March 2006
Economy & Policy

Peter Drucker, the great management guru—possibly the greatest ever—believed that managers have a vital, organic role to play in transforming society from a feudal-agrarian society to an entrepreneurial-industrial one by harnessing the potential and creativity of workers through their participation. With the emergence of the post-industrial knowledge society in the 1980s in the West and Japan he foresaw the rise of “philanthro-capitalists” or “social entrepreneurs” whom he defined as people who “raise the performance capacity of society” whether at the level of the village, the nation or the globe.

Madhukar SJB Rana

Be that as it may, in Nepal we are sadly witness to entrepreneurs taking to the streets protesting against HMG’s fuller implementation of the Value Added Tax (VAT) which is something that consumers pay. Not businesses actually, who do the collection only for and on behalf of HMG. (We may take lessons from the Indian advertising campaigns of recent vintage, after their introduction of VAT which too is unpopular, where an appeal is being made to all to pay taxes for the good of national and human security, and infrastructure development. The target population sought being the school children and youth presumably to inculcate an anti-taxation-evasion culture amongst the future generation.

At the same time we are witness to the welcome development in the FNCCI where a code of ethics has been adopted with serious initiatives towards “good corporate governance” with a noble mission seeking business social responsibility.

How we wish that each of the 122 or more political parties registered with the Election Commission in Nepal could, likewise, adopt codes of ethics and enunciate appropriate moral principles to guide “good party governance”. And, in turn, formulate the requisite rules of procedure to ensure effective party self-management for the flowering of a culture of democracy by the political vanguards of the state.

It is estimated that there are about 691 billionaires (compared to 423 in 1996) who may be referred to as the “sovereign individuals” since their wealth surpasses those of many nations’ GNP. Microsoft’s Bill and Melinda Gates have created a foundation with $ 31 billion to single-handedly make the world a better place. Intel’s co-founder, Gordon More and his wife Betty Moore, are said to have surpassed the Gates in their acts of philanthropy of late.

No doubt we will hear more from the likes of the founders of Google, Dell, eBay etc as the philanthropic race unfolds with other munificence super-rich entering the fray in a very big way. Nearer home, the IT wizards of India like the founders of Infosys, Wipro and Satyam are creating legends with their version of philanthropic capitalism all over the cities of Bangalore, Chennai and Hyderabad.

The American steel tycoon, Andrew Carnegie, said in 1889 that social progress was possible through wealth creation that was inescapably the price of inequalities. He went on to underscore, however, that in order that this inequality did not untie the brotherhood amongst mankind that bind the rich and the poor in harmonious relationship the wealthy had a solemn duty to devote their fortunes to philanthropy.

He believed that not to do so was the greatest personal failure and that “the man who dies thus rich dies disgraced”. Carnegie believed that philanthropy is part and parcel of a social contract that is as much a duty as an insurance against populist redistribution policies that eventually beggars everybody under the banner of equality, equity, effectiveness without consideration to the principles of efficiency and excellence that lie behind the creation of wealth.

Two instruments are a must for such a capitalism to take deep root in Nepal. The promulgation of the draft Private Trust Act and the draft Competition Act by HMG, as per the policy of the Budget for 2005-06, is a must.

Why both? Because private philanthropy though necessary is not sufficient since the wealth should be justly found in market fair play and not in the exploitation of consumers based on monopoly, oligopoly and cartelisation of the economy. It is submitted that the proposed private trust act will empower civil society by creating a legal space for the independence from political and bureaucratic patronage and for their functional professionalisation as social modernisers and social change agents.

“Philanthro-capitalism” should not be confused with charities built on public donations for humanitarian causes. They aim at maximising the influence or leverage of the donors for their business causes. This is why the term “sovereign individual” is an apt description to distinguish the new species of philanthropy from the old that functioned as Non-Governmental Organisations (NGOs) motivated primarily by religious purposes as well as the benefits from tax exemptions and not least death duties.

Another management guru, Michael Porter, so famous for his theories of competitive behaviour and strategy making (not just for corporations but also for nation-states), thinks that the new philanthropists seek a business-like approaches to being effective through “social entrepreneurship” and “social investing” by being “strategic”, “market-conscious” and “knowledge-based”—the new mantra of philanthro-capitalism, as it were. Social entrepreneurship and social investing are not constrained by the proverbial bottom lines—return to investment and return on equity.

