Budgeting for bikas

  • A consensual agenda that propels us to broad-based economic growth is as urgent as the new constitution
- Swarnim Waglé, Kathmandu
Budgeting for bikas

Jul 15, 2014-

After years of policy paralysis, the recently announced budget attempts to correct Nepal’s derailed economic direction. As Finance Minister Ram Sharan Mahat admitted, the government’s budget of a single year is a pittance that cannot lift the economy in one go. But it can send signals and issue hope. Buried as he was under a thousand demands from often conflicting quarters, Mahat has nonetheless aligned the thrust of the budget with three of the country’s most urgent needs—pursuing a fresh series of economic reforms through a large corpus of legislation to rekindle an entrepreneurial climate; relaxing the most binding infrastructural constraints on energy and transport; and consolidating our gains so far in social protection while strengthening the foundation for inclusive growth by re-energising agriculture.         

Going for growth

The budget embeds an implicit roadmap to prosperity by aspiring to sustained rates of economic growth the likes of which we have not seen in our history. This is necessary if we are to match the tall political achievements of a young republic and gradually meet the rising aspirations of our people who are increasingly educated, politically conscious and globally connected. The overarching ideal is to enable each of our citizens to lead a long, healthy and fulfilling life.  

Over the past four decades, our economic growth rate has hovered between 2 and 5 percent across 10-year periods. This is grossly insufficient to deliver the kind of economic change we seek. With an average growth rate of 4 percent, it takes about 17 years for national income to double; with an annual growth rate of 9 percent, we can more than quadruple output in that period. Over time, such differences in arithmetic make miracles possible. In 1978, China and Nepal had the same GDP per capita (in 2005 constant dollars) of around $200. Today, Nepal’s per capita GDP has barely doubled while China’s has grown 17-fold. This is because China has sustained very high rates of growth for the past 35 years. In 1994, Rwanda came out of a civil war that killed a million people and displaced several millions more.  Today, it is still poorer than Nepal, but is rapidly catching up with growth rates of over 8 percent since 2001.

In recent history, since the Second World War, only a small group of 13 ‘miracle’ economies, including Japan, Malaysia, South Korea and Taiwan, have witnessed sustained growth rates of 7 percent for a full 25 years. Following such a path is the kind of ambition we need if we also want Nepal to transform within a generation. We can no longer be content with incremental makeovers of simply projecting forward trends of the immediate past.

Strengths and vulnerabilities

We know what our strengths are and where our vulnerabilities lie. Our topography makes our access to world markets costly. Because of climate change, we confront an altered monsoon cycle, melting Himalayan glaciers and threatened biodiversity. But tourism and landscape marketing remain one of our primary hopes for prosperity, as long as we can protect them from air pollution and other sources of degradation. We have the potential to meet all our energy needs through clean hydropower. And our fertile Tarai lands and good agro-climates in the Hills can support a much more productive agriculture than what we have so far.  These three sectors—energy, agriculture and tourism—along with ambitious but realistic policy decisions can help move Nepal towards a ‘zero-carbon economy’. We must expedite progress on all these fronts but we also need additional sources of growth that are game-changing in nature.

First, we need to find creative ways to ride the boom of our immediate neighbours. What is happening is truly historic: the UK took 150 years to double its per capita income (from $1,200 to $2,400 between 1700 and 1850); the US took 50 years (between 1820 and 1870); but both India and China have doubled their output per capita in 20 years. As has been noted by the consultants, McKinsey & Co., at the time of industrial take-off in China and India, they had a population each of 1 billion people, unlike the UK and US, which had less than 10 million people. What is happening right in our neighbourhood, therefore, is a force much more powerful than the Industrial Revolution, and we have to strategise on taking advantage of regional growth poles, including latching on to value-chains and international production networks. Just like the European Union began with the Paris Treaty of 1951 as a Steel and Coal Community, we in South Asia could anchor our regional integration around trade in energy.

The second game-changing avenue is to ramp up our prowess in modern services. A landlocked country, we need to be competent and competitive in sectors that help us link better with the world economy and negate our disadvantage in shipping-based trade. These sectors include telecom, aviation, energy, landscape marketing and financial intermediation.

Our long-term ambition should be to have not only the cheapest per unit cost in modern services but also the most reliable so that new knowledge-based industries take root. We have already shown some promise in telecom, hospitality and banking; we can exploit our domestically available clean energy sources; and in aviation, a country as under-developed and landlocked like us, Ethiopia, has shown the way with an airline that serves 64 international destinations with 48 modern aircraft.

Competitive services are also our best hope for reviving our manufacturing sector, which has plunged to 6 percent of the GDP from a peak of 10 percent in 1996. As the recent work of economist Dani Rodrik shows, manufacturing as a sector is quite special: it exhibits unconditional convergence in labour productivity, absorbs a large workforce, and caters to demand that is not constrained by a small domestic market. However, we also need to recognise that the patterns of trade and industrialisation have themselves evolved in the 21st century. The new emphasis, for example, is on fragmented tasks rather than complete industries, on behind-the-border non-policy barriers, and in improving the competitiveness of individual firms that can become regional champions. To ease these shifts, we need to invest more in ensuring access to quality health care, in clean water and clean air, and of course, decent education.   

Graduation goals

If we are headed in this direction, we can become a vibrant middle-income country by 2030, peopled by a majority of enterprise-friendly middle-class, with absolute poverty confined to single digits. Indeed, it is our goal to graduate from our current status as a Least Developed Country (LDC) by 2022. The technical criteria of the United Nations require us to cross two of three specific thresholds—human assets, economic vulnerability and income per capita. With augmented investments in the social sector, the first two criteria are achievable. However, such a ‘graduation’ will be cosmetic and fragile if it does not rest on good finance. This is why a consensual agenda that propels us to a higher trajectory of rapid, broad-based economic growth is as urgent as the drafting of the republic’s new constitution.

Waglé is a member of the National Planning Commission

Published: 16-07-2014 09:14

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