Kathmandu:

Most people are shocked to learn that the US consistently runs huge trade deficits. In 2004 America’s exports were $1.06 trillion while imports stood at $1.63 trillion. The deficit on the trade account was $570 billion - the highest of any nation in the world.

When other countries would be crushed by a deficit a fraction of America’s, how does the US thrive with this imbalance?

The answer, in part, lies in the US dollar being convertible into any currency: the world believes that America will honour its dollars always. It is the stated US policy that its currency, whenever it might have been issued, is and will always be legal tender.

This coupled with a monetary policy which keeps inflation low makes dollar investments attractive both for governments worldwide and private citizens. Russian citizens never trusted their rouble but had faith in the dollar. They hid billions under their mattresses (as legal dollars holdings were not permitted) knowing that the dollar would retain its value.

America then just has to send its currency out and buy all the goods it needs. A $100 bill costs the US government a few cents to print and buys goods worth $100. A great plus for the US. Why then, are so many of world’s currencies not convertible and cannot be held by foreigners? The policy is without any economic rationale.

Another important method by which America funds its trade deficit is by way of foreign investment. America is a country which welcomes investment by foreigners. America thus imports what it likes and then gets its dollars right back as foreign investment. When I was in America, it was open to me to buy a house, invest and start a business or buy shares in any of their publicly traded companies; no questions asked.

Even if you are not in the US you can still invest over there. You may have shares in Microsoft or the Coca-Cola company. Your own government may stop you but not the US government. The US is not the only country permitting free movement of capital. Many other countries have realised the value of this. Australia welcomes investment from around the world. You may find Australian real estate companies advertising in Japan, Singapore & Hong Kong for sale of prime land, houses and apartments in Sydney and Canberra.

India, though still restricting foreign investment, has been liberalising for the last 17 years. It still has a long way to go. That is why a committee appointed by the planning commission suggested to the Indian PM to facilitate substantial increases in FDI in the hitherto restricted sectors like oil, insurance, aviation and others.Nepal too needs to open its doors to foreign investment. FDI would mean more jobs & opportunities for the people of this country.

Right now the picture is dismal, Nepal, with a population of 25 million, got a mere $28.3 million in FDI in 2004. Compare this with Singapore which, in the same year, obtained $5.4 billion with a population of just 4 million. On a per capita basis Singapore’s FDI was 1200 times higher than Nepal’s. No great wonder that the per capita income of Singaporeans at $25,000 is 100 times that of Nepalese citizens.

Sometimes I hear people ask, “what will happen when foreign companies take their profits and their capital out of the country?” Will the rupee not collapse? Yes, that would happen if foreigners were to pull out their capital.

This problem is faced by every country. If people feel that the US is not an attractive destination for their funds - because, its tax rates go upto 65 per cent - people will yank their capital out causing the dollar to collapse.

The remedy is the same for all countries be it the US or Nepal. Keep your country an attractive place to do business in. Keep taxes and inflation low, protect property rights, grant people economic freedom and then you do not have to fear any capital flight. People will come to Nepal, invest over here, retain their profits here and reinvest for expanding their businesses. The time to remove all restrictions on foreign investment is now. Change laws and eliminate regulations which stand between Nepal and wealth for its people.

(The writer can be contacted at: everest@mos.com.np)