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October 2014 Cover Story

Published on: 2014-10-13 00:00:00     902 times read    0  Comments
‘‘We do have the potential to graduate from the LDC status’’
 
Dr Ram Sharan Mahat, Minister of Finance, GoN
Dr Ram Sharan Mahat
Minister of Finance, GoN
The theme of this conclave which is ‘Unlocking Nepal’s Growth Prospects’ is very timely. It is often presumed that for fast economic growth, a country needs a good natural resource base. This is a traditional theory, not a modern theory. It is not time-tested. If that were the case, countries rich in natural resources like Russia and Brazil would be the biggest economies of the world. They are very rich in natural resource. But they are not necessarily the richest and most developed countries of the world. On the other hand, Japan, which has very little natural resource, grew very fast. In recent history, the so-called little economic tigers of the Pacific Rim such as Hong Kong, Singapore, Taiwan and South Korea grew very fast. These countries represent some of the most successful economic growth stories of the recent past. 
 
But what amount of natural resource did they possess? Practically nothing. Japan has practically no natural resource endowment. Similar is the case of the other countries that I mentioned. So, the traditional theory that countries rich in natural resource grow fast is outdated. It is no longer valid. It is the brain power, the creativity of the people that is ultimately responsible for fast economic growth.
 
Nepal does have natural resources. We often talk about these natural resources. These resources can make Nepal very rich and can be the source of Nepal’s economic growth in the future. For example, we are rich in water resource. We have huge hydropower potential. We can be the power house of clean energy in South Asia. Similarly, we talk of our tourism potential. We have huge prospects in tourism. We can be the tourism capital of South Asia. We have so many varieties of tourism – cultural tourism, adventure tourism, eco tourism, religious tourism etc. Similarly, we have potential in agriculture because of our agro-climatic diversity. We can grow practically anything.
 
These are of course our growth potentials but not necessarily the key elements needed for our future economic growth. The key element is human resource; the creativity of people, entrepreneurship and innovation. If we can unlock our human potential, if we can unlock entrepreneurship and innovation which will make use of the natural resources that Nepal has, then our growth potential will be unlocked; we will become a rich country.
 
Another thing that we need is the right policies. Unless we have the right policies in place, these potential will remain on paper only. In absence of the right policies, we can only talk about our growth potentials. For example, we have been talking about our hydropower potential for decades; hardly one percent of our hydro potential has been tapped so far. So what we did in the early 90s is we tried to unlock our potential by creating the right environment for freedom. We centralized economic policy. We planned and removed many policy hindrances. We removed the licensing process for industries. As a result, our growth rate in the mid 1990s was equal to that of the South Asian average; we were not lagging behind. But soon the violent Maoist insurgency started and engulfed the country. The insurgency took its toll on the economy and spoiled many things. It spoiled the growth potential and sapped the energy of the people. Many of our brightest and best young men and women left the country in search of jobs – manual jobs, semi-skilled jobs and skilled jobs.
 
Today, we have a sense of political stability as there is a stable government in Kathmandu. So, this is again the time for economic reforms. This is why I have announced in this year’s budget that we will start a second series of economic reforms.
 
Though there is relative political stability today, we still have unsettled political issues. We are not yet out of the woods. The constitution is still in the preparatory phase. There are still some serious differences among political parties over provisions to be made in the new constitution. But let’s not worry about these things. Political issues will take their course but at the same time economic development must also continue. We simply cannot afford to wait until the political problems are sorted out to start the process of economic growth. Politics will take its course; economy must have its own course. One good thing is contemporary politics in Nepal has become development-friendly. The parties which once supported one-party state, centralized economy are now saying that we need foreign investment and capitalist revolution in the country. This is a good sign. It also means that the reforms that we initiated in the past and the reforms that we are going to launch soon are irreversible.
 
