Online Gaming: The Omnipresent Phenomenon

Posted by: on Oct 4, 2012 | One Comment

It’s ubiquitous and yet it is an elephant in the room. Online gaming is a popular practice throughout the world, despite the national or state regulations that have plagued it for a while.

However, this element of uncertainty surrounding the legalities related to this flourishing sector isn’t a healthy sign for the industry as a whole. Not only does this make it difficult to judge the impact of this sector, it also impedes planning and strategizing for the future.

Free the People, Control the Government: A Lesson from Hong Kong

Posted by: on Jun 29, 2012 | No Comments

It is often believed that countries that are small are easy to govern. It is also believed that high population impedes economic development. There is one nation that shattered these popular beliefs… Hong Kong!

Was Laissez Faire Responsible for the Economic Crisis?

Posted by: on Feb 22, 2012 | 3 Comments

It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.

Adam Smith (Wealth of Nations, 1776, Vol. I Chapter II.2, p27)

 

The recent economic crisis showed that we live in a global economy. Economies across the globe are connected so that ups and downs in exchange rates, stock prices and product prices impact every corner of the earth. But, was the recent global crisis caused by the breakdown of the free markets? Can markets be sustained only by the state? This sentence assumes Laissez Faire. No country is even close to it.

 

The laissez faire philosophy does not support government intervention on matters related to the economy. This obviously implies minimal regulations and taxes and private ownership of property. Laissez faire does not support wealth redistribution. Wealth redistribution involves taking capital from the productive sectors and injecting it into the less productive ones. This forced economic egalitarianism, kills innovation and the incentive to work hard, thereby destroying productivity. Take the former Soviet Union. Its people are brilliant – no other country has chess as a spectator sport. And yet when its rulers tried to make all of us its people they destroyed the country but equality was not achieved.

 

Even if wealth redistribution leads to the establishment of equality temporarily, this situation would soon collapse. Every individual has different motivation levels, skill sets and qualities. Therefore, their economic choices are bound to differ. Furthermore, economic inequality is essential for people to select their own actions, without any external influences.

 

Coming back to the crisis… Markets always go through the process of correction. Sometimes the correction is miniscule and at other times it is huge. What happened with the busting of the housing bubble in the US was a market correction. Who caused the bubble? The government rescued Fannie Mae and Freddie Mac and pumped in billions of dollars into the economy. But the US is still reeling under economic pressure. Fannie Mae and Freddie Mac were formed with a charter and special privileges and functioned as an arm of the US government to promote house ownership. They incentivized banks to lend by purchasing all mortgages from the lender banks with no regard as to the capacity of the borrower to repay. Banks merely did what the US government them to do.

 

The same happens in countries across Asia. Whether it is India, Nepal, Bangladesh, or the rest of SAARC countries, banks are used for political purposes. Government will instruct lending to privity sector – means that lending is directed to areas where the party in power can gain the most. In India it is farmers and businessmen who carry favor and patronage with the political establishment. Bankers are never free to make sound business decisions. In Nepal, political interference results in loans which otherwise never be given. So why blame the US alone.

 

When next time you think about what caused the monetary crises – remember banking and finance is by far one of the most regulated, centralized sectors of all governments. It is not lack of controls but the regulation and the interference which caused the crises.

 

Myths About Free Markets Debunked!

Posted by: on Feb 6, 2012 | 4 Comments

The AT&T deregulation in the 1980s offered competitive phone rates to the market. The US airlines deregulation in 1979 facilitated lower airfares and more choices to consumers. Despite these historic successes of a free market system, those against the concept often term supporters as anarchists. Naysayers claim that a free market economy leads to overproduction and promotes greed. Here are some myths and misconceptions about a free market economy:

 

Myth 1: There are no regulations in a free market

 

One of the meanings of ‘free’ might be ‘unregulated’, but a free market is in no way related to it. According to economists, self-set standards and consumers are the two forces that regulate free markets. These are also forces that can replace governmental regulations and save the taxpayer’s money. Let’s take an example of vehicle manufacturers. Manufactures of automobiles analyze market reviews of the products and eliminate features in the upcoming models which irked consumers previously. This is a perfect example of how a so-called ‘unregulated’ market would operate.

