2.7 Trade, market and labor liberalization

Trade, Market, and Labor Liberalization

Concept of Liberalization

Traditionally, states controlled most economic activities. However, due to modernization, expanded scope of operations, the strengthening of non-governmental sectors, and increased governmental burdens, liberalization emerged as a concept where the state delegates certain functions to the private or cooperative sectors, accepts their roles, removes unnecessary regulations, and fosters multi-sectoral participation. Liberalization is the belief in achieving economic growth and development through the leading contribution of the private sector. It involves restructuring the economy from a highly controlled (self-reliant) system to an open (interdependent) one, minimizing the government’s role in management, operation, and regulation. The state acts as a facilitator, promoter, and catalyst, creating a private sector-friendly environment to achieve rapid economic growth, development, and a free, prosperous, interdependent, self-reliant, and sovereign national economy. Liberalization requires openness in fiscal and monetary policies, currency and capital markets, banking and financial institutions, and free entry, operation, and exit in trade and markets. Initiated in the 1980s by UK Prime Minister Margaret Thatcher and US President Ronald Reagan, economic liberalization gained global traction to address the shortcomings of state-controlled economies.

Historical Development

• The global economic crisis of the 1930s reduced reliance on private finance and free-market economies, increasing the role of public finance.
• Post-World War II, the establishment of the World Bank and IMF in 1945 led to the emergence of structures different from monopolistic state-controlled economies.
• In the 1970s, the IMF’s Structural Adjustment Programs reduced government controls and recognized the private sector’s role.
• In the UK, Margaret Thatcher initiated the transfer of responsibilities to the private sector through the Next Step Agency, while Ronald Reagan advanced liberalization by enhancing the private sector’s economic role.

Definition and Meaning

Liberalization can be summarized as:

• Encouraging private sector development.
• Simplifying policies, structures, and tax systems.
• Welcoming and facilitating foreign direct investment.
• Enhancing competitiveness and efficiency through public sector restructuring.
• Facilitating foreign trade through export concessions and facilities.
• Promoting modernization through technology transfer and free trade.
• Minimizing or eliminating trade barriers.
• Upgrading small industries or developing large ones to diversify goods and services.
• Protecting individual property rights and economic freedom.
• Determining production and pricing of goods and services through market demand and supply.
• Ending government interference in economic activities.
• Serving as a tool for economic policy management.
• Protecting consumer sovereignty and rights.

Objectives, Need, and Importance

• Increasing competition among national industries.
• Balancing imports and exports to promote foreign trade in line with national interests.
• Maximizing the use of foreign capital and technology.
• Integrating national trade into global markets.
• Reducing the state’s debt burden.
• Encouraging the private sector to leverage economic potential.
• Attracting multinational companies to increase investment.
• Involving the private sector in the development process.
• Reducing the state’s role in industrial development in the future.
• Enhancing the competitiveness of the national economy.

Areas Requiring Reform for Liberalization

• Deregulation of the industrial sector.
• Abolition of licensing systems in trade and business.
• Financial sector reforms.
• Tax and fiscal system reforms.
• Foreign exchange and external sector reforms.
• Trade and investment policy reforms.
• Industrial sector reforms.
• Labor and employment policy reforms.
• Payment system reforms.

Impacts of Liberalization

Positive Impacts

• Entry of multinational companies in education, health, and financial sectors.
• Free flow of capital leading to investments in high-profit industries.
• Opportunities for investment diversification.
• Reduced government interference in markets.
• Increased private sector activity and gradual development.
• Improved access to banking and financial services for the public.
• Access to foreign goods, services, and technologies (universal consumer).

Negative Impacts

• Weakening of the national economy.
• Mergers and closures of small and traditional industries.
• Increased business consolidations.
• Growing misuse of employment and capital.
• Creation of imbalances and inequalities in the global economy (e.g., wealth and consumption gaps, rural-urban divides, and disparities between developed and developing nations).
• Reduced contribution of labor to economic growth.
• Overexploitation of natural resources.
• Low growth in global GDP despite increased productivity.

