A faulty lifeline

Policymakers taking a free ride on remittance are perpetuating the conditions leading to mass migration of the youth.

Years of wrong policies have created insurmountable push factors in Nepal, forcing its citizens to migrate to foreign countries for manual jobs. This human outflow has been accompanied by a remittance inflow. In a country with massive unemployment and abject poverty, both flows may seem desirable. But failures in adopting warranted policies in the advent of these flows have pushed the country into a deep trap of hollowing-out — a decline in industrial production and job losses — rent extraction and skyrocketing cost of living, pushing even more citizens to temporary migration. The naïve short-term ‘warmth’ of remittance has thus turned into a long-term chill.

The only way for a country and its people to prosper is by producing more goods and services that can be consumed domestically and exported to finance imports. But by systematically exporting its youth (for the most unskilled work) to finance imports and favouring policies that divert remittance to non-productive sectors, Nepal is headed in a wrong, and potentially irreversible, direction. If policies are not corrected urgently, Nepal will soon be devoid of both youth and industrial production.

Mass exodus

Two out of every three males between the ages of 15 and 44 are in foreign countries. According to the Nepal Economic Survey, there are 3.5 million Nepalis abroad (excluding those in India). As 38 percent of absentees are in India, according to the 2011 Census, the number of Nepalis abroad rises to 4.8 million. The Census shows that 90 percent of absentees are between the ages 15 to 44, meaning that 4.4 million (37 percent population of these age groups) are abroad. Almost all absentees (92 percent) are taking dangerous, low-paid jobs in India, Middle East and South East Asia.

When measured by the share of remittance in GDP, only Tajikistan and Kyrgyzstan, two of the poorest countries in Central Asia, are ahead of Nepal, the poorest in South Asia. In Nepal, this share was 29 percent in 2013, a phenomenal rise from 2.5 percent in 2001. For every three rupees produced in Nepal, almost one rupee is added by remittance. In the last 12 years, remittance has increased annually at a compound rate of 35 percent.

Every day, a greater number of the working age population is leaving (1,800) than entering the job market (1,400). Yet, the unemployment rate in the country is 22 percent. The situation is so bad that only seven in each 100 of the working-age population are engaged in the private sector whereas 75–80 percent of employment in developed countries is in private sector.

Where else could they work? The argument, often made in the media, that they should do farming, is ingenious. These people, who do not even have land for subsistence, are not fortunate to be educated (75 percent of those migrating have below SLC education) and struggle to provide basic necessities to their children. They might like to work and be part of a prosperous Nepal, but they have no choices economically.

The vision should be for all these people to be gainfully employed inside the country. But instead, the government is fixated on signing as many employment agreements as possible (already signed with 109 countries and counting) to supply Nepal’s youth. Shamefully, policymakers take pride in the agreements signed and the remittance received.

Economic consequences

There are colossal social costs to temporary migration, ranging from death, confinement, sexual exploitation, stress, family breakdown and hardships for the children and elderly left behind. Besides, there are negative economic effects, which have strengthened the very forces that created the exodus in the first place.

Through built-in dynamics, remittance expands the non-traded sector (education, health and homestead, land, transport, banking) at the cost of the internationally-traded sector (agriculture and industry). With remittance, consumption of both traded and non-traded goods and services increases. The demand for traded goods is fulfilled by imports but their prices, determined internationally, do not change. However, as the demand for non-traded goods has to be fulfilled domestically, their prices rise, leading to higher wages and the expansion of this sector. The traded sector can retain labour only by raising its wages on par. Besides, the price rise of non-traded goods raises the production cost of the traded sector. Hence, remittances make the traded sector less competitive and divert resources towards the non-traded sector.

The policy mistake of not counter-balancing the bias of remittance toward the non-traded sector is reflected in the lower share of industry output and more vividly in the rising trade deficit, which increased from 10 percent of the GDP in 2001 to 27 percent in 2013. It is pity that Nepal’s real export (inflation adjusted) in 2013 was only 80 percent of that in 2001, whereas real imports doubled during this period. Exports from a year can finance imports for only 45 days (for the remaining 10 and half months, they are financed mainly by remittances).

Amidst this massive deficit, remittance is the rescue that the central bank has to retain over valued exchange rate (remittance is the source of one-third of the central bank’s dollar and substantial Indian rupee receipt). The same goes for fiscal policy. Policymakers do not have to make hard but required changes in tax policy, as revenue from remittance-induced consumption has increased, allowing them to wrongly ascribe it as fiscal policy success. For every rupee of remittance, the government raises 12 paisas through consumption tax (not counting its direct tax contribution). By taking a free ride on remittance and not correcting its negative effects, both fiscal and monetary policies have exacerbated the human exodus and the hollowing-out process.

In a country where basic needs are unfulfilled, it is not unusual that most remittance (80 percent) is consumed. The problem is not consumption; it is the lack of domestic production and exports to finance consumption. The problem is not low savings either; it is the lack of opportunity to invest and the policy-induced diversion of investment into sectors that do not increase employment and GDP but promote rent extraction.

These sectors are land, homesteads, private schools, health services and transport. Besides being protected from international competition, and intrinsically favoured by remittances, they also have the favour of other policies. First, as investors in these sectors do not have to deal with government officials, labour groups and street gangs on a regular basis, the incidence of bribery, strikes and other rent-seeking activities are lower compared to businesses (such as restaurants, retail shops and industries). Second, effective tax rates in these sectors are lower. Third, these sectors are devoid of any regulation, leaving investors to their own terms. With remittance, even more investments fly into these sectors, expanding rent extraction at the cost of productive sectors and growth.

Far from sustainable

Although remittance has pulled some families out of poverty, it has not done so in a sustained manner. It is good only as long as workers remain employed in a foreign country. Remittance has increased inequality. As prices of non-traded goods have risen with remittance, those who are in foreign countries have to stay longer to purchase the same service back home. The poorest of the poor, who cannot go to foreign countries, have turned even more destitute as the cost of living has skyrocketed due to remittance.

Nepal is on a serious slippery slope to economic ruin. There is no quick fix. The situation requires several policy changes aimed at reducing migration and taming the hollowing-out process. Otherwise, Nepal will turn into a mere consumption location for the children and elderly.

We need to address root causes. The main reasons for the exodus are economic deprivation, no hope of finding jobs in the country, failures of public schools, ineffective education, increasing inequality and increased health costs. The main reasons for hollowing-out are corruption and red tape — which discourage business — low productivity, misaligned exchange rates and policies that favour non-traded over the traded sector.

This article was originally published in The Kathmandu Post on Monday, 8 September 2014 and can be accessed at
http://www.ekantipur.com/2014/09/08/opinion/a-faulty-lifeline/394723.html