Money

‘There’ll always be disparity, inequities’

  • Interview Swarnim Wagle
To expect local governments to become completely self-reliant from get-go, generate excessive resources and send the surpluses to the centre is utopian

Nov 24, 2017-The feeling of euphoria has heightened in Nepal as the country is on the cusp of making a transition from unitary to federal system of government. Nepalis recently elected local representatives after a gap of almost two decades and are eagerly waiting for first federal parliamentary and state assembly elections scheduled for Sunday and December 7. Completion of these elections, many say, will bring some stability in politics, which has been marred by frequent government changes since the mid-1990s. This stability, many believe, will set the stage for the incoming government to focus on economic agendas and attaining economic prosperity. But there are challenges, as three tiers of government are expected to exercise their rights to lay claim to various resources because of ambiguity on the concept of fiscal federalism. Rupak D Sharma of The Kathmandu Post met with Swarnim Wagle, vice chairman of the National Planning Commission, the apex body that frames the country’s development plans and policies, to discuss these issues. Excerpts:

With the near-completion of over a decade-long political transition, focus has diverted to economic prosperity. What does economic prosperity mean in the Nepali context?

Nepal’s social and political indicators have improved substantially over the years. But we have lagged behind in building a dynamic economy propelled by entrepreneurship and a favourable environment for both domestic and international investment. Although prosperity is an all-encompassing concept that, among others, touches upon social wellbeing, political freedom and environmental integrity, I think the most important facet of broad-based prosperity in Nepal’s context would be an economy that creates large number of jobs and uplifts living standards of people. In quantitative terms, this would mean gaining at least a lower-middle income status by global standards over the next decade. Right now we’re stuck at per capita income of around $800. This income level should rise to at least $1,500 in current prices to really feel that the economy is moving in the right direction. 

Do you think bluffs made by political parties through election manifestos, like transforming Nepal into a developed country within 25 years or expanding the economy’s size by four-fold in the next decade, will help us achieve economic prosperity?

It’s not possible for Nepal to meet the standards of OECD [the Organisation for Economic Cooperation and Development, a grouping of 35 highly developed economies] and become a developed country in the next 25 years. What Nepal can easily do is expand the size of economy to $100 billion [from existing $26 billion] in the next 10 to 15 years. If Nepal’s population grows to 30 million by that time, the economic output of $100 billion would generate per capita income of around $3,000. So, with moderately ambitious economic targets, Nepal can reach Sri Lankan level of development in about 10 to 12 years.

Are you implying that it’s possible to expand the size of economy by four-fold in the next 10 to 12 years?

It is a moderately ambitious target in current prices. But it is attainable on condition that there is a strong, reform-oriented government that can last a full five-year term. To meet this target, Nepal’s economy should grow at the rate of about 6 to 7 percent per year for the next one decade. 

Nepal needs to build big infrastructure projects to unlock growth potentials and expand economic output by around 7 percent per annum. Even if construction of these projects is expedited, it’ll take at least five years to complete them. How can Nepal sustain growth as seen in the last fiscal year in that five-year period?

The growth achievement of last fiscal year was slightly exceptional as it was the result of small economic base of the fiscal year 2015-16. Nepal’s economy did not grow at all in 2015-16 because of devastating earthquakes, blockade and poor agricultural output. Mathematically, it is harder to secure a 7-percent growth rate and sustain it year after year because the economic base keeps on expanding. So the challenge is not to achieve a growth spurt but to attain a sustained economic growth rate. Only a sustained economic growth rate can uplift the entire nation and improve people’s wellbeing, as growth spurts often do not have long-lasting impact on development. As you said the gestation and completion periods for big projects that can propel and sustain economic growth are quite long. And given the difficulties with project implementation and execution in the country, the assumption that things will change overnight seems implausible at the moment. 

So, what should be done?

A majority government of the early 1990s, which unleashed economic reforms, was able to attain growth rate of 7 percent. I think that can be repeated 2018 onwards if a strong and reform-oriented government takes office. Such a government should focus on softer infrastructure, which is the legislative agenda, in the first two years and introduce 15 to 20 investment- and business-friendly laws, policies and regulations. Many of these laws, policies and regulations have been prepared and only need to be ratified by Parliament or approved by the government. This will instil confidence among investors, business community and entrepreneurs. Investors make investment decisions two or three years in advance, meaning a favourable business climate will immediately impact investment decisions, resulting in actual outlays in the next two to three years. These policy reforms should then be immediately accompanied by massive infrastructure investment. There too lots of the projects are in the pipeline. The 21 flagship national pride projects, for example, are being implemented. Where we have lagged behind is effective monitoring and execution of these programmes. But they can be expedited in the medium term. 

