Foundation of Social Economy in the Interim Constitution of Nepal

Kathmandu University School of Law (KUSL)
The 11th Asia Legal Information Network Expert Forum
Korea Legislation Research Institute
April 30, 2015

The Interim Constitution of Nepal 2007 is one of the latest constitutions of the world. It has led to the establishment of Constituent Assembly – II to write a new constitution for the country. Being an Interim Constitution, which outlines the legal framework providing a basis for the democratic transition, it also, at the same time, lays down the foundation for interim norms, values, institutions and procedures on the chassis of which the Constituent Assembly will draft and adopt a new constitution.

This paper argues that the Interim Constitution of Nepal has created a firm foundation for social economy in its interim arrangement for the country. It also argues that the new constitution to be adopted by the Constituent Assembly has a solid background to work on what the Interim Constitution has effectively laid on. Finally, the paper argues that the policy foundations enshrined in the Interim Constitution of Nepal needs to be institutionalized in practice to implement progressive transformation of democratic institutions, social and economic proliferation.

Concept of Social Economy

People may differ on what they understand as “social economy.” Generally, it refers to a ‘third sector’, different from the traditional public and the private market sectors.[1] Its origins can be traced back to ancient French and Anglo-Saxon societies where it was established to re-introduce social justice values into the economy. These values ranged from tackling social exclusion and promoting development in particularly deprived localities to establishing solidarity in production relations. Contrasting from a profit making enterprise, social economy comprises of group of individuals working together to set up adequate structure for individual and general public interest.

Essentially, social economy is comprised of non-profit, voluntary and co-operative sectors working independent of the state and dedicated to achieving social developmental goals that transcend the economic market. From farmers’ collectives working towards effective marketability to charities and NGOs working for public interest, the social economy encompasses a wide range of economic activities.  Additionally, as per Frank Mouleart et al., features of social economy initiative includes, among others, “redistribution of income and wealth within the market economy, various allocation systems and their political governance, solidarity and reciprocity relations, satisfaction of alienated individual and collective needs, the role of the public, private and third sector in operating and governing the social economy, and global governance.” [2]

The emergence of social economy concepts can be characterized by the outburst of co-operatives, associative, mutual aids, non-profit organizations and initiatives in the 19th century Europe in retaliation to the social inequalities, growing poverty and exploitation of the Industrial Revolution.[3] Critics have often undervalued the social economy movement as a naïve utopia. However, the impacts of social economy initiatives are hard to ignore. The modern day understanding of social economy is dominated by synonyms such as alternative economy, non-lucrative sector, voluntary sector, idealist sector, solidarity sector etc. In light of this, the major roles played by social economy initiatives range from institutionalization of better wages, better work conditions and consumer satisfaction in the early 19th century to sustainable social entrepreneurship, worker oriented co-operatives and formation of rights oriented NGOs in the 21st century.[4]

The academic discourse on social economy has sought to highlight the differences in the meaning and practice of the different synonyms used to describe the social economy movement. However, for the purpose of this paper, a broader approach, albeit unscientific, encompassing all the prevalent conceptions of social economy, keeping in mind the inherent qualities of solidarity, reciprocity and the emphasis of individual and social objectives over capital, has been accepted to offer a wider framework for discussion.

Nepalese Situation

Nepal has come a long way from the feudalistic state structure of the Rana regime (1846 -1951) to the post-conflict multi-party democratic state.

The country is a multi-cultural, multi-lingual and multi-religious society with a plethora of rich cultural diversity. Encompassing an area of 55,000 sq. miles, Nepal is a host to spectacular ecological variations. In terms of economic potential, Nepal has a tremendous prospect in the horticultural enterprises, tourism forests and water resources. The Himalayan Mountain ranges form a majestic outlook and attract millions of tourists annually. In light of this, there is an abundance of untapped economic potential in the country.

Historically, the top heavy system restricted people’s participation in the development process. As a result, the Nepalese economy could not flourish and the situation of marginalization of the non-elites, ethnic tension and poverty aggravated further. The current effort is to redefine the state’s role in facilitating people’s participation in the development process through progressive transformation of democratic institutions, social and economic proliferation.

