Friday, December 5, 2008

Price floor on rent in Nepal

The left-wing Finance Minister Bhattarai is scrambling to meet revenue target set by him in this year’s budget. Many said that around Rs 42 billion in tax revenue is very ambitious. Recently, the government decided to give bonus of up to 200% on the basis of per worker revenue collection in customs offices. Now, to bring house rental business under the tax net, the government is imposing a minimum price for rent in major cities.

This means that house owners will have to pay a fixed (minimum)amount of tax even if rent charged by them is below the one earmarked by the government. If the prevailing equilibrium rent (price) is below the one set by the government, then house owners will be forced to pay rent tax that is not consistent with the price charged by them. So, market rent price will rise till the point where the price floor corresponds to the 10% flat rent tax imposed by the government. On the other hand, if the rent price fixed by the government is below the market price, then either rent price will come down or it will not have any effect other than increase in tax revenue from house rent sector.

Here is the article.

Kapildev Ghimire, director general at Inland Revenue Department (IRD) told the Post they would conduct a survey later this month on rents in various business and residential areas of Kathmandu and major cities outside Kathmandu to fix reference prices.

He made it clear the government would collect tax according to the rent it sets even if it is found that the rent is lower than the fixed amount.

"Fixing minimum prices has become necessary to discourage those who show very little rental prices in paper to evade tax ," he said. The government will start collecting taxes by effectively enforcing the law from mid-January after completing the survey."

The government has set a revenue collection target of Rs. 1.03 billion through rental tax in the current fiscal year while the amount was Rs. 706 million in the last fiscal year.

[I have microeconomics-related demand and supply graph in mind but can’t spend time in drawing that in MS Word because it’s finals week and I am overloaded with exams and papers. Next time, if this issue emerges again, then I’ll definitely include a figure to explain the effect of this price floor.]


This news piece caught my eye. The vegetable ghee industry is perishing in Nepal. Why? due to high import taxes on raw materials, high transportation costs, labor troubles, and lack of power. The high cost of production has made Nepali ghee uncompetitive in the Indian market.

The ghee industry has been facing the squeeze for the last 10 months. There are 16 vegetable ghee factories in Nepal. High taxes in the import of raw materials from Kolkata of India, high customs duty on export, labour troubles, lack of power and poor transportation facilities have pushed these factories to the verge of extinction, said Laxman Nebatia of Swastik Ghee and Oil Industry. The closure of ghee factories has caused a loss of Rs 2,400 million. The government should revive the ghee industry, said Pradip Murarka of Nepal Ghee and Oil Industries’ Association. High import duty and export taxes have spoilt the competitiveness of Nepali ghee.

Financial crisis and protectionism

New e-book from about the dangers of protectionism due to the financial crisis. It is titled The crisis and protectionism: Steps world leaders should take.

Here is the synopsis:

Unless world leaders strengthen trade cooperation, new tariffs and competitive devaluations could trigger a protectionist spiral of WTO-consistent trade barriers. To rule this out, world leaders should: 1) Reduce protectionist pressures by fighting the recession with macroeconomic polices; 2) Translate APEC and G20 leaders’ words into deeds by agreeing a framework for concluding the Doha Round; and 3) Establish a real-time WTO/IMF surveillance mechanism to track new protection.

The dangers of protectionism:

If all nations put their tariffs up to their bound rate – i.e. the WTO tariff ceilings that they are committed to respecting – then exporters from middle- and high-income nations would faces tariffs that were on average twice as high as they are now; those facing poor nations would triple since they tend to export agriculture goods where tariff bindings are astronomically high or nonexistent. If a vortex of beggar-thy-neighbour moves pushed tariffs ‘only’ up to the maximum level that nations had applied over the past 13 years (i.e. since the last WTO Round was signed), then figures would be more like 50% higher and 100% higher for the groups.

Meanwhile, Rodrik ponders on Keynesian economics and protectionism. He is also taking about Tobin tax on foreign transactions and redirecting that tax revenue to the developing countries that are in dire need of credit.

So unless we come up with a solution to the credit constraints in the developing world, we are going to either endanger the effectiveness of Keynesian policies in the U.S. and other advanced nations, or risk a sharp increase in protectionism.  Not a pleasant choice.

