Nepal, South Asia & Economic Development, the Bihari Way

Corner Pub Friday evening; it had been a usual place for us to meet and unload the weekly updates. Not only did we rant about our heavy coursework, but also we shared our thoughts and insights on the future prospects of our region. It was a group of enthusiasts encompassing cross disciplines at Vanderbilt, yet we had one thing in common-hope for the economic prosperity in South Asia. Abhishek, Saad, Shafiq, Hemant, Yasser and I barely missed such opportunity. Our more than one and half billions that has the potential  for largest demographic dividends in the world, vast reserves of natural resources, rich ancient culture flourishing for millennia, would provide us hope for the bright future of our region. On the flip side, the current political situation would darken our optimism. Political instabilities, massive corruption, inefficiencies, discriminations, and you name it, would make the regional picture so bleak and disappointing. Despite all these, we were yet hopeful. With every sip of Blue Moon, our vision would become clearer; the intense discussion would continue past mid-night.

While I was sharing Abhishek my last blog entry, ‘Economic Development, the Nepali Way,’ he suggested I also address ‘Economic Development, the Bihari Way’. Bihar, once the epicenter of eastern philosophy and science, was mired with corruption, extreme political rent seeking and leakages. It gained notoriety not only in India due to its backwardness and massive inefficiencies of resource allocation, but also in neighboring Nepal. Lalu’s more than 15 years of corrupt regime turned Bihar into a ‘jungle raj.’ I still remember reading in Nepalese news outlets as late as 2005 as well as hearing elderly people of my community telling stories that one of the reasons for Nepal being backward was because it bordered with Bihar. Fast forward to 2013, Bihar has dubbed as the major fastest growing state in India besides Sikkim and Goa, which are comparatively smaller in size than Bihar. It outperformed every state including Modi’s miraculous state of Gujarat, Maharashtra and Andhra Pradesh during the 11^th Plan (2007-2012) wits its nominal gross state domestic product (GSDP) growing at whooping 21.9%(Planning Commission, India). World Development Indicators report also shows Bihar’s improved performance in social indicators such as primary enrollment, women empowerment and reduction in infant and maternal mortality rates. So, what are the mysteries of Bihari way of economic development?

Bihar closely resembles South Asian economy, demographics and the political system, which is a multi-party democracy practiced in all member countries of the region except Bhutan. It is land-locked yet highly resource endowed with youth dominated population and is home to one of the richest cultures in the entire sub-continent. The fall of ‘Lalu Raj’ in 2005 and the rise of Nitish Kumar as the Chief Minister have proven to be a boon to the people of Bihar. Nitish’s way of economic development can be explained from standard textbook of Political Economy & the Roles of Political Institutions in economic growth. As Acemoglu and Robinson explain in “Why Nations Fail,” strong political institutions are imperative to economic development. Strong and independent institutions that can act under their own discretions are key elements in maintaining peace and order in the society. These institutions can ensure not only personal safety, but also one’s investment. It creates an aura of business confidence where hardworking entrepreneurs are willing to take risks for their business ventures that provide both financial and social returns. It helps enforce business contracts and protects intellectual property rights, which have multiplier effects in the economy. What Nitish Kumar has done since coming to the office in 2005 is to maintain law and order in the society that has boosted the confidence of both public and business community. His efforts in making state governance transparent through e-governance have resulted in accountability both from public and the state. He has invested state resources to close the gender gap in school enrollment. Programs such as giving bicycles to girls continuing their education at schools have produced an increased enrollment in schools. Infrastructure investments, particularly in building roads and highways, power and modernization of agriculture through improved irrigation, have resulted high returns on investment. Even tourism has picked up from less than 100K foreign visitors in 2004 to more than 900K in 2012. All these positive economic indicators from Bihar show that with the visionary leader in office, right mix of policies and strong institutions in place, fuel the engine of economic growth.