 

Myth 2: Inflation in bound to happen

 

Did you think that it is natural for prices to rise as the years go by? No. Inflation is an unnatural phenomenon that acts likes an extra tax on earnings. Inflation helps some groups for a short time. For instance, farmers may sell their products at higher prices, till the time the prices of their inputs surge. In the long term, inflation is beneficial only to the government, as it offers more funds while reducing the real debt value.

 

Inflation is not caused by greedy businessmen – all businessmen are after all greedy. The cause of inflation is only one: the government increasing the money supply to fund its already limitless expenses.

 

Myth 3: Government can offer the best solution to problems

 

One of the political creations of the 1930s New Deal reforms is Social Security, which has only served to increase the burden of taxes since the last eight decades. Most often than not, solutions posed by the government to end economic troubles impinge heavily on the taxpayers. This is because most of the ‘solutions’ are schemes for redistributing tax in areas that buy political support.

 

Free market supporters believe that the true motivation behind any political decision is to help the decisions makers keep their seats. This reality is often ignored by the people who continue to believe that the government will come to their aid. On the contrary, in a free market, the consumer’s voice will determine the quality of products or services and contribute to political, civil and economic freedom.

 

Can Free Markets Battle Corruption?

Posted by: on Feb 5, 2012 | 4 Comments

When Alexander the Great visited the philosopher Diogenes and asked whether he could do anything for him, Diogenes is said to have replied: ‘Yes, stand a little less between me and the sun.’ It is what every citizen is entitled to ask of his government.

Henry Hazlitt (philosopher, economist, journalist)

 

Sometimes I feel that we Indians have sold our soul to the Devil! Can there be any other reason for our acceptance of corruption as a part of our lives? India is a country where the word ‘politics’ is linked with ‘dirty’, where almost all politicians are associated with mafia gangs and where bribes can make bureaucrats do any kind of work.

 

I am not trying to stir people’s conscience. All I want to do is understand the root of corruption and how best to uproot it.

 

Countries topping the list of corruption have a few things in common – government endorsing perfectionist, context minded policies and a number of tariffs and prohibitions. Similarly, the countries that have a low corruption rate have freer economies and less government intrusion as well as regulations. So, I conclude that introducing free market policies in India could be one of the ways of battling the corruption we have taken for granted as a part of our government.

 

Let me exemplify, the 1920s Prohibition Act forbade trade and consumption of alcohol in the US. Isn’t it funny that the US Government thought it could cure the problem of drinking by introducing a law? This resulted in the emergence of a black market and gave rise to mafia lords like Al Capone.

 

Now, let’s take a quick look into the Enron-UTI tale. One of the richest companies in the world, the Texas-based Enron Corporation, went bankrupt when its accounting scandal became public. Fraudulence was punished swiftly and lethally by the stock market with firm’s stock diving to zero. When an economy is market-driven, the consumer’s confidence determines success. In an instance where this confidence is shaken, the business comes to an end.

 

As opposed to this, the government-operated mutual fund agency, the Unit Trust of India (UTI), robbed investors of their money. How did the government react to this incident? It offered fresh funds to the agency and bailed out UTI. Where did these funds come from? Obviously, they came from the taxpayers.

 

In a free market, entrepreneurs are rewarded for doing well, that is, by offering consumers the products they want, at competitive prices. Irrespective of the size of a company, managers remain answerable to the public. Furthermore, since the market position is not permanent, entrepreneurs and managers cannot take things for granted and are forced to remain on their toes.

 

However, these market checks do not apply to government or government owned entities. Air India may be riddled with corruption and may lose Rs. 25 crores every day. Does it go bankrupt or cease to operate? It is sold to another company? No. It gets an even bigger subsidy from the government.

 

What do government approvals, licensing requirements and other regulations mean? Direct corruption. In order to obtain 2G licenses, telecom companies shelled out crores to the minister. End licensing and regulation and corruption goes too.

Government Regulations Hamper Growth of Small Businesses

Posted by: on Feb 4, 2012 | One Comment

Being an ardent supporter of the free market, I had always known that government interventions curb entrepreneurs’ innovativeness, thus leading to fewer opportunities for all. Data from the World Bank Group Entrepreneurship Survey (2008) proves it. World Bank economists said that there was a relationship between ease in establishing business and greater entrepreneurial activity.

