– NISCHAL Dhungel, Non-Resident Fellow

The opinion piece originally appeared in The Kathmandu Post on 4 September 2022. Please read the original article here.

Nepal has faced tremendous hitches in the path of economic development. Keeping natural barriers (landlocked externally and challenging topography internally) aside, the nation has been undergoing a protracted era of political change over the past two decades, graduating from a monarchy to multiparty democracy, marred by armed war, ethnic unrest and frequent changes in power. Frequent changes in government, irrespective of a unitary or federal form of government, has directly hampered Nepal’s development path, compounded by poor policy decisions. Poor policy decisions have led to weak performance of the primary agricultural and industrial sectors, low public investment and capital accumulation, and low productivity growth.

Given this context, it is not surprising that foreign employment has become more pervasive, particularly in the years following Maoist conflict. The Department of Foreign Employment started issuing labour permits in the late 1990s. The number of labour permits issued peaked in 2013-14 at a high of 519,638. In 2020-21, the number of labour permits issued plunged to a 16-year low of 72,081 due to the Covid-19 outbreak and the ensuing restrictions on people’s freedom of movement. At present, formal overseas employment procedures have become cumbersome due to the bureaucracy that requires foreign employment agencies to produce authentic labour demand letters, get the demands attested from the Nepali embassies in target countries, and provide several other documents. Despite the cumbersome out-migration procedures, foreign employment has become a lucrative area to escape Nepal’s job market.

Remittance trap

Remittances in Nepal have surged at an unprecedented pace. Personal remittances received were less than 1 percent of GDP up until the late 1990s, lower than Bangladesh and India. This share dramatically increased during the first half of the 2000s, rising from 2 percent in 2000 to 22 percent in 2010 and 30 percent in 2015. Following the pandemic, it was anticipated that Nepal would experience a sharp fall in remittance inflows, impacting imports, the balance of payments, foreign exchange reserves, consumption, savings, loans and interest rates. However, according to the data released for fiscal 2020-21, Nepal performed better in remittance inflows.

Given the extraordinary increase in remittances, they are probably the main driver of the improvement in living standards seen in Nepal, directly (households receiving remittances) and indirectly (increased labour income of those that remained). Research published by Nepal Rastra Bank showed that compared to households that do not get remittances, households that receive remittances have a 2.3 percent lower chance of falling into poverty. With every 10 percent increase in remittance inflows to households, the likelihood of those households falling into poverty lowers by approximately 1.1 percent.

Large-scale migration is a symptom of underlying, long-standing issues rather than a sign of strength. One of the world’s most extensive and dense anti-poverty initiatives is likely to be found in Nepal. Unfortunately, more resources go into the process of delivering benefits to “the poor” rather than achieving impact (making “the poor” rich). Economists Yurendra Basnett, Chandan Sapkota and Sameer Khatiwada have rightly pointed out that much effort is also put into process innovation and complexity (how to get the goodies to “the poor”) while neglecting the apparent reality that a great job with a high salary would go a long way in reducing poverty in one of the chapters of the book entitled Politics of Change.

Large-scale migration and the resulting remittances have facilitated the expansion of low-productivity services. Still, they have also contributed to the low competitiveness (via appreciation of the real exchange rate). As a result, this cycle intensifies already-existing problems that Nepal has faced for a while, further impeding its competitiveness and limiting its economic potential. Because of all these factors, Nepal, home to some of the most hardworking and adventurous people in the world, may remain in a high migration and remittance trap for years to come.

Domestic employment

The pandemic provided the government with a fantastic opportunity to learn a lesson from the existing policy gap to keep the people who had returned to help with the need for the nation’s development. It is a monumental task to switch from foreign employment to domestic employment. Approximately 500,000 young people enter the workforce each year, and 80 percent of them manage to find work abroad. Due to a lack of investment that may have helped produce output, Nepal is now entirely dependent on imports. Ironically, Nepal imports even agricultural items, even though 66 percent of the country’s population is employed in agriculture. Agriculture, which accounts for two-thirds of the workforce and one-third of GDP, has to undergo reforms to increase productivity, reduce poverty and free up labour for new sources of economic growth.

For Nepal, unleashing massive hydropower investments would be a game changer. It would not only result in considerable increases in productivity and new investments, but it also has the potential to raise wages dramatically, reverse migration and boost competition in downstream industries. According to the National Planning Commission and UNICEF report Demographic Changes of Nepal: Trends and Policy Implications, Nepal will have an ageing population by 2028 and an elderly population by 2054. Therefore, Nepal has a very limited window of opportunity to capitalise on the demographic window. It is necessary to invest in the skills of Nepali youth to fully realise the demographic dividend. For Nepal to continue on a more robust and sustainable growth path, more human capital must be put to productive use.

History also shows us that Nepal has implemented significant reforms in the past and is capable of doing so again. The broad-based reforms that Nepal implemented between 1986 and 1996 positively impacted the economy. The share of commerce in GDP and exports, as well as the share of manufacturing, virtually doubled, increasing the economy’s openness and diversification. The political shift to democratically elected administrations, which also gave the populace a new purpose, served as the foundation for these reforms. Today, they serve as a sobering reminder that Nepal can undergo significant and complex reforms. To escape the out-migration and remittance trap, a clear set of plans and policies to increase domestic employment should be the top priority of the federal, provincial and local governments. Without rethinking our development model, the country cannot prosper or graduate to a middle-income country.