Unfortunately what is happening in Nepal with the current political leadership both in office and in opposition is just the opposite of what Nitish has been doing in Bihar. Nepali politicians lack both social and economic vision on what our society should look like in the next 5 or 10 years. Political bickering for causes that are not worth fighting for and struggles for power that only fulfill personal interests rather than larger societal needs have inflicted our society. It doesn’t seem to be cured anytime soon. I do understand that the ultimate goal of a political party or a leader is to assume office, but that office should not be used as a way to reap benefits for personal causes. Politics is an ugly game no matter where you look in the world, yet there are at least some moral grounds that we all should be bound to. Missing visions, absence of strong institutions and lack of political willpower have become impediments of economic development in Nepal despite its resource endowment and the potential to become a prosperous nation. This is where the role of youth comes into play to create pressure in building strong institutions through civic engagement. We cannot close our eyes and ignore the failed political leadership in our country. We should not only engage in mere protest or activism, but also participate in healthy political discourse. We, the Nepali Youths, have a unique opportunity to become a strong driving force for the economic and social changes in our country. We can make difference in people’s lives and also do well in our lives should we use our energy and talent prudently. Let not just focus on personal gain. I am hopeful that our lives will be better than our parents. Is that all what we are striving for? I think we can do a lot better than this .LETS MAKE EVERY NEPALI’S LIVE BETTER- JAY NEPAL!

Economic Development the Nepali Way

Prof. Douglas Allen was a professor of philosophy, a peace activist and a renowned scholar on Gandhi. I was not his student, but we both shared the common interests; peace and prosperity of a billion plus in South Asia. Once at a friendly coffee talk, he asked me if Nepal had anything like a “brand recognition” that identifies a country; such as software to India and micro-finance (Prof. Yunus) to Bangladesh. I was tempted to say Mt. Everest and Buddha, but thought they were either nature given or an ancient phenomenon, so simply said “No”.  Our rich cultural history is not a mystery and so are the occasional political gimmicks on the paths to prosperity from natural resources, such as exporting electricity to India and becoming a prosperous nation, when people face more than 12 hours of black outs every day. Throughout my studies at Vanderbilt, questions like his always haunted me as I was trying to understand the trajectory of economic development in Nepal.

Paths to economic growth can be unique to nations, yet there are some basic ingredients that are common to all; such as investment and human- social capitals. Resource endowments may provide comparative advantage in some cases, but is not the basic ingredient for growth. In Nepal though, natural resource endowments provide prospects for both short and long term economic growth. Tourism, energy, agriculture and in some extent mining sector, though it is in incipient stage, can fuel the economic growth engine of Nepal. There is also a possibility of harnessing population dividend where majority (56 %) of people is from 15-59 years old (Nepal Census, 2011). Lack of proper education, training and skills may deter to fully exploit the potential of population dividend. This population group, however, has become the major source of remittances in recent years. World Bank estimates show Nepal as the sixth largest recipient of remittances ($3.5 billion) as the percentage of its GDP (23%) in 2011 alone and the number is only going to increase in future. We can argue for both the pros and cons of labor migration and the narratives of brain drain, yet it does seem to have positive impacts in terms of credit creation, liquidity and foreign currency reserves in Nepal.

From the tourism perspectives, Nepal is destined to be one of the best tourism spots of the world. It has comparative advantages both from the resource as well as cultural endowments. High hills, Himalayas and current water systems favor adventure tourism, which attracts people from all over the world. Cultural endowments such as Pashupatinath and Lumbini favor religious tourism. Nepal being the epicenter of both Hinduism and Buddhism can draw hundreds of thousands of religious tourists both from South Asia and South East Asia. In Nepali context, tourism is a minimal investment industry. World Tourism Organization estimates total direct contribution of tourism to be more than a billion dollar by 2022 and creating 1.3 million jobs. Provided political stability, this number can be significantly increased making tourism as the major source of national income and employment. With Indian and Chinese seeing big increase in their purchasing power, millions more of them will travel for both adventures and religious purposes, which can be the major source of tourism industry in Nepal.

Nepal is also greatly endowed with water, wind and solar resources which can be the major sources of energy. As much as hydropower seems promising, both wind and solar powers are also equally possible. I don’t necessarily want to go after the statistics of 80,000 MW of hydropower potential and political gimmicks on selling power to India. The truth is Nepal can be more than self-dependent in energy sector and its vast reserves of current river systems provide comparative edges against its peers. Firstly, we have to concentrate on small and medium scale projects that can produce enough energy to light every Nepali household. Large scale projects can be costly from investment and environmental externalities perspectives. Surplus energy can always be traded and countries like Estonia and Greenland have made billions of dollars of revenues annually by selling power. Current water systems make energy production cheaper that will reduce costs of producing goods and services making them competitive with other markets. Moreover, complete electrification of Nepali households will have positive long term impacts on education, productivity and competitiveness of the people. Now the question comes for the investment on energy sectors. Nepal is not equipped for mega projects due to capital and technological constraints. It will have to welcome foreign direct investment for big projects while promoting domestic investors for small scale projects.

