Nepal’s growth performance has been sluggish for the past 50 years, with decadal average growth hovering between two and five percent a year. This is not enough to make the kind of development leap that we aspire for. Almost a dozen Asian countries have made a dramatic transformation within a generation that we long to emulate, but we forget what was necessary for that kind of a jump: their average growth rate was at least seven percent sustained for about 25 years. Given Nepal’s indifferent track record, this appears dream-like for us, but we must nonetheless aim to secure an average growth of seven percent for the next decade. This will help double our national income, which will hopefully translate into higher quality of life for all Nepalis.
There are critics who say high growth rate alone is not enough, that growth does not necessarily trickle down. This is true if growth is erratic, and occurs in spurts: high one year, followed by a plunge the next. However, “high quality” growth that is sustained for a long time has been seen to be capable of lifting the entire nation up. High growth requires even lagging sectors like traditional agriculture to expand. This is inclusive almost by default. This is just a stylized empirical fact, hence the importance not of gimmick-like spurts, but of sustained high growth.
So, how do we get on such a path, then? We can break the problem into short-term, medium-term and long-term. In the short-term, we need a package of credible policy reforms that signals that a positive investment climate is imminent. In the medium-run, we need to have resolved critical binding constraints to growth which in Nepal’s case is the poor quality of infrastructure, especially in energy and transport. In the long-term, it is institutions – economic and political – that level the playing field for all with fair play and effective rules of the game, and nip in the bud incentives that make people rent-seekers and the groups they represent extractive. No honest entrepreneur is tempted to enter the fray when rules are rigged and foul play is the norm.
To signal that credible reforms are in the offing, the government announced last year that about 40 pieces of legislation -- acts, policies and regulations—would be approved. Many of them were aimed at laying a foundation for the next generation of reforms with an emphasis on regulation: a functioning market economy needs good oversight and regulation. In a democracy, legislating and governing are painstaking tasks with a lot of time and energy consumed by discussions and interactions among stakeholders. This makes people impatient, and gives the sense that things are not happening. This is partly true: things do move slowly in Nepal as the corridors of bureaucracy and arms of government are just too winding, figuratively speaking. But progress is being made. Ideally, policymakers prefer to announce a “big bang” of economic reforms. But in reality this is not always possible. We are tracking which piece of legislation is at what stage of maturity. Three new policies that I have myself been involved in – foreign investment, commerce, and public-private partnership – have been finalized, for example.
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Credible policy signals are important to attract private capital from within the country and abroad. There are signs that this is already happening, as proved by the unprecedented amount of FDI pledge in the hydro sector. What is remarkable is that we are generating more electricity in the next two years, thereby seasonally eliminating load-shedding, than what we generated in over hundred years after the first hydro plant was installed in Pharping. After that we are looking at a tantalizing possibility of generating 10,000 MW of electricity in ten years. This is all a result of policy reforms and lessening investment uncertainty, affirmed by the zeal with which the current government leadership is handling the matter. The energy constraint that is being relaxed gradually will now help energize other sectors such as modern agriculture, services (aviation, banking, tourism) and revive manufacturing.
Let me also add that the short-term policy reforms that help ignite growth initially just require a stroke of the pen. It is the second generation or medium term reforms that need an institutional overhaul. Substantial capital investments only flow if there is tangible progress on the ground, and not simply a policy announcement on paper. This means decent infrastructure that reduces costs of producing and trading, sound regulations that facilitate business and protect private investments. Indeed at our stage of development, it is capital formation that matters most for growth. The gross fixed capital formation (GFCF), as a share of the national economy, in fast-growing Asian countries was between 30 and 40 percent when they took off. In Nepal, that ratio has been very low at around 15 percent. It is only when a country seeks to go from a middle-income country to high-income that research and innovation become much more prominent. When they do not invest in these high-skilled technologies and manpower they may go through what is called a middle income trap. You can contrast Malaysia with, say, the Czech Republic, which has made the leap from middle-income to high-income.