In terms of social welfare service, organizations other than that of the government have been prevalent in Nepal since the mid 19th century. Whilst some were established as a joint venture between the government and civil societies, others were initiated purely out of the “…collective spirits of social activists.”[5] Gradually, the numbers of non-governmental organizations working in social welfare sector started rising. Keeping this in mind, the Government of Nepal, in a bid to regulate, established the Social Welfare Council to co-ordinate the activities of NGOs and civil society organizations.

Nepal’s continuous struggle for development through self fulfillment, utilization of human resources and collaboration on nation’s productive forces has been treacherous one indeed marred by dissatisfaction with state intervention, paternalism and market failures. The current democratic setup has failed to provide the impetus to the Nepali people to grasp the available political powers to enhance their economic interest. The reactive nature of Nepali politics, unable to usher progressive economic policies, has confined the nation to a Least Developed Countries (LDC) category with GDP of 694.10$ and more than 25% of the population living below the poverty line.[6] In addition, there are wide disparities between the unorganized agrarian and the industrial sector with no discernible bridging mechanisms. Moreover, the exodus of unemployed youths to pastures anew and the adoption of liberal economic policies without adequate preparation has further exasperated the country’s prospect for economic growth. According to Senior Development Analyst, Professor Maskey, “Change in economic perspective is, therefore, vital for initiating change in attitudes, values and expectations from the prevailing inertia to productive culture – essential for social transformations.”[7] This is where social economy initiatives in the form of innovation can form a viable alternative to meet the socio-economic needs. 

Furthermore, in terms of Nepal, social economy can play key role in the implementation of important community objectives, particularly in the fields of employment. The emergence of group saving initiatives and setting up of mutual pension funds, at the grass-root level, for the benefit of group of workers is a good example. Nepal has had a long cultural tradition of informal community based co-operatives working in different sectors. The savings and credit associations popularly known as dhikuti, and grain savings and labour savings systems known as parma and dharma bhakari are well documented practices still prevalent in the rural parts of Nepal. In addition, the introduction of trust principles, locally known as guthi has provided a broad based framework for co-operation among various groups, within the Nepalese society, to enhance their social and economic interests. The emergence of civil society organizations and NGOs, subsequent to the democracy movement in 1990, has further provided a much needed impetus to effective state governance promoting social justice, equity, equality, rights advocacy, reciprocity and solidarity.

In addition, social economy initiatives, through their activities, can achieve social cohesion, regional and rural development, environmental protection, consumer protection, and social security policies in Nepal. Countless co-operatives and non-profit organizations have been setup to achieve these goals. Despite these efforts, inefficiencies in the economic amelioration of the state are abundant. In fact, the capacity of Nepal to facilitate development hinges on the transference of devolution of power, granted by the constitution, into processes to bring desirable change in the economy through equitable re-distribution of resources, change in production and consumption to the satisfaction of the excluded groups.[8] In light of this, this paper seeks to outline the relevant legal provisions prevalent in Nepal managing the social economy movement and aspires to reconcile the anomalies inherent in policy and practice.

Interim Constitution of Nepal, 2007 and Comprehensive Peace Accord, 2006

The interim constitution of Nepal, 2007, under the preamble, upholds the mandate of “….progressive political outlet, democratic restructuring of the State and social-economic-cultural transformation…”[9] Similarly, the constitution, under obligations of the state provides for the provision to “ensure progressive political, economic and social transformations in the country.” [10] The state obliges to “… set a common minimum program on socio-economic transformation to do away with feudalism in all its forms, and keep on implementing the program;”[11] Further, the constitution obliges the state to “…build a common development concept for the socio-economic transformation of the country and justice as well as for the prosperity and rapid economic progress and prosperity of the country.”[12] 

In terms of the directive principles enshrined in the constitution, the fundamental objective of the state, as regards to economic objective, consists of transforming “…the national economy into an independent, self-reliant and progressive economy…. by preventing the economic resources and means available in the country from being concentrated within a limited section of the society, by making arrangements for the equitable distribution of economic gains on the basis of social justice, by making arrangements for the equitable distribution of economic gains on the basis of social justice, by making such provisions as to eliminate economic inequalities and prevent economic exploitation…” [13] In terms of the policies of the state, the constitution obliges the state to “….pursue a policy of making special provision of social security for the protection and progress of the single women, orphans, children, the helpless, the aged, the disabled, incapacitated persons, and tribes on the verge of extinction.” [14] In addition, the state is obliged to “…..pursue a policy of keeping institutionalizing peace in Nepal through international norms, by promoting cooperative and harmonious relations in the economic, social and other spheres on the basis of equality with neighboring friendly countries and all other countries of the world.” [15] 