Agriculture also holds a big potential to fuel the growth of our economy. However, the current subsistence way will have to be replaced with modern techniques. With increased irrigation, fertilizers and modern equipment, agricultural productivity can be increased by several folds. Nepali farmers should also shift towards producing high yield agricultural goods from conventional items such as rice, corn and wheat. Like in energy sector, Nepal can be way more than self-dependent in agricultural production. In addition, as banker Anil Shah of Mega Bank says, we also need to culture pride for being a farmer. There are several instances where farming profession is looked down. One way of cultivating pride in farming is to turn the profession lucrative so that farmers can get both personal pride and good financial returns. Modernizing agriculture sector is one of the immediate measures we can take right away. Indian experience of green revolution shows its feasibility in Nepal.

None of these insights are new to us; especially the political gimmicks for exploiting these resources go back as late as 1950’s. From a development economist perspective, I firmly believe exploiting tourism, agriculture and energy can provide the startup fuel to growth engine of Nepali economy. We are not favored to become a manufacturing led economy at least in a near future due to capital constraints and lack of social and human capitals. We can definitely increase our current GDP of $40 billion (PPP) by several folds in next two decades and be a middle income country. Growth histories have shown that once it catches a momentum, it can stay in motion for a long time like the Newton’s First Law of motion. What are holding us back are the political instability and the lack of youth participation in economic, political and social discourse of our country. Political rent seeking has turned really virulent and is destroying our nascent economic and social infrastructures. To Nepali youths in particular, this is our time to turn economic and social changes into reality.

The Mystery of Economic Development- Nepal & the World

Prof Heuser’s International Organizations and Economic Development class was the most engaging class I ever had at Vanderbilt. The combination of students who were smart yet open-minded and the Professor whose brilliance and enthusiasm were exceptional made it the best on any measure. We did our first group work on Hernando Desoto’s “The Mystery of Capitalism: why it works in the West and not Elsewhere.” His arguments were compelling: provide property rights to poor who already occupy the land and that will lead to economic growth. To Desoto, property entitlements will enable them to use their land as collateral for business investments.  In his eyes, this is what West did to their squatters in 18^th and 19^th centuries which helped flourish capitalism. The rest failed to do so and hence capitalism never bore its fruit there. To me, his approach was more like a Silver Bullet recipe for economic development; though the issue he raised is important to achieve economic growth, it was silent on several other variables that bring growth and prosperity in a country. There I was, actively engaged in the classroom discussion with many questions unanswered: does a universal solution exist against poverty? If providing property rights would solve poverty, why Nepal is still poor in spite of strong property rights?

      As compelling his theses were, I was tempted to find the disconnect between his claims and the real world I had experienced. The empirical evidence was somewhat different than his claims. Countries prosperity or poverty is not an outcome of a single variable. This reminded me one of my childhood conversations with my elder sister. I was at my first grade and she said to me that Nepal was poor because we were a landlocked country. Looking back, I think, my sister was half-right. It is quite true that many of the least developed countries of Asia and Africa including Nepal is landlocked, but, being landlocked is not the whole story why those nations are poor. In fact, the opposite of it is also true. Some countries, despite being landlocked, have performed really well in terms of economic development in the last 50 years. Botswana is the best example; it is a landlocked African nation, was poor until 1960’s and endowed with natural resources as many of its landlocked peers. With the best use of its resources (primarily diamond), instituting good political-social institutions and better management of foreign direct investment (FDI), it managed to achieve an unprecedented level of economic growth. In less than 60 years, it has become a middle-income country with a staggering GDP per capita more than $14,000 when many of its peers are still hovering below $1,000.

