Economic Survey for the fiscal year 2011/12, just released by the Ministry of Finance, contains one very significant piece of economic data, that the country’s per capita income—gross domestic product (GDP) divided by population—is now US $742, compared to just US $414 five years ago. Because per capita income is the most accepted measure of economic well-being of a population and of improvements in its living conditions, its near-doubling in such a short span of time is remarkable and commendable.
However, before we get carried away with this good piece of economic news, we need certain adjustments of the data to make it meaningful and realistic. For example, we need to discount its nominal value for inflation—to measure the change in purchasing power from one period to the next. Since per capita income data are in terms of US dollars, the applicable inflation rate will be in US prices, for the reason that income data has already been adjusted for change in Nepali prices by converting it into dollars. Ordinarily, the exchange rate change between two currencies—rupee versus dollar—reflects inflation differential, with currency depreciation implying a higher relative inflation rate in the depreciating currency country.
US consumer prices were, on average, higher by 10 percent in 2012 over 2007, which means that per capita income of US $742 in 2012 was worth US $675, compared to US $414 per capita in 2007, both expressed in terms of 2007 constant prices.
Inflation-adjusted per capita incomes of 2006/07 and 2011/12 yield a 63 percent increase over the five-year period or 10.3 percent annually. This figure represents a phenomenal growth in average income levels in the country—a faster pace than almost anywhere in the world. For example, inflation-adjusted per capita income increased annually by 8 percent rate in China and by 5 percent rate in India during the same five-year period.
It is then not difficult to see how erroneous is the Finance Ministry’s reporting of per capita income data, both its level as well as its rapid pace of increase. We can call such reporting of national income data tainted by political motives and not reflecting underlying conditions of the economy.
The erroneous reported per capita income data also becomes clear by looking at growth performance of the economy analyzed in the Economic Survey which records annual GDP growth rate of about 4 percent in real terms over the same five-year period,. Discounting for average population growth of 2 percent annually, real per capita growth comes to 2 percent, or a cumulated 11 percent. Taking into account the effect of US inflation over this period, Nepal’s per capita income in 2011/12 comes to be about 30 percent higher than US $414 reported for 2007/08 or US $540—a level that is one-third lower than US $742 level reported by the Ministry of Finance.
The lower per capita income figure of US $540 is exactly what World Bank reports in its 2012 World Development Report (WDR) for Nepal, calculated from a different presentation of Nepal’s income accounts, called the Gross National Income or GNI.
STUCK IN LOW-DRIVE
Ministry of Finance’s Economic Survey focuses on year-to-year performance of the economy covering five-six years period, which is very much like business cycle analysis of the economy and not of its underlying trend. However, the long-term economic trend is what actually matters for the quality of life and of living conditions and not the economy’s cyclical ups and downs. Because cyclical ups and downs usually cancel out, this gives little information about the underlying conditions of the economy over long-term.
Admittedly, it is very difficult to study long-term trends of the Nepali economy because no consistent set of data are available, particularly those on major economic aggregates such as output, savings and investment. Without studying the long-term trends in such data, it is difficult to determine what path the economy is following—towards prosperity, stagnation, or decline.
Fortunately, we have the rudiments of reliable data on per capita income going back to the late 1960s expressed in US dollars which gives a pretty good idea of the economy’s evolution over time. World Bank and IMF put Nepal’s per capita income at US $100 in late 1960s which, taking into account population then of 10 million, yields a US $1 billion economy.
EVALUATING ECONOMIC SURVEY 2011/12
When there is no understanding of past failures it is hard to believe policy options to keep the economy on a sustained growth path can be agreed upon.
Over some 40 years, Nepali economy has grown to US $16 billion and per capita income to about US $550. Over the same period, US price level has increased by four times, which means US $100 per capita income in 1970 is now worth US $400. Real per capita income thus grew by about 40 percent over this period, or at just 1 percent annual rate. This suggests almost an unchanged level of real income between then and how.
It is indeed hard to believe that an average person in Nepal lives the same way now as he lived two generations ago. The evidence is compelling that all development plans, development aid, upheavals and revolutions have meant almost nothing for the common people of Nepal, in terms providing them a better life.
THE RULE OF 70
It is surprising that our political leaders have been so naïve about dreaming of making Nepal a Switzerland or Singapore. Such statements are untruthful and irresponsible at their core and need to be punished as an act of blasphemy!
Of the highest order of concern is a lack of recognition by important government leaders and administrators to admit that economy has been stagnating over a long period of time; that all previous policies have failed; and that development strategy currently in place needs a complete overhaul and renewal. Indeed, none of the government reports dwell over long term issues and none of the leaders recognize that the economy has been at a standstill over such a long period of time. In a situation of complete lack of understanding and appreciation of past failures, it is hard to believe that required policy options would be discussed and agreed upon which can help place the economy on a sustained growth path.
Assuming, however, that leaders and policy-makers do wake up to this challenge—that the economy must be lifted out of current stagnation and measures implemented to achieve very high rates of growth—the task faced would truly be enormous—not of turning Nepal into a Singapore or Korea but even to catch-up with regional countries—Bangladesh, India, Bhutan. This is because Nepal’s per capita income stands at two-thirds of Bangladesh; half of India’s; and one-fourths of Bhutan; and also that all these countries have registered an average of 6 percent or higher growth over the past decades.
Even if Nepal starts growing at 8 percent rate, it will take decades to catch-up with these countries, which is suggested by the so-called Rule of 70, used in ascertaining long-term growth outlook for the economy. According to this rule, the number 70 divided by growth rate shows the years it would take for the economy’s size to double. It would then take close to 20 years for Nepal just to catch-up with Bangladesh!