Monday, March 19, 2012

Changing narrative of poverty and globalization in Nepal

[It was published in Republica, March 18, 2012, p.6]

Changing narrative

There is a tendency among development agencies and analysts to repeat same arguments regarding the state of Nepal’s development and capitalize on them to secure funding for projects. The government also goes along with similar reasoning to keep alive the stream of aid, which amounts to about one-fourth of our fiscal budget. With the evolving political and economic landscapes, the narratives are changing gradually, especially of those related to the state of poverty and globalization. The concerned stakeholders will better serve the development needs of this nation if they reconsider how they are selling arguments and development narratives henceforth.

For a long time Nepal has been projected as a country with too many poor people. The widely used benchmark for comparative poverty analysis is World Bank’s US $1.25 a day poverty line. Previously, its estimate showed that almost 53 percent of the population lived below this poverty line. The development agencies and even the government used this number to amplify results to get more funds for poverty alleviation. In order to score their point, they conveniently forgot the lower poverty estimate (30.8 percent) computed by the Central Bureau of Statistics (CBS) based on our own national poverty line. This has to change now.

The latest national poverty estimate based on the National Living Standard Survey 2010/11 (NLSS III) shows that 25.2 percent of the population lived below the absolute poverty line. Similarly, the latest US$1.25 a day poverty estimate based on data from NLSS III reveals that about 24.82 percent of the population is living below the globally comparable absolute poverty line. Furthermore, the Gini index—a popular measure of inequality—has declined from 43.83 in 2003 to 32.82 in 2010, according to WB estimates. The CBS estimated Gini index at 41.4 and 32.94 in 2003/04 and 2010/2011 respectively. Meanwhile, income or consumption of those in the middle of income deciles (i.e. middle class) has also increased remarkably.

With the latest globally comparable poverty and inequality figures, Nepal can no more be projected as the nation with extremely high share of absolute poor and increasing inequality. In fact, if we look at comparable figures, Bangladesh and India have more proportion of people below US $1.25 a day poverty line than Nepal has. Similarly, Nepal has lower income inequality than some countries in South Asia.

So, what changed? Did increased funding and development interventions work their magic when growth rate was subdued to under 4 percent? Well, the remarkable feat in reducing poverty level has more to do with the bump in household income due to rising remittance inflows than government’s or donor’s development-related interventions. In fact, the remitters did in six years what the government and development agencies could not do for decades. Of course, development interventions such as construction of rural road, improvement in agriculture production, and other interventions related to the achievement of MDGs helped, but these were effectively dwarfed by the contribution of remittances in directly increasing household purchasing power, and reducing poverty and inequality.

Between 2003/04 and 2010/11, nominal average household income and nominal average per capita income increased by 153 percent and 175 percent respectively. Furthermore, nominal per capita consumption of the poorest households increased by 165 percent while that of richest households increased by 66 percent only. Also, average household income of the poorest and richest 20 percent households increased by 297 percent and 133 percent respectively. These large bumps would have been impossible without significant remittance inflows, especially after 2000. According to the WB’s and CBS’s estimate, remittance inflows increased by 327 percent and 547 percent respectively between 2004 and 2010. With the phenomenal progress seen in these numbers, next time someone tries to score points by projecting Nepal as one of the most miserable countries riddled with desperately poor people, it would not be wholly incorrect to be a skeptic. That said, in terms of income per capita, which is different from the share of people below the poverty line, Nepal is still the second poorest (at US $644) in South Asia.

Another aspect where the prevailing narrative has to change is the one concerning the state of Nepal’s globalization. Generally, trade as a share of GDP is widely used to get a sense of the extent of globalization of a country. Using this barometer, Nepal has been projected as the most open and globalized country in South Asia (with trade to GDP ratio of about 53). However, globalization is not only about the degree of trade flows in and out of a country. It also incorporates a host of other social and political dimensions. The latest KOF Index of Globalization, which is published by KOF Swiss Economic Institute, comes handy while analyzing the economic, social and political dimensions of globalization.

The economic dimension (which has 36 percent weight on the overall KOF index) measures actual trade and investment volume as well as trade restrictions imposed by countries. Furthermore, the social dimension (38 percent weight on overall index) shows the extent of the dissemination of information via various modes, and the political dimension (26 percent weight on overall index) shows the degree of political cooperation computed by considering factors such as the number of embassies, membership in international organizations, participation in UN Security Council Missions and international treaties.

Contrary to popular belief that Nepal is one of the most open (or globalized) economies in South Asia, the KOF index of the latest year available shows that Nepal is actually the third least globalized country, followed by Afghanistan and Bhutan, in the region. Sri Lanka, followed by Pakistan, India, Maldives and Bangladesh, has the highest index value in South Asia. While Belgium and Austria are the two most globalized countries in the world, Nepal ranked 163rd out of 186 countries. Looking further into the three broad measures that are used to compute the overall KOF index, it appears that, in South Asia, Nepal has the least value in economic globalization, third least value in social globalization, and fourth least value in political globalization. The message coming out of this updated measure of globalization, which goes beyond the usual measure of openness based on trade as a share of GDP, is that Nepal cannot be portrayed simply as the most open economy in the region.

A study based on the globalization index shows that the actual economic flows and restrictions in developed countries are most strongly related to economic growth. In the meantime, while information flows are slightly less strongly related to growth, political integration has no effect. What does this mean for Nepal? Well, we have to work more on greater integration in order to have a sizable globalization-induced growth. Specifically, we have to boost actual trade and investment flows and address the factors that are hindering supply capacities, especially those related to infrastructure, strikes, labor disputes, and research and development.

With changing economic and political landscapes, the long held views about the extent of poverty and globalization in Nepal should also change. While Nepal is no more a country with the highest share of poor people below the poverty line, it still has one of the lowest per capita incomes in the region. Meanwhile, it is not the most open economy in South Asia and the potential to reap benefits from increasing degree of globalization is limited by supply-side constraints.

[Published in Republica, March 18, 2012, p.6. In the article I have mentioned income inequality (Gini index). It should have been Gini coefficient based on expenditure. Thanks to Purna Man for pointing that out.]