It is the Economy, Stupid!

Dr Raghab D Pant, Institute for Development Studies, UK  (www.ids.ac.uk)

ABSTRACT

We are not doing our politicians or public a favor when we present recent economic activities in a way that makes our system better than it is. Sometimes they need to hear unpleasant truths, even if these truths make them feel worse about the country’s economic situation.

FULL TEXT

The number and volume of comments that I received from the friends and the well wishers, especially from abroad, on my interview taken by Mr. Sanjaya Dhakal for Nepalnews.com on March 12 has compelled me to write this article. I was puzzled by the similarity in the questions raised by the majority of them, perhaps a contribution of the limited space provided by Nepalnews. com to us. It has nevertheless made me happy. It permits me to limit myself to answer the three issues discussed in the interview. They are: (1) how can the poverty sustain our economy? (2) can not remittances be used to increase domestic investment and growth rate? and (3) what do the general public want at this transitional phase?

At the outset, I must inform the readers that we are, to rewrite Prof. Krugman’s famous observations (The New York Times, August 22, 2005), not doing our politicians or public a favor when we present recent economic activities in a way that makes our system better than it is. Sometimes they need to hear unpleasant truths, even if these truths make them feel worse about the country’s economic situation. Now, to the business.

The economy of Nepal is certainly behaving in a strange way. The annual growth rate of the economy was slightly higher or even equal to the growth rate of population in the first four years of the Tenth Plan indicating the per capita income in real terms constant or even declining. Strangely, the Second Living Standard Survey conducted by the Bureau of Statistics with the assistance of the World Bank, the two most reliable institutions, shows the poverty level declining by 11 percent between 1995/96- 2003/04. In fact, the target of the Tenth Plan on poverty reduction was achieved in the first three years- a situation that even the government of King Gyanendra and his advisors in the National Planning Commission (NPC) did not seem to believe. As a result, the NPC did not change the target of the Tenth Plan nor there was any official comment or even speeches from the Vice Chairman and other members of NPC in support of their achievement! Perhaps, they did not understand how the Nepalese economy was working, and, hence, were compelled to remain silent.

The Tenth Plan had a target to increase employment in the organized sector at an annual rate of 210, 000 but the actual achievement is not expected to have exceeded 10, 000. According to the Tenth Plan, about 3.8 million unemployed people were looking for jobs in 2002/03 which must have reached now at least about 5.0 million; many more are not looking for jobs because they are sure it is not available and, hence, are not counted as unemployed at the official level. What these that I prefer to call Silent Majority are doing now? We have no information. At the political level too, there have been promises to create a New Nepal (whatever that means) with the implementation of ‘scientific land reform’ (the meaning of scientific has not yet been explained presumably assuming that the word itself will be sufficient to define the meaning that the authors of New Nepal intend to), though they have not bothered to explain what lies ahead for the Silent Majority of “Old Nepal”. In order to understand the structure of the economy of the “Old Nepal”, we have to understand the strategy followed by the Silent Majority for the survival in the midst of high and rising poverty.

Our difficulty, at the official level, arises partly from ignoring the role of demographic factors in national development process. It is argued by many that the record breaking growth of India in recent years was partly due to favorable demographic situation that has emerged at present due to successful implementation of population management program in the past. In the coming years too, it is believed that both domestic savings and investment, and subsequently economic activities, will continue to rise due to higher growth in working age population and falling dependency rate. This, of course, does not mean that the demographic factors alone will lead to higher growth path; it has to be supported by sound economic policies. Priority has to be given to change the structure of the economy in the desired direction and to maintain proper balance between resource development-population growth. Comments The Economist, a prestigious weekly published from London, “As workers shift from agriculture to more productive jobs in industry and services, this will automatically boost GDP growth. Yet this assumes the newcomers will all find jobs. If those jobs do not appear, the so called demographic dividend will more likely to turn into a demographic disaster.” (The Economist, February 3, 2007).

Nepal, where the growth in per capita income is barely positive since the past several years, and almost 60 percent of the population lives below the poverty level, provides a classic example of demographic disaster. The fertility rate in Nepal, that is, the number of live births that a women gave between the age 15-49 years, is 4.2- the highest in Asia- and, therefore, the population is increasing at an annual rate of 2.0 percent, compared with an annual growth of 1.7 percent in 2005/06 in the income originating in the agricultural sector, which provides livelihood to 75 percent of the population.

