Myths About Free Markets Debunked!

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

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The Military Industrial Complex

The US deployment of troops in Afghanistan has raised much ironic press against Nobel Peace Prize winner, Barack Obama. It has also brought back speculation with regards to the US defense budget, specifically money allocated to private production of defense equipment and the supply of this

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Free the Banks

Whenever I make a presentation on how economic freedom would make Nepal prosper, I am confronted with the objection that Nepal is landlocked, different and what applies to other countries is not applicable here. Nepal is different and landlocked, but, to say that economic

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David and Goliath

What is common to Estonia and China? Estonia is in Europe, China is in Asia. Estonia is just a dot on the map, in China you could fit 212 Estonias. Estonia’s population of 1.5 million is 6.5% of Nepal’s. China has 1.3 billion people, 56 times that of Nepal. Estonia is a

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13% – Russia’s tax on income

America is a haven for capitalists while Russia is a workers paradise. US glorifies profits, Russia vilifies it. This was the conventional wisdom. It has been turned on its head. Bush fought a bruising battle in the US Congress to marginally reduce taxes. Vladimir Putin, the Russian President, did it with ease.

Jan 1, 2001 was the beginning of a new era in Russia. Russians woke up to a flat 13 percent income tax. It was a watershed event. That’s right; it is Russia that we are talking about, not Hong Kong or Singapore. The USSR was founded on the principle that all businessmen were evil and profits were passe – a bourgeois concept.

Now, businessmen can retain 87 percent of what they earn in the land of Lenin! This is something which I would not have dreamed of 10 years ago. Truth is stranger than fiction.

What is surprising is that Russia had just three tax rates of 12, 20 and 30 percent prior to this reduction. The rates were high but comparable with what most countries charge, and, yet, Putin chopped them.

What has been the result of this relatively low tax rate? It has been an unprecedented success for Russia. It has contributed to Russia’s stability which was so lacking in the aftermath of the collapse of communism. The benefits to the Russian economy grow by the day.

Capital flight has stopped and foreign investors have started returning to Russia. This, inspite of the huge losses incurred by the dollar investors resulting from a complete collapse of the ruble in the 1990’s.

Hoover Institution scholar Alvin Rabushka observed in a February 21, 2002 analysis for www.russiaeconomy.org, “the 13 percent flat tax has exceeded the expectations of the government in terms of revenue. For the vast majority of taxpayers, its implementation is simple, and no forms need to be filed.” Adjusting for currency fluctuations, Rabushka adds, “real ruble revenues increased about 28 percent.”

This novel experiment is paying huge dividends for the Russian government by inculcating the habit of paying taxes in people who were used to a culture of evasion. This changed attitude was to be expected; after all, evasion too comes at a cost – black money is difficult to reinvest in business and peace of mind is lost. People, therefore, do pay up when rates are not extortionate.

Russian tax revenue which barely equaled nine percent of its Gross Domestic Product (GDP) has grown to 16 percent. Russia also grew by 5% in 2001. A win-win situation for all concerned. Taxpayers are smiling, Putin has become a hero of the ‘Union of World’s Taxpayers’, and Russia’s government is busy collecting a windfall.

The US meanwhile has six tax rates from 10 to a high of 38.6 percent. Its 46,900-page Tax Code provides elephant size loopholes to the wealthy while the middle classes pay up. Russians file a simple one page form.

It is estimated that tax accountants will gobble up over 150 billion dollars for the paperwork which accompanies the tax payment in the US. This burden is one of the reasons why the US economy will not average even half the growth rate accomplished by Putin’s Russia.

It is ironic that Russia has a 13 percent flat tax while the bastion of world’s capitalism cannot even bring in a flat 17 percent tax. This is what Steve Forbes, a republican contender for the US presidency, had wanted but could not achieve.

Clearly, Russia has more to do if it wants to prosper. Rule of law, freedom of speech and, especially, far stronger property rights are surely needed. The 13 percent income tax is however a very powerful step in the right direction.

Nepal, to make an impact, must abolish the income tax. To do so would signal to the world’s business community, ‘invest here; Russia may have larger markets but in Nepal you need no tax experts and pay no income tax.’

With the abolition of the income tax, foreign and domestic investment would boom and trade would virtually explode. Any loss in revenue would be more than made up by higher VAT realizations by the government.

The Boss

Trade will make us rich

Countries which trade are rich. Countries which don’t are poor.

If I were to pick up one indicator of the wealth of a nation, that would be its exports and imports. Consider India: its share of world trade which was 2.5% at the time of its Independence, had plummeted to 0.45% by the late 80s.

It was a pathetic performance. India, with 16% of the world’s population, would have had to increase its imports and exports by 32 times to just reach the world’s ‘average’. India remained poor – its people had to survive on less than a dollar a day.

Compare this with a ‘dot’ on the globe: Singapore. With a population of just 4.2 million, its imports and exports are double that of India’s. This translates to each Singaporean trading, on average, 500 times more than an Indian. No wonder an average Singaporean lives comfortably, enjoying an annual income of over US$ 25,000.

Some say that the comparison with Singapore is not apt. Let us compare China with India. ‘Anti-capitalist’ China’s trade with the world has burgeoned to a trillion dollars, five times that of India’s while China’s population exceeds India’s by just 28%. Chinese now enjoy an annual income which is more than twice that of the Indians while just three decades ago the Chinese were poorer.

Contrast Nepal with Switzerland. Both countries are landlocked, but, the similarity ends there. Again trade provides an indication of why Nepal lags behind. Nepal’s imports and exports don’t add upto even three billion dollars. Switzerland’s figure is 326 billion dollars.

