Budgetonomics: We need to focus on welfare and the digital economyThe recently announced budget is business as usual and more suited to the last century.
The government recently released a budget of around $13.66 billion for the next fiscal year. The opposition has called it extremely populist, overly impractical, and against the spirit of federalism. But, for the ruling Nepal Communist Party, it is federalism-centric and designed to propel the country towards prosperity. The new budget focuses more on low-tech physical infrastructure development, and it is extremely digital economy unfriendly and definitely not designed to steer the country towards gaining in welfare metrics. Simply put, the budget is business as usual and more suited to the last century. It is designed to stimulate the economy by increasing government spending to boost the gross domestic product (GDP). As conventional wisdom goes, an increase in public spending increases the GDP.
The World Bank estimates Nepal’s GDP growth at 7.1 percent in the fiscal year 2019. The Asian Development Bank estimates the GDP will grow by 6.2 percent in 2019 and 6.3 percent in 2020. The government’s forecast is even more optimistic. All three are making half-baked forecasts, as the GDP misses huge chunks of value in the digital economy.
A promising new avenue
The digital economy is increasingly commanding a bigger share of the GDP. According to the China Academy of Information and Communications Technology, China’s digital economy reached $2.3 trillion in the first half of 2018, accounting for 38.2 percent of the country’s overall GDP growth. The Ministry of Electronics and Information Technology of India and McKinsey recently reported that India could create over $1 trillion of economic value from the digital economy in 2025, which is equivalent to 18-23 percent of the country’s nominal GDP.
Erik Brynjolfson, professor at the Massachusetts Institute of Technology’s Sloan School of Management, believes that the GDP has started showing a weakness in the 21st century because anything with zero price has precisely zero weight in the GDP, and this is a problem in the digital age. Even though many digital goods on the internet have zero price, consumers still get a lot of value from them, for example, applications like Wikipedia, Google, or many smartphone apps that can be used for free. In order to effectively measure the digital economy’s impact on the GDP, Brynjolfson has come up with a new metric GDP-B, where B stands for the benefits consumers receive from free and subsidised services.
The GDP will be helpful to learn about wages and interest rates, but it will not be of much help if governments want to understand where the value is coming from or to measure wellbeing. The new metric, GDP-B, can tell where the value is being created, especially in the digital economy. Indeed, the world needs to start measuring wellbeing. For instance, the value that human beings produce around the world has to be measured. The networks of extraordinary value, digital assets of infinite use and reuse, and the new gig employment—short-term contractual employment—opportunities to name a few have to be accounted for in the GDP. It will be important to gauge economic prosperity and growth in order to create a more efficient, happy, and digital technology-dependent life as we move forward.
In a nutshell, the GDP is a flawed measure of the economy. It needs to be rethought because it measures output, not the actual state of the economy and the wellbeing of the people and the environment. Additionally, it calculates output domestically, which is no longer useful. For example, in 2013, the global GDP was $75 trillion while the value of the ecosystem services supplied by the earth was $125 trillion. The value contributed by the ecosystem was not accounted for in the global economy. A carpet may be produced and sold for $100. The money made by the carpet company and also the government through various taxes is accounted for, but the depletion of the earth’s limited fresh water and the environmental ruin offsetting costs in the present and the future is not taken into consideration.
Mindset of the future
The budget should be redesigned with a futuristic outlook. This time around, the government has prioritised low-tech physical infrastructure that will soon be obsolete in the Digital Age. For instance, the roads are not designed for autonomous vehicles. The damage done to the wellbeing of the natural ecosystem through dust and vehicle emissions is never part of the calculation. The main goal of the government of the future should be to allow citizens to breathe fresh air, drink clean water, move around the city comfortably, and have green parks to exercise and mingle in—and build an economy that provides a livelihood for everyone.
The budget of the future should aim to promote creativity, innovation, and the application of technology in various economic activities, and to launch a new economic model to develop Nepal into a value-based economy. This means allocating a huge amount of the budget towards digital infrastructure development, the innovation ecosystem, e-government services, human capital, and holistic frameworks for a truly digital Nepal. It is high time Nepali politicians, the Ministry of Finance, the World Bank and the Asian Development Bank got acquainted with the new concept of GDP-B as we welcome the age of the Fourth Industrial Revolution.
Shah has worked as a consultant for the Single Window Component of the Nepal-India Regional Trade and Transport Project.