Today, I think everybody agrees that we need economic freedom for private investment – both domestic and foreign. We need investment in infrastructure, education, and health. Not only the quantity but also the quality of investment must increase if Nepal is to achieve higher economic growth rate. The efficiency of investment must also increase. For private investment to come, we need to create more enabling environment. This is why we have initiated some new incentives to lure private investment from this year’s budget. In the hydropower sector, we have announced income tax exemption for the next ten years and fifty percent tax rebate for another five years. Similarly, for large-scale investment in the manufacturing and tourism sectors, we have announced income tax exemption for the next five years and fifty percent exemption for another three years. At the same time, we are about to sign [project development] agreement with some major hydropower projects that have been waiting for a long time to be agreed upon.
 
Following Indian Prime Minister Naredra Modi’s Nepal visit, both Nepal and India have signed the initial agreement on the Power Trade Agreement (PTA) between them. Now, if the PDA (project development agreement) with the Upper Karnali hydropower project is signed over the next few days or weeks, then it will be a game changer. It will lead to the signing of PDA with half a dozen other major hydropower projects which have foreign investment from various countries including India, China, South Korea, among others. Then the game of high economic growth will start. It will help instill new confidence in the investment community. That will be good for the many other projects in the pipeline. It will encourage investment in the industries because many investors have been waiting for adequate power supply to be available. 
 
We will have power deficit for the next couple of years. But with the PTA between India and Nepal now signed and a 400 KV transmission line being built between the two countries, it will be easier to purchase power from India. And after the next three years, we will have surplus power which can be exported and this will go on increasing in the years to come. So, I think Nepal now is at the threshold of a major economic take-off. Accordingly, the government has aimed to graduate from the LDC status to a developing country status over the next eight years. We do have the potential.
 
I believe that the government must be strong. One comment that I often hear is the government became weak since I favoured economic liberalization. That is another non-sense. The government must be strong enough to enforce rule of law in the country. Even for the open market economic policy to succeed, the government must be strong enough to create a level-playing field. The government must be strong enough to ensure that the labour, entrepreneurial and environmental interests are protected. In short, it must be strong enough to ensure that the law of the land is observed. 
 
Adapted from the speech delivered by Dr Mahat at the 2nd NewBiz Business Conclave  & Awards.
 
“We should not expect government to do 50 different things”
 
Bibek Debroy, Indian Economist
Bibek Debroy, Indian Economist
I think I am invited here to give external perspective to today’s theme of the discussion. But I believe the perspective I bring from where I live and work, that is India, has also relevance for Nepal because the essential template of development is no different for countries that are at a certain stage of development. 
 
The topic of this conclave is ‘Unlocking Nepal’s Growth Potential.’ Growth may be an important number for an economist like me but for most of the people, including politicians, it’s a meaningless number as you cannot sell growth as a political message. But, once you translate that growth into numbers that people can relate to, you can sell growth. 
 
Growth means less poverty, more employment, more jobs, being able to service the EMIs for what you borrowed to acquire consumer durables. Growth is important because throughout this region, there is an increasingly young population, which is impatient and unwilling to wait hundreds of years that wouldn’t be required to catch up with what other countries across the world have been able to achieve. That’s the reason growth is important.
 
Looking at the templates of economic development, we see that different countries tapped different factors to generate growth. Countries in our level of economic development, as a sweeping level of generalization, depend on tapping inputs such as land and natural resources, capital and labour. But this doesn’t mean that the things like innovation and productivity are not important. However, these things come a little later in the economic development spectrum. So question for us to ask is what can possibly be done at a conceptual level to ensure that inputs like land, labour and capital are exploited more efficiently. 
 
A mention was earlier made about the per capita income. The per capita income of any country is the rough measure of the productivity of the country’s citizens. The next bulleted point to note is that our people are voluntarily poor where an individual doesn’t want to better his or her life and improve his and his offspring’s living standards. When I say this I am talking obviously about able bodied people of working age group. If it is the proposition, that if everyone everywhere wants to better their lives, the next question to ask is: why are they unable to do so? The answer is also so obvious. It is because to be in the position to tap the opportunities or resources, you require certain things such as law and order, physical infrastructures like roads and electricity and social infrastructures like education, skills, health. Likewise, you require access to market, information, technology, access to land and finance. The question then follows that why are these things not available or not being delivered?
 