 

Not only do entrepreneurs engage in fewer business endeavors, but their performance is also hampered by regulations. Researchers have found that, in Mexico, the effort to simplify business formation increased employment by almost 3%!

 

Why Are Government Regulations a Problem?


Most economists, including Nicole and Mark Crain from Lafayette University, believe that government regulations harm businesses in the following ways:•

  • The need to comply with regulations adds to the cost burden of small businesses. The Crains estimated that the per member rate of Federal regulations compliance for small business houses with about 20 employees could exceed $10,585. However, businesses with about 500 members spend only $7,755!

 

  • Regulations tend to make business houses less competitive in the foreign market. The Crains explicated that regulations lead to “inefficiencies in the structure of American enterprises”. This adversely impacts the competitiveness of companies internationally. They also claimed that this situation leads to businesses relocating to places that have less government interventions.

 

  • Predicting the impact of regulations is difficult. This uncertainty discourages business owners from investing and recruiting. Therefore, the purchase of equipment or addition of workers keeps getting delayed.

 

  • New regulations may have inadvertent consequences. For instance, the healthcare law that was introduced in the US in 2011 required business houses to submit 1,099 forms, from 2012 onwards, for a payment of more than $600 made to one payee. The endeavor to boost health insurance coverage led to unrelated tax filings, which imposed heavily on small businesses. The outcome surprised even the Congress, the party that had voted for the law.

 

Due to the complaints from small business owners, American federal agencies announced several plans to reduce regulations. To this end, several changes were proposed in the 21st Century Regulation initiative. Some of those changes include the elimination of export barriers and duplicative requisites. The US government also decided to abolish the 1.9 million yearly hours of unnecessary reporting necessitated by employers. This, itself, has the potential of saving $40 million in yearly costs!

 

It is onerous burden of government regulations specially those impacting small businesses that have kept Indian poor and its regulations like Nepal and Bangladesh.

 

The Indian leaders too must think on the lines of reducing the burden of governmental regulations on small businesses. What do you think about this?

 

Airlines and Regulations

Posted by: on Jan 3, 2005 | No Comments

The world including Nepal has realized the disservice caused to all of us by the state running businesses. Worldwide privatization of government assets has taken place on a grand scale.

However, most people still maintain that regulation by state is essential. Poor service by private organizations is the reason why many of us want government oversight.

In an article on domestic private airlines in the 19-25 November issue of Nepali Times by ‘Artha Beed’, the service – or rather the lack of it – was given by him as a reason for wanting the government to step in. He said that free markets need government regulators to be successful.

Not so. Let us find out what went wrong. When private airlines first took off, the staff was enthusiastic and well groomed, service was warm, and flights were on time. Let us agree with Artha that service and courtesy has since vanished.

Let us, however, compare the situation now with what was prevailing at the time when RNAC was the only airline. Perhaps Artha is too young to remember. People used to queue up overnight to get tickets, service was non-existent, and the staff attitude said, ‘put up with us or walk to your destination’. However, bad the situation now is, it is infinitely better than at the time of RNAC’s monopoly.

Apart from the impossibility of government regulators forcing the airline’s staff to smile (Artha’s desire), regulations boost costs, empower corrupt bureaucracies, and achieve little.

Does it mean that Artha will remain permanently frustrated? Is there no way to make private airlines come upto his expectations? Fortunately, there are ways to improve efficiency and service without the heavy hand of the government.

Ending RNAC’s monopoly was good. What wasn’t good was prohibiting foreign airlines from flying on domestic routes. If you want world class service, then you must let world class companies compete in your markets.

This is not only true of airline business but of all businesses. India was no better. Under the anti-foreign-investment raj of Indira Gandhi, protected businesses produced shoddy goods and customers got lousy service. Now, foreign investment where permitted is changing that.

India which produced the ugly ‘ambassador’, even for which there was a waiting period, now offers its consumers an unlimited array of world-class cars. Its autos and their components are exported to many countries. Would this have happened under the protective regime of the Neheru-Indira era? Never.

Nepal does not need more government regulations but opening up of its market including the domestic airline market to free and unfettered competition. Then it will be companies which best serve the interests of the Nepali consumer which will thrive.