High poverty is both the cause and effect of high population growth. The size of the young population of the age group 15-29 years is expected to have reached 6.5 million or more than 25.0 percent of total population. The majority of them are without jobs or resources. The high and rising poverty coupled with lack of employment opportunities in the country provided young people basically two alternatives: (i) to migrate abroad in search of employment or (ii) to join the Maoist rebellion because it provided a hope that the state was not able to provide. A large number of young people migrated abroad, and the remittances forwarded by them are expected to have reached almost 25 percent of GDP. This has helped the family members back home to meet their basic necessities, and the poverty level declined by 11 percent between 1996- 2004 despite sluggish economic performances. The young people, especially of the age group 15-29, who could not migrate due to lack of jobs or the finance to meet traveling and initial establishment cost or personal reason, were in search of an alternative. It is believed that many of them, including females, have joined the Maoist rebellion. To make the story short, high poverty associated with the growth in population gave the government a false sense of prosperity and adequate ammunition for the Maoists to initiate their revolution.

The structure of the economy, and the answers to the questions discussed above, were discussed in detail in the report issued by IfDS on February 6, 2006 in which we had warned the government of King Gyanendra of national bankruptcy by not later than the end of May, 2006.(See The Economy and the State: Can It Survive?, IfDS, February, 2006). It was argued at that time the “receipts from remittances have been the single most important factor determining the level and direction of economic activities, both at micro and macro levels”. I don’t see any reason to change or revise the argument even now. It is obvious now to all that the remittances helped the family members back home to finance their consumption at a rate higher than the growth in income resulting in an increase in import and further deterioration in foreign trade balance; the deficit in foreign trade in the first five months of the current fiscal year has reached Rs. 52.7 billion. The increase in import, however, was instrumental to increase in government revenue, and still there is no incentive to the government to take measures to reduce import. Similarly, the receipts from remittances helped the government to maintain its balance of payments in favorable position, and the foreign exchange reserve of the banking sector has reached more than Rs. 171 billion in December,2006. The increase in foreign reserve, on the other hand, resulted in an increase in deposits of commercial banks which has now crossed Rs.300 billion. As expected, there is little incentive to the commercial banks or other institutions to accept deposit at high interest rate; the interest rate on savings deposit, at present, is about 2 percent per annum. The number of commercial banks and finance companies in the country continued to increase as there was money floating around in the country. The prospects of investment, however, were deteriorating. It provided several so called entrepreneurs to borrow heavily from the banks, presumably with the support of politicians, with little prospects for repayment.

Thus, the high and rising poverty and the receipts from remittances associated with it have generated an impression of a self sustaining process of macro economic structure and development. True, as discussed above, it has provided direct financial and other benefits to the politicians, businessmen, government and even bureaucrats and they have no incentives to change the exiting economic scenario whatever the current studies indicate. In 2005, the International Monetary Fund released a staff paper that used empirical estimations to show that the remittances were negatively correlated with GDP growth, that is, higher the receipts from remittances lower will be the growth rate. John Lyons was more critical in his paper published in the Wall Street Journal. He said “Though remittances fuel some spending, there is not much evidences that they have added to sustained growth. Instead, the infusions of outside cash often distort the local economy and may diminish the long-term prospects for gains”. In October, 2006, the World Bank even urged the member countries to take more cautious approach toward the development potential of remittances. There has not been, however, even modest change in our approach to the export of able manpower to countries wherever they can find a job.

It is exactly the policy followed by King Gyanendra to sustain his regime from financial bankruptcy. The Finance Minister of King Gyanendra on March 20, 2006 even explained that foreign employment needs to be encouraged, and “the government has plans to promote it”. I made a very simple comment at that time “Should short- sighted, misguided and incompetent people handle our economy? A government that promotes foreign employment is beyond naivety. ….This is the equivalent of promoting alcoholism to boost beer sales, or thinking that an epidemic is good for the medical sector”.( The Himalayan Times, March 31, 2006). I do not see any reason to make any changes in the statement for the current government that has recently entered into agreement with the Government of Korea under which it is claimed that “thousands of Nepalis will be eligible to enter Korea for employment every year”. Explains the Minister of Labor, Mr. Ramesh Lekhak “the government would handle the labor quota the country would receive … If an applicant meets the criteria set by the Korean authority, Nepal Government will forward the names to South Korea. The South Korean Government will make the final selection..”. Why do we need now domestic investment to increase domestic employment opportunities? We need answer from the government which, I presume, is busy to select workers to work in the development projects in Korea. It is amazing that seemingly qualified and educated person could actually act this way, specially after Janaandolan-2. We have come to a full circle, and it is in the same circle we are moving now.

New Nepal is a dream or a slogan, just as the promise one and half decade earlier to uplift the level of the Nepalese economy to the standard of Singapore, but what we really need to understand is how the “Old Nepal” works so that a consensus can emerge among the general public to identify – what is necessary and what is not for what they wish to accomplish for themselves. This is what we need to do at the Institute for Development Studies ( IfDS) and that much – and it is a great deal- is clearly within our reach. In this spirit, we have decided to issue a report ” Old Nepal: How it Works” soonest but not later than Baisak, 2064, that is, sometimes next month. Oh, it will not be a report on politics. It is the economy, stupid!

Source:
NepalNews.com – March 17, 2007

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