Botswana’s story can lead to an argument for natural resources endowment for economic development yet the evidence is not complete. South Korea, which had the similar income level in 1950’s (below $500 per person) as India, managed to become a first world economy in half a century despite its limited natural resources endowment. We could perhaps say that South Korea and India are not comparable because they differ in terms of culture, size of population and the forms of governments they had. Yet, South Korea’s example shows that economic growth is possible despite limited resource endowment. In the meantime, when we look in Africa, it experienced resource curse. The same endowment of resources which could have brought prosperity in Africa became the causes of endless ethnic violence and civil wars. Rampant corruption and political instability deteriorated the economic and social health of Africa leading to stagnation of economic growth in the entire region. Nigeria even broke the history of becoming one of the few countries in the last 50 years whose income level was lower in 2000 than in 1960’s.

Similarly, the case for Democracy as an imperative for economic growth also doesn’t hold much water though I believe that there is no alternative for democracy and freedom. Both South Korea and Singapore had autocracy during the most part of their economic success history. And, we have of course China as the classic example for this argument that has proven capitalism, free markets and international trade are all possible even under the command and control economy. India’s story until late 80’s when it had the dismal Hindu rate of growth also shows that having democracy and democratic institutions in place were simply not enough ingredients for economic growth.

  
The process of Economic Development seems to be somewhat mysterious. There is no single growth prescription that a country can adopt that will lead magically to prosperity. In the first place, developing countries should build their own model of economic development that is endogenous. If they were to adopt policies that seem to be working elsewhere, they should critically assess them and determine what works the best in their domestic soil.

Going with the flows and blind adoption of external policies, can have counterproductive impacts in the economy and poor might get worse off than before. However, there are several things that are universally accepted as fundamentals of economic growth; investment in education, health, infrastructure and strong political and social institutions. We sure can’t oppress people’s voices in the name of achieving unhindered economic growth. The process should be transparent and we have to be attentive to the externalities such as environmental degradation that comes with the process. With all the advancements in technology and the lessons learned from the past, I believe, a balanced economic growth is feasible and should be made inevitable to the developing parts of the world.

Politicians, Politicians Everywhere, Not a Single Leader…

         It’s being more than 9 years ( year 2002) yet feels like yesterday ( time just flies) since I finished my 10^th grade. We had just taken our Send Up exam and me and my friends Sachin, Nirmal and Sumit were on the way to Hungry Eye Momo restaurant in Bharatpur ( a popular destination for youths), Chitawan. On the way back, we decided to walk past Bharatpur Medical College. There were tall concrete buildings both sides of the road and squeezed amid these buildings was a small hut. While passing, I saw a girl (perhaps 10 years old) reciting Samuel Taylor’s, “Water, water everywhere, Nor any drop to drink”. What also stroke me was, she was reading on kerosene lamp while buildings around her hut were lighting on bright electric lights. For some reasons, don’t know why, that memory is still fresh and that small girl’s diligence, her parent’s poverty and her dreams (perhaps) have forced me to picture our real Nepal. Like that girl’s recitation, we are also facing a serious leadership crisis in Nepal. It’s like, “Politicians, politicians everywhere, nor a single leader to lead.” Every single day, what all we hear are political gimmicks, foul-crying and bickering and we are fed up with this.

A good leader after all has a vision, strong willpower and the extraordinary ability to catch the flow of time, which we still have not seen  these merits on any of our seasoned politicians yet. Time and again, majority of the political leaderships have failed to transcend into good leaders, though they have succeeded to drive the changes most notably the Janaandolan-2. They have however, failed to institutionalize the changes that people had fought for. There is no doubt there are many corrupt souls out there, yet even those who are clean have failed to meet people’s expectations. Even Prachanda who spearheaded insurgency (don’t want to comment on the merits of it now) in just within 10 years has turned himself as another seasoned politician, far short of a true leadership.

 Last week, I was reading an article about Ulseyes Grant, the legendary Lincon’s American-civil war general and also the US president, who defeated the Confederation and saved the union. However,  his presidency is rated as one of the worst by Historians due to rampant corruption and Grant’s inability to go with the flow of time, and lack of pragmatism. He was truly a wartime leader, but turned out to be a very bad manager. What we have also seen in current Nepal is also the lack of true managerial skills in political leaders, and that’s partly because majority of them are more like wartime leaders, who have failed to transform into peacetime pragmatics. In addition, these old generations utterly failed to embrace the needs of 21^st century. Same old coterie politics, old mindset and arrogance. And now is the time that we young generations step into the nation building processes. Like one of my friends Arjun commented, it’s only the wine bottle was changed, but not the wine in our national politics. So, hey Facebook and Twitter generations, no matter where we live ( in Nepal or abroad)  but do share similar vision of prosperous Nepal, let’s bring our hands, minds and hearts together : we  sure can replace these retired generations and create the society of 21^st century  which is founded on merit, equality and justice.