On a per person basis, the comparison is even more stark. Each person in Switzerland trades 400 times more than a Nepali. Switzerland’s per capita annual income at US$ 35,000 is one of the world’s highest.

Trade is not the only reason for Switzerland’s wealth. Their banking laws which guarantee anonymity to the depositor also have a lot to do with the Swiss being rich. However, trade plays a significant role.

Why are Singaporeans and the Swiss such good traders, achieving a prodigious percentage of the world’s trade, while the Indians and Nepalese are bit players and do not count? High taxes and stifling controls pursued by Nepal and India compared to the free market, low tax policies (average import duty is below one percent) of Singapore and Switzerland is the reason.

India, upto 1990, was ‘protected’ by the world’s highest tariff rates, import bans on all consumer products, and an inefficient and corrupt bureaucracy bent upon controlling trade.

The results of this ‘protection’ were obvious. Indians who would buy from a Scot and sell to Jew and still make a profit had no opportunity to do so in the world markets.

Post 1990, India began to see sense, but only after its policies had brought the economy to a shuddering halt. It had no foreign currency left and had to pawn its gold reserves. India liberalized and very soon its trade took off and dollar reserves started accumulating.

Within 15 years India achieved what it could not do in the earlier five decades. Its share of world trade has increased to 0.8% and foreign exchange reserves have crossed the 140 billion dollar mark starting from almost nothing.

If this was achieved with only a modest reduction of controls and import duties, consider what can be attained by the abolition of all controls and taxes on trade.

The good news for Nepal is that it can rewrite its laws tomorrow. There is nothing stopping this country from emulating Singapore and eliminating its trade barriers.

The government has to do just this and then watch the people of this country take to trade as a child takes to candy. Nepal will have shopping malls no less full of merchandise than Singapore. Goods will be cheaper too as both labour and real estate are priced lower.

Further Nepal will get as many tourists as it can handle. Why should people from India, Bangladesh and Pakistan go to Singapore, Hong Kong or Dubai when they can come to Nepal with its warm, hospitable people, majestic mountains, and, yes, cheaper perfumes too.

The Himalyan Times

Regulate Less, Save Lives

It is a fundamental principle of economics that demand for a product increases with a reduction in its price. As regulations are ‘free’, and people who advocate them bear negligible costs, it is virtually guaranteed that demand for government regulations will continue to grow indefinitely.

However, do government regulations really cost us nothing? Is the cost always borne by big corporations and evil businessmen? Businesses may initially bear the costs, but rest assured that they will, as soon as they can, pass on these costs to you and I. How? By an increase in the price of goods that we buy. We as consumers ultimately pay for all government regulations.

Each individual regulation added onto by the government means little to us, and the cost of each may be so infinitesimal, that it is only rational for us to ignore it and concentrate our attention on more pressing matters. The problem is that when the cost of all the regulations imposed on us is added up, it is no longer a small matter.

The only country where an attempt has been made to identify the cost of regulations is the US. The cost borne by its people was estimated at $660 billion in the year 2000. The projected annual cost now for a household of four exceeds $10,000.

Clearly, this level of regulation if imposed on the people of Nepal, would immediately shatter the economy. Imagine if the US regulations, designed to protect buildings against earthquakes in Los Angeles, were made applicable in Kathmandu. All, except the wealthy few, would find themselves gazing at the stars at night instead of a roof.

Even though a rich country can better tolerate regulations, yet it is this regulatory burden – exceeding half of the US federal government’s tax receipts – which has made annual growth rates in America average an anemic two percent.

No one doubts the good intentions of our lawmakers. Regulations are often drafted with thoughts of making our buildings safer, food healthier, water hygienic, air pollution free, aircrafts less likely to have accidents, and labour happy.

The problem is that this plethora of regulations increases the cost of everything we buy and, hence, makes life difficult for the most vulnerable in our society: the poor. They just cannot afford the costly goods.

Theoretically, it is possible to eliminate aircraft crashes by zealous government oversight and regulation. However, the cost of such burdensome regulations would make air-travel so expensive that many more people would die because of the use of road transport, which is far less safe than travel by air.

In Nepal, the best way for government to make domestic air travel safer would, ironically, be by deregulation. Let the government abrogate the monopoly of domestic airlines and permit foreign airlines to compete on domestic routes. This would increase foreign investment, bring in international airlines – with a worldwide reputation to protect – and make flights safer.

Big companies often capture the government agency in charge of regulating by intensive lobbying. They then use regulations as a weapon against their smaller competitors.

In the UK, for example, large businesses wanted an onerous licensing burden to be applied to all food premises. These big companies knew that they would have an easy time complying with these regulations, but their smaller competitors would be forced to close shop.

In the same manner, asking roadside restaurants in Nepal to adhere to standards which are met by Hyatt or Holiday Inn would result in their closure. Commonsense tells us that this is not a desirable outcome.

Likewise, minimum wage laws and other labour legislation cause problems for small businesses. The big companies can pay their staff more than what is required by law and would be happy to see that the small enterprises are forced to do the same. Strict enforcement of wage & labour laws as exist today would lead to the closure of most of the small businesses with unemployment even more widespread than it is now.

We should learn from the example of the developed countries and try to rid ourselves of regulations if we are to banish poverty faster. Deregulating by creating wealth, would save lives. Rich people live longer by about 20 years – that is the difference in life expectancy between those living in the rich and those in poor countries.

The Himalyan Times