Understanding povertyIt is not only bad governance but a failure to attract foreign capital and to stop cartels from forming that has hampered development.
Poverty in Nepal is majorly a rural phenomenon characterised by chronic hunger, inability to access proper health care, lack of amenities of safe drinking water and sanitation, poor education and perhaps the lack of rudimentary shelter. There are still places in Nepal where attending a school is a thing of luxury and access to safe drinking water and proper health care are privileged services. While our neighbours continue to achieve tremendous growth, we seem to get stuck in limbo. Sadly the situation may not improve—or even further worsen—if immediate and radical measures are not undertaken.
While we unconscionably derail against politicians, we often ignore the fact that in a democratic society electorates tend to get what they deserve. If Nepal is to climb the ladder of development, or at least gain a strong foothold in a bottom rung, electorates need to wisen up to what has been happening. It requires a radical change in attitude; often it has been observed that electorates are too lazy to think beyond their inherited political ideologies.
Avoiding bad governance and policies
Not every solution to the problem can be found in good governance, but the trap of bad governance in a poor country is definitely the central part of the story. For instance, if there are no opportunities in the country only having good governance and policies probably will not work, as it cannot generate opportunities where none exists. But Nepal has sufficient opportunities for growth, only to be swamped by years of self-serving policies. An obvious example is the lack of appropriate guidelines to encourage the industries. The recent Covid-19 crisis embarrassingly exposed Nepal’s trade vulnerability. It was humiliating to realise that no Nepali companies are producing simple sanitary amenities like masks and sanitisers. For years, Nepal has been riding a labour surplus situation and the government still has no economic impetus to harness it. Instead, it has promoted foreign employment. It needs to be noted that the brunt of any mishaps in Arab countries, like the recent downturn in oil price and the pandemic, will painfully push Nepal into extreme poverty.
Although good governance is a salient feature of a promising economy, it is not the only major fact. Bangladesh is notoriously corrupt and also has bad governance. In fact, as per Transparency International, Bangladesh ranks 146 on a list of least corrupt nations (Nepal is ranked 113), but as the country adopted clear development strategy since the 1980s (exporting labour-intensive goods), the country has been able to achieve economic success. This eccentric case of Bangladesh suggests that exporters simply need an environment of moderate taxation, macroeconomic stability and transport facilities. Further, by actively promoting export processing zones, which definitely provides an island of better governance, the country can actually keep its bad governance from choking off export activities.
Encouraging capital flows
Besides a bold step from home, success also depends on financial help from abroad. Traditionally, foreign aid—the largest source of foreign capital—has been supposed to supply the needed capital. But such foreign capital only aims to supply public funds and not private capital. According to the current budget, approximately 23 percent of the estimated source of financing came from foreign grants or loans. For a country like Nepal, such external funding sources are important. While the public fund could expedite the construction of infrastructure, the supply of adequate private capital could invigorate the economy by providing the required technology and equipment to boost productivity. In 2018 the contribution of private capital equalled only 29 percent of the gross domestic product; in China, the figure is approximately 60 percent. China’s rise since the reforms of the 80s and 90s—manufacturing exports soaring from a puny amount to $2.6 trillion in 2018—shows how important capital inflow really is for a developing country.
However, for latecomers like Nepal, luring private capital could be much harder due to the strong presence of China and India as global manufacturers. In fact, if Nepal is to break into the global market, the wage gap has to widen until it becomes big enough to offset the advantage of economies of scale.
Reforming trade treaties
Various reports suggest that gains from trade are usually generated by the differences and therefore the aim should be to engage in a trading agreement with the rich economies. As such, it provides a big opportunity for low-income countries to harness the advantage of their cheap labour. In Nepal’s case, trilateral trade treaties including China, India and Nepal should be prioritised. The evidence suggests that the average income in China has been increasing. In fact, as per the Global Wage Report of the International Labour Organisation, the average wage in China has doubled within the past two decades. Multinationals that produce labour-intensive products are actively seeking to diversify beyond China. In this context, a prudent trade treaty, by imposing common external tariffs (for labour-intensive goods), will encourage reallocation of such industries to Nepal.
It will not be entirely incorrect to label the private sector in Nepal as being composed of organised cartels. The profits are gained by lobbying and restricting the entry—rather than production efficiency. It is important to encourage private sector players to increase investment in manufacturing industries. The use of crucial capital towards gaining arbitrages in trading must be discouraged.
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