The Promise of Progress

The major parties’ proposals for the economy look visionary but lack substance, sincerity and realism

The three major political parties — the Nepali Congress, CPN-UML and UCPN (Maoist) — have spoken. In the November Constituent Assembly election, the parties proclaimed themselves as socialists, champions of the poor, super-democrats, growth-minded, nationalists and of course, visionary. In turn, they have tabled a plethora of programmes spanning decades. The proposals have a façade of being visionary but unfortunately lack substance, sincerity and realism.

The fundamentals of any economic agenda are economic growth (how to increase the pie size) and economic equity (how to share the pie). A responsible party would aim for policies that are efficient — expanding the size of the pie — and also equitable — distributing the pie justly. Instead, the parties have merely provided a collection of hodgepodge wish lists that lack objectives, targets and policies supporting their agenda.

Going for growth

All three parties — although stated differently and in different timeframes — have proposed the same target of raising annual income per person by about 10 percent over the next one to two decades. In Nepal, where per person income and historical growth rate are the lowest in the world and the social sectors and infrastructure are starving for more resources, the need for economic growth cannot be overemphasised.

Because of its sluggish growth, Nepal’s relative economic size vis-à-vis its neighbours is dwindling rapidly. Going back 40 years, in 1972, by gross domestic product (GDP) — a yardstick that measures a country’s economic size — China was 60- and India was 70-times larger than Nepal. Fast forward to 2012, China and India are now 412- and 125-times larger. A Nepali who was as rich as a Chinese or an Indian in the early 80s fares miserably today with a yearly income of only $400 (at 2005 constant US dollar). In comparison, a Chinese earns an equivalent of eight Nepalis ($3,348) and an Indian earns the income of almost three Nepalis ($1,107).

In light of the above, one would expect the parties to be serious about growth. However, this is not the case. It is the allure of the expression ‘double-digit growth’, not genuine intentions, that has led all three parties’ target to converge at 10 percent. The double-digit per capita annual income growth over a decade or so is ‘too high a bar’. Growth leaders — Japan in the 60s, Singapore and Hong Kong in the 70s, South Korea and China in the 80s and China thereafter — grew at most seven-nine percent. Nepal’s growth was 2.4 percent in each of the last three decades. This low growth is not due to armed conflict or a transition; Nepal has never grown faster. Out of the blue, the parties promise to accelerate the growth rate four-times.

At the historical growth rate of 2.4 percent, the income of a Nepali at $721 (at current price) would rise to only $1,160 after two decades but at the proposed 10 percent growth rate, the income would increase to $5,000. This is an astronomical difference; at 2.4 percent, it will take 30 years to double the income whereas at 10 percent it will take only 7 years.

Growth gravitas

Economic growth depends on the employment rate — the share of employed in the working age population (age 15 and above) — and labour productivity — the value of production per employee. Based on a labour force survey, factoring out underemployed and involuntary job loss, there is 22 percent unemployment in Nepal. Imagine, the value added to society if these people were fully and gainfully employed.

The determinants of labour productivity — the only sustainable way for higher growth — are capital per worker, number of educated work force, average school year of the workforce, business environment, number of ideas, technology and innovative activities. Further determinants are fiscal and monetary policies, trade orientation, infrastructure and institutions.

Nepal has one of the lowest labour productivity in the world, a reflection of the fact that the determinants are rudimentary, causing stagnation. To cite a few, investment flows to wealth transfer not wealth creation (eg land and homestead) and to services duplication (eg private schools) not service creation. The inefficiency of the education system is such that only four percent of those that started grade 1 in 2002 completed the School Leaving Certificate (SLC) without failing. Government success is measured in terms of acquiring foreign aid. The equality of opportunity — the cherished growth factor in the developed world — is so neglected that only 11 percent of the population (of eligible age) complete higher secondary education. The result is that about one-quarter of youth aged 20–39 and 48 percent of male youth have migrated to foreign countries seeking employment as manual labourers.

The problems do not end there. Government interventions more often distort the markets rather than correcting them when they fail. A calculation using data on cost of trading and four indices — ease of doing business, cost of start-up business, corruption perceptions and global competitiveness — shows that doing business in Nepal is 42 percent more expensive than the most efficient country, 23 percent more expensive than China and 15 percent more expensive than India. Add to this, the disadvantages incurred due to the country’s land-locked nature, its small size, unskilled labour force and frequent strikes, Nepal has insurmountable costs hindering business, foreign investment and economic growth.

Parties are the problem

Growth requires radical changes to the existing economic, social and institutional policies that have generated the aforementioned problems. The parties, perhaps deliberately, have failed to introduce policies to correct these shortcomings. Nepal cannot attain per capita annual growth of 10 percent; it simply does not have the political discipline, economic forces and policies required for this feat. Even half of that growth rate is unattainable because of growth-impeding, inequality-enhancing and incentive-penalising practices of the political parties.

The monarchy — a major institutional obstacle to growth — has been abolished, but the more draconian obstacle — corruption — abounds. This is reflected in the forms of no rule of law, pervasive rent (payment higher than what a person is adding value to the society by his/her work), rent-seeking activities (the attempt to collect rent by manipulating political systems) and the triumph of party perks over all else. Correcting these institutional failures, which are of the parties’ own making, is a prerequisite for any good economic and social policy. Refusing to correct them and promising double-digit growth is akin to boasting to win a marathon and declining to take the first step. This is simply deceptive. Standing behind a podium and promising double-digit growth rate in the absence of sound policies is not only irresponsible but insulting. To bring Nepal out of stagnation and put it on a growth trajectory, pressure should come from Nepalis at the grassroots level, those ever enthusiastic and curious people, to fulfill the following demands:

One, within the next three years, make Nepal as good as China and India in the indices of corruption, ease of doing business, cost of start-up business and global competitiveness. And in the next five years, make Nepal one of the best countries in these indices. Two, make sure that the after tax return on urban land, homesteads and barren land is lower than in other business investments that produce goods and services. And three, make sure that in the next 12 years, 90 percent of students enrolled in grade 1 complete grade 12 without failing and that there is an option of choosing English as a medium of education in public schools.

This article was originally published in The Kathmandu Post on Monday, 14 April 2014 and can be accessed at
http://www.ekantipur.com/2014/04/14/opinion/the-promise-of-progress/388228.html
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