Let me now connect the importance of high and sustained growth to our prospects for graduation from the status of LDC.
We have done reasonably well on social indicators. Our life expectancy has crossed 70, a phenomenal achievement. In the 1990s, it wasabout 54. The Lancet singled out Nepal as one among a few countries with the fastest rate of positive increment in longevity in the past two decades. Our primary school enrolment is almost universal. We are doing well in gender equity, as measured by the ratio of male to female Human Development Indices, and behind only Sri Lanka among populous countries in the region. Absolute poverty, as conventionally measured, has been halved. However, we now need to go focus more on ‘quality’ than on mere ‘access.’
Some of the social indicators above are captured by the ‘Human Assets Index’ that is computed to assess our eligibility for graduation by the UN. Together with this, and our performance in the ‘Economic Vulnerability Index,’ Nepal is now poised to graduate from the status of LDC around 2022, as is the government target. These international reviews are held triennially. In the 2015 review, we crossed the threshold for graduation in two of the three pillars, which is what is required for graduation, if sustained until another review in 2018. Three years after that, we can graduate on technical grounds. But the crucial indicator where we have performed miserably for decades and are keen to make progress on is average income. This is a direct consequence of how we fare on economic growth.
So, the dilemma for us right now is whether we should be happy with ourselves for clearing some of these internationally-determined development milestones or be anxious that we are meeting those without really having a durable economic foundation. In other words, our goal should really be not only to graduate on technical grounds, but also in a manner that such a graduation is irreversible and sustainable. A meaningful graduation from LDC status requires high incomes that translate into the quality of lives that Nepalis lead. The Government knows this, and this is why many policymakers are going out of their way to downplay the salience of the course Nepal is on now to graduate out of LDC. But we’ll let the UN proceed with its reviews and assessments over the next five to six years, and decide whether it is in our interest to cross the river when we reach the bridge.
Indeed, for people to feel that we are really graduating, the indicators need to correlate well with other tangible achievements that people associate with modern progress: well-fed and well-clothed hygienic citizens; tall, shinybuildings;durable roads; uninterrupted water and electricity supplies; public buses that run on time, etc. These are the popular perceptions of material progress, but the UN indicators measure none of these. Nepal and Bangladesh will likely be the two rare LDCs which will graduate based on non-income criteria, whereas many other smaller countries, especially those in the Pacific, are likely to graduate based on rising incomes.
Now, in addition to the policymaker’s concern that Nepal’s graduation may be premature, based only on non-income criteria, another concern floated by our civil society is whether we may lose in terms of aid and trade preference when Nepal formally is taken off the list of LDCs. Bulk of these concerns are misplaced with exaggerated claims of potential loss. We and the UN will begin work on analyzing these issues systematically. But one thing to note is that the most important donors: ADB, World Bank and the US government do not even recognize the LDC category. The terms on which they lend to Nepal are based on our debt solvency, or other governance indicators, not whether some obscure committee in the UN declares that we are no longer ‘least developed.’ On preferential market access for exports accorded to LDCs, especially in Europe, I think we will be able to negotiate a prolonged grace period during our post-graduation transition. This is the spirit of the UN General Assembly Resolution 59/209 which dissuades abrupt withdrawal of special measures currently in place for LDCs even after they graduate.
I reject the implicit desire of some who want Nepal to be permanently poor and weak so that they can perpetuate their ‘aid business.’ We have to graduate out of poverty and low development status, and wean ourselves away from dependence on petty amounts of concessional charity aid. We need to grow up as an economy so that we attract real dollars of hard inward investment that give decent returns to Nepali workers, the tax-collecting government, and the investors themselves regardless of origin. While LDC graduation is a UN construct monitored externally, Nepal may need its own internally-imposed deadline of, say, 2030, for a meaningful development leap undergirded by high and sustained growth that ensures that our social progress so far does not unravel.
(This article is based on a verbal interview with Dr. Waglé)
Wagle is member of NPC Twitter: @SwarnimWagle
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