Major Areas of Liberalization

Trade Liberalization

Trade refers to the buying and selling of goods and services. Domestic trade is limited to a country’s borders, while international trade occurs across borders. Trade liberalization refers to an environment where trade in goods, services, and intellectual property faces no restrictions, allowing anyone to trade anything, anywhere, anytime. This involves open and free trade, imports, exports, distribution, display, advertising, and promotion. Procedurally, trade liberalization entails reducing or eliminating commercial and non-commercial barriers, customs and non-customs barriers, administrative simplification, tax rate reduction, tax rebates, and concessions. According to Investopedia, trade liberalization is the removal or reduction of trade barriers, such as tariffs, duties, licenses, and quotas, to facilitate the free exchange of goods and services between countries.

Concept and Development

• Historically, trade was limited to domestic markets (self-reliance).
• Population growth, diversified needs, rising costs, and declining productivity led to internal production failing to meet demand.
• Countries began exporting surplus goods and importing those they couldn’t produce, fostering interdependence.
• Regional trade agreements like SAFTA, BIMSTEC, EU, OECD, OPEC, and G8 emerged to promote free trade.
• Agreements like GATT (1947) for goods, GATS (1995) for services, and TRIPS (1994) for intellectual property facilitated free trade.
• Liberalization gained momentum in the 1980s, leading to the establishment of the World Trade Organization (WTO) in 1995.
• Post-WTO, import-export openness, quota abolition, and removal of trade restrictions (e.g., extra taxes, customs, licenses) were mandated.

World Trade Organization and Trade Liberalization

The WTO, an evolution of GATT, promotes principles like Most-Favored Nation (MFN) and National Treatment, requiring equal treatment of domestic and foreign investors or traders without discrimination. While strong economies thrive in free trade, weaker economies risk being marginalized. To address this, the WTO adopts the principle of development justice, providing technical and legal assistance, and special facilities for landlocked and least developed countries. Developed nations are expected to provide aid to developing and underdeveloped countries to enhance trade capacity.

WTO Principles: Non-discrimination (MFN and National Treatment), market access, fair competition, transparency, and special treatment for developing countries.

Trade Liberalization in Nepal

• Towards the end of the Panchayat regime, Nepal adopted the IMF’s Structural Adjustment Program, initiating financial sector reforms.
• The Foreign Investment Act, 2038 BS, opened limited sectors to foreign investment.
• Post-democracy restoration, the government embraced liberalization in commerce, investment, business, electricity, and IT sectors.
• The Privatization Act, 2050 BS, facilitated the privatization or dissolution of public enterprises.
• Efforts included reducing tax rates, customs duties, tax system reforms, a fixed exchange rate with India, and adopting an open exchange system.
• Nepal joined the WTO on April 23, 2004, and participated in regional trade systems like BIMSTEC and SAFTA.
• The Commerce Policy, 2065 BS, emphasized multilateral and regional trade integration, trade facilitation, and export promotion through institutional efforts.

Impacts of Trade Liberalization in Nepal

Despite efforts to implement global trade policies, Nepal has not reaped significant benefits.

Positive Impacts

• Some foreign investment inflow.
• Increased trade volume.
• Entry into international markets.
• Access to global consumption opportunities.

Negative Impacts

• Weakening of the domestic economy.
• Inability to boost domestic production and productivity.
• Reliance on remittances for balance of payments.
• High trade deficits.
• Lack of infrastructure for trade competitiveness and export promotion.
• Failure of Nepali goods, services, and intellectual property to establish a strong global presence.
• Limited presence of multinational companies.
• Growth in import and consumption-driven trade.
• Increased dependency on foreign goods.
• Compromises on national sovereignty for trade.
• Near-impossible survival without imports.

Large, powerful countries have gained disproportionate benefits, while smaller, weaker nations like Nepal face growing inequalities. Nepal has not been able to leverage trade liberalization for economic prosperity or national interest protection.

