Nepal's Other Path

Nepal's Other Path

  March 27, 2011    Surath Giri

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-Surath Giri

In 1989, Peruvian economist Hernando De Soto published his seminal book entitled “The Other path", which was written as a response to the growing atrocities and violence of Sendero (The Shining Path), an ultra left wing terrorist organization which had been debilitating Peru’s economy and murdering thousands of people for almost a decade by then. The Other Path made history not only by helping eradicate one of the most brutal terrorist organization ever to operate in Latin America by solely engaging in the war of ideas but also by creating a new wave of understanding of the causes of poverty around the world.

During the research for the book in Peru and subsequent researches in developing countries around the world, De Soto and his team found out that unlike what ultra left wing groups usually claim, most poor people aren’t  proletarians. Instead they are emerging entrepreneurs working outside the legal system engaged in subsistence activities because they lack clear property rights to what they own which in turn denies them access to capital, broader market, legal protection and technology.  Ironically, it is not the market economy and provision of private property that’s keeping them poor but the very lack of access to it. Contrary to the arguments of left-wing groups or ideologies, poor do not lack property or means to become prosperous. Poor around the world are estimated to have amassed a wealth of more than 9.3 trillion dollars which is multiple times higher than all the foreign aids and grants combined from around the world. What the poor lack, however is the proper property rights that would enable them to expand their means of production to expand their wealth.

Peru’s government which embarked into reforms based on these findings and worked in partnership with the Institute for Liberty and Democracy (De Soto’s think tank), was able to bring some 300000 owners into the legal system within 5 years whose property on average doubled. At the same time,  more than twenty five new institutions began giving loans to those owners who had been denied access to any credit hitherto during the reform. Cutting down business regulations and bureaucratic procedures, Peru was able to bring majority of its informal economy into the formal system creating over half a million new jobs and revenues of USD 1.2 billion.  Today Peru’s economy is among the most vibrant ones in Latin America with very high growth rates-including the world’s highest growth rate of 12 percent in 1994.

Nepal’s Case

The experience is no different from the one De Soto describes in his book when one walks down any road or hikes in Nepal's hills. Reaching out to any village in Nepal, or exploring the shanty settlements in cities, one will find  many things: houses used for shelter; parcels of land being tilled, sowed, and harvested; merchandise being bought and sold and a plethora of entrepreneurs engaged in businesses of their own.  

Hearing about some farmers making hundreds of thousands solely by selling their produces after they had access to the markets isn’t news anymore. And yet, majority of populace still languishes in abject poverty. What explains the discrepancy?

Though poor of Nepal too own some properties or means of production, clear property titles, lack of scientific measure of assessing properties and their values and their lack of access to sources of capital are some of the reasons poor people never seem to be able to rise above subsistence. Lack of roads and means of transportation still bottleneck the progress of remote villages in different parts of Nepal. Informal economy still reigns as the largest employer of the populace. Agricultural sector, the largest segment of Nepalese economy is largely informal. Due to lack of formal property rights and access to capital, most of these emerging entrepreneurs are forced to seek informal money lenders who charge exorbitant interest rates and are once again confined to subsistence activities.

Even those operating within the formal environment are increasingly plagued by the growing insecurities and threats to their lives and properties. Proliferating violent groups and lawlessness is forcing people to limit themselves to survival and operate within their own circles only.

Recently released International Property Rights Index 2011 has ranked Nepal 100th out of 129 countries with regard to secured and strong property rights. Nepal scores 4.4 out of ten and is among the bottom 20 quintile of the index. Among the components used to measure property rights, Nepal scores 3.2 in legal and political environment, 5.8 in physical property rights and 4.1 in intellectual property rights. Contrast this with China, the so called communist country, which scores 5.5 and ranks 60th among the 129 countries. The sorry state of property rights may explain in part, why the poor in Nepal remain poor and proletariats whereas the poor in countries even like China are getting prosperous exploring their entrepreneurial abilities.

Besides this, the World Bank’s Doing Business report too highlights the obstacles that deter the emerging entrepreneurs from getting into formal system. Nepal ranks among the worst countries to be doing a business with very high costs of registering, operating and closing down a business and one of the most unfriendly labor laws in the world.

The Other Path

While our political parties, intelligentsia and media are blaming liberal economy and capitalism for all the poverty and everything else that has gone wrong, the observation around the world in countries which once stood on equal footing with us tells just the opposite. Private Property Rights are rather the source of prosperity and wealth creation than the cause of poverty. Contrary to general notion, it’s the poor who need property rights and economic freedom the most in order to get out of the vicious circle of poverty which is made vicious due to welfare and aid driven programs for them. Acknowledging the fact that even poor people have some form of property and means of production and are of entrepreneurial nature despite the lack of formal titles and ownership is a more pragmatic approach of alleviating poverty. We can at least start from there. Recognizing private property rights of everyone, especially the poor, and  making it easy for anyone to get into the formal system while securing and enforcing their private property rights, encouraging entrepreneurship among the poor too and maintaining a strong rule of law is the other path Nepal could take to get rid of poverty.

(Published in The Himalayan Times of 27th March 2011.)