Nepal has long been saying appropriate changes to policies, policy stability and development of physical infrastructure will help attain higher economic growth rates. But no one seems to be serious about rolling out these plans. Why?

It’s politics. We are technocrats, and there are well-meaning entrepreneurs, but unless politics is on a stable course and unless elected politicians are forward looking, very little will happen. Politicians need to be secure about their individual and party fortunes. They cannot think about long-term goals when they are insecure about their tenure. This insecurity has taken a toll on bureaucracy as well, because the bureaucracy is as stable as the ruling government. Also, governing parties, over the last two decades, have focused on political issues like managing the full-blown decade-long conflict and post-conflict transition. So, economic agenda has taken a backseat after the mid-1990s. Now, almost all political issues are kind of resolved, and the country has a new constitution that foresees a very lean federal government with only 16-18 federal ministries. Also, certain disciplinary provisions have been put in place to make sure the governments last at least a few years. In addition, pre-election alliances have been formed on the left and the centre. These are indications that Nepal will have more stable governments with a strong popular mandate to focus much more on economic agenda beginning 2018.

When technocrats, policymakers and politicians talk about economic agendas, focus tends to be more on development of physical infrastructure, investment and trade. Isn’t lack of quality education, both formal and vocational, one of the bottlenecks for Nepal’s rapid economic growth?

Day-to-day press coverage tends to make one believe that the country is focusing more on development of expressways, airports and hydropower projects. But in the day-to-day humdrum of governance, lots of discussions take place around education, health and other social sectors. However, there are big issues to be resolved. For example, 82 percent of our school children go to public [community] schools. But rate of absentee teachers and rate of attrition after primary level are shocking. We’ve solved the first generation challenges in education and health sectors. Look at our school enrolment rates where we have full gender parity and enrolment is also universal at about 97 percent. In health sector, life expectancy has jumped dramatically from about 54 years to about 72 for women and 69 for men. The maternal and infant mortality rates and the rate of stunting have also come down. These first generation achievements in education and health sectors have helped Nepal to become one of the global leaders in human development achievements. 

But what about the quality of education and healthcare services?

That’s why we are pushing to address second generation issue in both health and education sectors, which is quality. In education sector, focus, till date, was on school enrolment. Now, focus should also be on learning outcomes, because kids are going to school but they are not learning much. If you take a Grade 8 child attending a public school, for example, and ask him or her to take Grade 4 exam, that child will most likely fail because of lack of basic numeracy, sentence construction and paragraph composition skills. On health, the biggest killers in Nepal were diarrhoea and pneumonia in the 1990s. Now more and more people are contracting sophisticated diseases. The next generation challenge will be to raise people’s access to healthcare services and provide quality services through public hospitals.

And what about the quality of higher education? Most of the universities are not doing much of research and development works which are crucial to identify challenges and shortcomings and make policy recommendations. What is your take on this issue?

We need to inject innovation in the way we drive education and health sectors. We will not be able to achieve our broader economic targets without skilled, literate and educated workforce. Thus, the need to develop physical infrastructure and human infrastructure, or human capital, in tandem is very important. This will be especially critical over the medium term. We’ve seen examples of countries like Malaysia that made rapid transition from low-income to middle-income status, but now seem to be stuck in middle-income trap. Countries like Malaysia made rapid progress in development of physical infrastructure in a short span of time, but they did not invest in softer infrastructure, which is human capital. You can relieve the constraint of shortage of human capital up to a point by importing skilled people; and Gulf countries, which do not have a big indigenous human resource base, have done just that. But Nepal need not rely on such measures because of its population size. What we need to focus on is building an educated workforce in the medium to long run to meet ambitions on the economic front.

Let’s move back to the topic of economic prosperity. Another catchphrase doing rounds these days along with economic prosperity is social justice. No wonder, political parties have incorporated a slew of social security concepts in their election manifestos. Some of these concepts, if implemented, may encourage people to drop out of labour market. Wouldn’t that be a disaster?

Social security programmes should not have perverse impact on the labour market. So, lots of these programmes need to be conditional, meaning there should be no free handouts. Also, cash transfers should be time-bound and conditional on community service. Programmes like 100-day labour guarantee are okay, as they have been tried and tested in countries like India. This type of public investment programme helps kick start rural infrastructure works and aids local governments to create jobs. Schemes like first 1,000-day early childhood investment are also welcome as real science supports massive investment in early stages of childhood. That’s why advanced economies like the US are implementing these programmes. 

