In the last two decades, most of the analysis of Nepal’s economic development has been dominated by emotions, personal expectations and experiences, metaphors and anecdotes rather than appropriate, well established and reliable economic indicators and statistics. Overwhelming dismal conclusions of these analyses can be attributed to this. It is quite natural for human beings to draw conclusions based on day to day experience. Walking through broken pavements, breathing in dusty and smoky air, higher rate of food inflation, corruption at public offices and hassles of day to day life would easily convince people that the economic performance of the country is at its worst.
But it could be easily the case that the day to day experience of a common citizen and long run economic trend of a country could be completely different. An individual rarely thinks about the average economic, social, and educational and health status of its society a hundred years in the past. Rarely do they think about what was going on in the world stage a two hundred years back. People compare their today with yesterday and their current year’s living standard with that of yesteryear. Has there been any improvement recently? That’s what people are focusing at.
In an age of media and information, a Nepali citizen compares her living standard with the current (not that of the past!) living standard of a developed country and digs a hole of pessimism in her worldview. Can we sketch an accurate picture of our development path by analyzing merely our recent experience and by comparing our living standard with that of developed world? Through this article, it is argued that such a comparison is not only unjustified, but also misleading
Any kind of scientific analysis has to be based on data and evidence. Emotional or anecdotal analysis would not lead to any logical conclusion. A few examples would be helpful to justify the point.
A common perception on Nepal’s economy would signal that there has not been any changes in Nepal’s economic wellbeing in last two decades. It is considered as a well-known fact that people’s life has stagnated at worst and has progressed very little at best. Moreover, people argue that, “We had such golden days. Now this is the situation!!” Is this narrative a true picture of our economic development? What does evidence have to say on this? Let us have a look. Nepal’s real per capita GDP was less than US$ 200 in the 1960s, at current price. In 2018, it has just exceeded US$ 1000 and is increasing significantly every year since 2015 (GDP growth rate has hovered around 6-7% per year since then. It had averaged around 3-4% since 1985). Without COVID-19 pandemic, Nepal could have easily continued its recently achieved higher growth path. Though can be argued as a slow growth, this is a five times improvement of average earnings. Is this not progress? And this does not take into account the increased diversity of goods and services consumed by an average Nepali. Quantitative and qualitative progress Nepal has made in health and education sector in last decades is comparatively rapid and sustained. This facet of Nepali development is always underrated. Why? This could be a very interesting research question.
Although there is an overwhelming consensus among economists regarding the rapid progress the world has made in last 200 years, such issues has always remained in shadow. Neither media nor the common discourse seems to notice the significant changes we have been able to make due to the short memory we have. In his book Enlightenment Now, the renowned author Steven Pinker has blamed high but natural demand for negative news for such a narrative. He has thoroughly argued why media and public has failed to highlight the major trend of positive changes we have been able to achieve despite the tremendous achievements of the past 200 years.
Economists use certain economic indicators to assess the health of an economy. Similar to a physician measuring and using a child’s height, weight and their growth rates to assess the child’s health, an economist uses gross domestic product (GDP) and its growth rate. These indicators of health and economy would never give a hundred percent complete picture of a child’s health and economy’s performance. A child with good height, weight and temperature could still have other serious health problems. But healthy growth of height and weight and normal temperature indicates a lot about a child’s long run health.
If we take per capita real GDP since 1960 (the data is available since then), Nepal’s economic trend can be divided into three periods. First period can be considered to have spanned till 1985. In this period, the average growth rate of per capita real GDP (simply called growth rate) remained around zero percentage. This means that the average living standard of Nepali citizen remained unchanged. Massive reliance on subsistence and traditional farming practices invited lots of oscillations in growth. In the second period which spans from 1986 to 2015, the growth rate floated around 2-3%. This means it took 25-35 years to double the per capita real GDP. Since 2016, Nepal has been continuously experiencing a growth rate of 6-7% enabling per capital real GDP to double every 11 years. This indicates that Nepal has made a structural break after the devastating earthquake of 7.8 Richter scale in 2015. Moreover, the double digit inflation Nepal had experienced in the second period has been pacified down to 5-6% in the third period. This kind of high growth and low inflation is considered to be a golden moment for a developing country like Nepal. The estimates by World Bank and the Asian Development Bank clearly indicates that this period of higher growth is not momentary at all. Nepal has been ranked as one of the top 10 fastest growing economies in the world for 2019.
Nepal can aim for even higher growth rate of 8-9% if it can work on reducing the cost of production by providing easy and cheaper access to energy, improving business environment to attract foreign direct investment and by increasing the capital expenditure from the annual budget. With the growth rate of 9%, Nepal can double it’s per capital real GDP in just 8 years. Economy of Bangladesh was going through similar phase 10 years back.