                                                          Sushil Khadka

                                                      skhadk@gmail.com

Suez Crisis, Public Debt and National Security

                                      http://en.wikipedia.org/wiki/List_of_countries_by_external_debt

The last time Egypt had seen a big turmoil before the recent Facebook-induced people’s revolt was during the height of Suez Crisis. Thanks to the wise Nasser’s diplomacy that helped to secure Suez Canal permanently to the people of Egypt. One rarely told weapon out in public which was as effective as Nasser’s diplomacy was the British External Debt. The nationalization of Suez Canal led to the invasion of Egypt jointly by UK, France and Israel resulting into Suez Crisis. The motive was for Israel to invade in the ground while UK and France would provide aerial support, and later to intervene in the name of resolving crisis so that they would control the Canal again. Things didn’t work as well as British and French had hatched when the Canadian Foreign Secretary Lester B. Person proposed the first ever UN peace keeping force that would help ensure the access to all to the canal and also keep Israel out of the Sinai. The United States backed up Secretary Person’s proposal and exerted pressure on the British side by selling pounds ( British’s external debt) when the British initially didn’t support Pearson’s proposal. The US move to sell pounds would depreciate Pound Sterling which would be more damaging to British Economy. As a result, United Nations Emergency Force (UNEF) was established to maintain the neutrality of the canal and the Suez Crisis was resolved.

                The parallel that can be drawn is having stockpile of external debt can act against national interests. As can be seen on the graph, most of the developed nations including US, UK, Germany and France are estimated to have external debts more than 90% of their GDP. With respect to US external debt, China holds almost $1 trillion, which is going to be the major competitor against US on both economic and military frontiers. One cannot rule out the possibility China can use its stockpile of US treasuries against US anytime and anywhere like US used against British during Suez Crisis, which helped to resolve crisis rather than bring one. We could only hope China will use it to avoid future wars and conflicts among big nations rather than to fulfill its limited interests. 

Where do you wanna be in 2020?

           I had never been as hopeful as I am today with the future of emerging countries. Perhaps History gets repeated as Mark Twain said or it’s just the sinusoidal cycle of economic prosperity each nation and parts of the world goes through times of history. Whatever can be the reasons, the world is changing, especially the economic landscape and the global geopolitics. I hesitate to comply with the linear projection with the data put forward by the World Bank and IMF that China will be the economic superpower by 2050 ( the adjusted forecast by Goldman Sachs is 2032) and India will also surpass US around the same time. Yet there is no choice but to trust the data as commonly said, “In God only we trust, everything else, we need data.” Well, on the other hand, we could probably debate about the date or the year when those nations will economically take over, what is not debatable is their unstoppable economic growth. With Chinese and Indian being the dominant global powerhouse, we can only speculate how that is going to look like.

           As Martin Jacques puts into his book, “When China Rules the World”, the world will be ruled again by the majority of people, unlike Britain or France or even United States did. The economic growth will sure create opportunities for better lives for billions of people in the region primarily in South and South East Asia. On the other hand, more multinationals will flock to the region to tap into the opportunities from burgeoning economic growth, and, most likely the next generations of multinationals will be evolved from China and India. Furthermore, as these nations empower themselves with economic clouts, they are also very likely to shape the financial and markets rules and policies. Perhaps, Marine Drive in Mumbai or the Corner Street in Shanghai will likely replace Wall Street. Hundreds and thousands of billionaires and millionaires will be minted from these regions. Especially since the Chinese economy is tilting towards being consumer-driven from export-based economy, it will need an unprecedented number of financial, business and engineering talents. This talent haunting will generate a massive wave of employment opportunities for many western educated students especially from the US and Europe.