A word of caution here is necessary. Open and free competition does not mean that private businesses, be they airline or any other, will always meet all of the customers expectations. It only means that customers will have a choice and most will be satisfied most of the time. All customers cannot always be satisfied. Airlines, for example, can only provide the level of service which the public is prepared to pay for.

While travelling within the US, I find that airlines do not serve much more than a packet of peanuts and a soft drink. This is because the US airlines have found that people travel on basis of cheap fares. The preference of people is not for fancy service and gourmet food but low ticket prices. Customers want rock bottom fares and that is what they get. They can always pick up-food of their choice at the airport’s fast-food restaurants and are unwilling to pay extra for food and service inside the aircraft.

It is possible that even after the domestic airline market is opened to foreign competition Artha still does not get gourmet food served to him on his half hour flight to Pokhara. This would only be if most travelers value cheaper flights which do not factor in the cost of Artha’s choice of food and drinks.

But again if Artha has resources he should have options. He could buy a plane, hire his own pilot and airhostess, and have food of his choice served to him. Good luck Mr. Beed.

The Himalyan Times

Drugs: How Regulations Kill

Posted by: on Dec 15, 2004 | No Comments

The year 2004 has been a bad one for the big drug companies of this world. It has been a particularly trying year for Merck, one of the world’s biggest drug manufacturers. Merck share price dropped from its peak of $95 in November 2001 to US$27 in November, 2004. This means that the company is worth US$60 billion vs US$200 billion it was worth just three years ago.

The reason for Merck’s pain is its blockbuster arthritis drug Vioxx. Merck has had to pull it off the market. Worse, Merck faces liability potentially running into tens of billions of dollars which it would have to pay to the users of Vioxx.

In a study conducted by Merck, it appeared that users of Vioxx faced a slight increase in risk of getting a heart attack. Merck decided to make the study public and, in keeping with its high ethical standards, also recalled Vioxx. Stores have sent the medicine back to the company and so have consumers. They are entitled to a full refund.

There is do doubt that Merck is seriously wounded. Swarms of lawyers in the US smelling blood have sprung into action. They have begun the process of collecting names of all Vioxx users. Cases will be filed on their behalf against Merck. It is possible that every user will be entitled to damages whether or not he has been harmed.

Those who have suffered heart attacks will probably be awarded damages in tens of millions of dollars. If someone has died while taking Vioxx, it is conceivable that Merck may be liable for a 100 million dollars in damages. It is now certain that Merck will end up paying billions of dollars to settle claims against it.

Persons investing in Merck have seen the value of their holdings vaporize. Its shareholders have lost a substantial portion of their wealth. If you bought Merck shares at its peak, you would have witnessed your holdings decline by over 70% in value.

This example illustrates why drug companies in the US have to charge high prices. The risk involved in developing a new drug is just too great. The approval process is time consuming, tortuous, full of pitfalls, and costs a fortune. In the US, the Food and Drug Administration (FDA) which has to approve all drugs takes upto ten years to do so. The company seeking approval may need to spend a billion dollars before it is ready to market its new molecule.

And even this rigorous approval process does not protect a company from liability. It still remains fully liable to users for any untoward effects which may come to light years later. The fact that Vioxx was approved by FDA does not protect Merck from liability in the least bit.

Vioxx has shown to not only Merck shareholders but also to investors in other drug companies as to how severe the liabilities can be. The share prices of other drug companies like Pfizer, Roche, and Bristol Myers have also fallen. In recent years a mere whiff of legal trouble is enough to cause share prices to plunge.

When we complain of mega profits and high prices drug companies charge, we have to take into account the enormous risks they face. Drug prices in the US and worldwide can come down only if the FDA is disbanded and legal liability is limited to actual damages.

For a user of Vioxx to be awarded a million dollars in damages without having to prove actual harm is not reasonable. If he has suffered a heart attack or died, yes a million dollar or even several million dollars may be reasonable compensation.

Reform liability and compensation norms, eliminate regulations to extent possible and we will see cheaper drugs. Will we be sacrificing safety? As we have seen with Vioxx, government approvals by no means guarantee safety, they in fact enhance the danger by providing an illusion of safety when we all know that you should take drugs only if you must. There is hardly any drug which does not have any side-effects.

