By Sishir Devkota—
There are hundred and ninety six nations on earth. Don’t be surprised. But, Nepal chops more than half the rest of nations to stand at a commendable 119th position in the receiving FDI (Foreign Direct Investments) rankings. Though governance in Nepal is poor and unacceptable; more than $100 million worth of FDI stocks roam inside Nepali markets. It would be challenging to explain how that happened; but it is a clear warning. Free Trade is knocking charming Nepali heartlands.
How should Nepal prepare for the best and worst? It will take less than a year to witness the $100 million figure rocket into space figures but the notorious Free Trade has either consumed states into debts and failure or has blessed nations with lavishness. Nepal can choose what it wants.
Triggering the button will wholly occupy the Nepali way of life. Employment will soar, pollution will thrive, economy might bust or the society might have to adjust to new faces from abroad. It is also possible that our beloved dumplings म:म will find crazy orders from fast food chains in New York city. Your city house could invite multinationals asking for office spaces in exchange to mind boggling remuneration. Or, your local tea hangout shop could produce the taste comparable to the famous Irish Coffee. Ask Joe Sheridan, the Irish local behind the idea; who brought Ireland to the world with his whisky added coffee. Ireland is just an example. There are many nations who have moved from being poor to rich; thanks to Foreign Direct Investment.
How will it happen
When markets open, three things could possibly happen. First, multinational companies operating in various fields will flock Kathmandu with their people and capital to establish their businesses. Secondly, multinational companies will outsource their resources to operate inside Nepal.
Third, multinationals will purchase any flourishing local competition and transform it into a global commodity. Or, destroy it altogether. For all the three possible reasons, capital will be essential. Nepali banks will have to possibly expand and embrace for large volumes of transaction that would be necessary to commence the multinational revolution.
This in turn will have double consequences. Firstly, it will mean that both borrowing and interest rates from Nepali banks will reduce which as a reaction will help start ups and small businesses to expand. Secondly, prices will wobble and competition will rise leading to the possibility of a complete economic transformation.
Nepali commodities will not only have to survive the fierce competition but also steer themselves among external disturbances like the listed stock markets or fluctuating currency rates. Weather forecast in Brazil for coffee yields will then directly affect the health of subsidiary companies in Nepal. Fluctuating employment scene will be the reality. These are possibilities that will be out of Nepal’s control.
How to control the possibilities
The conventional way has been to build what is termed as “gates”. Gates are percentage limits on the inflow of capital as part of the FDI. One way to utilize the gates would be to tax capital inflow during their first entry to Nepali markets, proportionately to the size of their financial prospects. The idea of an entry tax is used so as it would be easy to increase the tax rate when foreign projects grow. The downside is that an entry tax system might scare investors and Nepal might have to give in to foreign pressures.
Especially, given the lack of Nepali experience in world trade. It is also possible that the inflowing capital to Nepal could be a part of an illegal offshore investment where investors try to invest in a relatively unstable nation like Nepal and skip legal proceedings in their home nations. In the case where Nepal misses out on such monitoring, it will have to pay a heavy price of tackling an artificially generated financial bubble.
Illegal offshore investments will also involve Nepali companies and workers into international financial disputes which is always subject to heavy fines. Nepali administrators will have to realize the fact that multinationals will arrive Nepal solely for their benefits. The work would be to find common ground and police illegal ventures. One way to do it would be by introducing checking systems called “economic rents” where dubious profit margins will have to justify the level of investment and input of work.
How to succeed with Free Trade
It will require much more than a specific national trade policy. But, with experience it has been widely agreed that de-regulation can save disasters. Just like entry tax schemes, a fixed de-regulating trade policy in place will thwart incompatible investments and even save Nepal from foreign interference; possibly on how political appointments will be made.
De-regulation could also save multinational firms from buying out startups and creating a monopoly. Competition policy will be vital where Nepali startups will have to feel secure in doing their business. Free Trade lessons have also pointed out to how over-protectionism will do more harm than good. Nepal will face a confusing challenge to balance the multiplicity of actors and agents involved with free trade mechanisms.
Among other issues, Nepali trade policy will have to know how to stop, start or reset the economic momentum. Governance will need to be walled and effective so as to monitor financial application. Skilled personnel(s) along with technology will be required. Nepal is coming late to the world. But, it is also the very opportunity to plan multiple exit windows and learn from global experiences. The time is going to be soon rather than later. Possibly, by the year 2020. Nepal’s preparation can afford excitement and anxiety not unawareness and vulnerability.
(Author is pursuing Masters in Democracy and Global Transformations at the University of Helsinki, Finland)
Published on Nov. 26, 2016