Steps for Nepal to Benefit from Trade Liberalization

• Effectively implement bilateral and multilateral trade agreements to ensure national interests.
• Pursue diplomatic efforts to open transit, air, and waterways.
• Reduce costs and increase productivity through commercialization, industrialization, and mechanization.
• Identify, develop, and specialize in areas of comparative advantage.
• Attract high foreign investment through administrative and legal simplification and tax exemptions.
• Mandate sorting, grading, packaging, quality testing, and certification of exportable goods.
• Dissolve unnecessary public enterprises and enhance the capacity of essential ones.
• Encourage the entry of multinational companies.
• Diversify trade by country and product.
• Revise BIPPA and DTAA agreements to align with national capacity and interests.
• Implement single-window services, tax collection, and zero customs duties.
• Maximize the use of public assets and natural resources.
• End state monopolies in sectors like oil and electricity.
• Strictly curb private sector malpractices like black marketing and monopolies.
• Reduce transportation costs through internal and external transit, air, and waterway development.
• Bring all businesses under the tax net.
• Provide tangible facilities and concessions to exporters.
• Promote Nepal’s products in global markets through effective economic diplomacy.
• Establish strategic partnerships for national interests.

Market Liberalization

Market liberalization refers to an environment with free market entry and exit, producers’ rights to choose products, pricing determined by supply and demand, removal of investment restrictions, and an open exchange system. In a liberal market, the state acts as a facilitator, while the private sector leads the economy. Economic sectors like production, investment, labor, technology, and consumption are freely mobilized to make the market self-regulating. The government creates a conducive business environment, while the private sector promotes entrepreneurship and economic growth.

Market Liberalization in Nepal

Banking and Currency Market

• Open interest rate system.
• Market-controlled exchange system.
• Private sector investment in commercial banks.
• Permission for foreign investment in banks and financial institutions.
• Full convertibility of Nepali currency in the current account.
• Foreign banks allowed to open branches and operate in Nepal.

Public Finance

• Recognition of a mixed economy and three-pillar economic policy (public, private, cooperative).
• Tax system reform programs.
• Reduction in tax rates and expansion of the tax base.
• Customs duty reduction.
• Curtailment of facilities and concessions for the industrial sector.
• Privatization or dissolution of public enterprises.

Industrial and Business Sector

• Abolition of licensing systems.
• Legal provisions for private investment protection.
• Openness to foreign investment and technology transfer.
• Privatization of government-owned industries.

Trade Sector

• Abolition of initial general licensing requirements.
• Legal recognition and openness for service trade.
• Permission to open foreign currency accounts for business purposes.
• Openness to foreign investment in the trade sector.
• Nepal’s membership in WTO, World Customs Organization, WIPO, BIMSTEC, and SAFTA.

Nepal has facilitated trade, eliminated trade and non-trade barriers, reduced tax rates, removed trade protections, curtailed subsidies, abolished quotas, and initiated equal, free, and competitive trade systems. With globalization, trade in goods, services, labor, and intellectual property has expanded both into and out of Nepal.

Policy Arrangements for Market Liberalization in Nepal

• The Constitution recognizes government, private, and cooperative sectors under its economic objectives.
• Provisions for utilizing foreign capital and technology in line with national interests.
• Public-Private Partnership Policy, 2072 BS, Act, 2075 BS, and Regulations, 2077 BS.
• Privatization Act, 2050 BS, for divestment of public enterprises.
• The Sixteenth Periodic Plan emphasizes collaboration with the private sector for a free and self-reliant economy.
• Competition Promotion and Market Protection Act, 2063 BS, to ensure market competition.
• Private Investment Act, 2063 BS, for legal recognition and protection of private investment.
• Foreign Investment Policy, 2071 BS, and Foreign Investment and Technology Transfer Act, 2075 BS.
• Consumer Protection Act, 2075 BS, to ensure consumer rights.

Positive Impacts of Market Liberalization in Nepal

• Legal and structural arrangements for consumer rights protection.
• Increased competitiveness of the Nepali market.
• Enhanced opportunities for rights and choices.
• Increased investment and production in the business sector.
• Contribution to employment creation and revenue generation.
• Support for balance of payments through remittances.
• Promotion of economic democracy and reduction of unproductive public investment.
• Government focus on welfare and social security.
• Some improvements in the quality of goods and services.
• Mobilization of additional resources, boosting national production.
• Increased private sector activity and institutional development.

