Nepal’s growth trajectoryWhen population growth outstrips economic growth, the output per person falls.
Bijendra Man Shakya
The economic growth rate is a basic indicator of a country’s prosperity and well-being. It shows how income or the gross domestic product (GDP) expands over time. While this provides investors, businessmen and policymakers the simplest way to make their decisions, political parties often aim at high or sustained growth as an economic agenda to attract voters. But for the common man, economic growth is a puzzling concept. Normally, what is of greater concern to the general public in underdeveloped countries like Nepal is people's wellbeing. So, does growth really matter?
As the economy grows, the output and income that people get to share also become larger. Businesses and workers are better off when the economy grows. With economic growth, a country’s living standard increases and there is fiscal stability.
Nepal recorded an average annual growth of 5 percent from 1986-96. This was the highest and longest period of sustained growth in history brought about by a broad-based reform programme. Since then, Nepal’s economic growth has been irregular with an annual average growth of less than 4 percent. In 2021, the growth rate was 4.2 percent compared to 8 percent in the rest of South Asia. Nepal is growing at a slower pace than its neighbours. For example, Bangladesh and India experienced 6.9 percent and 8.7 percent respectively. Nepal's growth rate is far below the 9.6 percent target stipulated in the country’s current development plan (2019-24).
Nepal has witnessed a decline in poverty and made improvements in the multidimensional poverty index that includes human development indicators such as education, health and living standards. As a result, Nepal is set to graduate from a least developed country to developing country by 2026 as per the United Nations economic development ranking.
Does this mean the growth rate is irrelevant? When a country’s population growth outstrips economic growth, the average income or output per person falls. Income disparities appear when earnings are broken down by region. For example, there is a wide gap between people’s incomes and living standards in rural areas like Jumla or Humla and urban centres such as Kathmandu Valley despite a rise in Nepal’s per capita income. This disparity has encouraged mass migration from rural to urban areas, resulting in urban-centric economic development. This led to misallocation of scarce development financing, depriving rural areas of opportunities to exploit local resources and generate income and output. Ultimately, it resulted in not only lopsided economic progress but also low national output and growth. Similarly, there are other things that raise the growth rate but don’t contribute to economic prosperity, for example, squandering on superfluous projects.
However, one cannot say that there has been no economic development. What matters is the recipe that helps the economy to grow sustainably. According to classical economists, one way to boost the economy is to increase labour or capital for production. But that doesn’t help the economy to grow indefinitely as per unit output tends to fall with the application of diminishing returns in production. That idea was followed by the role of technology or the total factor productivity in the growth model assuming that it helps the economy to expand exponentially over time. The growth experienced by the industrialised countries in the past four decades confirms this standpoint. But its relevance was questioned when the world’s advanced countries experienced a slowdown in growth since the late 1990s.
Urban to rural development
In contrast to the idea of development as a gradual and steady change, developing countries such as Nepal have different development problems. Besides growth targets, development issues of poor economies are concerned with the efficient utilisation of unused resources for the production and distribution of output.
Nepal's development process must emphasise shifting resources from low-productivity to high-productivity sectors. Normally, economies grow by transferring resources from agriculture to manufacturing or trade. Paradoxically, this is not happening in Nepal. Agriculture contributes barely 25 percent of the country’s GDP despite the economy being overly dependent on farming. The share of manufacturing has shrunk from 10 to 6 percent although this sector is indispensable for structural transformation because of its ability to generate backward and forward linkages. At the same time, a huge trade deficit burden has put the country’s external economic sector in a critical state.
Two important things need to be done in this regard. One is devising a strategy which diverts economic programmes from conventional urban-centric development to rural development. This will expedite the mobilisation of dispersed natural and human resources. It will also create an efficient supply chain at the national level, generate jobs and bring structural transformation. Secondly, the development process must represent the whole gamut of change from growth rate to jobs, better education and cultural and human values. This will generate both material wellbeing and national self-esteem for high and sustainable growth. This means growth is not an end in itself, but a means for economic as well as social welfare which is crucial for an economy like Nepal which is progressing to a higher development status.