They can thus venture into highly risky undertakings for social mobilisation, social inclusion and employment creation to deliver social justice and human security for the poor. Imbibing new ideas and innovations bereft of the old ideologies and psychology that we are yet prisoners of in the 21 st century—a century where globalisation should lead us to a global village with all its differences living as one humanity in peace without violence.

Philanthropy is ingrained in the social Asian civilization. At the corporate level the Tatas and Birlas are household names in the subcontinent. Where social entrepreneurs differ is in the non-traditional approach that ventures to change a whole village, municipality, or district and not simply to gift a charitable project that can not have a transformational impact on society at the micro, meso or the macro level.

The likes of George Soros has created waves for social entrepreneurship amidst the banking and financial sectors. Let us pray and hope that our banks and financial institutions will seek new ways and means to help the rural poor with their credit needs through their creativity, innovation and risk-taking so that they can link the urban-rural economy for the prosperity of all. The young, ambitious philanthro-capitalist, Uday Khemka of the SUN Group investment company, may be an ideal role model for all our young bankers and financiers in South Asia as he told the Economist, “I want to help develop an infrastructure of philanthropy”.

And who can omit the lessons from the one who best exemplifies social entrepreneurship, Professor Moham-med Yunus who created the Grameen Bank and demonstrated to the world that the poor are rich and that they can contribute to economic growth if they are provided timely micro-finance.

Finally, the British management guru, Charles Handy is reported to be publishing a book, Beyond Success: The New Philanthropists (as reported in the UKEconomist Volume 08/2006). He is following Abraham Maslow’s hierarchy of needs: whereas people earlier sought self-realisation when they were in their 60s and 70s, with wealth being generated so fast and in such vast amounts nowadays successful people will seek self-esteem and self-realisation in their 30s and 40s. The super-rich are beginning to perceive that they have been blessed and should be giving something back to society as a token of gratitude to the people and in reverence of God.

(Rana is former Minister of Finance)

WTO and SMEs in Nepal

Shiva Raj Bhatta

WTO membership as an instrument of trade liberalisation may affect firms of all size, including SMEs. It may help to expand business activities by expanding market access opportunities and by providing predictability, security, transparency and stability in economic policies at national level and globally. But a predominantly agricultural economy like Nepal, having very poor infrastructure and resource scarcity, needs proper policy interventions, institutions and infrastructure to seize the benefits of WTO membership and protect vulnerable sections of the society. Nepal’s commitments to further liberalise its trade regime and adopt WTO compatible policies and legislation is likely to produce winners and losers in industrial sector, particularly within SMEs.

Status of SMEs in Nepal

Industrial Policy 1997 (amended) has defined small industries as industries having fixed assets not exceeding Rs 30 million and medium industries having fixed assets between Rs 30 million and Rs. 100 million. The overall figure about the status of SMEs, including investment and contribution to the economy is not well documented, but it comprises most of the country’s economic activities. As stated in the 10 th plan, over 90 per cent of the industries fall under Small and Cottage Industry (cottage and small scale) categories and these industries have contributed over 70 per cent of employment in industrial sector, and 50 per cent in value addition.

The table on next page clearly shows that the golden age for SMEs started with the restoration of multiparty democratic system in Nepal in 1990. The number of SMEs registered increased over five times in the year 1991/92 than in the previous year. This growth trend continued almost for one decade, albeit with some ups and downs. The number of SMEs registered, fixed capital investment and loan disbursed by the banks reached the highest point in the year 1999/2000. The growth of SMEs, however, decreased continuously after 2000/01. It reflects that the ongoing conflict has hit hard the SME sector.

WTO membership: Implications for SMEs

WTO is an international organisation that deals with the rules of the trade between its 150 members. WTO rules embodied in its various agreements provide the basic framework for international trade. WTO Agreements cover not only trade in goods, but trade in services and in ideas (intellectual property) as well. The goal of WTO, among others, is to help enterprises, including SMEs, to conduct their business in a rule-based trading environment. However, WTO does not provide direct assistance to SMEs.

Nepal's WTO membership may affect SMEs as a producer or an exporter and importer of goods and services. Most importantly, various WTO rules and decisions involving obligations relating to reduction of tariffs, cutting of major subsidies incompatible with WTO rules, trade related intellectual property rights, technical standards and large-scale liberalisation of services/infrastructure could affect SMEs.

