Nepalese Business Environment

Sandesh Shrestha | Khitiz International College

Political Environment Lesson 2

Outline

Introduction to political environment Political parties and political structure in Nepal Relationship between political structure and the economy Government and its branches: legislative system executive system, and other constitutional bodies

Basic Issues in business-government relations, Government ownership of Nepalese business

Problems of Nepalese political environment Impact analysis of overall Nepalese business by citing above political environment particularly with reference to business sector

Political Environment Political environment is defined as the state, government,

institutions and laws together with the public and private stakeholders who operate and influence that system.

Business managers will pay attention to the political environment to see how government actions will influence their company.

Political environment also includes the political culture which are views held about what governments should act with relation to its citizens.

Political Environment• Politics is universal social activity • Politics is concerned with gaining/using power to achieve goals • To study political system business firm should know to:

Analyze constitution major political parties form or structure of government the mechanism designed to guide a transition of power

from one leader to another key power blocks

• All above factors are concerned with political stability a major factor for business environment

Political System• Business firms have to bear, cope with ideological tensions, conflict • Political system is concerned with i) the direction and administration of

state• ii) the government iii) the regulation of social relationship • State: is an association of people formed for specific common purpose

with a clearly defined territory system of laws and an organized government• Government: involves in making and implementing laws, representing

state, reunite political affairs management • Social relationships: in aggregated forms are integrated & regulated by

state & its government for national harmony, peace & well being, development & human rights

Economic System is determined by political system Market economy: what is produced in what quantity determined by supply/demand and through a price system

Mixed economy: a balance of both of the above State-Directed economy: state directly influences investment activities of private enterprise through “industrial policy.”

Command economy: planned by government

Impact of Political Environment• Nature of country`s political system reflects certain underlying

social values and philosophies • Political parties have their own economic policies • Democratic set up: Political system changes somewhat along

with change in government. Such political uncertainties create opportunities and threats

• Business firms also do exercise considerable influence on political and government machinery to draw attention to fulfill their needs

• Business firms also influenced by international politics.(Change in international politics affect domestic government policies which have impact on country`s environment)

Political Structure and Political Parties Constitution

• It is a legal document, a blueprint for the governance of the state.• It lays downs the fundamental principles, policies, institutional

power and sets limits on the exercise of such power by a particular body politic

• Nepal has gone through major political transitions and at current it is also in transition phase

Nepal does not have a long constitutional history. However, several constitutional exercises were made in the

country prior to the people movement of 2006. The historic people ‘s movement of 2006 expressed the prime

goal of building a prosperous, modern Nepal.

Political Structure and Political Parties Constitution ( Contd.)

• A comprehensive Peace Accord was signed on November 21,2006 to accomplish, through the Constituent Assembly,certainity of sovereignty of the Nepali people, progressive political outlet, democratic restructuring of the state and socio-cultural transformation.

• The parties agreed to seek the UN assistance in monitoring the management of the arms and armies both sides by the deployment of qualified UN civilian personnel to monitor all the arms and ammunition of Maoists according to international norms.

Political Structure and Political Parties Constitution ( Contd.)• The Interim Constitution of Nepal,2007 was enforced and the

common minimum programs were agreed based on eight party consensus.

• November 20,2007 was declared the date for the Constituent Assembly elections. However on October 5,2007 ,the seven party alliance decided to postponed the elections till further decision.

• first constitution election 2064, chaitra 28 ,caste and division issues

• Jesth 14,2070 constitution assembly was adjourned.• Mangsir 4,2070 Election was done.

Political Structure and Political Parties Constitution ( Contd.)

• Salient features of Interim Constitution are as follows;

Promotion of conditions of welfare on the basis of principles of an open society by establishing just system in all aspects of national life

Establishment and development of healthy social life on foundation of justice and morality and harmony among all castes, tribes

Wider participation of the people in governance of the country, decentralization and promotion of general welfare for protection and promotion of human rights

Political Structure and Political Parties Constitution ( Contd.)

Policies to be adopted by state Emphasis on education, health, housing and employment of people and raise the standard of living of people.

Environment protection. Participation of female population in national development

Safeguards the rights and interests of children Promotion of interests of the economically and socially backward groups.

