Nepal's politicians may have acquired a distinctive characteristic of not talking about poverty. Instead, by ignoring the country's 'least developed' status, below even Africa's poorest, they have the habit of talking about prosperity—of making Nepal rich, placing it in the ranks of Singapore and Switzerland.The latest victim of this disease happens to be Finance Minister Ram Saran Mahat, who speaking at the 16th Annual General Meeting of the Society of Economic Journalists of Nepal, complained that the country's economic agendas are overshadowed by constitution-writing, a diversion that has put the vital economic agenda 'of making Nepal economically prosperous' on backburner.
But given the abysmal living conditions of most people in the country, he should, instead, have talked of battling poverty as his primary mission as Finance Minister. It doesn't require more than commonsense, much less a PhD, to know that two aren't the same.
Poverty is common while very few countries in the world can claim to be prosperous: those with at least an annual US $30,000 per capita income, according to the World Bank. In this measure, New Zealand barely makes the ranks of prosperous countries. If Mahat is hinting that his mission of economic leadership is to make Nepal prosperous, that is nothing less than insanity, for Nepal's per capita income of about US $650 is one of the lowest in the world and markedly below even the average Asian standards.
Those who are familiar with the government's economic soothsaying should know that the current struggle for economic policy-making is to help the country exit the least-less developed status, which is reserved for wretchedly poor African countries, with the exception of Afghanistan. But looking at the list of 18 African countries on the World Bank list of truly poor countries, all of them face abnormal climatic conditions and decades of civil conflicts, while Nepal is endowed with nature's bounty, much less civil strife, and enjoys a large measure of political stability.
The new budget
Now that Mahat is so worried about gifting prosperity to the nation, he must pursue this goal through the budget he has presented and those he will present in later years. The government sets annual goals and policy priorities for improved economic performance and good living conditions for people for the long term.
How does the budget that Mahat presented two months ago help in this endeavor? What will drive economic growth to help Nepal join the ranks of prosperous countries? In his 63-page-long budget speech, Mahat talks about hundreds of items relevant for day-to-day workings of the economy. However, for assessment of the budget's contribution to prosperity, we need to look just at how much it contributes to growth of output and incomes over many years and decades.
Economists attribute growth to only a few factors: labor, capital, technology and, in a limited way, natural resources. However, experience shows that for extraordinarily high rates of economic growth over long periods, the size of capital investment—addition to nation's infrastructures and stocks of buildings and equipment –determines how rapidly an economy grows.
Mahat's budget provides over Rs 200 billion for capital expenditures which, we can assume, represents new capital investment—for roads, bridges, airports, power plants, irrigation facilities, flood control, education, and health, water supply and sanitation facilities, among other things. This helps improve the lives of people and creates an enabling condition for private sector to invest in production enhancement.
The other component of national investment is undertaken by the private sector, in industries, businesses, and in agricultural infrastructure. The data for private investment are scant and unreliable but looking at key indicators such as bank financing, issuance of licenses and permits, we can estimate this component of national investment to be 10 percent of GDP, although the government shows a higher figure—as much as 15 percent of GDP.
Even if we take government investment data at face value—an average of 25 percent of GDP over the previous decade—how does it relate to the economy's growth? Mahat cites 4.1 percent average GDP growth over the past decade but nongovernment sources put this closer to 3 percent. Now, if we match investment figures to the economy's growth—known to economists as incremental capital output ratio or ICOR—this yields an average 5-size ICOR, high but not exceptional compared to other countries.
Given this, we can conclude that even if investment is sustained at super-sized level of 25 percent of GDP, economy's growth is unlikely to exceed 5 percent over the long haul, which would be slightly better than past performance, but lower than 6 or 8 percent that Mahat expects.
Other point that refutes Mahat's talk of prosperity is the economy's international ranking. Mahat pledged government help in upgrading economy from the current 'least developed' country status to 'less developed' status by 2022, and to middle income status by 2030. The national investment figures cited above form key set of information for assessing Mahat's vision of prosperity.
We can get some help from The Lucas Rule in economics that says the number 70 divided by the country's growth rate would give the number of years it would take for the economy's size to double. The Chinese economy, for example, has been doubling every 8 or 9 years which is the result of 8-9 percent annual growth sustained over 35-year period. And achieving this level of growth has been possible because of Chinese high investment rate—of close to 40 percent of GDP.
Nepal, by investing 20-25 percent of GDP over many years, can hope to achieve 5-6 percent annual growth even under most optimistic conditions. (Growth in the most recent year was a meager 3 percent.) Growing at this super-high rate, Nepali economy's size will double over the next 15 years which would barely qualify the country to graduate from the group of least developed countries, much less become a middle-income country as Mahat foresees.
For a middle-income country status—which China has barely reached with per capita income of US $10,000—growth must accelerate to 20 percent annually, a rate not seen anywhere in the world. Then to talk about prosperity—which would require at least the New Zealand level of income ($30,000 per capita)—this is irresponsible, even outlandish!
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