Government data show that per capita GDP has increased about US$100 each decade since the early 1970s, to reach nearly US$500 towards the end of this decade. Compounding this rate for over 40 years—from 1970 to 2009—annual growth of income per person comes to about 4 percent in US dollar terms.
The reported per capita income of US$473 should not be a cause for celebration in view of the serious erosion of our purchasing power over a long period of time and the implied deterioration in living standards.
However, we need to take into account the price effect—inflation component of the total increase in nominal dollar terms. Long-term price data available from the US Commerce Department show the US consumer price index increasing by six times during this 40-year period which comes to 4.6 percent increase per annum or a slightly higher rate of increase than of nominal per capita GDP. This indicates that capita income in real terms—people’s capacity to purchase goods and services—is lower now than it was 40 years ago.
We can also measure the growth of per capita income in rupee terms, making adjustment using Nepali prices. At the 1970 exchange rate of 10 rupees per US dollar, per capita income of about US$100 was equivalent to 1000 rupees. At about US$500 per capita income currently, and using an average exchange rate of Rs. 75 to a dollar, this is equivalent to Rs. 3,750, which is about 40 times higher than the rupee per capita income in 1970. No reliable long-term price data are available for Nepal but those who remember the good old days (five paisa for Gorkhapatra and 10 paisa for a cup of tea) will tell you that average cost of living now is at least 50 times higher than in the 1960s, which also confirms that the average people in this country are less better off than they were two generations ago!
In summary, the reported per capita income of US$473 should not be a cause for celebration in view of the serious erosion of our purchasing power over a long period of time and the implied deterioration in living standards—a fact that is not captured by the up-and-down reporting of economic progress using data for short periods. We need to base our judgment looking at achievements over a much longer period.
LOOKING AROUND
Our overall economic situation appears much bleaker if we look at the performance of other countries, regionally as well as worldwide. The data reported below are drawn from the latest issue of World Bank’s World Development Report (2009), probably the most reliable source of economic data for cross-country comparison. In addition to per capita incomes, the table below shows GDP growth rates on a per capita basis, which adjusts total growth of the economy for population growth. This is a better reporting of economic performance if the intent is to show trends in living standards and quality of life enjoyed by an average person in the country.
It is obvious from the above set of data that Nepal is a definite outlier in terms of relative economic positions as well as the outlook for medium term. Nepal has fallen behind even Bangladesh – much more so compared with India – which is a dismal performance, compared to a situation of parity level income a generation ago. Even more surprising is the very high income level recorded for Bhutan, which is now five times higher than Nepal’s—again, from a position of parity about 40 years ago. We can forget about comparison with China and Thailand, other set of regional countries, which were not that rich compared to Nepal a half century ago but are now more than 10 times richer. And, of course, Japan and America are the countries in another planet compared to Nepal, with average incomes 100 times larger.
We need not exaggerate these differences, however. There is something called the countries’ relative income levels adjusted for purchasing power of each country’s currency in the domestic market. Because average prices—in large part, of service items like hair-cuts and medical expenses—happen to be much lower in poor countries than in rich ones, cross-country standard of living differences adjusted for relative price levels are not as extreme as suggested when we use the market exchange rate (shown in the above table). Nonetheless, differences still are very large. For example, Nepal’s per capita GDP adjusted for purchasing power exchange rate is mere 2.3 percent of US per capita GDP, compared with less than 1 percent level using market exchange rate.
Another set of important data shown in the above table are the countries’ relative growth rates—how well the economy is doing relative to each other. This again presents a dismal picture for Nepal—a world outlier and relegated to pariah status with about zero growth rate. On average, low- and middle-income countries are making up with 4-5 percent growth in per capita income, which implies a doubling of average income every 15 years. However, there are some star performers—India at 7.7 percent; China at 11.2 percent, and a spectacular performance by Bhutan at an unheard of 17.4 percent growth rate. Sustained at this rate, average income of Bhutanese citizens will double in four years and quadruple in eight years, making it the richest country in the region within a generation.
LOOKING AHEAD
There is no dearth of Nepali leaders making outrageous claims about the country’s economic fortunes. For those having memories of good old days – the early 1960s – many would remember the late King Mahendra’s pronouncement of making Nepal a Switzerland of Asia. Some 30 years later, NC leader K.P. Bhattarai chose to look closer to home for a model for Nepal to emulate to achieve economic prosperity. He found this in Singapore and he, indeed, is on record saying that he will make Nepal another Singapore of Asia, more likely in a generation!
More recently, party manifesto issued by UCPN (Maoist) in early 2008 proclaimed turning Nepal into a middle-income country in about 20 years and a high-income level country in 40 years. This would imply achieving economic growth in the range of 20 percent per year, from a historic 3 percent rate. Looking at it more reasonably, such claims are nothing less than a reflection of plain insanity. For one thing, this rate of growth will need investment levels equivalent to 100 percent of GDP, which will leave nothing for today’s consumption. However, going hungry for achieving higher growth does not seem to be a sensible option!
There is no intention here to ridicule our great political leaders who have good intentions, great dreams and a life-time commitment for public service. However, this does not give them freedom of making false and misleading statements, especially in matters affecting people’s daily lives and their children’s future. It is not surprising then that credibility of our leaders and of political parties generally has fallen to such low levels, with government and its institutions now perceived as placing roadblocks to the proper functioning of the economy.
If we are at all serious about achieving high economic growth – and making the country prosperous – we do not need to look beyond neighboring Bhutan, for example, as the model for Nepal to emulate. Both Nepal and Bhutan have about similar resource endowment, except that Bhutan is less densely populated and lacks flat terrains. Since its opening to the outside world in early1980s, Bhutan has sustained double-digit growth rate, achieving a remarkable transformation of its production structure. Starting from about the same level 30 years ago, Bhutan’s per capita income is now five times higher than Nepal’s.
There are many reasons why Bhutan has done so much better than Nepal but the list can be narrowed down to just a handful of factors: More skillful exploitation of hydropower potential in cooperation with India; its open and free trade relations with India; more trustful political understanding between two countries; and, most importantly, the practice of good governance, meaning almost a total absence of corruption.
I see no exaggeration in saying that much of the economic problems now facing this country can be solved, or at least greatly softened, if it follows Bhutan’s example.
(Writer is an economist.)
sshah1983@hotmail.com
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