Lately, people have often remarked, jokingly, that the unannounced blockade of Nepal failed to achieve its objective primarily because the bureaucrats in the ‘South Block’ forgot to prevent the flow of migrants departing for the Middle East. This comment basically highlights the fact that for Nepal remittance is becoming the new lifeline, especially in turbulent times. However, its impact on sustainable growth of the country remains uncertain.

 

 

Economic and social development of the country with a liberal political order has been the official goal of the Nepali state and society. The government’s vision is to transform the economic structure of the country from subsistence agricultural to an industrialised and export-competitive economy capable of generating employment opportunities for the young labour force while taking advantage of the ‘demographic dividend’. Naturally, for this purpose a high savings rate and investment coupled with foreign aid was considered crucial, and Foreign Direct Investment was hoped to bridge the savings-investments gap in the initial phase of transformation. In this process, a balance in investments—between human and physical infrastructure—was required to create the necessary synergy to absorb new technologies for a rapid increase in labour productivity. The conceptual foundation for this approach was the famous Harrod-Domar model, an early post-Keynesian model of economic growth, which Evsey Domar himself had declared inappropriate for wholesale transplantation in developing countries.

 

Investments, savings and an economic growth pattern that is inclusive cannot be seen as being independent of the norms and values that are embedded in the institutional structures of the nation.   

 

But habits die hard and we in Nepal continue to follow the Harrod-Domar model as usual. The numbers crunched out by the model give a sense of certainty and professionalism that allows the economist and planners to impress the politicians and the general populace.

 

 

At present, Nepal’s economy is dependent on remittance. Over the past decade, the government has virtually given up attempts to transform its subsistence agriculture-based economy. The implicit, as opposed to formal explicit, strategy of development consists of three distinct steps. First, an increasing number of young people entering the labour force, in the absence of productive employment in the agricultural sector, are encouraged to go abroad, primarily to the Gulf nations as unskilled labourers. Second, the agricultural and infrastructural development in the country has remained far below the intended level. Commercial farming, although present in some pockets of the country, has not been able to take off. The state has not been able to build the necessary physical and financial infrastructures needed for specialisation and application of new technologies. Thus, a large pool of young rural population has been forced to migrate from rural to urban areas in search of jobs. The special characteristic of this migration is that it is not from rural to urban areas inside Nepal but from rural Nepal to urban cities in the Middle East and beyond. As a result, cheap labour is absent in Nepali economy. Third, remittances are used by the families in Nepal for health and education, purchase of real estate and other products, mostly imported, for daily consumption.

 

It has been argued that remittance has played a significant role in reducing poverty in the country.  It is a fact that poverty level has been decreasing over the years and there has been a rise in the supply of services of private health facilities, educational institutions and retail establishments to cater to people’s rising purchasing power. Yet the growth rate of the economy has remained erratic and exports, manufacturing and infrastructure remain ignored. The whole idea of developing an efficient competitive export sector to finance imports has been a non-starter since its absence is not felt in the balance of payments. Similarly, rising unemployment is neither an issue of discussion in political debates nor in economic policy-making, as the labour force entering the market is conveniently encouraged to seek employment abroad. Instead, the increasing number of young people leaving the country to work abroad is beneficial for the power establishment in Kathmandu for both economic and political reasons: It assures revenue for corruption and excess of foreign exchange to finance imports.

 

 

But remittance cannot be a base for sustainable economic growth. Although remittance does help to reduce poverty and maintain macro balances, it cannot increase the competitive capacity of the nation. At best, remittance can provide a ‘breathing space’ while employment opportunities are generated within the country which is conducive to increase total factor productivity. Moreover, when remittance indirectly becomes the reason for postponing important policy changes in the economy towards more competition, meritocracy and performance-based metrics in public spending, it can lead to social instability and disorder. Unless this possibility is recognised, the outward signs of modernity and prosperity in a remittance dependent economy can be deceptive; it may hide the hollowing of the manufacturing sector, loss of the competitive strength of the economy and the rapid growth of corruption and cronyism.

 

Remittance, however, does relieve the pressure on the balance of payment while a growth strategy that emphasises physical infrastructure and exports is executed. Inflow of remittance in this context should make it easy for the government to move ahead with its investments plans without being unduly constrained by the lack of foreign exchange. Alternatively, the shortage of foreign exchange would be less of a ‘binding constraint’.  Reliance on remittance will automatically decrease once investment picks up in the labour intensive manufacturing sector both for internal consumption and exports. Over time the absolute value of remittance could increase but as a percentage of GDP it could decrease as in countries like China and India.

 

For Nepal the objective should be to decrease the share of remittance in the national economy to less that 10 percent in the next five years whereas creating jobs in labour intensive manufacturing, tourism and infrastructure sectors. The objective should be to absorb the new entrants to the labour force as much as possible within the country itself. The youth population of the nation should have the opportunity to contribute to the national economy; the government in partnership with the private sector should create the institutional capability for absorbing new investments, technology and ultimately an increase in total factor productivity vital for sustained economic growth. Reliance on remittance alone, as is the case today, is a temporary palliative that will turn risky if it is seen as the way to development.

 

 

Published on: 29 February 2016 | The Kathmandu Post