Spurring Growth During Crisis_2011-12-05

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SpurringGrowthDuringCrisis

Chandan Sapkotaou s a a c on ra e, conom cs an nv ronmen

December 5, 2011

www.sapkotac.blogspot.com

Presentedat aguestlectureseriesinDepartmentofConflict,PeaceandDevelopmentStudies,Tribhuvan University, December5,2011,Kathmandu,Nepal[GlobalCollege]

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Economy during crisis

Growth and political stability

Why so? Consequences

rowt strateg es ur ng cr s s

Comments Discussion

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. w

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GDP and per capita growthThere are no instances of sustained rowth rate of over five ercent for three consecutive

12

years. Highest GDP growth rate (9.6 percent) was attained in 1984.

The average GDP growth rate in the past five decades was 3.57 percent.

6

8

10

2

4

4

2

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

86

GDP growth (annual %) GDP per capita growth (annual %)

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Rocky rates'erv ces sec or ma or con r u or o grow . gr cu ure sec or s con r u on s ec n ng

Industrial sector is not growing and is marginally eroding. Services and industrial sectors

after 1996?

60.0 StructureofOutput(%ofGDP) 30.0 Growthofoutput(annual%change)

50.0

20.0

25.0

30.0

.

15.0

10.0

20.0

5.0

10.0

0.0

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

5.0

0.0

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

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Agriculture Industry Services Agriculture Industry Services GDP


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2. Economy during crisis

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6Averagegrowthduringdifferentpoliticalperiods

Not much impact on growthArmed insurgency had some impactGrowth is picking up but is below 5

4

5

prereformed panchayat (importsubstitution era)

Reformed ancha at structural

3

adjustment era)

Constructional monarchy (economicliberalization and opening of economy

era)

2

ao s nsurgency re orm nodevelopment reforms era)

Post revolution (post monarchy era).

1

Consumption expenditure isincreasing

Exports have plunged since the Maoistinsurgency began and imports are

19711979 19801991 19921996 19972006 20072009

Pre reformed

panchayat

Reformed

panchayat

Constitutional

monarchy

Maoist

insurgency

Post revolution

increasing; Trade deficit is wideningInflation rate is still highFDI has decreasedValue added of all sectors exceptservices sector is decreasin

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GDP growth (annual %) GDP per capita growth (annual %)Revenue is increasing

Remittances are increasing


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Government changes and coups had little impact on the

trend of overall growth rate. This does not mean that conflict

of other nature did not have impact on socioeconomic

The insurgency intensified after 2001. The armedMaoists rebellion came to an end after the

monarchy was abolished in 2006.

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n cators.

changeisseenonGDPgrowthrate,whichnever

crossedthe6.10%after2000,tosomeextent.


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3. Why so? Consequences

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Why? 14 Valueaddedaverageannualgrowth(%)

gr cu ure an serv ces sec ors nterms of value added) are little affected

during insurgency. Their growth rate was

pretty much the same during the five

periods. They have the highest weight on10

12

GDP and its growth rate.

The industrial sector was the mostaffected. Our productive capacity eroded

8

. . .

Exports hit.

4

6

But,why

growth

rate

continued

to

be

2

e ween o percen

Agriculture and services sectorkept up the rocky growth and

contribution to GDP.

The loss in industrial capacity and

19711979 19801991 19921996 19972006 20072009

Pre reformed

panchayat

Reformed

panchayat

Constitutional

monarchy

Maoist

insurgency

Post revolution

production was /is compensated byremittances and imports , thanks to

our largest export, i.e. migrant

workers

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Agriculture Industry Manufacturing Services


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Some of the consequences

Migration

Internal migration from rural to urban

350

400

4000

4500RemittanceinflowsandgrowthinNepal

,services compared to the increased demand

External migration (around 25,000 each

month) due to low job opportunities in theurban areas

3003500

physical infrastructures) and increase in

imports. Clustering of firms in urban centers.

Hard to do business in Nepal and

competitiveness went down.

200

250

2500

3000

Remittances kept the economy functioningand helped tremendously in brining down

absolute poverty level. But, real estate andhousing bubbles plus symptoms of Dutch 100

150

1500

2000

Poor development and capital

expenditure resulted in weakindustrial/productive capacity. 0

50

500

1000

Weak governance and over politicizationof bureaucracy, leading to corruption andmisappropriation of state resources

No insurgency now, but still there are many

500

political and social fissures , the seeds ofconflict, that are ripping apart our economicpotential.

