After decades of political experimentation, Nepal is finally at the cusp of a potential growth take-off. If it can swiftly settle simmering grievances over the new republican constitution issued in 2015, it could use a period of relative stability to project a clear roadmap to prosperity. What shall be its long-term sources of economic growth? How can it better exploit its advantages in clean energy, agriculture and tourism to emerge as a vibrant “zero-carbon” economy by mid-century? How can it ride the boom of its giant neighbors, China and India? Will it leverage, and eventually wean off high remittances? How can it augment its prowess in modern tradable services?
Nepal’s underdevelopment to date mimics the paradox of an “irresistible force meeting an immovable object” where the compelling potentials of a uniquely attractive country lay under-utilized because of politico-institutional failure. It can no longer wait. The young republic has no choice but to ramp up its economic ambition if it is to match the tall political achievements of recent years and meet the rising aspirations of its 28 million people who are increasingly educated, politically conscious and globally connected.
Historically, the pace of economic change in Nepal has been sluggish. This past decade, we fell behind regional peers. Over the past 50 years, the decadal average growth rate hovered between 2 and 5%, grossly insufficient to deliver the kind of economic change we saw across East Asia. Going back 200 years, our long-run growth translated into little perceptible increment in average income. This is jarring when contrasted with countries that experienced a critical juncture followed by a growth take off. We fought for politicalcritical junctures, but never saw an economic critical juncture. The promise of the 1990s was nipped in the bud by armed conflict.
With an average growth rate of 2% it takes about 35 years for national income to double; at 10%, output can increase 35-fold in 35 years. This is the beauty of compounding which makes human miracles possible. In 1978, China and Nepal had the same GDP per capita of around USD 200. Today, Nepal’s per capita GDP has barely doubled while China’s has grown 17-fold (in 2005 constant dollars). This is because China sustained very high rates of growth over the past three decades. Since the Second World War, only a small group of 13 “miracle” economies, including Japan, Malaysia, Korea and Taiwan, have witnessed sustained growth rates of 7% for a full 25 years. Following such a path is the kind of ambition we need if we also want Nepal to transform within a generation. We can no longer be content with simply projecting forward the trends of the immediate past.
We know what our strengths are and where our vulnerabilities lie. Our topography makes our access to world markets costly. Because of climate change, we confront an altered monsoon cycle, melting Himalayan glaciers, and a threatened biodiversity. But tourism and landscape marketing remain one of our anchors of prosperity, as long as we can protect them from air pollution and other sources of degradation. Despite being one of the most beautiful countries in the world, tourism receipts as a share of the economy in Nepal are lower than that in Haiti, and six times less than in Cambodia. This sector is vastly under-exploited as are our fertile Terai lands and agro-climates in the hills which can support a much more productive agriculture. To illustrate how we can make headway in tourism and agriculture, let me discuss the progress that is underway in the third sector of national promise: energy.
Nepal has the potential to meet all its energy needs through clean hydropower. Yet, we have so far exploited less than 800 MW (below 2% of what is economically viable). Since much of the electricity is from ROR (run-of-the-river), generation drops to around 400 MW in the winter when the demand is at least 1200 MW, implying severe power cuts that have hurt consumer welfare, stunted private sector competitiveness, and aggravated the trade deficit. However, all the factors that obstructed exploitation of water resources in the past have metamorphosed.
First, since 2002, only 92 MW of energy was generated and almost no transmission line built despite a looming energy crisis. This was largely because of civil unrest and political instability which is now expected to subside.
Second, although the private sector has been allowed to generate electricity since 1992, they still account for less than one-third of the total installed capacity. They are getting stronger with experience. Over the next three years, 42 independent power producers will add 628 MW of electricity (on top of the 560 MW expected from the public sector).
Third, there is now a realization that the structural weaknesses of Nepal Electricity Authority (NEA) have to be fixed. An NEA that is under-resourced will remain a chronic under-investor in generation, transmission and distribution of electricity. These services will be unbundled and delivered competitively.
