SpurringGrowthDuringCrisis

Chandan Sapkota
South Asia Watch S th A i W t h on Trade, Economics and E i T d E i d Environment (SAWTEE) t
December 5, 2011 www.sapkotac.blogspot.com

PresentedataguestlectureseriesinDepartmentofConflict,PeaceandDevelopmentStudies, g p f f p Tribhuvan University,December5,2011,Kathmandu,Nepal[GlobalCollege]

20111205 SAWTEE

Presentation outline
Economicandpercapitagrowth Economic and per capita growth Economyduringcrisis Growthandpoliticalstability Whyso?Consequences Growthstrategiesduringcrisis G h i d i i i Comments/Discussion
20111205 SAWTEE

1. 1 Economic and income growth

20111205

SAWTEE

GDP and per capita growth

Therearenoinstancesofsustainedgrowthrateofoverfivepercentforthreeconsecutive There are no instances of sustained growth rate of over five percent for three consecutive years.HighestGDPgrowthrate(9.6percent)wasattainedin1984. TheaverageGDPgrowthrateinthepastfivedecadeswas3.57percent.

12 10 8 6 4 2 0 2 4 6 6 8 GDPgrowth(annual%) GDPpercapitagrowth(annual%) 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
SAWTEE

20111205

Rocky rates
Servicessectormajorcontributortogrowth.Agriculturesector scontributionisdeclining Services sector major contributor to growth Agriculture sector's contribution is declining Industrialsectorisnotgrowingandismarginallyeroding.Servicesandindustrialsectors after1996?
60.0 StructureofOutput(%ofGDP) 30.0 Growthofoutput(annual%change)

50.0

25.0

40.0 40 0

20.0

30.0

15.0

20.0

10.0

10.0

5.0

0.0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 5.0 Agriculture Industry Services GDP 0.0

Agriculture

Industry

Services

20111205

SAWTEE

2. Economy during crisis

20111205

SAWTEE

Notmuchimpactongrowth Armedinsurgencyhadsomeimpact Growthispickingupbutisbelow5 percent percent prereformedpanchayat (import substitutionera) Reformedpanchayat (structural p y ( adjustmentera) Constructionalmonarchy(economic liberalizationandopeningofeconomy era) Maoistinsurgency(reform+no Maoist insurgency (reform + no developmentreformsera) Postrevolution(postmonarchyera). Domestic savings are decreasing Gross DomesticsavingsaredecreasingGross Consumptionexpenditureis increasing ExportshaveplungedsincetheMaoist insurgencybeganandimportsare increasing;Tradedeficitiswidening d d f d Inflationrateisstillhigh FDIhasdecreased Valueaddedofallsectorsexcept servicessectorisdecreasing g Revenueisincreasing Remittancesareincreasing
20111205

Averagegrowthduringdifferentpoliticalperiods

0 19711979 Pre reformed panchayat 19801991 Reformed panchayat 19921996 Constitutional monarchy 19972006 Maoist insurgency 20072009 Postrevolution

GDPgrowth(annual%)

GDPpercapitagrowth(annual%)

SAWTEE

Politicalchangeandgrowth Political change and growth

Governmentchangesandcoupshadlittleimpactonthe trendofoverallgrowthrate.Thisdoesnotmeanthatconflict ofothernaturedidnothaveimpactonsocioeconomic indicators. i di t

Theinsurgencyintensifiedafter2001.Thearmed Maoistsrebellioncametoanendafterthe monarchywasabolishedin2006. Between2001and2005theimpactofpolitical Between2001and2005theimpactofpolitical changeisseenonGDPgrowthrate,whichnever crossedthe6.10%after2000,tosomeextent.