Political Structure and Political Parties Constituent Assembly The interim Constituent adopted in January 2007,transferred the

executive power of the King to the Prime Minister and established a 330 seat Interim Parliament, this was later replaced by an elected 601 seat Constituent Assembly.

After two postponements in 2007,Nepal’s first ever Constituent Assembly elections were finally held on April 10,2008.

A mixed electoral system was adopted with 240 seats for direct elections from the constituencies,335 for proportional representation on the basis of parties’ overall share of the votes, and 26 seats for distinguished individuals to be nominated by the cabinet. The constituent Assembly was given two years timeframe to draft a constitution that speaks to the needs of Nepal multi-ethnic population.

Political Parties Political environment is most powerful and most

influential components among the external factors. Political system is the outcome of the agreement of the

various political powers ( parties and social factors). In multiparty system, political parties are the backbone

of the political system of the country.Out of the 139 political parties, 76 are new ones that were not in existence during the 2008 CA election.

Government, its branches and Political Institutions• Political system consist of : a) legislature, b)

Executive and c) Judiciary.

• Legislature is also known as House of representative or parliament or Pratinidhi Sabha in Nepal.

• Executive is also know as Government or Council of Ministries or Mantri parishadh.

• Judiciary is known as Court of Justice or Sarbochcha Adalat.

Legislature ( House of Representative)

Most powerful institution of the state / nation

Representation of the people / elected body

Prepare acts even constitution as per the need of the society / country.

Approve budget, control executives,

Facilitates the business through formation of various acts.

Direct the executives to prepare policies and provide supports.

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Executives ( Council of Ministries)Centre of political authority which possess immense power to exercise.

Prepare rules, regulations, policies and procedures to enhance the business environment.

It composites Ministries, Department, Division, district branches of various ministries, District Development Committee, District Branches, Municipalities and VDCs.

It shapes, guides, controls, promotes, fosters and destroys the business activities.

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Three levels of courts are exist : Supreme -1, Appellate-16 and District - 75.

Supreme court has rights to review and make void any acts prepared by parliament if contradict with constitution.

Legal disputes are settled by the court.

It provides justice to the victimized group and give punish who break the law.

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Judiciary (Courts)

Government, its branches and Political InstitutionsThe Interim Constitution of Nepal,2007 imagine the Constituent Assembly as the Legislature-Parliament.

The president of Nepal has the responsibility to act as the head of the state and guardian of the constitution.

The term “government” refers to the center of political authority having the power to govern those it serves. In Nepal, the Council of Ministers headed by the Prime Minister represents the executive system.

In Republican Parliamentary democracy, the real storehouse of power is the Cabinet. The Cabinet, functioning on the principle of collective responsibility, is the top policy making body in the government.

Government, its branches and Political InstitutionsThe local government structure comprises the VDC and municipalities.

Each of the 3915 VDCs in the country comprises 9 wards, a VDC has approx 800 households and there are 58 municipalities in the country.

At the district level, each of the 75 district has a district Development Committee.

The Judicial System ensures that the executive system does indeed function as conceived, and also provides the mechanism to deal with deviations. The court of justice protects the citizens from unlawful acts passed by the legislature and arbitrary acts done by the executive.

Government, its branches and Political InstitutionsAn important elements of the state structure is the provision of the Constitutional Council, which nominates office-bearers to the constitutional bodies.

There is Judicial Council, which is similarly empowered with regard to appointments to the judiciary.

Another special feature of the new institutional arrangements is the provision of the Commission for Investigation of Abuse of Authority.

Nepal Human Rights Commission has been constituted for human rights protection and promotion.

The National Planning Commission has emerged as a policy making organ of key importance on a wide range of subjects, especially developmental issues.

Basic Issues in Business-Government Relations1. Level of corporate tax affect all business firms.

2. Regulation to limit dust and fumes in the workplace considered by the Department of Labor for the manufacturing firms.

3. Exchange rate policy affecting export-oriented industries.

4. There may be political impact on three different types of business like

Financial institutions such as banks, insurance companies and other investing institution. Manufacturing and mining firms, Small business( from restaurants to workshops), the policies of the government may have favorable impact on one type of business and may not have favored equally.

Basic Issues in Business-Government Relations5. Market and government are complements rather

than substitutes.