In nations across the world that have elected government, citizens come together and elect government with the expectations that it will deliver these goods and services. If these are not made available, mechanism and processes used to deliver these things are seriously questioned. 
 
If the government is going to deliver these goods and services, two or three questions arise. First question is government needs revenue. Where is this money going to come from? The moment government decides to give a fiscal incentive to a business enterprise that is tax revenue foregone. Every resource has an opportunity cost. That is tax revenue that the government could have used to build physical infrastructures like rural school, or hospitals. 
 
When we say, public goods and services, does it necessarily mean the government alone is supposed to be in a position to deliver it all? There are several instances where private sector is perfectly willing to come in. Therefore, there is an important difference between government actually trying to deliver these goods and services and government financing these goods and services. When it come to issue like this, it is important for any government to distinguish between regulations and licensing that masquerades as regulations. 
 
In both of our respective countries, the level of economic development is such that we should not expect government to do 50 different things. If we expect government to do all these things, it will do none of those satisfactorily considering the limited governance and administrative capacity. Instead it should do only five or six things that are most important. If we collectively insist that the government should only focus on five or six such things such as law and order, roads, water, electricity, health and education then governance, growth, development, Human Development Indicators (HDI), and other sectors and services will improve. And people will be able to better their lives and we will no longer have to wait for those hundreds of years.
 
So, collectively as a body what we are required to do is to change our mind-set in terms of our expectations from the government. The less we expect from the government, and  the more we ask ourselves of what  we are going to do, the sooner we will be able to unshackle ourselves from the constraints that have historically plagued growth in your and my countries.
 
An Indian economist, Prof Debroy has been a professor at Centre for Policy Research, New Delhi. This article is adapted from the key-note speech he delivered at the 2nd NewBiz Business Conclave & Awards.
 
Nepal's Economic Development Trajectory
 
Dr Swarnim Wagle, Member of National Planning Commission, Nepal
Dr Swarnim Wagle
Member of National Planning Commission, Nepal
Anticipating that many of the speakers would focus on the present day economics, I wanted to step back into history and take the long view. I want to talk about development trajectories that we and other developing countries have taken over the past two centuries and take stock of where we stand today and where we need to go to unlock our growth potentials. 
 
Whenever I talk about development stories, I recall this beautiful first line from Leo Tolstoy's famous novel Anna Karenina, " All Happy families are alike, each unhappy family is unhappy in its own way". This applies to countries as well and each country’s context is unique. But I think the divergent pathways that different countries have taken, give us immensely valuable policy lessons on the kind of policies and institutions that have proven helpful elsewhere.
 
I would like to borrow the concept of ‘critical junctures’ from political science to highlight that most successful countries in hindsight appear to hit a point in the development trajectories when significant changes occur that set them off on a path in history that ends up in producing distinct legacies. 
 
The graph here (see next page) sums up the history of the world over the past 200 years and we can run through these broad trajectories of different countries that we often aspire to emulating . 
 
I believe that the year 2015 will be our critical juncture. We are few centuries behind than other countries but I think that we can really make the year 2015 our critical juncture and really expedite our path into modernity. 
 
This graph draws on the historical macroeconomic data from New Maddison  Project Database.  
 
Let’s start with the year 1775. This   is the year when King Prithivi Narayan Shah who conquered Kathmandu valley in 1769, died. Territorial expansion of modern Nepal continued then after. Likewise, this is also the year when United States of America, the largest economy in the world, started its modern journey, George Washington was appointed as the commander in chief of the continental army in 1775, then US declared independence in 1776. America also had a decade of turbulence and it took 12 years for them to draft a new constitution and finally in the year 1769, George Washington became the president. But on our side, our territorial expansion continued. Just like the US doubled its size in the early 1800s with the "Lousiana Purchase", the descendants of Prithivi Narayan Shah doubled the size of Nepal with west-ward expansion. It was around 1815 that we acquired relative degree of political stability in both the countries. 
 