The main benefit to entrepreneurs, including SMEs, arising from WTO membership can be as follows (for details see, International Trade Rules: An answer book on the WTO Agreements for small and medium-sized exporters, ITC UNCTAD/WTO, 2001):

(i) Benefits to exporters of goods and services: Security of market access, stability of investment conditions and stability of access are the main benefits to the exporters. Under WTO, almost all the tariffs of member countries have been bound at a level guaranteeing that it would not increase beyond that. Such binding insures that the improved market access resulting from tariff reductions will not be disrupted by sudden increases in duties or the imposition of other restrictions by importing countries. The secured access to markets enables exporters to make investment and production plans under conditions of greater certainty. Moreover, all countries are required to apply, at the border, the uniform set of rules elaborated by various Agreements of the WTO.

(ii) Benefits to importers of raw materials and other inputs: As importers of raw materials and intermediate products and services used in production process, SMEs benefit from the rules of the system. The rules require imports to be allowed in without further restrictions upon payments of duties, while countries are also under the obligation to ensure that other national regulations applied at the border confirm to the uniform rules laid down by the agreements.

(iii) Some rights of domestic producers, importers and exporting enterprises: WTO agreements also ensure some rights of domestic producers, importers and exporters. For example importers have the right to justify declared value of imports where customs expresses doubts on the truth or accuracy of that value. They also have the right to require customs to give reasons in writing for rejecting the declared value, so that they can appeal to higher authorities. Similarly, industries can, under certain conditions, request their government to take action to restrict imports (safeguard measures), if they find that they are unable to withstand the increased competition resulting from their government's liberalisation measures. Likewise, they can request the imposition of anti-dumping duties on products that are being dumped in their country, and countervailing duties on products entering at low prices because they have been subsidised. But such rights can only be claimed if certain conditions are met. For example, the increased imports should be material injury to the domestic industry and there must be causal link between the dumped or subsidised imports and the injury to the domestic industry. Similarly, enterprises have the right to give evidence during anti-dumping and countervailing duty investigations in importing countries in respect of their products and rebut the claims made by the petitioners.

In the above context, it can be said that the WTO agreements, by creating a rules-based trading system, confer advantages to all enterprises (including SMEs) involved in international trade in WTO member countries. However, WTO rules do not differentiate between enterprises according to their size. They provide a level playing field for all participants in international trade.

The WTO membership has also posed many challenges to SMEs. First of all, WTO's import liberalisation measures including gradual tariff reduction and prohibition of quantitative restriction on imports may increase competition for SMEs. They may also be deprived of conventional subsidies and differential treatments that are not compatible with WTO rules. Similarly, some WTO agreements, particularly Sanitary and Phytosanitory (SPS) Measures, Technical Barriers to Trade (TBT) and Trade Related Aspects of Intellectual Property Rights (TRIPS) may bring additional challenges to Nepal's SMEs. SMEs, due to their unstandardised products, may face a quality/standard gap because of WTO's standard and quality related agreements (SPS and TBT). Such standard and quality related aspect may limit market access opportunities for SMEs. Adapting standards will imply additional costs and a rise in operational expenditure. Therefore, export risk will increase for SMEs especially in those products from regions subject to higher standards of SPS measures. Similarly, SMEs are expected to incur high cost as a result of TRIPS Agreement due to royalty payments related to intellectual property (copyrights and related rights, trademarks, industrial designs, patents, layout designs of integrated circuits etc).

In this context, increased competitive pressure and challenges to fulfill quality and technical standard and royalty payments to the owners of intellectual property rights can be said to be the most important issues that may add challenges to SMEs of Nepal after WTO membership.

How to protect and promote SMEs?

Against the fact that the SMEs occupy a crucial position in the Nepali economy and are vital for poverty reduction and WTO membership brings both benefits and challenges for them, various efforts are needed to protect and promote SMEs in WTO era. First of all, SMEs need to adopt, revitalise and reposition themselves in order to seize the opportunities created by WTO membership and trade liberalisation. Secondly, the government should develop a WTO compatible SME development/protection strategy. The strategy, among others, should focus on facilitating technology transfer to SMEs, standardisation of their products, equipping them with an updated knowledge of global trade regime and trends. Additionally favourable policies and incentives should be introduced for the development of SMEs at the grassroots level. Similarly, proper networking is required to link grassroots level SMEs and global buyers (importers). Technical support, trainings and human resource development needed for establishment of SMEs should also be enhanced. Similarly, a broader network of SME entrepreneurs, civil society, media, academia and government should be established to foster the growth and progress of SMEs in the changed context of globalisation and liberalisation.

(Bhatt specialises on foreign trade and development)