The comprehensive peace accord, signed to signal the end of the conflict era in Nepal in 2006 also highlights the significance of transforming social economy measures along with democratic re-structuring of the state for the progression of the state. As per the economic and social rights, as agreed upon the accord, the conflicting parties believed in “….encouraging to give continuity to production works without disturbing the industrial climate in the country, to respect the right to collective bargaining and social security in industrial enterprises, to pacifically resolve problems, if any, arising between the industrial enterprises and labors, and respect the right to work…” [16] 

The Supreme Court of Nepal for almost two and half decade have been encouraging public interest litigation on behalf of the poor and oppressed by using a very broad interpretation of several articles of the Constitution in force.  

The constitution has provided ample legal measures to support the social economy movement. However, future fluctuations in state’s commitment towards social economy could be problematic. The spirit of the constitution needs to manifest into concrete long term commitments dedicated to mitigate the needs of the state. This could be achieved by setting periodic goals, enacting legislations and setting budgetary assistance facilitating social economic enterprises. The second issue is the concept of durability, i.e. Nepal’s ability to institutionalize and implement an alternative investment project in relation to the time it takes to transform social economy into an innovative and durable mechanism for governance. Given Nepal’s poor implementation records in the past, it is indeed an uphill task. The third issue is the diverse nature of social economy itself. Social economy initiatives include a wide range of concepts and as such any normative approach to delineate a sustainable social economy approach could be impossible to establish. In light of this, Nepal needs to establish a sustainable approach based on its own experiences, state structure, and political environment, social and economic constructs. 

The contents of Nepali constitution can be contrasted to that of the US Constitution drafted in 1787 which, according to Charles A. Beard, was an economic document motivated to achieve the economic domination of the elites and the exploitation of the lower classes. [17]Albeit criticized by many including Jonathan Macey, the landmark book written by Beard entitled, “An Economic Interpretation of the Constitution of the United States” marks the initial constitutional economic debate, popularly known as constitutional economics. [18] The assertion of Charles Beard is interesting in that the constitution of US, at that time, despite claiming to be an economic document, failed to address the social economy component. Charles Beard himself professes, in his book, the concept of competing economic interests between the elites and the lower classes and the motive of economic dominance inherent in the then constitution. In contrast, the Nepalese constitution has a comparative advantage, in that, it addresses the need for state re-structuring based on social, economic and political transformation. In light of this, the constitution of Nepal is more aligned towards economic enhancement through social welfare than retention of hegemonic property rights. 

Today, though, the American economic sphere comprises of thriving private, social and public enterprises working comprehensively towards overall economic growth. The legislations have been put in place, based on egalitarianism, to cater to all the different forms of economic sectors and implementation mechanisms have been evolved to expedite the growth process. Nepal, despite having enlisted progressive principles in the constitution, needs to expand its scope of constitutional economic analysis and respond to the changing nature of economies around the world. 

Micro-Finance and Co-operative Movement 

There are several legislation in Nepal that have tried to enforce what the concept of social economy generally requires.  

The Co-operatives Act (1992), for example, was formulated to manage the “…..formation and operation of various types of cooperative associations and societies based on the mutual support and cooperativeness for the economic and social development of the general public consumers by the farmers, craftsperson, class of people with low capital and low income, labors, landless and unemployed people or social workers of the country..”[19] Firstly, the Act sets the criteria for the formation of social economy based association on the co-operative principle.[20] Secondly, the Act sets procedures for the registration of the associations. Thirdly, the Act set the modus operandi for the associations including code of conduct, functions, appointment/termination of employees, duties and powers of general meeting etc. Fourthly, the Act set about the procedure for pursuance of financial source and mobilization of the human capital. Fifthly, the Act sets the accountability clauses through processes such as: information dissemination, record keeping and account of profits. Sixthly, the Act provides certain concessions and facilities to the co-operative association. Subsequently, the Act stresses the non-applicability of Companies Act (1964) to these associations. 