The year 1775 is also the date when Adam Smith wrote "Wealth of Nations". Everyone thinks that it was published in 1776 but the first few editions of the book were actually printed in 1775.  
 
So, it is a very clean date to start the story about global development trajectories. I refer to "Wealth of Nations" because it was the first text in the economics that talked about how some countries became rich and how some countries stayed poor. It was also the beginning of modern study of economics .In the graph I have chosen 10 countries, beginning with Britain, obviously the first modern industrialized country in the world. The data series before the year 1775 is little bit flat. It is now well acknowledged that the modern economic growth rate became a sustained phenomenon only after 1820s. Before that it took 100 if not 1000s of years for the per capita income or the economic size of the countries to double. So, before this date it is basically stagnant. But we know that the critical juncture for Britain was 1688 with the Glorious Revolution when they threw James II and brought the two monarchs William and Mary. However, there was an implicit contract that you would constrain the powers of the monarch and empower the parliament to decide on the affairs of the state. Therefore, constitutional monarchy began at the end of 17 century. That was also the period when a sort of leg-work for the industrial revolution was taking place. We know that one of the major triggers of industrial revolution was the invention of the steam engine by James Watt in 1768. Earlier to the steam engine, pumps and, rotary machine and high-pressure engines were also invented. With the steam engine, Britain was able to break through the astronomy and navigation in the warfare and this was the first wave of Industrial Revolution. yes, this was not straight and there were lot of factors that played a vital role. But it was after about 1820 that Britain began to see a systematic increase in economic growth rate. Hence, that is also the critical juncture for the world as the modern economic growth as a whole became a sort of sustained preposition. 
 
For US, 1870 or 1860s would be a critical juncture. The end of the civil war and the first wave of globalization in 1870s -1913 with the massive influx of immigrants, the economies of scale and the technological adoption and borrowings from the leading industrial country was the time when Britain and US were roaring to grow. So, the next critical juncture was after the union was saved followed the year 1865.  This is the period when US took a sort of take-off. 
 
And 1868 was the critical juncture for Japan. One of the most noteworthy things is that rarely in the history we have seen the elite of one country sitting together and deciding that we are falling behind and we need to get our acts together. Japan did that and sent in 1871, a massive ambassadorial troop of around 40 people, around the world to borrow the best ideas. Adapting best ideas and institutions brought Japan on the trajectory of higher growth from 1870s. Then of course there is Argentina as a country, which had an equal promise like United States before the turn of the century but later continued to stagnate for different reasons. 
 
Now let me skip to the post-second world war period where we see around 13 economies that were able to grow at 7 per cent per annum for a continuous period of at least 25 years, which is the kind of sustained economic growth rate that countries aspire for. The sustained economic growth at such very high levels is important to transform a country within a generation and this is what happened with countries like Korea, Malaysia and, later in the 1970s, China. The critical juncture for South Korea, for example, was 1961. 
 
I want to emphasize that there comes point in many countries’ history, where there is point of critical juncture where opportunities arise and you can really set your country on a path that will produce a different legacy. For China it was 1978, when agricultural reforms, giving way to township and village enterprises which can be termed as critical juncture. In India its brief reforms in late 1980s offered a critical juncture but the reforms were with some hiccups. However, still we can see that there is a distinct critical juncture in 1991. Sri lanka, one of the first liberalizers in south Asia took a real turn around in economy in 1977. These examples are quite inspirational for our own vision. 
 
The point here is what about Nepal? We have seen lot of political junctures. So the question is: what have we done? We can say that the abolition of the Rana Regime was our first critical juncture and abolition of the Panchayat system, in 1990, was our second such juncture. But we really have not had a real critical juncture yet. I would argue that the 1990s presented the opportunity.  We did begin a slight uptake but we were not able to sustain it due to conflict and other things. I think by 2015 the new constitution will be there and that will also shore up anticipated period of calm and stability in our country. 
 