20111205

SAWTEE

3. Why so? Consequences

20111205

SAWTEE

Why?
Agricultureandservicessectors(in Agriculture and services sectors (in termsofvalueadded)arelittleaffected duringinsurgency.Theirgrowthratewas prettymuchthesameduringthefive periods.Theyhavethehighestweighton GDPanditsgrowthrate. Theindustrialsectorwasthemost affected.Ourproductivecapacityeroded alot.Factorieswereclosed.FDIdeclined. a lot Factories were closed FDI declined Exportshit. But,whygrowthratecontinuedtobe between2to5percent? b t 2t 5 t? Agricultureandservicessector keptuptherockygrowthand contributiontoGDP. Thelossinindustrialcapacityand p y productionwas/iscompensatedby remittancesandimports,thanksto ourlargestexport,i.e.migrant workers

14

Valueaddedaverageannualgrowth(%)

12

10

0 19711979 Pre reformed panchayat 19801991 Reformed panchayat 19921996 Constitutional monarchy 19972006 Maoist insurgency 20072009 Postrevolution

Agriculture

Industry

Manufacturing

Services

20111205

SAWTEE

Some of the consequences

Migration
Internal migration from rural to urban centers, centers leading to insufficient supply of basic services compared to the increased demand External migration (around 25,000 each month) due to low job opportunities in the urban areas

4500

RemittanceinflowsandgrowthinNepal

400

4000

350

3500

300

Erosion of production capacity (including physical infrastructures) and increase in imports. Clustering of firms in urban centers. Hard to do business in Nepal and competitiveness went down.

3000

250

2500

200

2000

150

Remittances kept the economy functioning and helped tremendously in brining down absolute poverty level. But, real estate and housing bubbles plus symptoms of Dutch Disease Poor development and capital expenditure resulted in weak industrial/productive capacity. Weak governance and over politicization of bureaucracy, leading to corruption and misappropriation of state resources No insurgency now, but still there are many g y y political and social fissures , the seeds of conflict, that are ripping apart our economic potential.

1500

100

1000

50

500

50

Growthrate,%(rightscale)

Totalinflows,inUSDmillion(leftscale)

20111205

SAWTEE

4. Growth strategies during crisis

20111205

SAWTEE

State of economy now

Right now the economy does not have the necessary conditions and institutions to sustain growth rate of over five percent even for even 2 years. This is partly contributed by the conflict, weak bureaucracy and governance, and loss of productive capacity. It requires i
a vibrant private sector entrepreneurial citizenry business-friendly fiscal policy less red tape infrastructure required for unleashing the entrepreneurial spirits in the economy

A sustained growth rate of over five percent is not achievable from the agricultural sector; the non-agricultural sector has to play a vital role role. Even though the agricultural sector still account for over 35 percent of sectoral value addition to GDP, almost all of the instances of growth gg y growth in industrial and service sectors. increases were in fact triggered by g
SAWTEE

20111205

Conflict sensitive growth strategy

Few resources but numerous economic and political problems. Cant address all of them at the same time. What generates the biggest bang for a buck?
Identify for most binding constraint to economic activities Devote a proportionally high amount of resources in relaxing the binding constraints which could have led to a constraints, large positive effect on growth rate.

Thelevelofpoverty/economicbackwardnessisthestrongestpredictoroftheonsetofviolencein Nepal.Thatswhyfocusingonthefactorthatstimulatesgrowththemostisasensibleandpragmatic strategy. gy A10percentagepointincreaseinpovertyisassociatedwith2527additionalconflictrelateddeaths. Meanwhile,geographicfactorsaresignificantlyassociatedwiththeintensityofviolenceafterits onset.SeepaperbyIyer andDotitledGeography,PovertyandConflictinNepal,HBSWorkingPaper 07065 07 065 Geographicconditionsuchaselevationandthepresenceofmountainsandforestsexplainaquarter ofthecrossdistrictvariationinconflictintensity. Conflictissignificantlyhigherinplaceswithgreaterpovertyandlowerlevelsofeconomic development. Peopleresidingindistrictsthatweresociallyandeconomicallybackward(irrespectiveofgeographic landscape)weredrawnintoinsurgencyeasilyandearlierthanresidentsfromotherdistrictsbecause theopportunitycostsofjoiningthearmedrebellionwaslowforthemandtheeconomicandpolitical gainsfortheMaoistswashigh.
20111205 SAWTEE