          Hence, while nations around the world metamorphose from the worst recession since the Second World War with many countries in the western world losing their economic grounds to eastern economies, we perhaps should not be waiting until 2032 or 2050 to start thinking going East; it can happen as early as 2020 or earlier. We are probably better off learning Chinese and India cultures and languages. Most importantly Mandarin for sure as more than 50 % Indians speaks English already. When should not be surprised if we will have to queue at Indian or Chinese embassies for next generation of H-1B visas few years from now.

Sushil Khadka: skhadk@gmail.com

Currency War vs Innovation

                                                          Currency Wars vs. Innovation

     It’s always easier to blame on others than taking responsibility of our actions. Same holds true to the ongoing currency war between the US policymakers against the Chinese manipulation of its Yuan. The rhetoric looks like the Yuan’s appreciation is a panacea to all the Job losses and the ailing economy at home as if it will act as a magic bullet and the policy makers can just fold their hands up doing nothing. Blaming Yuan can be a good politics for next election cycle, however, will hurt the next generation of Americans if not assessed thoughtfully. What is really unfortunate is nobody seems to be talking about the most important aspect of growing economy: innovation.

      The issue of currency manipulation should have been raised years ago. Now it’s too late that focusing exclusively to appreciate Yuan by US policymakers’ looks like a very loosing game. Yuan’s appreciation, believe it or not, in fact will work for the Chinese favor rather than help create US jobs and make US manufacturing competitive. Studies have shown that cost of production in China is skyrocketing, meaning; Chinese products will no longer remain cheaper anymore. This, however, won’t guarantee that US products will fill the gap in place of expensive Chinese products, simply because, US manufacturing is also losing war against innovation. Let’s say, Yuan is appreciated by 50-100%, wages and cost overrun of manufacturing products in China becomes high, yet, US manufacturing will still be very unlikely to gain its lost market share. Because China is not cheaper anymore won’t barricade companies to move into India, Brazil, South Africa or Vietnam to manufacture dirt cheap products again.

          It’s the Capitalism stupid, not the currency. This is how Capitalism works and Capitalism survives if only there are resources to exploit, both human and natural by paying a minimal price. Country like India, which is gearing behind China on its race to economic growth, with its more than 500 million youthful population, improving science and engineering education, poses enormous potential for multinationals to produce goods and services. It’s not only India or Brazil, but the whole Africa is yet untapped for its natural and human capital, which will potentially replace China as a hub for cheap labor. On the other hand, Chinese government has realized already that exports based economy won’t be sustainable. Hence, the policies have been put forward to boost the domestic consumption by its people, which means, they will have no choice but to appreciate Yuan to increase the purchasing power of its people. Just look at the past few months; of Yuan has appreciated about 20% and government will further appreciate because it will act on its favor. It’s State owned Bank’s with branched in New York and two other cities recently announced customers of the option to open account on Yuan’s denomination. This shows that China is on the race to make Yuan an international currency. So, when the big jump in Yuan’s appreciation happens, US shouldn’t take it as their victory, because China was going to do that anyway, not because it gave in on US’s stance, but was going to be good for its economy.

         Now the question arises; what is the winning way? I think it’s the innovation in US manufacturing to make value added and unique products and services. US manufacturing is ailing because it is not innovating anymore, so they are not competitive anymore. An example is Paper Industry; paper mills have moved overseas, while more and more are being closed here at home. The reason is not only because cheaper labor and forest resources in Brazil, Malaysia or Indonesia. Mills overseas are streamlining their manufacturing, bringing in new technology, innovating new products, while many mills at home are still running with paper machines that are decades old, no lean manufacturing in place and no innovation for new products and services. The situation has become so perilous that the Innovation Guru Doug Hall has summed his message to US manufacturing; “You Innovate or Die”. My own experience as an innovation consultant at Eureka Ranch translates small business in US is in peril because they are not innovating. And it’s the small business that creates the most jobs, not the other way around. Big corporations will keep on stockpiling profits by running operations overseas, while small business will be hard hit due to massive competition from foreign made goods and services. The situation is going to be worse because there is no clear direction and commitment from policymakers on innovation and help small business. It’s still not too late for policymakers to focus on innovation, invest more on R&D, clean energy and produce more engineers. Not taking bold action for innovation will not only make US lag far behind, but also diminish the prosperity it has garnered, eventually making American civilization, a story of the past, as we have witnessed on the Rise and Fall of Civilizations of the past like Romans and Far East.

                                                       Sushil Khadka