Nepal.
Favourable Investment Environment
Favorable environment refers to the creation of an environment where entrepreneurs, irrespective of their financial and social status, feel comfortable to invest their capital in business activities. It is about making entrepreneurs feel, realize and harness their potential.
Government has a key role in creating enabling environment. Relevant Government support to promote products in domestic & international market encourages domestic and global investors. Creating an enabling environment encompasses steps and measures that enhances share of the private sector in an economy by encouraging innovative ideas to entrepreneurship.
The major elements of such environment are: reforming regulations that govern business sector (property rights, taxation, regulation of business, banking and finance etc.), promoting the rule of law and engaging the private sector in policy making processes, to name a few. Predictability of public policies, political stability, transparency and accountability and sound macro-economic policies are also key elements of the enabling environment.
Current national economy of Nepal is heavily dependent on remittance which is not a good sign. In order to reduce that over-dependence, policy makers should think timely about it. One of them could be tapping the potential of returning workforce. That workforce has already gained diverse skills and knowledge in foreign employment for many years, which can be turned a a innovative group of entrepreneurs after they return to homeland. By creating a policy framework and an enabling investment environment, they could use their fresh skills & knowledge to train fellow countrymen and continue to generate income to their family and for their own retirement.
Entreprenurs need good investment climate. The main elements of a good investment climate are as follows:
Improving Security & Stability
These are threshold requirements. No investor wishes to invest in an unstable and unsecured environment. Stability is about providing predictable policy and regulatory environment in which investors are assured of the future of their investment. Security is about the protection of properties, people and their investment & reducing the cost of doing business.
Creating Supportive Regulations
Businesses in any jurisdictions such as federal, provincial or municipal/rural need to comply with the regulations set by government (local, provincial or central). Legal and administrative conditions and provisions to be complied with are critical for entrepreneurs. Reducing possible over-regulation by federal, province and municipal government agencies often referred to as red tape, improving competition policy, cross border business and effective tax laws are the matters to be considered to encourage investment.
The quality, accessibility and affordability of infrastructures are one of the major determinants of growth and development. Financial infrastructure implies banking, insurance and financial services. These services provide support in managing and mobilizing finance which is critical in business. Physical infrastructure (transport and communication networks and power) connects businesses to customers and suppliers and helps take the advantages of modern technologies, to access market and promote efficiency in production. It makes significant impact on cost which is a key element of competitiveness.
Socio-cultural values also affect private businesses. Developing countries are facing the problem of attracting qualified people in the private sector for a variety of reasons including job security, social values, and underdevelopment of corporate culture and prospects of career progression. These issues need to be addressed carefully to promote business activities and the interest of human resources.
Improving Labour Markets
Availability of skilled workers and organized labour market directly impact the development of business activities. Potential investors are always concerned with quality and availability labour force, the rate of compensation and the terms and conditions of services. These elements are critical for the success of business and profitability. Technology is changing fast. Labour should be trained and developed to keep pace with the changed technology. Businesses that fail to realize the need of change tend to lose opportunities to grow.
Lowering the Cost and Minimizing Risks
Incentive to investment also depends on the cost involved in making the investment productive. High cost associated with various factors such as inadequate and underdeveloped infrastructure, corruption, criminal activities, legal requirements and excessive red tape reduces profit, discourages investment and creates disincentive to business firms. Risks are integral element of any businesses. Entrepreneurs are normally prepared to take some of that risks. But risks caused by policy uncertainty, macroeconomic instability and arbitrary regulations and administrative procedures create disincentive to potential investors. Such risks should be minimized or even eliminated to encourage investment.
Improved Access to Knowledge Resources
Modern economy is turning to be knowledge economy. Ownership of ideas has become increasingly important than the ownership of capital. Knowledge to efficiently combine the factors of production to produce goods and services is considered the fourth factor of production called management. Knowledge resource is comprised of data, information and knowledge. Modern business must have enough data and information not only about own product but also about human and non-human elements that affect business prospects. Technological innovations and the shift towards knowledge-based economies recognize that the investment in human capital is a pre-requisite for sustained economic growth and central to start-up, growth and productivity of firms. Small and medium scale enterprises in developing countries are seriously constrained by the access to knowledge resources for modernizing their product and enhancing their responsiveness. Easy access to knowledge resources would be a great help to make businesses more competitive.
Enhancing Management Capability
Developing the capacity of people, organizations and society is a central and crosscutting element of all development efforts. Business management has become more critical and challenging than before for some obvious reasons i.e., trade liberalization, globalization and the development of technology. The capacity of management must be built and constantly updated to improve the private sector’s ability to overcome constraints, to adopt the changes in business environment and new technologies, to promote innovation and to expand entrepreneurial skills.
Likewise, small business enterprises need direct support at the initial stage of business set-up. Such entrepreneurs may lack market information, business management skills and the understanding of business environment at initial stage. Direct support to new entrepreneurs who lack enough resources to invest on these matters can help them to integrate to business community and to boost their confidence to stay on and thrive.
Development of entrepreneurship requires positive support from all levels of government. Private enterprises can bring substantial and lasting changes in national economy. Therefore, government, donors & financial institutions in Nepal should work closely to formulate right policies that encourage entrepreneurship. The current public discourse of tax hikes & fee increases on government services should be reconsidered on fundamental purpose of bringing prospeioty to the nation . Taxpayers should be taxed on their surplus production or profits from their enterprise, not on their subsistence level incomes. Charges for government services should be considered based on marginal utility of those services by payers, not based on requirement of large revenue base to operate the government.
The blog is written by Dr Sakuntala Devkota, Research Fellow, Institute for Studies and Development (IFSD) Worldwide, Sydney, Australia. The views and opinions expressed in this blog those of the author, and not in any reflect the position of IFSD.