Pessimism also dominates the status of agricultural growth in Nepal. For example, it is argued that Nepal has turned from rice exporting country to a rice importing country due to liberalization. Let us see what the data has to say about this. According the World Bank statistics, Nepal’s cereal productivity was 1.85 thousand kilogram per hectare. In 2015, it is estimated to be 2.75 thousand kilogram per hectare. In the same time period, percentage of population working in agriculture has declined significantly from over 90% to 68% (USAID). So, how is it possible that we turned from an exporter to an importer? This is due to rapid increase in per capita consumption due to emphasis on nutrition and rising income level. The contribution of agriculture in GDP has also declined from 90% in 1960 to 28% at present. This trend is widely considered to be a good indicator for economic development of a country. Could we have done a lot faster and lot better? Yes. Although slow, the progress is noticeable.
Now, let us turn to industrial and service sector. If viewed through the angle of daily headlines, gloom and doom is apparent for this sector. It is an obvious fact that industrial growth has not been super exciting. But there has been a tremendous growth in the service sector of Nepali economy. In many ways, production of services is not much different from production of goods. Economists always lump these two and talk about production of goods and services for a good reason. Service sector also creates employment opportunities, fulfills human desires and contributes significantly to nation’s revenue. Services such as health and education are crucial in improving the human development of its citizens. Yes, the contribution of industrial sector in GDP has declined, but the sector itself has been continuously growing. Number of industries, employment and their total production have grown. Closure of government owned industries that were not economically viable to begin with and were massively mismanaged is a good indicator for the growth of industrial sector in Nepal. Since these industries are controlled by politically motivated entities, their net contribution to industrial growth and employment generation was highly negative. These publicly owned industries polluted and distorted the overall industrial environment of the country.
Let us take the example of shoe production. Before the liberalization of 1990s, there was a single government owned shoe factory and a pair of shoes was a luxury for most of the rural people. The employment and revenue created by this industry was minimal at best. Very few citizens could afford or access the products of this industry. One can easily guess the profitability of the entity. This enterprise was privatized and later on shut due to financial difficulties. Currently, there are 79 privately owned shoe producers in Nepal. More than 60 thousand are directly employed in the industry. Consumers have access to cheaper and better shoes. They have been able to export their products earning foreign currency for the country. Billions of rupees of annual revenue comes from this industry alone. The exact same phenomenon can be observed in other industries such as cement, pharmaceuticals, and airlines in Nepal.
Can mere economic growth give us a developed nation? Without improving our health and education sector, rise in income level alone might not be sufficient for a prosperous nation. Fortunately, the progress Nepal has been able to make in non-income aspects of its citizens such as health and education is even better. Nepal’s educational and health indicators are performing better than its many neighbors in South Asia. Nepal’s current life expectancy at birth is 71 years. To achieve the same level of life expectancy, USA had to have the per capita income of US$ 12000 (in 1979). It’s not just Nepal but many other developing countries have also been able to make similar progress much faster and at much cheaper price.
Similarly, if one is to look at the literacy rates, it was respectively 2%, 20%, 59.6% and 65% in 1951, 1981, 2001 and 2018 (World Bank). Although we would expect much faster progress, this is a real progress having positive and noticeable impact on long run economic growth of Nepal.
Now, let’s talk about the infrastructure. We are not at all satisfied with the existing quality of infrastructures such as roads in Nepal. The accidents being reported in the daily newspapers makes us think absolutely negatively about our roads. But let us look at the real data. Till 1990, total length of roads in Nepal was 6.84 thousand kilometers. Currently, it has exceeded 20 thousand kilometers. If we go back further in the past to 1951, there were no highways at all to begin with. First, when there are no roads, nothing needs to be talked about their quality. Second, qualitative improvements begin only when we have sufficient size of the pie to share. The same rule applies to quality of school education and health services in Nepal. Starting with a couple of hospitals and few hundred schools 60 years back, now we have thousands of hospitals and 35 thousand schools. And we are talking about improving the quality of services we expect from them.
After a tenuous efforts from investors and policy makers, Nepal’s tourism sector was experiencing a rapid growth before the COVID-19 crisis enveloped the world. In 2018, 1.2 million tourists came to Nepal and the government had aimed at ambitious plan of welcoming 2 million in the year 2020. At one time, Nepal had difficult time having even half a million tourists. Many newer five star hotels under construction across the country, two more international airports nearing completion and educational sector trying to cash in the human resource requirement of the sector is already making positive impact on foreign exchange reserve, investment and employment.
Hydro electricity is another important sector of Nepal. This sector has been growing rapidly ending decades of hours long power cuts in homes and industries. Thousands of megawatts of electricity is expected to be generated in coming few years enabling Nepal even to export its surplus electricity to neighbouring countries. This has clearly reduced the cost of production for industries who had been relying on expensive and polluting deiseal to fuel their power needs. Nepal electricity authority has already signalled of reducing the electricity bill for industries. This could be an important turning point for Nepal’s industrial sector.
Comparing Nepal’s development process with that of Europe or Singapore is highly misleading at best as their baseline and context is totally different from that of Nepal. Nepal needs to be compared with its own past and with countries in the similar socio-cultural context such as Bangladesh or India rather than with Singapore or South Korea.
