Before we introduce policy prescriptions, the review of current literature is necessary to find out linkages between different variables that affect growth. Some studies have shown that growth is sufficient for poverty reduction, as incomes of the poor move one-for-one with overall average incomes. However, Ernesto M. Pernia of the Asia Development Bank has shown through sub-national econometric analyses that there is much more to poverty reduction than just economic growth. In India, for instance, study has shown that growth has lesser role in poverty changes. The lesson is; growth alone is not an answer to nation-building.
The Chinese leaders, during recent ten-day long meeting of the National People’s Congress in Beijing, agreed that increasing happiness was more important than increasing the GDP. However, happiness is contingent on raising income by generating employment and growth and contraction in GDP means lowering average income. This will have a multiple effect in the socio-economic structure. I do not think Chinese leaders are unaware of this reality. But there could be a problem achieving the so-called “happy China” policy, since China decided to stay at 7 percent annual average growth in GDP beginning 2011 through 2015. This growth is less than 7.5 percent which was achieved during 2006-10. March 19th -25th issue of The Economist, 2011 writes, Prime Minister Wen Jiabao also thinks, lowering growth without lowering unemployment rate is going to be an “extremely big test.” The bigger test would be to sustain a paradigm shift in China’s new policy of “balanced growth” as against the “unbalanced, uncoordinated, and unsustainable” pattern of economic growth practiced for last several years.
Nepal’s ambitious development goals and preparation of expanded deficit budget indicate that at any cost, the country would go for the balanced growth policy, which China is thinking to give up for certain period. As Charles P. Kindleberger states, balanced growth implies that investment takes place simultaneously in all sectors. You cannot do anything unless you can do everything. From these perspectives, there is a need to reexamine the theory of balanced versus unbalanced growth in helping Nepal achieve the post-republican mission of “inclusive growth.”
This is not the situation in Nepal. Inadequate and inefficient institutional arrangement, weaker governance, unstable bureaucracy, security threat for individual life and property, declining investment, increasing capital flight and emerging issues in corruption and constitutional matters have limited the scope for institutionalizing the process of inclusive growth.
The global phenomena of crisis and revival of the economy are not very complex. The crisis emerge, output falls but recovers steadily over time. This is not the situation in Nepal. Inadequate and inefficient institutional arrangement, weaker governance, unstable bureaucracy, security threat for individual life and property, declining investment, increasing capital flight and emerging issues in corruption and constitutional matters have limited the scope for institutionalizing the process of inclusive growth. The constraints in fiscal management, inadequate information in understanding investors’ and consumers’ confidence indexes, failure in increasing investment in social sectors, dilemma and delays in creating enabling environment for businesses especially in reforming the labor market problems and finalizing the pending laws from the Constituent Assembly, have limited the growth potential of Nepali economy by severely damaging society’s social bonds and institutions.
The absence of micro-foundations has limited the scope for empirical studies.
Therefore, finding out the exact constraints, the extent of distribution of gains and losses and estimated time for economic revival have always been unanswered which is largely based on guess estimates. This is where policy adjustment is necessary to rescue Nepal’s ailing economy from one and half decade long political uncertainties.
There is no question that growth needs to be reasonably well-balanced. The balanced growth theory demands proper balance between different sector and all-round development of the economy. A Nobel Laureate Paul A. Samuelson observes, balanced growth implies growth in every kind of capital stock at constant rates – both physical capital and human capital. Such growth can occur when the growth rates of consumption, investment and income are equal to each other. In Nepal, this is not the situation. In theory, one can make commitment to pursue balanced-growth policy for political mileage, but in practice as Nepali economy is not prepared for maintaining balance in supply, balance in demand and also the sectorial balance, the case for balanced growth may be broadly possible but incomplete.
Nepal suffers from the shortages of raw materials, technology, skills, uninterrupted power supply, industrial security etc. This means simultaneous investments in number of industries are not only difficult but raises the overhead costs much beyond entrepreneurs’ capability. Other possibility is that this situation may place a ceiling to the development projects because of inefficient administrative capacity.
Nepal’s budget has most of the time been expansionary. Popular slogan to create a welfare state by making everybody rich and prosperous is possible only in the preamble of the constitution. It is not possible by increasing the size of the budget. The impatience not to give continuity to the current budget with minor modifications to accommodate the interest of ruling political parties by reallocating the unspent capital expenditure is going to be a great mistake. The political game we are playing with the existing economic vulnerability may satisfy short-term interest of ruling party, but it sadly prepares us to be leveled as a “failed state.” The concept of balanced growth teaches us the reality that supply fails to cope with increased demand due to increased investment outlays in different sectors resulting into inflation. It is a dualistic pattern of growth that puts an industry upon the old one by violating the concept of development.
Economists such as A.O. Hirschman, Hans Singer, Paul Streeten and W.W. Rostow introduced the concept of unbalanced growth theory as an alternative concept of the balanced growth theory. Even if someone creates the imbalances in the economy to correct the existing disequilibrium by investing in selected sectors and offers the possibility of using the derived economies for remaining sectors, why then, is it wrong for Nepal to adopt this policy? Nepal has identified priority development sectors with great effort using both the domestic and external experts.
These priority sectors such as hydropower, infrastructure, agriculture, tourism can be termed as the ‘leading sector’ in Nepal. Unbalanced growth theory advocates creating imbalances and tensions to assign top priority to the leading sectors because the development of leading sectors is a pre-requisite to achieve sustained growth. Last year, resources for priority agriculture sector were aborted with reasons not known. If as committed in Nepal’s development plan that hundred percent guarantee for resources is there in P1 (priority one) projects, Nepal will be fortunate to go for unbalanced growth concept of development.
bishwambher@yahoo.com