Tuesday, May 23, 2017

Can Nepal become a middle-income country by 2030?

May be, but it depends on the pace of reforms and how fast it is able to break the low growth, high migration equilibrium, according to a latest report by the World Bank. Nepal’s performance so far can be summed up as: impressive decline in absolute poverty rate (proportion of population below $1.90 a day, 2011 PPP), low growth grate (below 5%), large-scale out-migration for work, and huge inflow of remittances that is popping up revenue growth, consumption demand and more. Also, see this paper on remittance in Nepal: boon or bane.

A business-as-usual scenario (BAU) and the resulting GDP growth would lead to per capita income (GNI) of $958 in 2030 (short of $1025 benchmark for lower middle income country as per the WB definition). However, under a reform scenario (investment and productivity improve until 2021 and then level off), per capita income level will breach the lower-middle income threshold in 2027. The exercise comes out of a classic neoclassical growth model (growth accounting/long-term trend [steady state] analysis). 

The WB recommends a “systematic assault” to break the inferior equilibrium through:
  • Breaking policy barriers (ramp up public investment, promote competition, trade integration)
  • Building new sources of growth (mainly hydropower)
  • Revitalizing existing sources of growth (reform agriculture)
  • Investing in people (take advantage of the demographic dividend and invest in skills of youths)
Here is an earlier analysis (Macroeconomic Update August 2013, ADB) on prospects for graduation from LDC category by 2022. Also, here is a piece on rapid economic transformation to be a middle-income country by 2030. Here is a econ-political analysis on why is Nepal poor. And, here is a short piece on low growth trap and the unusual structural transformation