Economic leapfrog

  • To become a middle-income country by 2030, investing in private sector while promoting foreign investment is a must

Dec 22, 2017-

With the successful completion of local, provincial and federal elections, the mandate now is to achieve a substantial and prolonged economic growth. The limping economy should be able to experience a leapfrogging growth, and henceforth no argument should stand against leveraging economic empowerment. Nepal has an aspiration of becoming an upper middle income nation by the Fiscal Year (FY) 2030. To achieve that status, per capita Gross National Income (GNI) needs to grow from the current level of approximately $900 to $4000. Even in terms of simple mathematics, the required per annum growth of 14 percent is very ambitious. More realistic is the prospect of the Nepali economy achieving a per annum growth of 7 percent, resulting in an increase of GNI per capita to $2000 by FY2030. 

To achieve economic growth, Nepal needs time to realise tangible development. However, given the resources and learning curve, the time required should be considerably less as compared to our counterparts. As such, for years, Nepal has been mutely observing the phenomenal growth of other nations and therefore should be able to configure an appropriate blueprint for achieving fast growth.  

Investing in infrastructure

It would be fair to conclude that the development of infrastructure is at the heart of any economy. The process of economic development in Nepal, therefore, should start through the expansion of  its infrastructure. This will unquestionably change the economic landscape of Nepal by mobilising economic actors. Similarly, the big push that the Nepali economy is striving for can be achieved by unleashing infrastructure development. For instance, road access will facilitate private investment, provide new markets for rural farmers and consequently improve their living standard by enhancing the prospect of jobs and education. Likewise, road/rail access is equally essential in minimising socio-economic differences across the provinces.  Besides, development of infrastructure will also help to raise the productivity of human and physical capital. 

Hydro energy has been seen as the most promising sector for boosting the economy. Accordingly, the budget of Nepal has allocated Rs62.45 billion (approximately $625 million) to the sector, giving it great priority. The election manifestos of all the major political parties have considered hydro energy as a prime source of economic development. There is no denying that hydro energy is our comparative advantage and we should acknowledge the sector as a crux for the forthcoming economic revolution. However, there remain practical struggles. Besides financing, the proper use of surplus energy is yet to be figured out. It seems that we have not learnt from past lessons, and once again are considering the possibility of having India as our sole trading partner. When the notion of landlocked to land-linked is increasingly on the rise, our myopic lens cannot envision trade beyond the Bay of Bengal. Nepal is adamant in tweaking only the mode of trade—as earlier we used to import everything from India and now we are vying to export everything to India—rather than waging war against the orthodox economic dynamism. In place of unilateral trade agreements, 

what we need is a rampant development of industries. 

Promotion of industries

Over the past nine years, the average contribution of the manufacturing sector to Gross Domestic Products (GDP) is less than 6 percent—the lowest contribution was in FY2016 with 5.2 percent and the highest in FY2008 with 6.2 percent. If Nepal is to achieve ambitious economic growth, it is equally essential to promote the manufacturing sector. The apprehension about the manufacturing sector not being our core advantage will further derail the path to a prosperous Nepal. However, it is not necessary to jump into the production of high value manufacturing goods. The production of simple and low value goods can act as the necessary spark in igniting our economy. In this regard, the government must act as a facilitator in promoting such Small and Medium Scale Enterprises (SMEs). Appropriate measures and policies must be put into practice. For instance, the government can provide subsidies or other financial and tax benefits to private entrepreneurs for a certain number of years. Likewise, bureaucratic hurdles must be completely eliminated to promote SMEs by encouraging the participation of the private sector. Unfortunately, the current situation is odious and bemusing. For instance, one has to go through a tiresome and arcane administrative process to export any herbal products. And in many circumstances, the government is completely unaware of the policies required to promote trade. Similar tax rates charged for importing raw materials and finished goods is a pertinent example.               

Finally, the nebulous influence of foreign aid must be replaced by foreign investment. Currently, foreign aid and loans contribute to approximately 23 percent of the total national budget. 

On no account should foreign aid be considered as a medium of economic growth, as our country will become inured to such aid, all the while nonchalantly promoting bureaucratic malpractice. Experiments with foreign aid must be stopped before Nepal becomes an interesting case study of failed development. In this regard, even though macroeconomic management could be increasingly complex in Nepal due to the trade-offs presented by the well-known economic notion of the “impossible trinity” (an idea where it is impossible to simultaneously have a sovereign monetary policy, fixed foreign exchange rate and unobstructed capital flow), foreign investment should still be the doctrine for modern economic development.

KC is a student of economics and coordinator of Nepal Economic Forum (NEF) 

Published: 22-12-2017 08:08

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