Subsequent to the restoration of democracy in 1990, the Nepal Co-operative Act was enacted in 1992 with a view to regulate co-operative sector and apply cooperative values, norms and principles into practice. Similarly, the government is in the process of enacting a legislation pertaining to NGOs to institutionalize, regulate, and organize all non- profit foundations and associations engaged in social development and nation building fields and to make these associations transparent, accountable and responsibly managed. As per the National Cooperative Development Board (NCDB), some 3 million people are affiliated in approximately 19,724 cooperatives and more than 50,000 people are employed directly in Cooperative business.[21] Whilst many cooperatives related to health, handicrafts, dairy and vegetable products, and genuine self-employment activities have successfully assisted the income generation initiatives of locals with a stark rise in living conditions, some have been accused of deceiving innocent citizens in both rural and urban areas. The numbers for civil society initiatives and NGOs are equally staggering. In light of this, there is an urgent need for umbrella legislation on social economy, much akin to the one enacted in Spain[22], which supplements the objectives enshrined in the constitution, provides a legal definition of social economic entities and creates adequate mechanisms through establishment of special bodies to meet their needs and improve communication with the state. In this context, the spirit of the Interim Constitution needs to be translated into practice. 

National Legislation 

Nepal is in the early stage of economic development and as such chances are that economic power concentrates on a small number of players to achieve an economy of scale, and, as a result, a monopoly emerges, rather than competition being fostered in the market and the principles of market being proliferated. In light of this, anti-trust laws are imperative to prevent concentration of economic power in the market. In Nepal, this theory holds true not least because the country has adopted a policy of progressive reforms but also because country’s recent accession into the WTO has provided impetus to this process. 

With the objectives of making “…provisions for protecting consumers from irregularities concerning the quality, quantity and prices of consumer goods or services, ensuring that no one lowers or removes the attributes or usefulness of consumer goods or services, preventing circumstances in which monopolies and unfair trading practices may lead to an increase in prices, as well as false and misleading propaganda about the use and usefulness of consumer goods or services, selling, supplying, importing, exporting and storing safe and quality consumer goods or services, and protecting the rights and interests of consumers through the establishment of an agency for redressing the hardships of consumers, and thus maintaining the health, convenience and economic welfare of consumers…..”[23], the Consumer Protection Act was enacted in 1998. This Act is an umbrella act aimed at protecting the rights of the consumer as well as restricting unfair trade practices. The Section 6 of the Act assures and recognizes six rights of the consumer out of eight rights recognized globally. Further, the Act seeks to punish, through jail sentence or fine, perpetrators that fail to meet the obligations set forth by the legislation. 

Further, the government, especially in the last decade, has been actively pursuing liberal economic policies that are conducive for the growth and progress of trade and industry. Following the membership of the World Trade Organization (WTO) during the fifth Ministerial meet at Mexico[24], the need for legislation incorporating fair competition practice was made abundantly clear. In light of this, Competition Promotion and Market Protection Act, 2063 (2007) was enacted, among others, to promote; fair competition for the growth of trade, commerce and social welfare through equitable allocation of resources whilst protecting the open market. [25] 

Moreover, for the purpose of this study, it is relevant to note that the Competition Promotion and Market Protection Act, herein referred to as the Act, aims to protect consumers against monopoly rights of trading enterprises that may arise from the joint action of two or more enterprises. There are provisions in the Act that help control anti-competitive practices, apart from ensuring that the actions of business and trading firms do not come in the way of consumer welfare and open market price formation. [26]Further, the Act has provisioned for the formation of a Market Protection and Monopoly Control Commission to monitor the market.[27] The Commission is entrusted with setting the standards that are left out the Act, promote fair competition and create public awareness.Moreover, The Act also contains special providing for waivers in punishment and fines for those who help in curbing malpractice and bringing the offenders to justice. [28] 