Binding constrains to growth

Inadequate supply of infrastructure (road y p g network, communication, hydropower, irrigati on facilities, storage, etc.) During conflict infrastructures were destroyed, which reduced productive capacity of our economy. The poor quality of existing infrastructure and a virtual absence of linkages between production and manufacturing sites in the hilly and mountainous regions has not only sty ed structural transformation and stymied st uctu a t a s o at o a d impeded a shift to new productive activities, it is also leading to a skewed spatial distribution of agents (firms and labor) and assets in the economy. Better i f B tt infrastructure, hi h industrial t t high i d t i l activities:
Conflict led to clustering of firms in urban centers. The major firms are clustered in and around few cores like Kathmandu, Pokhara and Taraithe same places which have relatively low transportation costs and high potential for economies of scale. The road density in Tarai (24.99) is two and 17 times higher than in hilly and mountainous regions respectively.

Inadequate supply of infrastructure is the most binding constraint to growth at present. But, this does not mean other constraints are irrelevant.

20111205

SAWTEE

Spurringeconomicgrowth Spurring economic growth

First tackle the most binding constraint to First,tacklethemostbindingconstraintto economicactivitynow.
Increase hydropower production (cost of production Increasehydropowerproduction(costofproduction willgodown,newfirmsandventureswillprop up,innovation,increaseincompetitiveness,export revenue) ) Linkproductionsiteswithmarketsbyconstructing roads

NewStructuralEconomics
20111205 SAWTEE

Agendasandstrategies Agendas and strategies

Fivereformagendastokickstartgrowth

Infrastructure(electricityand I f t t ( l t i it d roads); Updatedindustrialandtrade policies Overhaulofeducationand healthcaresectors Governanceandregulations (financialandnonfinancial (financial and nonfinancial sectors) Socialsafetynets

Growthstrategies
Giventhegeographicaldisadvantage,domestic Given the geographical disadvantage domestic policiesshouldbesynchronizedwithIndias andChinaseconomicpoliciesinorderto maximizeneighborhoodgrowthspillovers. Ratherthanexclusivelyfocusingonmarketsin theEUandtheUS,policiesshouldbedesignedto maximizetradingwithourneighbors,India maximizetradingwithourneighbors I di andChinathetwoemerginggiantsintheglobal economy. DesignpoliciestoenticeFDIintransport infrastructureandlarge andsmallscale hydropowerprojects. Togivethestrugglingindustrialsectora breathingspacesothattheycancompeteinprice andqualityintheinternationalmarket,the governmentshouldimplementtheprovisions outlinedinInvestmentBoardandSEZ ordinances. Thegovernmentshouldfacilitateforeign investmentinthetourismsector. Thegovernmentshouldalsofacilitateforeign employmentandinflowofremittances.ONLY FORSHORTTERMUNTILWEGETOUR FINANCESINORDER!

20111205

SAWTEE

6. Conclusion
Thelevelofpoverty/economicbackwardnessisthestrongestpredictorofthe onsetofviolenceinNepal.Thatswhyfocusingonthefactorsthatstimulates themostgrowthisasensibleandpragmaticstrategy. A10percentagepointincreaseinpovertyisassociatedwith2527additional conflictrelateddeaths.Meanwhile,geographicfactorsaresignificantly associatedwiththeintensityofviolenceafteritsonset. y Connectpeople,connectmindsandgetconnectedwithregionaleconomies!

20111205

SAWTEE

Discussion

Commentonpresentation Conflict and growth: Nepal versus Sri Lanka Conflict andgrowth:NepalversusSriLanka Viewsonspurringgrowthduringcrisis Anything thingrelatedtoeconomy y g g y

20111205

SAWTEE SAWTEE