Nepal’s economy is projected to grow at 6.8 per cent (at basic prices) in the current fiscal year. This is the third consecutive year the country’s economy is expanding at a rate of above six per cent. This is a feat for an economy which has witnessed average annual growth rate of four per cent for 45 years from 1970 to 2014. As Nepal is on the cusp of escaping the low-growth trap, there are concerns about quality of economic growth, as the contribution of the industrial sector — known as the largest job creator — to the gross domestic product has dipped to 14.6 per cent from 16.9 per cent in fiscal year 2000-01. On the other hand, services sector’s contribution to economic output has jumped to 57.8 per cent. But most of the jobs in the services sector are being created in wholesale and retail trade, which are low-paying, whereas employment opportunities in high-value services sector are very limited. Rupak D Sharma of The Himalayan Times met Hans Timmer, chief economist, South Asia Region, the World Bank, to discuss these issues. Excerpts:
Nepal has achieved growth rate of over six per cent for three consecutive years. But growth is mainly driven by low-productivity services. How do you assess this situation?
High growth rates are a positive sign and they might continue for some time in Nepal given the presence of a stable government and focus on investment. But the big concern is that Nepal’s growth has been mainly driven by domestic demand and not exports. This has widened current account and fiscal deficits. Nepal is financing current account deficit by dipping into foreign exchange reserves, which is not sustainable. So, it needs to enhance exports. But it is not only Nepal that is underperforming in exports in South Asia. South Asia is exporting only a third of what it should be, compared to countries with similar characteristics. Nepal’s situation is even worse. It is exporting only a ninth of what it should be, given its characteristics. That really is a long-term concern because I don’t know a single country that has been growing decades after decades at high rates just from domestic demand.
Exports cannot jump without a medium- to long-term plan. Since Nepal does not have a comprehensive plan, will it face problems in even sustaining six per cent growth in the coming years?
Nepal does not need a long time to start boosting exports. Export level is so low at the moment, there is a lot of unutilised capacity. Of course, Nepal cannot solve all the structural problems at the moment, but I think it is incredibly urgent to understand factors that are restricting export and take appropriate measures to generate quick results. Take the case of agricultural products. Today, there are technologies that can improve productivity and enable farmers to gain access to international markets. So, there is no reason to think that you cannot enhance exports of agricultural products within a short period of time.
Could you give examples of countries that have been able to rapidly increase agricultural exports within a short period of time?
One country that has made impressive reforms in the last two years is Uzbekistan. It once had a centralised top-down economy. But the new president started making reforms. Uzbekistan could have said the problems were very difficult and that it would take decades to make changes. But they focused on exports and short-term results and they saw that opportunity in agriculture, especially horticulture. The success partly came from reforms in exchange rate and trade policies. But the government also made it clear that it was serious about solving problems of smaller farmers to boost exports because there was monopoly of intermediaries. So, results can come much earlier if you focus on right issues. Maybe, in Nepal, the focus on exports is not that strong.
The problem with Nepal is that it is exporting agricultural products in raw form without adding much value. It appears this will continue for some time, as forward linkages are not being created. What is your take on this issue?
In general, there are problems with exports in Nepal. This is partly because of remittances, which has made Nepal expensive and eroded competitiveness within the country. That explains why you cannot jump to a very high level of exports. There are also vested interests in Nepal, where companies have become accustomed to protection and they find it very difficult to see more competition. So, these are all structural problems. But this doesn’t mean you cannot have some success in the next two years or so. There are always low-hanging fruits. So, the country needs to say there is only one thing that it really needs to do now and that is start exporting. Nepal cannot continue to attain high growth rates in the long run without further integrating into the global market because that is where you get competitive pressure and knowledge. That means your investments and policies should be focused on raising exports. Nepal must understand that composition of growth is really essential to make the growth sustainable.
The government has identified a number of exportable goods and services where Nepal has competitive and comparative edge. But their production is low. Also, Nepal often fails to come up with home-grown solutions and tends to replicate foreign policies, which do not guarantee results. Is that a problem?