In addition, there are other legislations in Nepal which directly or indirectly deal with the issues of fair competition practices. For example, the Black Marketing and Certain other Social Offences and Punishment Act, 1975 prohibits business practices such as black marketing, profiteering, and deflection of commodities, hoarding and creation of artificial scarcity, fraudulent sale and the adulteration and sale of drugs. Similarly, the Industrial Enterprises Act, 1992 seeks to provide liberal, open and competitive policies to the state in order to make the industrial sector competitive. Also, the Foreign Investment and Technology Transfer Act, 1992 seeks to, “… promote foreign investment and technology transfer for making the economy viable, dynamic and competitive through the maximum mobilization of limited capital, human and other natural resources.” [29] 

The prevalent norms around the world suggest that competition law is a widely acknowledged principle in developed countries. It is credited as a vital tool in establishing “…competition in the marketplace and enhancing efficiency of business enterprises, leading to consumer welfare.”[30] However, in Least Developed Countries including Nepal, these values are yet to be fully appreciated. Effort have been made to initiate fair competition practices in the country, though by and large, the situation is dismal as far as implementation of these legislations are concerned. In light of this, it is imperative that stakeholders in Nepal acknowledge the significance of competition law and formulate adequate measures to institutionalize globally accepted competition practices. 

Millennium Development Goals, 2000 

These initiatives are not enough. The challenges that Nepal faces in the economic sector are enormous. The Millennium Development Goals can help explain the situation. 

One of the eight millennium development goals undertaken by Nepal includes the goal to develop a global partnership for development. The fulfillment of this goal, as per UNDP, entails various components such as establishing trade, setting up aid and debt relief mechanism, ensuring employment and mobilization of national and international organizations for economic enhancement and general interest. [31] Further, as per the Millennium Development Goals report. Nepal relies heavily on foreign assistance for implementation of its development initiatives including achieving the MDGs.[32] Further, the flow of foreign assistance to Nepal, from the donor communities, through loans, grants or any form of assistance, is on a steady increase. In light of this, Nepal needs to demonstrate its effectiveness at utilizing the funds for developmental goals. Social economy components could also tap into the large resources at their disposal and the state needs to promote co-operatives and other social initiatives dedicated to achieving the development goals. 

In addition, the Millennium Development Report highlights the need for Nepal to “…adopt forward-looking macroeconomic policies that promote sustainable development and lead to sustained, employment-centric, inclusive and equitable, broad-based economic growth; promote national food security strategies that strengthen support for smallholder farmers and contribute to poverty eradication; support participatory, community-led strategies in a decentralised fashion and align them with national development priorities and strategies; promote universal access to public and social services and provide social protection floors; and improve the capacity to deliver quality services equitably.”[33]These suggestions place value on the importance of all the major components inherent in the social economy components for a post-conflict, power sharing driven, transitional state. Nepal needs to make sure that these suggestions are effectively implemented at the central and the local levels, through effective policies and resource allocation, in order to reconsolidate the progressive economic values envisioned in the constitution. 

In terms of socio-economic development, an immediate focus should be granted to the tourism and agriculture sectors. These sectors form two major elements consisting of revenue generating industries with multiplier effects on the economy including income generation, employment creation and growth of overall GDP of Nepal[34] Further, both of these sectors serve to enhance inclusion, eradicate gender disparities, and create institutions for participatory decision making process. Subsequently, labour market needs to be regulated adequately in order to provide equitable wage distribution to the workers. If implemented efficiently, this could curb the exodus of Nepali youths to foreign countries and boost the state’s human capital. 

Conclusion 

In essence, development processes seek to transform societies and this could put a post-conflict state in a precarious position of uncertainty. Therefore, it is imperative that whilst formulating a framework for sustainable development, the interventions must take into account the conflict dynamics. In Nepal’s context, the conflict arose as a result of the failure of the state to facilitate participatory development, equitable redistribution of resources and institutionalize democratic norms. These complexities need to be addressed, at an initial phase, through devolution of powers, proportional representation, democratic governance and delegation of decisions making powers at all levels.

Once these sensitivities are addressed, the state can proceed with proliferation of social economy initiative designed to ameliorate the anomalies inherent in the private and the public sector. The Interim Constitution certainly lays down the foundation for the sort of social economy that Nepal needs to build on in the new constitution.  

(This paper has been revised upon the comments on the initial paper by Professor Taehi Hwan, Department of Law, Sungshin University and others.)