But what about populist social security programmes that political parties are talking about?

Nepal must reject profligate, unwise and populist spending on social security programmes, and the media and civil society should keep a close eye on these issues. Lately, ambitious social security programmes are being floated all around the world because of growing realisation about inequities and inequalities. For example, universal basic income is one idea that is doing the rounds in policy circles these days. So, the concept of an integrated birth-to-death social security package that covers vulnerable segments of the population has become a well-accepted development idea that also finds its place in the United Nations-backed Sustainable Development Goals. The aspiration to rely both on state redistribution and the insurance markets so as to set the stage for a viable social security framework to cover almost all Nepalis is a noble ambition. But the life-cycle approach to addressing vulnerabilities needs to be affordable and viable. 

Let’s move to the topic of fiscal federalism, which is important part of the country’s shift from unitary to federal system of government. Many seem to be more interested in embracing ‘learning by doing’ approach to operationalise and institutionalise fiscal federalism. Isn’t that risky?

I don’t agree with what you said. The whole federalism experiment is new to Nepal. And it may be impossible to predict how this will unfold. But looking at what we’ve put in place, sensible people can anticipate what will happen over the next few years. The constitution is the top guiding document [for fiscal federalism]. There are annexes in the charter that explain specific rights of three tiers of government. These rights are being elaborated through the unbundling exercise, such as formulation of new laws. Yet we anticipate problems in the short term. For example, it may be somewhat challenging to formulate next year’s budget because elected local and provincial representatives will demand much more resources. But lower tiers of government will continue to exhibit their needs and exert pressure on the central government to provide more grants. So this tension between the central and lower tiers of government will remain for some time. But over the years everyone will mature and legitimate negotiations for resources will be held. Then a right balance will be found. What we are more concerned about at this moment is inability of lower tiers of government to maintain fiscal discipline and create system of checks and balances. Hence, we need to put systems, like information technology and human resources, in place to ensure fiscal controls and prevent fiscal abuses. The government is already working to address these issues and the National Planning Commission is preparing model periodic plans and model budgets, which will enable local governments to introduce their own periodic plans and annual budgets. So we have begun responsible budget formulation practice. 

This is where the problem lies, isn’t it? The central government is currently focused on governance issues and teaching local bodies how to prepare and execute expenditure plans. But what about resources? How will majority of local bodies generate revenue? 

Subnational governments don’t perform equally even in the US and India. For example, New York, Florida, Illinois and California do much better than landlocked states like Kansas and other smaller ones. That variation will always be there. So, the performance of local bodies will be diverse in Nepal as well. This means hundreds of local governments will continue to rely overwhelmingly on central grants. And this is well understood. That is why the constitution has anticipated four kinds of grants for local and provincial governments. The National Natural Resource and Fiscal Commission, which will be formed soon, will have a very important task of ensuring that these grants are well allocated. Also, local bodies are entitled now to raise a slew of taxes. They should exercise these rights wisely.

Won’t resource crunch among local governments and their inability to generate own resources create horizontal and vertical imbalances and widen inequality in the country?

I don’t think so, because provisions for special and equilisation grants have been put in place to ensure inequality does not widen. But like I said earlier, not everything will be even. Per capita income in Connecticut, for example, is double that in Mississippi. This is an example from the US, which has practiced federalism for 230 years. Look at China, where living standards of people residing in coastal areas are comparable to certain countries in Europe, whereas western provinces are really behind. So, there will be structural challenges and some of the provinces will be richer than the other. What the state can do is minimise these inequities through policy incentives. Also, proactive policies aimed at encouraging investors and social service providers to locate their businesses in less developed parts will help uplift some of the areas. But even after that we will never be able to nullify inequities and state support can only bridge those gaps to a tolerable level. 

The ultimate goal of the government should be to make subnational governments self-reliant in income generation isn’t it, because cash transfers will only weaken fiscal discipline in the long run?

The goal is to make all local governments as self-reliant as possible. The central government has to be realistic and expect that there will always be a number of local governments that will need support in the longer term. How can you expect certain local governments in Dailekh and remote parts of Gorkha to be completely self-reliant from the get-go? That’s impossible. That kind of unrealistic expectation will distort policy priorities. So there will be disparity and inequities because of structural issues. And the government should work to narrow those inequities to a tolerable level. But to expect local governments to become completely self-reliant, generate excessive resources and send the surpluses to the centre is utopian. 

Published: 24-11-2017 08:29

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