Nepal’s Faltering Aspiration To Join Middle-Income Group Of Countries Club

Nepal’s economic development strategies should have long grabbed benefits accruing from a globalized trading setting and unfettered Supply Chain from the initial stages of economic liberalization, and by linking the nation as an economic bridge between the two economic giants of the world i.e., China, and India.

June 8, 2022, 4:20 p.m.

Context and background

Pandemic-induced situation combined with the on-going Russo-Ukraine conflict is intensifying global shortages of food and higher prices of petroleum products. Analysts and technocrats believe the world is witnessing global economic stagflation. This will directly hurt more ordinary people than the rich ones. Multilateral institutions are predicting possible shock waves across countries from this situation because the world could be facing varying rate of price inflation, increased pressure on food commodities unseen in recent memory. There are no signs of amelioration of deteriorating situation in the unrelenting Russo-Ukraine war scenario and it is compounded by already fragile global supply chain, depleting food production and availability.

Nepal’s high growth projection is largely based on soft socio-economic indicators at a time of growing trade deficit, falling remittances, rising poverty, low employment and wages, low agricultural yields, low productivity, climate change, degrading environment, and shortages of skilled labor for attracting domestic and foreign private investments in manufacturing industries. This means the nation will remain in an environment where trading businesses will only focus on quick returns through cross-border trading of limited items.

Vulnerability of growth projection is a function of seasonal rain-fed agriculture which suffers from low yields. Pandemic-induced economic environment has been dampened and stagnant, and recovery of services sector may not be realized as contemplated. Fragile social and economic indicators used for growth estimates also are not sustainable. Things could not be better for the fact that Nepal’s dependance on imports of staple food items are unlikely to improve, so long as migrant worker’s remittances keep flowing into national treasury, and where decision-makers do not see any urgency of resuscitating actions.

Fallacy of GDP myth and People’s Prosperity

Graduation to the next level sounds politically marvelous but, again, country will confront with a new set of unknown challenges. It seems we are not thinking about new challenges that could overwhelm us in due course of time. Are we ready for graduation to the next level amidst several challenges? But, how?

Annual growth rate of 8% is ambitious with running rate of 7% price inflation. It is hard to believe the growth projection will be attained against years of dismal budgetary performance of successive governments. If this trend is to continue this nation will be trapped inside a long narrow tunnel of ongoing economic nationalism and people’s prosperity will turn into a myth. Surely, it will not uplift citizens living standards from the status of least developed country (US$ 1.90 per person/day at 2011 estimate) to the next level of lower-middle-income (US$3.90 per person/day at 2011 estimate) group without bold, pragmatic, and sustainable economic recovery strategy.

Nepal’s economic development strategies should have long grabbed benefits accruing from globalized trading setting and unfettered Supply Chain from initial stages of economic liberalization, and by linking the nation as an economic bridge between the two economic giants of the world i.e., China, and India.

Unfortunately, economic nationalism of near self-isolation under the pretext of political sovereignty became the biggest roadblock in development and pushed the nation into economic vulnerability and food insecurity. Nepal now faces shortages of domestically produced food commodities and people’s prosperity is on sovereignty betting. Mere GDP growth estimates used for planning purposes will not generate additional disposable incomes in citizens pocket, ensure better quality of life, and improved living standards. It, then, becomes an economic fallacy of statistical conundrum without prospects of people’s prosperity and increase in real terms of disposable personal incomes.

For moving forward, the government may consider re-examination of Public Private Partnership (PPP) relationship and caramelize stronger cooperation with private investors in economic development pot. Boosting capacity of manufacturing will depend on re-invigorating ‘ease of doing business which is in terrible stage if compared with ASEAN countries. Impediments to growth happens to be (a) lack of competition policy that ensures economic viability of investments, sustainability, and market, and (b) lack of high-quality workforce, with relevant and functional education for world class products, needed for industrial development.