6. The relationship between the government and business is particularly complex where the state itself involved in business. In Nepal the state owns varieties of companies, which operates sometimes in competition with private owned companies. this is to be managed by the government.

Government Ownership of Business Government ownership of the factors of the production is

found everywhere.

However, such ownership differs from country to country.

In socialist and communist countries ,the government own a very large segment of business, whereas in other countries relatively less is under direct control of the government.

Today many countries in the world has been privatizing the state-owned companies and liberalizing the economy, this policy has given rise to political issues in many developing countries including Nepal.

The public sector in Nepal has a dominant position.

Government Ownership of Business This sector at present consists of seven industrial enterprises,

seven service enterprises, six business enterprises, five social sector enterprises, three public utility organization and eight financial institutions.

The total investment of the government in public enterprises was more than Rs.84.92 billion. In 2010-11,the overall operating profit of these enterprises amounted to Rs.10.55 billion representing about 12% of the capital employed.

Only a few enterprises namely ,NTC,Nepal Insurance Corporation,RBB,Agricultural Development Bank,Hetauda Cement Factory,DDC were running in profit.

Among the 36 public enterprises,22 had earned some profits while 14 were operating at loss.

Employer’s Association In Nepal, enterprises and business houses are organized into their respective district wise chambers of commerce and industry, which in turn are affiliated to the Federation of Nepalese Chamber of Commerce and Industry at the national level.

FNCCI is an umbrella organization of the Nepalese private sector. The FNCCI membership comprises of :

1. 89 district /municipality level chambers in 66 district

2. 61 commodity /sectoral associations

3. 361 public and private sector undertakings and

4. 10 bi-national chambers

Employer’s Association These chambers and associations try to influence government policy through the FNCCI.

The role of these associations has usually been to watch over their members’ commercial and financial interests.

FNCCI have been active in labor administration and other functions.

They are also representing their interest in the national and international bodies.

The government seek their advices on important policy matters.

Trade Union Act secures the rights of workers

Trade union(s) have been established under the most of the establishment / enterprises.

Trade Union are influenced by different political ideology so their voice is not unified to raise the common issues of labors.

Characteristics of labor movement are two types: revisionary and revolutionary.

Labor union should be directed to establish the healthy industrial relations.

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Labor / Trade union in Nepal

Labor as a political force Major trade unions are affiliated to political parties.

The political party which is in power, favors a union, which is affiliated to it, and the result is endless industrial change.

Labor union works as pressure groups and keep an eye on the emerging business-government relations.

As these unions also have the support of the political parties ,their voices are heard and even discussed at the legislative bodies.

Nepalese Political Scenario/Problems of Nepalese Political Environment

Instable government

List of demand from each and every sector increasing day by day (ethnic, marginalized, regional , deprived, labor and peasants )

Lack of common decision in the national interest, constitution formulation and economic development.

black marketing, strikes, corruption, confusion, impunity and nepotism are contemporary challenges.

Sister organizations of some political parties have resorted to violence to push their political agendas, such practices has serious effects on business organizations.

Nepalese Political Scenario/Problems of Nepalese Political Environment

The number of illegal armed groups is increasing everyday raising concerns that these groups are to be mobilized to influence the politics.

The human right situation is deteriorating in the country; human right defenders, civil servants, businessman and journalists have been attacked, killed and kidnapped.

Law and order situation is very critical throughout the country.

Role of Government 1. Facilitating Role: Government assists the business by

providing grants, subsidies, facilities, build infrastructure ( Road, port, hydropower, airport etc.)

Eg. Establish Industrial Districts with full of facilities like, BID, HID, PID etc.

2. Regulating Role : Control the business organization by formulating acts, rules and policies, forming different regulating authorities. Eg. Nepal Rastra Bank, Securities Board of Nepal, Insurance Board, Office of the Company Registrar etc.

Role of Government 3. Entrepreneurial Role: Setting up business enterprises (PEs)

and deliver service like public utilities and public enterprises to the society in a affordable prices.

e.g.. Nepal Food Corporation, Nepal Oil Corporation, Nepal Airlines Corporation etc.

• Nepal Bank Limited is first State Owned Bank in Nepal( B S 1994). RBB is 100% government owned bank.

