Double-digit growth And question of rich-poor gap

Double digit growth is not impossible but growth failing to reduce poverty, very much so. Since inequality has coexisted with growth it is necessary to look into whether the current growth in Nepal is sustainable or largely a function of the monsoon rains. Economic growth becomes unsustainable when there is a limitation in productive capacity and export products lack global competitiveness. Even if there is high growth, if the country slows down from above-potential growth rates, inflationary pressures develop and overall economic performance declines. This has happened in Venezuela and to some extent in Argentina and Columbia. This scenario poses a question: What kinds of growth do we expect with a human face of development? Growth theory hints at increasing number of macro-micro applications. As a safeguard , such application is beneficial to assessing income distribution consequences of macro policies.

Last year, the average growth rates in the East Asian economies and Latin America were 7.6% and 5.3% respectively. But average real income per capita (in 1985 dollars) during three decades averaged about $2,000 in East Asia, which was considerably less than the average of $3,400 in Latin America. It raises a few questions: does economic growth result in a more unequal distribution of income? Or is it that countries with unequal income distribution show slow growth? Should we achieve a faster growth or adopt redistributive policies to improve the condition of the poor?

In an egalitarian economy, the poorest groups’ share of total income has not changed over the last 60 years. World Bank economists Klaus Deininger and Lyn Square consider a 4% growth would be enough to raise the incomes of the

poor. India has tried to sustain at least 4% growth in agriculture in order to achieve a double digit growth. Nepal’s annual average growth rate of GDP has remained at approximately 3% in past seven years. It ranges from 0.16 in 2001/02 to 5.65 (preliminary estimate) in 2007/08.

The reason for this satisfactory growth being the growth in rice production by almost 17% during the first eleven months of the FY 2007/08 and average growth of agriculture sector by 5.65%.

However, the average annual growth rate of agricultural GDP is just 3.2% during the same period (2000-08). The lowest rate is 0.94 in 2006/07 indicating the volatility of the sources of growth.

Thus there is the need to establish a link between growth and inequality. Other countries have sustained growth by massive investment in social and physical infrastructure. Newly Industrialised Economies have invested 20% of GDP in Physical Capital. Economic literature has identified a negative relationship between initial inequality and subsequent growth. It justifies the need for sustained growth.

India’s economy has grown by more than 8% for over a decade despite interrupted power supply and spiraling prices of petroleum products, which pushed inflation beyond double digit. China had sustained double digit growth for more than two decades. Such growth has contributed to reducing poverty and inequality and creating employment opportunities.

The trade-off is either that the farmer is given remunerative prices or the middle class citizens are hurt by making them pay more for food. Countries have followed the former path as a balanced approach to improving the real incomes, and to minimising temporary anomalies.

Azerbaijan (31%), Timor (24%), Macau and Angola (21.1%) have experienced more than 15% growth rate in real GDP during 2007/08. Other countries with around 12% growth include Armenia, Sudan, Equatorial Guinea and Georgia. In Azerbaijan, in 2005, the growth rate was 26.4 % and in 2006 it climed to 36.6%. Their economy is based on oil and hydrocarbon and mining industries, which contribute around 95% to GDP. Gross fixed Investment in Azerbaijan is 54.4% of GDP. Despite 70% destruction of economic infrastructure in late 1999 by Indonesian troops and anti-independence militias, East Timor has achieved 24% growth. Macau’s growth is linked to tourism, much of which is geared towards gambling. Although an OPEC member country, Angola is now the fastest growing economy in Africa. It also has plenty of diamond, gold and uranium.

Capital and technology is a binding constraint in large investments in physical and human capital. Prolonged instability has weakened governance; as a result, resource management is poor. If the benefit of economic prosperity is considered high, hydropower, a renewable and sustainable source of growth, could become Nepal’s white gold. Harley-Davidson still exhibits double-digit growth after 100 years. Why do we not expect similar growth? But, careful, dear comrades, that the gap between the rich and the poor is not widened any further in the process.

Dr. Pyakuryal is professor of Economics, TU