Fourth, the distrust and the lack of cooperation from the civil society in building large dams and hydro-electric plants have weakened. This turnaround cost two decades. In 1995, the World Bank pulled out of Arun III, a billion dollar project to generate 402 MW. NGOs claimed that in lieu of Arun III, Nepal could generate more electricity at lower cost in less time. This never materialized.
Fifth, the disadvantage of a small domestic market is being overcome with a landmark agreement with India on electric power trade, cross-border transmission interconnection and grid connectivity. Without Indian assurances to purchase surplus energy, Nepal had been unable to tempt large foreign investors.
These three sectors – energy, agriculture and tourism – carried along by ambitious but realistic policy decisions, will help move Nepal towards a “zero-carbon economy.” We must expedite progress on all these fronts, but we also need additional sources of growth that are game-changing in nature.
The first game-changer is our spatial location. Historically, the UK took 150 years to double its per capita income (from USD 1200 to USD 2400 between 1700 and 1850), the US took 50 years (between 1820 and 1870); but both India and China have doubled their output per capita in 20 years. As has been noted by the Consultants, McKinsey & Co., at the time of industrial take-off in China and India, they had a population each of 1 billion people, unlike UK and the US which had less than 10 million people. What is happening right in our neighborhood, therefore, is a force much more powerful than the Industrial Revolution, and we have to strategize on taking advantage of regional growth poles and agglomeration, including latching on to value-chains and international production networks.
Just like the European Union began with the Paris Treaty of 1951 as a Steel and Coal Community, we in South Asia could anchor our regional integration around trade in energy. Half a billion consumers at Nepal’s doorstep (in neighboring states of India and China, as well as Bangladesh) will be an asset. However, this fortune will take time to unravel. Nepal should continue to exploit the rich, mature markets of the West in the meantime.
The second game-changing avenue is to ramp up our prowess in modern services. A landlocked country, we need to be competent and competitive in sectors that help us link better with the world economy and negate our disadvantage in shipping-based trade. These sectors include telecom, aviation, energy and financial intermediation. Our long-term ambition should be to have not only the cheapest per unit cost in modern services, but also the most reliable so that new knowledge-based industries take root. We have already shown some promise in telecom, hospitality and banking; this year marks a turning point in the exploitation of our clean energy sources; and in aviation, a country as under-developed and landlocked like us, Ethiopia, has shown the way with an airline that serves 64 international destinations with 48 modern aircraft. Because of Ethiopian Airlines, an entire cut-flower industry grew from one firm in 2000 to about 100 firms a decade later contributing exports worth over USD 200 million and supporting the livelihoods of 250,000 people.
Competitive services are also our best hope for reviving our manufacturing sector, which has plunged to 6% of GDP from a peak of 10% in 1996. As the recent work of Dani Rodrik shows, manufacturing as a sector is quite special: it exhibits unconditional convergence in labor productivity, absorbs a large workforce, and caters to demand that is not constrained by a small domestic market. However, we also need to recognize that the patterns of trade and industrialization have themselves evolved in the 21stcentury. The new emphasis, for example, is on fragmented tasks rather than complete industries, on behind-the-border non-policy barriers, and in improving the competitiveness of individual firms that can become regional champions. To ease these shifts, we need to invest more in ensuring access to quality health care, in clean water and clean air, and of course, decent education.
What, then, is the vision for our life time? We can become a vibrant middle-income country by 2030, peopled by a majority of enterprise-friendly middle-class, with absolute poverty confined to single digits. The crux is that we need to mobilize an unprecedented volume of domestic and foreign investment by sending credible signs of sustained economic and governance reforms. As a foretaste, the budget of 2014 emphasized the pursuit of a fresh series of reforms through a large corpus of legislation; relaxing of the most binding infrastructural constraints; and the consolidation of social protection while firming up the foundation for inclusive growth by re-energizing agriculture. Of course, a government’s budget of a single year is a pittance that cannot lift an economy in one go. But it sends signals and issues hope. A consensual agenda that propels us now to a higher, “Asian” trajectory of rapid growth is therefore urgent.
This is a revised and expanded version of the author’s article published in The Kathmandu Post on July 16, 2014