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Growth rate, % (right scale) Total inflows, in USD million (left scale)


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4. Growth strategies during crisis

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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 andgovernance, and loss of productive capacity.

requ res 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.

Even though the agricultural sector still account for over 35 percent ofsectoral value addition to GDP, almost all of the instances of growthincreases were in fact tri ered b rowth in industrial and service sectors.

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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,

large positive effect on growth rate.

Thelevelofpoverty/economicbackwardnessisthestrongestpredictoroftheonsetofviolenceinNepal.Thatswhyfocusingonthefactorthatstimulatesgrowththemostisasensibleandpragmatic

strate .

A10percentagepointincreaseinpovertyisassociatedwith25-27additionalconflict-relateddeaths.Meanwhile,geographicfactorsaresignificantlyassociatedwiththeintensityofviolenceafterits

onset.

Seepaper

by

Iyer and

Do

titled

Geography,

Poverty

and

Conflict

in

Nepal,

HBS

Working

Paper

-

Geographicconditionsuchaselevationandthepresenceofmountainsandforestsexplainaquarterofthecross-districtvariationinconflictintensity.

Conflictis

significantly

higher

in

places

with

greater

poverty

and

lower

levels

of

economic

development.

Peopleresidingindistrictsthatweresociallyandeconomicallybackward(irrespectiveofgeographic

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theopportunitycostsofjoiningthearmedrebellionwaslowforthemandtheeconomicandpolitical

gainsfortheMaoistswashigh.


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Binding constrains to growthInadequate supply of infrastructure (road

network, communication, hydropower, irrigation facilities, storage, etc.)

During conflict infrastructures weredestroyed, which reduced productive capacityof our economy.

The poor quality of existing infrastructureand a virtual absence of linkages betweenproduction and manufacturing sites in thehilly and mountainous regions has not only

st mied structural transformation andimpeded a shift to new productive activities, itis also leading to a skewed spatial

distribution of agents (firms and labor) andassets in the economy.

etter n rastructure, g n ustr aactivities:

Conflict led to clustering of firms in urban

centers. The major firms are clustered in and

around few cores like Kathmandu, Pokharaand Taraithe same places which have

relativel low trans ortation costs and hi h

potential for economies of scale.The road density in Tarai (24.99) is two and17 times higher than in hilly and mountainous

regions respectively.

Inadequate supply of infrastructure is the

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most binding constraint to growth atpresent. But, this does not mean other

constraints are irrelevant.


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,

economic activity now.

will go down, new firms and ventures will prop

up, innovation, increase in competitiveness, exportrevenue

Link production sites with markets by constructingroads

New Structural Economics

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Fivereformagendastokick-startgrowth Growthstrategies

n ras ruc ure e ec r c y an

roads); Updated industrial and trade

policies

,policiesshouldbesynchronizedwithIndias

andChinas

economic

policies

in order tomaximize neighborhood growth spillovers.

Rather than exclusively focusing on markets inthe EU and the US, policies should be designed to

Overhaul of education andhealthcare sectors

Governance and regulations

max m ze ra ngw ourne g ors, n aand Chinathe two emerging giants in the globaleconomy.

Design policies toenticeFDIintransport

infrastructure

and

large-

and

small-

scale

hydropowerprojects.

sectors)

Social safety nets

To give the struggling industrial sector abreathing space so that they can compete in priceand quality in the international market, thegovernment should implementtheprovisionsoutlinedinInvestmentBoardandSEZordinances.

The governmentshould

facilitate

foreign

investmentinthetourismsector.

The government should also facilitateforeignemploymentandinflowofremittances. ONLYFOR SHORT TERM UNTIL WE GET OURFINANCES IN ORDER!

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6. Conclusion

Thelevelofpoverty/economicbackwardnessisthestrongestpredictorofthe

onsetofviolenceinNepal.Thatswhyfocusingonthefactorsthatstimulates

themost

growth

is

asensible

and

pragmatic

strategy.

A10percentagepointincreaseinpovertyisassociatedwith25-27additional

conflict-relateddeaths.Meanwhile,geographicfactorsaresignificantly

associatedwiththeintensit ofviolenceafteritsonset.

Connectpeople,connectmindsandgetconnectedwithregionaleconomies!

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Discussion

Comment on presentation Views on spurring growth during crisisAn thin thin related to econom

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Spurring Growth During Crisis_2011-12-05

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