Nepali Times
Strictly Business
Looking Phelps-wards


Last Monday in Stockholm, Sweden's Central Bank announced that it would award this year's Nobel economics prize to Edmund Phelps. That same day in Kathmandu, the Federation of Nepalese Chamber of Commerce and Industry (FNCCI) announced that it would shut down all businesses across Nepal on Monday, 16 October.

Phelps completed much of his ground-breaking work in the 60s. His core insight-that "imperfect information and imperfect knowledge, with their consequent complications," affect macroeconomic results-is to economics what, well, gravity is to physics. In the 90s, Phelps turned his attention to issues that could be of immediate interest to countries like Nepal. He looked at the transitional economies of Europe, and teased out factors that help raise a country's economic performance. In doing so, he has shown how some key market-friendly relationships affect one another.

Phelps is not a market fundamentalist. He grew up during the Great Depression. He has written against George W Bush's tax cuts that favour the rich, showed how state subsidies help firms to hire additional workers, and critiqued his own profession for neglecting issues concerning social justice.

Phelps defines high economic performance as a state in which there is high productivity and high employment. For such performance, he outlines two conditions: that there be jobs that "enlist the minds of employees, engage them in problem solving-leading them to discover some of their talents and expanding their abilities", and that employees see such jobs "embedded in a stimulating workplace, with new problems to solve, harder tasks to be mastered, and added abilities to strive for." This combination of challenging jobs and motivated employees, with its attendant influence on employment and productivity, is what Phelps says makes up a country's "economic dynamism".

What raises a country's economic dynamism? Phelps cites the role of institutions. What matters for dynamism, he says, is how an economy's rules of the game are defined and played out. It's not enough, he says, as some socialist-leaning European countries display, to have a general rule of law that safeguards, say, private property or places conditions on who gets hired and fired at a firm. A country's economic dynamism is slowed by the absence of specific, yet flexible, institutions-"company law and corporate governance, the population's preparation for business life, the development of the stock market", and lower barriers to entry to do business.

What does that tell us about raising Nepal's economic dynamism, especially in light of the FNCCI's protest program?

Four things: First, a high economic performance matters urgently for Nepal. This is so basic an idea that it gets routinely ignored. It's as if those who lead us happily view the rise of a remittance economy as an excuse not to engage in any serious thinking about Nepal's economic performance.

Second, our politicians need to view high employment and productivity rates as issues that will keep them in power, no matter who gets to govern from Singha Darbar.

Third, Nepali defenders of free enterprise need to further argue publicly that making it easier for all sorts of private sector businesses to function in Nepal provides the best antidote to unemployment and poverty.

And finally, the terms of our national economic debates need to be recast not to look at ways to restrict, but to understand how institutions or rules help Nepali business owners, employees and customers to thrive together.

Applying the findings of Phelps's recent real-world research is a way for us to look forward to an economically dynamic Nepal in times ahead.

(11 JAN 2013 - 17 JAN 2013)