South Asia Watch on Trade, Economics & Environment (SAWTEE)

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Planning for prosperity
Published: The Kathmandu Post, 3 June 2006
By: Shyamal Krishna Shrestha

The finance minister presented a 'White Paper' regarding the Nepali economy to Parliament on 15 May, which reflects a nation on the brink of bankruptcy. It is evident that the previous authoritarian regime plundered national resources for personal welfare and unproductive activities. Statistics aside, the White Paper is a sobering revelation of the irreparable damage that dictatorship can do to development. Aided by poor policies, such blatant fiscal irresponsibility has kept Nepal as an under-developed country for the last 50 years.

While other developing countries are making rapid progress, Nepal has truly become Asia's new 'basket case'. With a per capita income of US$ 260, it is the second poorest country in Asia (after East Timor) and the world's 12th poorest nation. As a polity that has been under authoritarianism for 60 percent of its modern history since 1950, 'political underdevelopment' has hampered prospects for economic, political and social progress.

To recall, Nepal has been undertaking development planning since 1956 with the prime goal of raising living standards of its citizens through optimal utilization of resources. It is tragic that even after five decades, the country is unable to emerge from the 'poverty trap'. Growth in national income has barely exceeded population growth, resulting in persistence of both human and income poverty. The majority of people have a poor quality of life and low living standards. Besides a widening gap between the 'haves' and the 'have-nots', the development process is skewed along caste, class, ethnicity, gender and geographical lines. A Nepali citizen has an average life expectancy of 59 years; 50 percent of its people do not know how to read or write (a majority of them women); six percent of infants die before their first birthday, 50 percent of children below the age of five are malnourished and maternal mortality rates are among the highest in the world.

Furthermore, 30 percent of the population survives on less than Rs 73 (US$ 1) a day while 80 percent live on an income of less than Rs 146 (US$ 2) a day (at 1984/85 constant prices). Without any breakthrough in its agrarian structure and industrialization, employment opportunities have not kept up with a growing workforce. Thousands of Nepalis are forced to leave their homes in search of better livelihoods; either to toil in low-paying jobs or to fall prey to human trafficking. Inequality, absence of broad-based growth and lack of entitlements lead to 'grievances' and are catalysts for conflict as Nepal's experience demonstrates.

As the current Tenth Plan (2003-07) is expiring next year, a debate should be initiated on development strategies that have neither expanded the economy's productive capacity substantially nor led to sustained rise in incomes. Hitherto planning exercises have only paid lip service to 'poverty alleviation' while neglecting more fundamental issues related to socioeconomic justice such as inequality.

It is pertinent to note that Joseph Stiglitz --- the Economics Nobel Prize laureate --- urges low-income nations (implementing market-oriented reforms) to instead focus on education, land and reforms in production relations as part of the newly-coined 'post Washington Consensus'. The argument is primarily based on grounds that many least developed countries have been unable to secure high and equitable growth even after adopting liberalization policies as prescribed by the Bretton Woods institutions. In Nepal's case, the basic economic questions of 'what, how and for whom to produce' are influenced by its entrenched feudal structure. No wonder, the development agenda has been in perpetual crisis.

Identifying some basic principles should inspire the new development agenda and mark a departure from those followed by the ancien regime. First, optimal resource allocation should be the basic paradigm for an economy where resource misallocation has become commonplace.

Nepal cannot afford to spend on defense and conspicuous consumption while a remotely-located health post or a school is in dire need of resources. Second, without raising living standards, enhancing quality of life and expanding the capabilities of citizens, the overall economy's productive capacity will remain low. Third, keeping in view the fact that 90 percent of Nepalis reside in villages, decentralization will have to be a priority to address acute dualism and regional development imbalances.

Fourth, trade has exposed Nepal to the opportunities and risks of economic globalization. So an educated and highly-skilled labor force, engaged in industrial upgrading, is the only route to achieve competitiveness. Fifth, creation of a strong market economy in terms of instruments such as property rights and competition law should be pursued to enhance the strength of the market economy and unleash entrepreneurship.

Sixth, private-public partnership is required in infrastructure to create a 'big push' with positive spillover effects. The above may create the basis of sustained income growth by raising investment rates and creating a virtuous circle of human and physical capital accumulation. Last but not the least, an inclusive development process is vital to ensure the participation of all sections of society.

It is natural to question state-led development and its inherent inefficiency. However, the idea is to reinforce state intervention where it is required and not to discount the market's role. As Nepal embarks on a journey towards becoming a modern democratic state, sustained peace will depend on whether a new development agenda can effectively meet people's aspirations. Peace lies largely on fostering prosperity.

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