• Total 75 PEs were established during Panchayat regime.

Political EnvironmentPublic Policies Public Policies are the instruments in the hand of the government to regulate business and economic activities.

There are three types of public policies, which shape the pattern of business-government relationship.

1. Distributive Policies (such as tariff, government contracts etc)

2. Redistributive Policies (such as liberal taxation and welfare policies)

3. Regulatory Policies ( such as the imposition of rules by government concerning excessive urbanization,pollution,deforestation and the like)

Political Stability Issues• Political stability is prerequisites to increase the

productivity of the business.

• Why there should be stable government ? 1. More contribution for the development of

economy.2. Stability in rules and regulation, policy &

program3. Industrial security4. Less anarchism5. Less uncertainty, less risk

Impact of political environment on business sector Political instability in the country has led to different

economic policies along with the change in the Government

No proper vision developed for overall economic development of the country

Frequent changes in the government has also resulted in the change/transfer of key positions of government which has led to poor stability

Politicization in state and government machinery has failed to result in the proper vision for the economic enhancement of the country

Impact of political environment on business sector Politicization and lack of good governance has resulted

in the amassment of the misappropriate funds misusing the authority

More centralized development more Kathmandu centric development

Unequal distribution of wealth and gap between rich and poor widened

Conflict in the country has resulted in loss of 11,000 human lives and damaging economy at the rate of 5-10 % per annum

Conflict: damage of infrastructure (telephone, buildings etc.) reconstruction to cost more .

Impact of political environment on business sector Tourism and manufacturing sectors have hard hit due to

conflict

Some business units have been forced to close down

Tourism earnings as % of foreign earnings have declined from 15.9% in 1999/00 to 9.1% in 2003/04

Rampant corruption originating from kickbacks available to politicians and high raking government officials

No specific program at satisfy level for the proper utilization of its resources

Impact of political environment on business sector Conflict/lack of employment opportunity led the workforce

to go abroad resulting in lack of skilled workers in the country

Lack of transparency and accountability particularly in context of state and economic activities

In the changed political context also business community have been asked for forced monetary donations

In today`s changed context of national politics all works of life in along with business community expecting fro better situation (sustainable and lasting peace)

Political Risk Political risk is a type of risk faced by investors, corporations, and governments.

It is a risk that can be understood and managed with reasoned foresight and investment.

Political risk refers to the complications businesses and governments may face as a result of what are commonly referred to as political decisions—or “any political change that alters the expected outcome and value of a given economic action by changing the probability of achieving business objectives”

Political Risk in BusinessSources of political risks:

I. Unstable Political SystemII. Political involvement of religious or military leaderIII. Frequent changes in governmentIV. Corrupt or poor leadershipV. Civil disorder due to:

Economic conditions Human rights violations Conflict among races, religions & ethnics Group animosity

Type of Political RiskDue to the instability in the political system of Nepal there are various risk exist.

• Ownership risk – Risk of insecurity of the property.

• Operating risk - interruption in the smooth operation of business.

• Transfer risk – barriers to transfer of the fund from one country to another country.

Other types of Political Risk There are other type of political risk, which also have significant

adverse effects on the functioning of a business firm, they are;

• Expropriation : Ownership transfer by government to the domestic industries with payment of compensation.

• Intellectual Property Rights / design and patent rights: Nepal has very weak mechanism to protect the intellectual properties.

• Boycotts or blacklisted or rejected of foreign goods by government or society.

• Inflation, taxation and devaluation of currency due to political instability.

• Embargo and Sanctions ( restriction ) by government: This twist free flow of trade in goods, services or ideas.

Forms of Political Risk It is the assessment of factors that influence the likelihood that a country will have a healthy investment climate.

The political risk analysis can be done from two perspectives, they are:

Macro political / country specific risk :It affects all the firms operating in a country. It exists outside the firm such as political protests, civil wars, disturbance, terrorism etc. which is the beyond the control of the firm.

Micro political / firm specific risk : It affects only a specific firm or firms within a specific industry. Risk like protest against the services, boycotts and campaigns against the certain products, strikes by the trade unions.

Political Instability The most important and necessary precondition for business climate is to

create stability in the environment.