In broad terms, it seems that inclusive political institution played a protective role in long sustained rise of western economy especially that of the UK and US. 
 
In the medium term it appears that we need a very credible and effective state that invests a lot in people as well as in the infrastructure and a package of policy reforms that provides a credible signal to the private sector and to foreign investors as well. I think this act of signalling is really important in the immediate run. I am happy that this year's budget has come up with package of positive reforms. Hence, our critical juncture is near the horizon and we must seize that moment.
 
Dr Wagle is a member of the National Planning Comission. This article is adapted from the speech he  delivered at the 2nd NewBiz Business Conclave & Awards.
 
“Investment, Infrastructure and Inclusion Should Be Nepal’s Top Priorities”
 
Johannes Zutt
Johannes Zutt
The World Bank believes that there are some areas that the government and the people of Nepal need to focus in order to realize higher levels of growth. The three ‘I’s - investment, infrastructure and inclusion - should be the priority for now. 
 
Nepal is investing below the rate of investment needed to achieve a double digit growth. There is actually money available in Nepal for higher investment, but it isn’t happening. The business community complains about access to finance, regulatory burdens and labour costs. These are the problems existent is South Asia but it is debilitating in Nepal. Also, the public expenditure is crowded in the end of the fiscal year which is not a very good way to run the expenditure. Unlike most countries in the world, in Nepal, the budget doesn’t get spent until a lot of supplementary negotiations are done during the fiscal year itself. As a consequence, infrastructure and other spending are delayed and the outcome of the expenditure is delayed. Public financial management needs to be improved for better expenditure. 
 
Investment is important because without it, infrastructures cannot be built that are needed by the private sector. Nepal is caught in a vicious cycle in this matter. We don’t have high enough levels of investment in infrastructure that is necessary for businesses to succeed and because we don’t have that infrastructure, we are not getting the investment. 
Nepal is blessed in being between two of the fastest growing largest economies of the world. Although being landlocked is typically associated with slower growth, in Nepal’s case, it is landlocked with two huge dynamic economies that can actually accelerate Nepal’s growth. Nepal has enormous markets both to the north and south. Nepal needs to make necessary infrastructure investments to unlock access to those two markets. 
 
Inclusion should be the other major focus of Nepal. Inclusion is making sure that every Nepali, no matter where he or she is born, has equal opportunity to share and contribute to the country’s economy. Everybody has something to contribute and we need to make it possible for them to do so. Inclusion also means giving people access to reasonable quality health care and education, and helping those people who are not able to participate in the economy because of things out of their control like disability or old age to get financial supplement to enable them to participate and meet their needs. 
 
 Finally, bringing government closer to the people, enabling people to work with their public representatives and holding them accountable is critical for every country that wishes to achieve success.
 
Zutt is World Bank's country director for Nepal and Bangladesh. This article is adapted from the speech he delivered at the 2nd NewBiz Business Conclave & Awards.
 
‘‘Business, Bottlenecks and Beyond’’
 
Bkesh Pradhanang, Managing Director, Jade Consult
Bkesh Pradhanang
Managing Director, Jade Consult
Wikipedia says that Nepal is the country with the highest elevation, Mt Everest which is shared with China.  That is the only thing that distinguishes Nepal from the rest of the world. Other country that we relate ourselves with is our neighbouring country Bhutan which has the highest growth rate of 21.44 per cent in its real GDP. 
 
So, let’s ask ourselves why is our country where it is today? Why is our country lagging behind? What are the bottlenecks here? Is it because of the old policies that have not changed over a decade? Examples are Hydropower Policy of 2001 and Foreign Investment and Technology Transfer Act of 1992. Moreover, we still have the same infrastructure and the same bureaucracy.  The work process in the bureaucracy is still the same as it was during the period when there were no computers.
 
