Transcript Political Environment

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
and philosophies
values
•
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
groups.
of interests of the economically and socially backward
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.
17
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.
18
Judiciary (Courts)
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.
19
Government, its branches and Political Institutions
The 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 Institutions
The 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 Institutions
An
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 Relations
1.
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 Relations
5. 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.
Labor / Trade union in Nepal
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.
29
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.

2.
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.
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 Environment
Public 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 businessgovernment 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 & program
3. Industrial security
4. Less anarchism
5. 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
development
more
Kathmandu
centric
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
resources
its
Impact of political environment on business sector
Conflict/lack of employment opportunity led the workforce to
abroad resulting in lack of skilled workers in the country
go
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 Business
Sources of political risks:
I.
II.
III.
IV.
V.
Unstable Political System
Political involvement of religious or military leader
Frequent changes in government
Corrupt or poor leadership
Civil disorder due to:
Economic conditions
 Human rights violations
 Conflict among races, religions & ethnics
 Group animosity

Type of Political Risk
Due 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 :
Business contributes to Government :
•
Money, Foreign currency & Credit
•
Employment generation
•
License
•
Taxes
•
Tariff & Quotas
•
Voluntary welfare program
•
Infrastructure
•
Consultancies Services & Contacts
•
Security / law & Order
•
Foreign currency
•
Information
•
Information
•
Technology
•
Political Supports
•
Appropriate policies
•
Resources mobilization
•
Regulating the business
•
Economic Development
47
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 Risk
1.
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 Risk
2. 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 events
 The 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 Environment
Democracy: - 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
56
Practice Questions
1.
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.