Low-growth trap

  • To achieve higher growth, Nepal needs to get more investments and enhance productivity

May 25, 2017-

Nepal’s political class has paid very little attention to economic policy over the years. The last decade was consumed by negotiations on the peace process and the constitution. In the decade before that, a civil war distracted attention from economic policy. Nepal’s leaders have been complacent about economic matters, for they have not had to face a serious economic crisis. Our macroeconomic and balance of payments situation is stable, largely because of the remittances sent home by the thousands of migrant workers. In fact, the government seems to view labour migration not just as a panacea for the country’s economic woes, but almost as a natural order of things. 

To continue to disregard economic policy, however, would be a major mistake. The consequences for the country could be dire, as warned by a recent World Bank report ‘Climbing Higher: Towards a middle-income Nepal’. Nepal aims to become a middle-income country by 2030. But if productivity does not improve, public investments do not increase and agricultural yields continue to depend heavily on the rains, it will be almost impossible for Nepal to achieve this goal. 

Nepal has been stuck in a low-growth trap for years, with average economic growth remaining at around 4 percent a year for the last five decades. There is a danger that if the current situation persists, the growth rate could fall to 3 percent on average per year between 2017 and 2030. This will mean that the average income of each Nepali citizen will only be around US$950 by 2030. The World Bank classifies middle income countries as those with Gross National Incomes (GNIs) per capita between $1,045 and $12,736.

In order for Nepal to jump-start economic growth, it will have to do its utmost to improve productivity and substantially increase investment. Significant attention will have to be paid to agriculture, for this is the sector that employs a vast majority of Nepalis. But it is also the sector that has suffered the most neglect. Furthermore, it is not that Nepal lacks the funds for investment. Gross national savings over the last 16 years have averaged 34 percent of GDP per year. These funds need to be channelised aggressively and efficiently so that economic growth can take off. Among other measures, this will require significant improvements to infrastructure in areas such as transport, logistics and telecommunications. And crucially, the state will have to invest in developing the skills of the youth. Only through a combination of such measures can the state break out of the low-level growth trap it has been in for many years, and create a conducive environment for its citizens so that they do not have to leave home to seek employment in distant lands. 

Published: 25-05-2017 07:55

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