One of the most interesting concepts in economics is comparative advantage. You can be bad in everything and you can still have comparative advantage to export. Nepal should identify those areas. Secondly, the problem is not only about scaling up. To scale up, you have to start somewhere. And Nepal hasn’t started in many areas. So, Nepal needs to start talking to smaller farmers and companies and students who have graduated from universities and see if they can actually supply products, however small, to the international market. Nepal should also open itself to foreign investors because foreign direct investment is non-existent here. Foreigners, who see opportunities to invest here, can add higher value and push up exports. Nepal must understand that development is not possible without exports.
Do you mean to say there is a problem with planning and Nepal does not have the will as well?
There is not enough of relentless focus on exports. That focus is lacking in the government, the private sector, students graduating from universities and everybody in the society. The real opportunities are in the international market and with new digital technologies, landlocked countries like Nepal can benefit a lot. In the beginning, it could be at a smaller scale, but that’s not a problem; let it be small, but then it will start growing.
But things are not likely to change much in the coming days because the country is too dependent on low-productivity services, like wholesale and retail trade. Does this scenario make you optimistic?
I would be a lot more optimistic here. I was recently in Pakistan where I also met representatives of the private sector. They all said that they wanted to export more, but at the same time they were advocating for higher import tariffs because they saw that as the only solution for current account and fiscal deficits. They said higher tariffs would provide them competitive edge and protect jobs in the country. You can never export more with that attitude, because low import also means low exports. That kind of attitude will also prevent a country from moving towards a more competitive environment. So, I see that as a wrong focus.
You just said low import translates into low exports. Nepal’s imports are lately increasing, partly because of imports of capital goods. But Nepal’s failure to enhance exports has started exerting pressure on foreign exchange reserves, generating calls from the International Monetary Fund to cool down growth. Is Nepal’s economy overheating? And how can Nepal strike a balance because without rapid growth it cannot escape low-income trap?
I understand IMF’s analysis because when there is large current account deficit, despite inflow of all the remittances, you say growth is more demand-driven than supply-driven. That, to some extent, is the definition of overheating. In my view, you shouldn’t solve this problem by importing less. As you said, those imports are necessary, either to increase productivity or enhance capacity of sectors. So, it would be self-defeating to say Nepal should import less. Nepal can sustain larger current account deficit for one or two years if the purpose is to increase productivity and lift exports. But if Nepal continues to import to drive domestic demand, I would be completely on the IMF’s side because that would be unsustainable and can create problems.
Nepal’s failure to drive up exports is also the result of lethargy expressed by the government to promote the private sector, isn’t it?
You cannot just blame the government for lack of exports. The problem is also in the private sector. The government cannot export. It can take away impediments and build infrastructure. It is ultimately the private sector that should drive exports. So, export promotion should be a subject of public discourse than just a government-led programme. The problem is that the private sector is inward-looking, more interested in defending its own interests, and pretty happy being isolated because it can get rents out of the situation. That mentality has to change.
But the private sector of most of the developed Asian economies from Japan and Korea to Taiwan received incentives from the government at growth stage. Shouldn’t the government provide some support to the private sector, as it is still not very mature?
It’s true that even high income countries have some form of industrial policy to protect and support the private sector. I would argue that the Nepali private sector is also getting that support through political connections and trade policies that are kind of protectionist. The difference is that East Asian countries had a clear focus on export-led development. So they made sure the support to the private sector was geared towards making the companies very competitive in the international market. In other countries, perhaps in Nepal as well, support being provided to the private sector is not making companies competitive in the international market. That support is instead making them lazy and comfortable and helping them seek rents. I think the focus should be on taking away impediments for new companies, as older companies have already received government’s support.
So, you think rent-seeking is one of the biggest problems here?
It is the biggest problem. There is a positive correlation between exports and growth because you learn a lot and get competitive pressure when a country gets integrated in the international market. We have found that it is even better to export to countries that are very integrated in the international market. Recently, we published a report that established the link between exports and quality of jobs in South Asia. The findings make it very clear that rent-seeking, being comfortable and not having enough to export are the problems that are preventing productivity growth in South Asian countries.
A version of this article appears in print on June 11, 2019 of The Himalayan Times.