And, here is ‘modern day Keynes’ aka Krugman applauding the great Keynes.

Indian feels the heat of the financial meltdown

The NYT reports:

In a country where most marriages are arranged by parents, the downturn has even taken a toll on the matrimonial prospects of those in technology outsourcing. “Because there is no job guarantees for I.T. people, for the last six months brides’ families have not been accepting grooms from this background,” said Jagadeesh Angadi, a matchmaker in Bangalore.

The Indian National Association of Software and Service Companies estimates that the country’s technology sector will create 50,000 fewer jobs in 2008 than last year, although it predicts the sector will still have added 200,000 workers by year’s end. India’s technology outsourcing companies have laid off about 10,000 employees since September, according to the Union for Information Technology Enabled Services, a labor group that represents technology workers.

Meanwhile, India announced a stimulus package worth Rs 20, 000 crore.

The package, coming on the back of fresh monetary measures announced by the RBI on Saturday, includes a four per cent cut in ad-valoram duty across the board, to boost additional spending, besides enhanced credit for exporters, along with a Rs 10,000 crore mop up for India Infrastructure Finance Company.

The measures include additional plan expenditure up to Rs 20,000 crore in current year; total spending in four months till March expected at Rs 300,000 crore. A series of steps to boost exports; Rs 350 crore additional funds for export incentives; back-up guarantee to ECGC for up to Rs 350 crore; to be allowed refund of services in some areas.

The package also includes import duty on Naptha for use in power sector as well as export duty on iron ore to be eliminated. India Infrastructure Finance Company to raise Rs 10,000 crore through tax-free bonds by March 2009. PSU banks to soon announce package for borrowers of home loans upto Rs 20 lakh. An across-the-board cut on ad valorem rate to encourage additional spending; additional Rs 1,400 crore for textile sector.

Legal foundations of free markets

A new book The Legal Foundation of Free Markets published by Institute of Economic Affairs.

Here is the what this book is about:

The law, together with the institutions associated with it, plays a central role in economic prosperity, which concerns all of us. The legal foundations of free market economies, which have delivered enormous improvements to the quality of life of countless people, evolved over centuries. Their justification does not lie simply in utilitarian concepts of economic efficiency but also in moral concepts of natural law and a broader concept of freedom. Great care needs to be taken when changes are made to areas of law that can be foundational in shaping market behaviour, to ensure that they are not undermined. Similar care needs to be taken in developing other areas of law, such as competition law and environmental law, where significant inroads may be made, often justified by reference to alleged market failure. This book suggests various practical solutions to these problems, including ensuring greater jurisdictional competition, greater adherence to the doctrine of the rule of law, the restoration of economic rights, greater use of judicial lawmaking,and more constructive engagement between economists and regulators.

And, a little bit over praise the virtues of free markets and all bad stuff dumped on the government.

First, the market is more capable of producing institutions for its own enforcement than conventional wisdom permits. Where government is absent, society does not launch itself into a violent and dishonest frenzy that leads to the end of trade and the death of many of its members. Instead, private institutional arrangements emerge as the result of individuals’ efforts to find alternative mechanisms of securing peace and honesty so that they can realise the tremendous benefits of exchange.

Second, commercial rules, specifically those relating to contracts, can and do emerge where government is absent. Perhaps more importantly, private mechanisms for their enforcement emerge alongside them. Evidence from stateless societies not considered here, such as that from Somalia, and from the international arena, which I considered only briefly, supports this claim. Significantly, this latter arena is a massive one and involves thousands of traders from many different backgrounds and countries who are able to coordinate on such a level that their resulting market activities constitute nearly 25 per cent of global economic activity.

Finally, contrary to prevailing wisdom, criminal behaviour poses no special problem for markets under anarchy. Like rules for dealing with ‘peaceful theft’, such as those that emerge endogenously to govern commercial contracts, rules for dealing with ‘violent theft’ also emerge endogenously without central direction to regulate the violent disposition of some members of society. importantly, private institutions for their enforcement, including mechanisms for adjudicating claims of criminal behaviour, and mechanisms for enforcing the decisions of such adjudications, evolve along with rules regarding criminal conduct to enhance the safety individuals require for markets to function.