Yes, there have been some changes, but these changes are minimal compared to the rest of the world.The political system is still not stable and we have very low investments here. And, on the other side, we have a very hostile civil society that just wants to criticize everything just for the sake of criticizing. Is that really productive? Let us ask ourselves these questions. 
 
The year 2012 was declared the investment year in Nepal. But, what happened in that year? We had an inflow of only 62 million dollars as investment that year. In 2013, we went to 200 million dollars but in 2014 it went down to around 130 million dollars. Given the large population, our resources and our potential, these kinds of figures are pathetic. 
 
We have also had different problems here. One is related with the policies, or policy predictability. Although the policies seem very stable to us, they seem inflexible from the eyes of the investors. And, obviously the other problem lies with the unstable politics here. I think we have lost the count of prime ministers. It is understandable that we are poor but let us analyse the industry average in the SAARC region or Asia. Nepal comes very low, in the range of Bhutan and Afghanistan, which is definitely not a good sign.The data from United Nations says that foreign investment in Nepal was below 100 million dollars in the year 2013.  We all understand that we have to do a lot and the current and the past governments have been putting a lot of effort. We are in a world where 200 countries compete for FDIs. So, we cannot just ask investors to invest in Nepal. So, how do we really compete with all these countries? We have problem also because our government’s revenue collection is very low and our national budget is very low. 
 
Yes, some of our domestic industries are performing well but that is not enough and we definitely need FDIs. Recently, the investment goal is to focus on big projects. Some projects are in a really advanced stage and probably in the next two years, we will be in the position to start construction. This is a positive sign. Above all, these projects have an investment need of 13 billion dollars or more. The government of Nepal has taken a positive sign of inviting expression of interest (EOI) for fast-track roads. So, all these projects should actually start off in the next two years.These projects require a huge amount of money. But how are we going to arrange that? 
 
Positive Side 
I believe that we have too many of sad stories and complaints, but we need to look at the positive side as well. Data show that we have performed well in the communication sector. It is among the top 50 in the world ranking in the field of communication. So, what does it take for us to be in the same position in other sectors as well? It might require us to have another 70,000 kilometres in roads and 8,000 MW in energy.  Data have shown that Nepal has around 16 million working population (that is 50 percent of total population). But instead of using theme here we are sending them abroad and we are sustaining in this country because of the huge amount of money that these Nepalis send in from abroad. But, we cannot solely depend on that. These are our human resources and the government should mobilize them properly within the country. Even for those who go abroad, we should see that they go with higher level skills. For this, the government should invest in higher education. The government should also think about the people that will come back from Qatar after the World Cup 2022 is over. Where will these people go then and what will they do? These people need to be trained and they should be provided with opportunities. 
 
China and India put together have around 150 million people that go out as tourists.. If we tap even one per cent of this, that will be a big achievement. But again, targeting bigger number of arrivals will not help. We also have to concentrate on infrastructure. In the next five years or 10 years, we need to start improving our road condition, airports, etc. The basic and the most important thing is that we need to sell Nepal as a brand that depicts business. This branding has to be done with tourism.
 
The other thing is that the money that comes from overseas has to be utilized, which is not happening in the current situation. Government has to utilize this money by investing it in infrastructure so that when people return from overseas, they have opportunities in their land.The government has a priority project in hand named Budi Gandaki hydropower project. There is a big need of money in this project. Remittance is compared with rainfall, if not stored and utilised, it will drain out. And that is exactly what is happening right now. The remittance money is fuelling imports growth. Another sad thing is that though we are very close to India with open borders, we are not able to reap the benefits out of this situation. This is something we need to consider immediately.
 
In conclusion, the main thing is that we all have ideas but these ideas need to be turned into actions. If we focus on potential areas, we will develop or else we will be in the same position in the next 20 years also.
 
Adapted from the speech delivered by Pradhanang at the 2nd NewBiz Business Conclave & Awards.

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