Inferior quality of human capital and shortages of productive workforce

Nepal’s education system is fundamentally faulty because it is not geared to the needs of market dynamism, creativity, and linked to productivity. Work forces need to be regularly recalibrated to new skills, and re-skilling and upskilling to match with the technical know-hows of market relevance, and for self-sufficiency. Job market is already dominated by innovation, creativity, and evolving technology. Education without multidimensional creativity will hinder productivity and growth. Such workforce will neither inspire nor motivate private investors for investments in large industries, and again, in a narrow domestic market who would want to put monies in such uncertainties. Remember: no country has economically developed without strong manufacturing base.

Undoubtedly, it calls for bold undertakings by governments, and forging partnerships with select industrialized countries for possible joint-investments and joint-management of expandable economic sectors having international market potential. For example, collaboration in travel and tourism industry, energy and infrastructure sectors could be a starting point. Government could, then, focus exclusively on resuscitating domestic production of agricultural commodities for self-sufficiency, and reinforce resilience.

Pandemic-induced challenges and global impact of Russo-Ukraine conflict

Countries which followed the bandwagon of liberalized trading have positively attained varying levels of economic growth and national prosperity prior to the pandemic. However, heightened conflict between Russia and Ukraine is having serious global impact on availability of staple food grains in Europe, Africa, Middle East and Mediterranean countries, and Asia irrespective of their economic stability.

Fearing shortages and hoarding, India recently imposed export ban on rice, wheat, and sugar. Price escalation is, therefore, highly likely, and government may resort to subsidy. This action could further deepen budget deficit and debts pot would rise. Government may then choose either to reduce imports or dampen the demand for commodities by other unpalatable restrictive measures. This could generate socio-political instability. This will have more unfavorable impact on life of daily wage earners, and poorer segments of society, more than richer and well-offs.

We are not sacrosanct to global events and remain without some forms of impact for Nepal heavily depends on imports of basic food items. Difficult to imagine how Nepal will navigate through this at the end of economic tunnel of projected high growth and join the club of middle-income countries like China and Bangladesh or Vietnam, for example. Continued reliance on protectionist policies influenced by economic nationalism have not delivered aspired level of growth other than in paper because Nepal has indeed missed the fast-track economic train of past decades that benefited other countries. When will this nation wake up from such daydreams of economic falsehood?

Lessons from Sri Lanka’s economic crisis

We may not have realized, from Sri Lanka experience where people are facing shortages of food, fuel, medicine, and power, that this upper-middle-class economy, (long before other South-Asian nations at this level) have fallen into the same club of countries like Nepal with hundreds of thousands of people falling into poverty trap. The key lessons from this economic tragedy can be attributed to high trade deficit, grandiose associated with uneconomic pride projects, fiscal fiasco, and debts. This situation may only be resuscitated through recovery of strong manufacturing bases, and, perhaps, with substantial dose of foreign direct investment.

This crisis is augmented by flawed populist economic policies of the governments. Economic recovery will require much better investment climate in ‘ease-of-doing-business and grant high level confidence to businesses and investors, ensure security, and adopt more favorable investment strategies. Building a strong national resilience for preventing re-occurrence of similar crisis will require high priority in domestic production and supply of food commodities.

Government must also demonstrate utmost fiscal prudency, tap institutional corruption and political impunity. This experience seems relevant to Nepal if we are to read through the public statements, populist policy rhetoric, and protectionist nationalism for doing-things better and efficiently are few examples of evidence that require little or no illustration.

Agriculture and national vulnerability

It seems we either do not understand it or because we are not serious about the significance of development of agriculture. Nepal is in a serious state of food deficiency, for we are highly dependent on availability by imports of staple food items even though we continue to claim Nepal is an agricultural country. In Nepal’s context, we suffer from low productivity, high production and transport costs, and inferior product quality. This situation is not a direct function of Nepali youth migrating overseas who are looking for better paid employment away from Nepal. And, targeting them for agricultural policy program failures is neither helpful nor going to lift the country out of food insecurity trough.

