Wednesday, March 25, 2009

Reality about Nepal’s GDP growth rate

If you don’t like numbers and econ jargons, then you’ll probably not enjoy this article! Anyway, I wanted to write about the trend in GDP growth rate in Nepal and if the economy can attain a double-digit growth rate, which the Maoists government likes to trumpet over and over again. Nothing wrong with that but my point is that growth projections has to be realistic. Given the loss in price and quality competitiveness in the international markets, labor disputes, unfriendly fiscal policies, downward slide in foreign employment, and question mark on the soundness of the monetary situation, the economy is not even in a position to sustain 5% growth rate for three consecutive years. For how and why, read the opinion piece here.

The economy has never seen a double-digit growth rate in the past five decades. The highest GDP growth rate (9.6 percent) was attained in 1984. This was not surprising given the fact that it was simply a recovery from three consecutive years of recession. The growth rate in 1983 was minus 2.98 percent. In no other years have growth rate touched this upper bound. More troubling is the fact that the growth rate has never been stable. Roughly, every increase in growth rate is followed by a decline. The economy experienced more bouts of growth decelerations than accelerations, i.e. more episodes of declining growth rates than increasing growth rates. Since 1960, the economy witnessed 19 instances of an increase in GDP growth rate and 25 instances of growth collapses. There are no instances of sustained growth rate of over five percent for three consecutive years. The average GDP growth rate in the past five decades was 3.57 percent.

Given this historical peek at GDP growth rate of Nepal, it appears that the growth projection for the next three years by the finance minister was very unrealistic in the first place. Unrealistic because even during the heyday of liberalization policies designed according to the Washington Consensus - pushed vigorously by international financial institutions and development agencies during the 90s - the economy did not witness sustained growth rate of over five percent for three consecutive years. Now, the economy does not even have the necessary conditions and institutions to sustain growth rate of over five percent even for two years. This would require a vibrant private sector, entrepreneurial citizenry, business-friendly fiscal policy, less red tape, and more importantly, infrastructure required for unleashing the entrepreneurial spirits in the economy. We severely lack all of these conditions right now. The populist talk of double-digit growth rate has no real substance on it.

There two figures say a lot about GDP growth rate in Nepal.

Fyi, this evening I am off to FEI Educator’s Night at the Hershey Company, Harrisburg, PA. I am getting this award :)