Economic Revolution In Earnest

Published: The Rising Nepal, 17 April 2008
By: Paras Kharel

Many in the media had borrowed a line from a verse penned by a Nepali poet of a revolutionary bent to describe the constituent assembly (CA) election as an epoch-making event changing things inside out. That prediction has come true--though most of those who made it did not necessarily have in mind the subsequent results that would alter the prevailing power equation in the country. It would be a blunder, however, if the decision makers that have received a fresh popular mandate were to be tempted to rest on their laurels, in the mistaken belief that the revolution is over. Nepal now needs a new kind of revolution--an economic revolution--one that may not have the appeal of lofty political ideals, one that may even sound mundane, but nevertheless is a must for sustainable peace, democracy, stability and national sovereignty.

Dismal growth
For all the jazz about building a new Nepal, economic issues have so far been put on the backburner. The state's preoccupation with the peace process involving efforts at "mainstreaming the Maoists" and holding the CA polls is often cited as the reason why economic problems received scant attention. Now that the ex-rebels have been more than mainstreamed, as made loud and clear by their thumping electoral feat, no one will buy the excuse further. For it is widely acknowledged that poverty, unemployment, inequality and absence of social justice sparked the Maoist insurgency. Envisioning a peaceful new Nepal without addressing these problems would be a pipedream.

Despite an end to the conflict, the performance of the economy has been dismal. It grew 2.3 percent last fiscal year. The Asian Development Bank forecasts a 3.8 percent growth for this fiscal year. Forget about the scintillating near-double digit expansion registered by the economies next door, the 2.3 percent rate barely keeps pace with population growth. Agriculture, which still employs about two thirds of the labour force and contributes 36 percent of GDP, is facing productivity decline and, hence, is unable to absorb the half a million annual new entrants to the workforce. The manufacturing base is negligible. The safety valve that has helped take some pressure off an economy where employment generation has lagged way behind workforce growth has been the bonanza of foreign employment--a phenomenon also largely credited for the drop in poverty incidence from 42 percent to around 31 percent in the period 1995-2004.

True, the sweat and toil of Nepalese working in foreign lands has helped keep the economy afloat all these years. But this is not a viable way of achieving a broad-based, rapid and sustainable growth in the long run. An adverse change in demand for Nepalese labour, and our sense of "false prosperity" could be shattered in a jiffy, dealing a severe blow to the economy--from the macroeconomic level (forex reserves position) down to the household level (consumption). The implication of swelling ranks of the unemployed for the law and order situation can be easily imagined.

The economic revolution in order is one which enables the economy to shift from exporting labour to exporting goods and services. Nepal's landlockedness and difficult terrain render it a high-cost economy. This limits its export potential. The need is to focus on areas where it has natural comparative advantage. Tourism is one such sector. It has also the potential to address the problem of unemployment thanks to its high elasticity of employment stemming from its potential to engender backward linkages. For Nepal to turn the industry into an engine not merely of growth but also of job creation, complacency derived from a congenial domestic climate is no longer an option. A "critical minimum effort" entailing substantial amounts of spending on effective promotion and publicity and infrastructure is required. Likewise, merely relying on international airlines to fly into Nepal is not enough. The national flag carrier Nepal Airlines Corporation (NAC), ravaged by political interference, corruption and ineptitude, has to be revamped inside out. It remains to be seen whether the new government can refrain from doing what its predecessors did with great gusto.

As agriculture remains the largest employer, increasing its productivity is a must. Though predominantly agrarian, Nepal for the last 30 years has been a net importer of food grains, exposing itself to international supply and price shocks. Fragmentation of land-holding and absentee landlordship are constraining productivity. Agriculture is a sector that has the strongest link with poverty in Nepal. An overwhelming majority of the poor are rural farmers. Almost 70 per cent of households have land holdings of less than 1 ha; many of them depend on plots that are too small to meet their subsistence requirements. An estimated one million of the total 4.2 million families are landless. Land reform has always been a sensitive issue; lack of political consensus has impeded effective implementation of land reform measures. The challenge is to come up with a land reform package that is neither too diluted to be of any consequence nor so disruptive as to tear the society apart.

Concentration of merchandise exports in a few commodities, trade dependence on a single country and ballooning deficits are chronic problems. Diversification, mainly country-wise, that began in the 1970s was reversed in the 1990s. About 70 percent of trade is with India, not to mention informal trade. Diversification of trade in general and product- and destination-wise diversification of exports in particular is indispensable for not only sustainable growth but also a nation's ability to pursue policies--economic and foreign--independently and in tune with its own interests. In other words, diversification has a bearing on material wellbeing as well as national sovereignty. Nevertheless, our largest market will continue to be India at least in the foreseeable future. Therefore, diversifying the export basket has to be complemented by effective negotiations with our southern neighbour so that new exports do not meet the same fate as the current major exports (e.g., vegetable ghee, copper wire and zinc oxide) that are subject to quantitative restrictions. Non-tariff barriers and an array of duties imposed out of the blue are other areas of concern. Getting unfettered transit through India to access Bangladeshi ports, which will help cut transportation costs, should be a priority.

Power cuts have crippled the manufacturing sector. Which brings us to hydropower, another area of comparative advantage. Little or no attention is given to a fundamental dilemma: whether to export cheap electricity or to use it to meet the country's own needs, not just electrifying households but also as a cheap input in industries and transportation. There is a compelling argument that in exporting electricity we will also be exporting away potential multiplier benefits. Stifling the hydropower sector is the trend of a handful having access to the corridors of power hogging rivers by sitting on generation licences as speculators.

Promises to keep
The biggest challenge will be to stamp out corruption, an institutionalized malady that has eaten into the vitals of our economy. Any anti-corruption move will be successful only if the rulers lead by example. The logic is simple: if a minister is 'clean', the secretaries under him/her will be compelled to follow suit, and so will other civil servants below. For starters, bringing transparency to the recruitment process in public enterprises would be a remarkable achievement, though the temptation to continue staffing them with one's supporters is seemingly irresistible. A tall order? Not quite. They have long been promising they can deliver. And they have the mandate. The zillion rupee question is: will they deliver?