The stability in the environment can be examined in terms of

1. Political stability

2. Policy stability

The one measure of political instability is the frequency of changes of government. In business terms, business firm believes that greater political instability means instability in policies.

Business including agriculutral,commercial and financial activities can prosper only when there is a stable government with gradually changing policies.

Over the last 20 years,govt. remained for the short period of time,then,3 general elections and one Constituent Assembly were held and as many as 20 govt. were formed on after another.

Relationships Between Business & Government

Government 's support to Business :

• Money, Foreign currency & Credit

• License

• Tariff & Quotas

• Infrastructure

• Security / law & Order

• Information

• Technology

• Appropriate policies

• Regulating the business

Business contributes to Government :

• Employment generation

• Taxes

• Voluntary welfare program

• Consultancies Services & Contacts

• Foreign currency

• Information

• Political Supports

• Resources mobilization

• Economic Development

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Political Risk Analysis There are four basic methods for a business firm to judge and assess the political risks, besides analyzing available information and news reports.

Grand tour: An executive or a team of executive can visit the place after some preliminary market research. The information from these visitors often is selective. Even with the limited information, it is beneficial to have the executives get a feel for the political climate in person.

Expert hands: The business firm can acquire expert opinion from seasoned educators,diplomats,journalists or businessman hired as consultant. its disadvantages is that firm is putting too much faith on the judgment of outsiders.

Political Risk Analysis Delphi technique: strategist can attempt to identify selective

elements influencing a nations political destiny: the size and composition of armed forces, delay experienced by industries and political kidnapping. Next expert weigh the importance of these factors and put them into a checklist. The checklist is often transferred into an index so nations can be compared. This can be both quantitative and qualitative.

Quantitative method: Tools and techniques can be employed that involve multivariate analysis, which uses a number of mathematical variables, use to predict trends using historical data or to understand more fully the underlying relationship affecting a nation.

Procedure to analyze Political Risk1. Assessing issues of relevance to the firm

The critical political issues which are relevant to the business firm

The degree of their importance to the firm is to be assessed. To what extent does the government control the ownership of

the business? How the government regulates the supply of basic inputs like

people, raw material and capital ? What are the regulations concerning the outputs of a firm i.e.

the regulations of prices, profits and exports?

Procedure to analyze Political Risk2. Assessing potential political events

The likely political events immediately and in the distant future? What is their probability of occurring? What will be their cause and effect ? Does the government have the ability to respond to these issues? Would the government be willing to respond to these issues?

3. Assessing probable impacts and responses.This is the step of assessing the impact of political eventsThe managers have to determine the initial impact of probable

scenarios.Then they determine possible response to initial impacts.

Methods of managing Political Risk Build Image

Social Responsibility

Portfolio investment

Insurance

Avoidance

Lobbying

Political Philosophy• Socialism is an economic and political theory

advocates that public or common ownership and cooperative management of the means of production and allocation of resources.

• Capitalism is an economic system in which the means of production are privately owned and operated for profit. Income in a Capitalist system is split between the business owners and the workers.

Political Philosophy• Liberalism is the belief in the importance of liberty and equal rights. Liberalism supports such fundamental ideas as constitutions, liberal democracy, free and fair elections, human rights, capitalism, free trade, and the freedom of religion.

• Conservatism is a political and social philosophy that promotes the maintenance of traditional institutions and supports, at the most, minimal and gradual change in society.

Political EnvironmentDemocracy: - Government is by the people,

exercised either directly or through elected representatives

- Safeguards hold elected representatives accountable.

Autocracy : An autocracy is a form of government in which one person possesses unlimited power. An autocrat is a person (such as a monarch) ruling with unlimited authority. It is called totalitarian system.

Political Culture of Nepal

1. Delay in decision making / implementation

2. Lack of clear idea on Globalization & Privatization

3. Violation of laws and system

4. Lack of farsightedness

5. Nepotism

6. Corruption

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Practice Questions1. Why labor union is regarded on of the most powerful

component of business environment?

2. Political environment is most important factors to be considered by the business. Comment the statement.

3. Trace out the current political structure of Nepal. How political factors regarded most influential factors for business?

4. What are the responsibility of business towards the government and society?

5. Examine the political risk associated in the business community.