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.