Our competitors in the region have been improving production, supply, and product quality. This has indirectly impacted domestic market in Nepal and availability of food ingredients ranging from spices in our kitchen shelves to staple items like rice, lentil, wheat, and cooking oil which are being imported. Ignoring this reality, we continue to make policy declarations, without evidence, that Nepal could export agricultural items internationally, and become prosperous and rich. This falsehood may be one of the reasons of ballooning imports of food items and falling agriculture into abysmal. Clearly: we are ill-prepared to feed the nation while wrapping ourselves with piles of challenges, and by resorting to protectionist policy, and unpragmatic economic myth of GDP estimates.

Some hard shells require breaking prior to charting a way forward

Past performance of governments raises serious doubts over political commitment and ability to implement pragmatic actions. Moving forward realistically requires out of the box rethinking and bold actions for re-instilling people’s confidence in good governance by tackling following questions, to begin with:

  • Who in the government has the right insights into the depth of national and international political economy environment? Is it a politician or bureaucrat?
  • How independent is monetary and fiscal policy making process in Nepal and how are these set? Is it a politician, bureaucrat, or technocrat?
  • Who is the architect of ambitious development of central plans in a liberalized global economic free setting where private investment plays the lead role? Why have we failed to inspire private investments?
  • How come Nepal is still a poor country while neighbors in Asia have done far better than us? In early 60/70s Nepal was not far off than China and Vietnam, and why did not we notice these developments, and learn?
  • How come even after more than three decades of poverty eradication programs citizens are still trapped in inter-generational poverty cycle? Why so and for how long this situation to continue with?
  • Who is nation’s poverty reduction expert? Is it a politician or bureaucrat? Do we really know if people across the country in rural areas are not passing a day without being hungry or missing a meal due to extreme poverty? Who is monitoring this? How are we going to deal with this?
  • Why is nation failing to uplift people out of poverty despite years of rhetoric to eliminate it? Or is this designed only as a mouthpiece utterance of government and political establishments?
  • How come employment opportunities for nation’s youth, poor and marginalized segments of society not improving? Do government utterly understand reasons of unemployment and the situation in the country, and reasons why youths are migrating?
  • Do government bureaucrats, legislators and elites genuinely understand needs and interests of Nepali Migrant Workers, value their contributions in sustaining economy, and provide necessary support services without creating bureaucratic roadblocks for them?
  • Who needs a bureaucracy in policy making that is interested in creating only bureaucratic hurdles and fails to grasp the aspirations of people and of industrious migrant workers?
  • Who in government guide and advise pragmatic economic policies? Is it a politician, bureaucrat, or technocrat?
  • How come government policies fall into bureaucratic holes and fail to inspire genuine collaboration of private sector entrepreneurs and international private investors who would have been inspired by the national economic vision?
  • How come successive governments fail to streamline processes across institutions, reduce and cut red tape, and put a permanent plug on grafts for it is a well-known fact that Nepal’s political establishment and bureaucracy suffers from structural weaknesses and inefficiencies that promotes widespread corruption, and help grease the wheel of corruption?
  • How come legislators, elites and media fail to stand tall against those politicians and bureaucrats who are among the violators and promoters of anti-corruptions, accept kickbacks from government projects and supply contracts?
  • Why is government failing to adopt a system of performance-audit process to examine efficiency and effectiveness of resource allocations instead of continuing with cheap low-quality work in the name of economy-oriented?
  • Why has government not paying serious attention to unreported and possibly unliquidated funds by the end of fiscal year (i.e., Beruzu account) where billions of rupees remain unaccounted for?
  • Why do we fail to grasp impact of degrading environment, climate change, low agricultural yields and causes of low productivity, supply, and availability of food commodities?

(Kedar Neupane is a founding board member of Nepal Policy Institute, an independent non-political international think tank, and a former staff of the United Nations High Commissioner for Refugees. Neupanek1950@gmail.com)

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