Ten days ago, people power once again hit the streets of Kathmandu and other major towns throughout Nepal. This time however, it was over the government’s decision to raise the price of petrol (ok, gasoline to you Americans!), from around 67 Rupees (about US$0.90) per litre to 84 Rupees (US$1.14), with most other fuels experiencing similar rises. In a country that ranks as one of the poorest on the planet, this was a substantial rise and took fuel out of reach of many here in Nepal. And so, understandably enough, the locals took exception to this and took their objections onto the streets. However, unfortunately because Nepal must import almost all of its fuel, it must therefore pay the world price for it. It was understandable, but it was also completely wrong, and the government in initiating this rise, completely failed to put its case to its people.
The Nepal Oil Company (NOC), who has a monopoly on fuel imports into Nepal, was haemorrhaging huge amounts of money, requiring substantial financial support from the government. However, after a week-end of demonstrations and with transport brought to standstill, the government backed down and reversed the decision. Petrol has now reverted to its subsidised price of 67 Rupees a litre. This merely compounds the problem for not only do the financial losses continue, but this back down has eroded the credibility of the government and has made it that much more difficult for any future attempt to fix this problem.
This episode has been most revealing in several ways. Firstly, it showed up the incompetence of the government here to make decisions properly: it made no attempt explain why these price rises were indeed necessary, or to make any attempt to soften the impact through phased rises, or by introducing other measures that it would now be able to afford, thanks to the huge savings it would make from these price rises.
Secondly, subsidising prices is not a good nor accurate mechanism to help society’s poorest: the biggest beneficiaries from cheap fuel are those (ex-pats and Donors) with big antisocial 4WD trucks and large thirsty cars – hardly the most needy members of society! Unfortunately for governments, vehicle users tend to be vocal and politically well connected, precisely because of their greater wealth. Cheap fuel offers almost no benefit to society’s poorest. It would be better for the government to direct its limited financial resources directly to these most in need.
The episode also showed how over-interference by government in the operation of the economy distorts the underlying purpose of pricing in the market. It is absurd that any government is interfering in fixing the price of fuel. Why stop there? What about imposing fixed prices for everything else that might be used by society’s poorest, from water and power (it currently does!) to phone calls, bread or rice? This is what the communists tried to do, to the extent that eventually the price of something had no meaning. It simply served no purpose, because it was quite unrelated to the cost of providing that service or product. There was no effective feedback mechanism, adjusting the demand to the supply and the cost of this supply. That is the real beauty of using the market to do this, and it can do it far better than any government can, as the failures of communism conclusively demonstrated. Distorting this mechanism only increases waste and costs to the society as a whole and it is sad that the level of such waste is greatest in those countries who can least afford it.
This is not to say that the government should not influence the retail price of products, for it must do this through the imposition of taxes, and the level of these taxes is a valid area for debate. However, they should be “neutral” in so far as minimising any distortions on the market mechanism at work. Let this mechanism automatically direct this country’s oh-so-limited resources to those areas where it can achieve the greatest benefits overall. It is only through greater economic affluence that people and nations can ever attain greater choices as to how they conduct their lives and societies.
The NOC appears to have a reputation for inefficiency and corruption in Nepal. If this is so, then it is not surprising, given that it is a monopoly and the size of its business. But this also further adds to the level of waste and loss to the community here, for someone here is paying for it. In fact I would guarantee that it is neither efficient nor effective in its operations, for this is the price that we pay for any monopoly. How is the monopolist to know if he is operating well, when he has no one else with whom to compare himself? And what incentive is there to be better? It makes no difference to them, and the customer can only buy their products anyway. Simple human nature should tell us that it is a rare person indeed who is going to seek to change a comfortable status quo or work more when there is no need to do so.
Instead of trying to obsessively construct and control the fuel market in Nepal, the government should get out of it and allow a competitive free market to sort out this hideously expensive mess. Deregulate the importation of fuel into Nepal and let the market set the price of it. Its current policy of interference is a hiding to nothing: it creates a rod for its own back and will sooner or later inevitably fail. Just watch: the government will eventually be forced to abandon its current approach, just as happens everywhere else. But it would be better for the country if it recognised the error of its ways now and avoid the further losses and waste, rather than being forced to change later on.
And finally, this episode has demonstrated the imperfect relationship between the governed and governing. It might once have been possible for the government here in Nepal to impose its decisions without debate or any attempt to justify them to a subservient populace, but this is rightly no longer acceptable to an increasingly emancipated population. But conducting consultations through street demonstrations is not the ideal mechanism for the population to make its views known to the government. Communication is a two way process, and governments are here to serve their populations, but these raise other important issues that I will address in other articles…
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