There are dangers stemming from regulation and limitless liabilities. FDA is going to be even more careful in approving new drugs. New life saving drugs may not be available to the world for decades.

“I think this is really blown out of proportion,” said Dr. Carl Lavie, medical director of preventive cardiology at Ochsner Clinic Foundation, in New Orleans. “I don’t think it’s easy at all to get a new drug approved, and if you start being extremely conservative you stand the risk of taking good medicines from people.

Fewer companies can now afford to develop new drugs. Companies will not market drugs which harm a few even if they substantially help a 100 times more people, since the potential liability for damages far exceeds potential profits. No one is looking at how many have benefited from Vioxx, every lawyer is concentrating on those harmed. Regulations cost far more lives than they save.

It appears that Merck will have to pay damages even if Vioxx users reside outside the US. Are you a user? If you can prove usage you too may become a millionaire. Good luck.

The Boss

Plan or Prosper

Posted by: on Mar 10, 2004 | No Comments

Most people believe that governments must plan. Communist and socialist regimes made planning the centerpiece of their development agenda. India had its five year plans, copied on the basis of central planning by its ally the Soviet Union. Nepal too has its planning commission.

Government it seemed – and still seems to most – is required to plan everything. Government has to plan the savings rate. Government has to plan the growth in population, and family size. Government has to channel investments according to its plan. Government has to plan the food grain output. Government has to plan, plan, and plan – for four decades after independence the government of India planned the production of cement, iron, scooters, cars, fertilizers, electricity, wheat…

Nothing in India could be produced without a license. The government decided that it alone must allocate scarce resources in a planned manner for its people’s benefit.

Government also intervened directly to mandate that no private investment would be permitted in TV, airlines, railways, telephones, power stations … and that government would exclusively run and plan the production of these goods and services.

The private sector and markets were subjugated. Indira Gandhi referred sarcastically to those who advocated free markets as ‘marketwallahs’. In interest of planning India’s progress she nationalized the insurance companies and banks.

How successful were these plans? Indian industry was chained and crippled by its planners. Shortages became endemic. People could – at least some people could – satisfy their urgent requirements by buying in the black market. Smugglers satisfied the requirement of goods demanded from abroad.

Government planned the use of foreign exchange. “Perish the thought of private importing”, the people were told, “we hardly have enough dollars to buy petrol”.

Government of India planned. The economy stagnated. The sub 2% growth rate achieved during that period was dubbed, “the Hindu rate”. There was a problem with Hindus, thought the people of India. Inspite of such extensive government planning, if we still can’t progress, the reason must lie in our nature and our religion that advocates a belief that life is pre-destined and beyond our control.

All this changed in the early 1990’s. Industrial licensing was abolished in one fell swoop by the Narasimha Rao government. What could not be achieved by bureaucrats in over four decades of planning was accomplished by businessmen in a few years when planning became their job.

Shortages of steel, cement, telephones, scooters, and cars vanished. Today, not only do these industries fund their own expansion, they pay huge taxes as well. Foreign exchange reserves have grown from zero to $110 billion and the problem now is how to effectively use all the dollars coming in.

Similar failures of planning became even more apparent in the former Soviet Bloc. Planning by the state doomed the ‘evil’ Russian Empire. It collapsed overnight. The Berlin wall came down and East Germany disappeared in its rubble.

What is required is not planning by the state, but a complete separation between government and the economy. The role of the government must be minimized, that of the market maximized.

It is not the job of bureaucrats to allocate resources, it is for the consumer guided market to do so. Bureaucrats have no incentive to take correct decisions. If they allocate too few resources for the manufacture of cement, so what, they can always shift the blame to greedy hoarders. If government buys wheat at a price leading to overflowing granaries that serve as food stores for rats, so what, the loss gets to be borne by the taxpayers.

If private companies make mistakes – and they often do – it is they who lose out, not the taxpayer. Businessmen, therefore, have all the incentive to rectify mistakes fast or risk bankruptcy. If they produce too little they leave room for a competitor to come in and bridge the gap. If they produce too much, they run into a loss. They will thus continually struggle to get things right. There is no taxpayer and no currency printing presses supporting their mistakes.

Government, if it is serious about economic progress must shut down its planning office, and leave planning and implementation where it belongs – in the hands of businessmen.

The Himalyan Times