Negative Impacts of Market Liberalization in Nepal

• Inadequate private sector capacity to lead economic development.
• Price fixing by a few traders and businesses, leading to artificial price hikes affecting consumers.
• Weak regulatory capacity and law enforcement, neglecting consumer health.
• Widening gap between rich and poor, increasing class disparities.
• Decline of micro, cottage, and small industries, reducing traditional employment.
• Growing consumerist culture, leading to trade deficits and economic dependency.
• Uncontrolled markets, with youths falling into substance abuse.
• Farmers receiving low prices for produce but paying high prices as consumers, exacerbating poverty.
• Unrestricted entry of Indian goods into Nepal, while Nepali goods face barriers in India.
• Prevalence of black marketing, syndicates, and cartels, limiting consumer sovereignty.
• Low competitiveness, with foreign products displacing Nepali goods, weakening the domestic economy.

Steps for Nepal to Benefit from Market Liberalization

• Strictly enforce market competition laws.
• Facilitate good practices and strictly control malpractices.
• Review treaties based on Nepal’s capacity, experience, and interests.
• End government monopolies in sectors like oil and electricity.
• Revise or cancel unequal treaties with India that favor India alone.
• Enhance diplomatic capacity to ensure unrestricted access for Nepali goods in India and global markets.
• Discourage consumerism by imposing high taxes on luxury goods and restricting their imports.
• Allocate budgets only for productive systems.
• Develop sustainable production plans for agriculture, livestock, herbs, forest products, and tourism, transforming them into industries.
• Provide subsidies, reduced rates, and mandatory market arrangements to ensure fair prices for producers.
• Adopt a “one import, two exports” policy with incentives for compliance.
• Implement anti-dumping and countervailing measures to restrict imports of low-cost foreign goods.
• Develop north-south roads, railways, and ropeways for transit and transport in the Himalayan region.
• Promote electric public transport with subsidies for electricity.
• Enhance storage, quality testing, price labeling, monitoring, and inspection.
• Recognize businesses based on good practices, not transaction size.
• Provide incentives to households minimizing the use of imported goods.
• Modernize and upgrade domestic technology for competitiveness.
• Promote consumer awareness and eliminate black marketing and syndicates.

Labor Liberalization

Labor liberalization refers to a system where the labor and employment market is regulated by supply and demand. It encompasses the free global movement of labor, equal rights for workers, respect for labor, market-determined wages (with government-set minimum wages), and the elimination of restrictive, protectionist, discriminatory, or unequal legal and structural arrangements. Labor liberalization ensures open internal and external labor markets based on capacity, merit, and fair competition, with free entry and exit, labor freedom, workers’ rights protection, sustainable labor markets, access to services based on ability, non-discrimination in work or wages based on caste, gender, or nationality, collective bargaining, trade union rights, elimination of hazardous labor, child labor, and exploitation, and a market-driven labor system.

Labor Liberalization in Nepal

Nepal has taken steps to make its labor market flexible, competitive, and integrated with the global market over recent decades.

Constitutional Steps

• Right to employment (Article 33), right to labor (Article 34), and labor and employment policies (Article 51(J)).
• Rights to choose employment, unemployment assistance, fair labor practices, trade unions, collective bargaining, and non-discrimination in wages or social security based on gender.
• Policies for social security, ending child labor and exploitation, ensuring safe and organized foreign employment, and utilizing capital, skills, technology, and experience from foreign employment.

Policy and Legal Steps

• National Employment Policy, 2071 BS
• Foreign Employment Policy, 2068 BS
• “Respect for Labor, National Campaign” Strategy, 2078 BS
• Labor Act, 2075 BS, and Regulations, 2075 BS – workers’ rights, fair labor relations, and ending exploitation.
• Right to Employment Act, 2075 BS
• Trade Union Act, 2049 BS – collective bargaining, fair labor relations, and dignified labor.
• Civil Service Act, 2049 BS – trade union rights with collective bargaining.
• Foreign Employment Act, 2064 BS, and Regulations, 2064 BS
• Contribution-Based Social Security Act, 2074 BS, and Regulations, 2075 BS

Institutional Steps

• Ministry of Labor, Employment, and Social Security
• Department of Labor and Occupational Safety
• Foreign Employment Department
• National Vocational Training Institute
• Foreign Employment Board
• Social Security Fund
• Contribution-Based Social Security Fund
• Foreign Employment Office
• Occupational Safety and Health Center
• Employment Permit System (EPS) Branch
• Labor Court
• Foreign Employment Tribunal
• Provincial Ministry of Social Development

Other Steps

• Nepali workers have historically worked in countries like India and the UK.
• Nepal is a signatory to ILO conventions.
• Bilateral labor agreements with 12 countries.
• Institutional openness for foreign employment in 111 countries.

Impacts of Labor Liberalization in Nepal

Positive Impacts

• Laws like the Labor Act, Trade Union Act, employment policies, and constitutional provisions have ensured labor freedom, respect, non-discrimination in wages and services, and workers’ rights protection.
• Increased labor competition and diversification.
• Establishment of minimum wages.
• Inclusion of workers in social security schemes.
• Implementation of labor courts and workers’ welfare funds.
• Job creation in the private sector post-liberalization.
• Foreign exchange, skills, and experience gained through foreign employment.
• Significant contribution of foreign employment to balance of payments.
• Improved worker welfare through organized and democratic practices.
• Near-elimination of child labor and exploitation.

Negative Impacts

• Poor implementation of labor laws, leading to chaotic and distorted labor movements.
• Workers engaging in politics, dividing based on political ideologies.
• Formation of political party-affiliated unions in the civil service.
• Undue political pressure on managers or administrators for personal gains.
• Dominance of non-working union leaders influencing labor decisions.
• Inability of managers to hire or fire non-performing employees due to union pressures.
• Failure of market mechanisms to regulate wages and services effectively.
• Foreign employment limited to risky, discriminatory, low-level “3D” (dirty, dangerous, difficult) jobs.
• Loss of thousands of Nepali workers’ lives abroad.
• Rampant fraud in foreign employment.
• Persistent high unemployment rates.
• Preference for foreign consultants over locals.
• Inadequate social security for workers.
• Failure of labor liberalization to deliver expected results due to weak labor markets and job scarcity.
• Increased labor migration due to excessive competition and job scarcity.
• Examples of industries failing due to strained labor relations.

Steps for Nepal to Benefit from Labor Liberalization

• Conduct surveys on labor demand and supply in national and international markets, identifying Nepal’s potential labor supply.
• Develop and implement forward-looking labor and employment policies to balance future demand and supply and compete globally.
• Conduct education, training, and skill development programs for future labor supply.
• Establish a dedicated labor university.
• Open foreign employment only to safe, well-compensated, and dignified jobs aligned with national interests.
• Sign labor agreements with minimum conditions for equal treatment and services.
• Review labor agreements with countries offering low-quality labor markets.
• Mandate public disclosure and documentation in labor and employment information systems.
• Blacklist or ban labor markets and countries failing to provide just treatment to Nepali workers.
• Expand service industries and identify new labor sectors to enhance Nepal’s labor market capacity.
• Prevent labor and brain drain by ensuring clear minimum service benefits and bright futures for workers.
• Redefine trade union rights, setting clear boundaries for rights and responsibilities, and strictly regulate activities beyond those limits.
• Issue a code of conduct for worker discipline and define clear boundaries for labor-management relations to avoid conflicts.
• Legally restrict the use of foreign employment and workers’ welfare funds for non-labor purposes.
• Mandatorily include all workers and unemployed citizens in a contribution-based social security scheme, developing a system to grow the fund through employment.

Conclusion

Recent global economic indicators show that liberalization is not a panacea for economic development and prosperity. Like a rare herb on a mountain peak, liberalization benefits the strong and clever, while weaker nations are often exploited as mere stepping stones. The overexploitation of natural resources in small, weak countries has widened global inequalities. Equal and liberal policies among unequal nations yield unequal outcomes. Thus, Nepal must implement liberalization’s positive aspects—facilitation, simplification, delicensing, deregulation, and debureaucratization—while setting boundaries based on national capacity and interests. Developed nations should provide sustainable aid to poorer countries, and nations should be free to open global markets only when their economies are robust. A review of liberalization policies that deepen inequalities and force weaker nations into dependency is essential.