Sabrina Singh, in her column for The Kathmandu Post, discusses how incorporation of legal perspectives in Nepal’s prevailing investment policies and strategies may help the concerned authorities to make these documents and associated logistics more conducive by allowing the state and investors enough rooms for discuss and settle tangible and binding legal effects of investment policies.

Key Aspects of India-Nepal Logistics Summit 2019

Nirnaya Bhatta

Synopsis

Last month (on July 28th), for the very first time, India-Nepal Logistics Summit was held in Kathmandu, Nepal. Co-organized by Federation of Nepalese Chamber of Commerce & Industries (FNCCI) – the custodian and largest private sector organization in Nepal, the Summit was an expression of the need felt by Nepal’s business community to integrate logistically local businesses into the global supply chain. The theme of the Summit was ‘Transforming Logistics Landscape’. While the Summit is a progressive step forward, it is too quick to judge if merely holding such an event will transform the country’s logistics landscape. This commentary first examines Nepal’s existing logistics landscape and its place in the world by referring to the highly comprehensive Logistics Performance Index. Since the Summit is between India and Nepal, a further examination is also made on the existing state of trade-related logistics between the two countries.

Background

The India Nepal Logistics Summit was jointly organized by FNCCI and Maritime Gateway, a media house based in Hyderabad, India. While the Summit was inaugurated by the Nepali Prime Minister, Mr. KP Sharma Oli, absence of his Indian counterpart – Mr. Narendra Modi – demonstrated that the event was an expression of Nepali rather than the Indian aspiration to improve its logistics landscape. Further, PM Modi’s written statement fell short of directly referring to the Summit by name and rather had a generic tone to it. It wrote, ‘India will always stand by Nepal in its quest for all-round growth. Emphasis will be on completion of connectivity projects outlined in the past.’

“Transforming Logistics Landscape”

The theme of the Summit was ‘Transforming Logistics Landscape’. Before commenting on the theme itself, it will be necessary to closely look at Nepal’s current logistics landscape first. To that end, there may not be a better reference than the Logistics Performance Index (LPI) that ranks 164 countries based on six comprehensive indicators. The LPI states that the logistics pertains to ‘how efficiently supply chains connect firms to markets.’ For Nepal, it would mean how well-connected Nepali firms are with the global supply chain and the markets abroad.

Now, let us explore the phrase used for this year’s theme word-by-word. The “Logistics landscape” comprises of the entire gambit of physical infrastructure, human capacity at the custom points, transportation endowment as well as agreements that are in place with the transit countries. While, “transformation” is defined by most dictionaries as extensive changes in the current scenario. To really transform Nepal’s logistical landscape, billions of dollars investment and an all-encompassing national plan would be required as ‘logistics is not just about connecting infrastructure but encompasses regulation of services, sustainability, and resilience, or trade facilitation.’

Figure I: The six indicators on which the LPI rankings are based (Competing to Connect 2018)

Figure II: Nepal’s comparative rankings in the LPI (Data: World Bank)

Figure II compares Nepal performance in logistics with India, China, Germany, the South Asian and East Asian region, and finally low-income countries. These comparisons help in providing a perspective on where Nepal stands in terms of its logistics landscape.

The first column titled LPI is the aggregated scores, which is the weighted average of the country scores on the six key dimensions based on which the ranks are determined. In 2018, Nepal ranked 121 out of 167 countries that were ranked, while India stood at 42 and China at 27. South Asia, on the whole does not fare too well and is almost at par with Nepal on almost all the indicators. I have also compared South Asia with the most economically vibrant region in Asia, i.e. Southeast Asia. All countries and regions are then juxtaposed with Germany, which ranks 1st in the LPI and scores close to 5 on all indicators (a score of 5 denotes best possible performance in any given indicator).

Nepal-India Logistics Landscape

For very obvious reasons, India warrants special mentions when discussing Nepal’s logistics landscape. The economist Paul Collier observes that neighbors matter more when a country is landlocked. While comparing two landlocked countries, he writes- ‘Why is Uganda poor when Switzerland is rich? It is indeed partly that Switzerland’s access to the sea depends upon German and Italian infrastructure, whereas Uganda’s access to the sea depends upon Kenyan infrastructure.’ In 2018, while Germany ranked first in the LPI, while Kenya ranked 63. As an extension to this logic, the extent of access Nepal gets to the world depends on India’s performance in general infrastructure and how well the former negotiates to get access to the Indian infrastructure.

“If you are coastal, you serve the world; if you are landlocked, you serve your neighbors,” Colliers further contends. He also suggests, no matter how far or near a landlocked country is situated from the closest shore of the neighbor; the cost of exporting is usually very high. The coastal country’s expenditure on transport infrastructure determines the transport cost for a landlocked country. “If you are landlocked with poor transport links to the coast that are beyond your control, it is very difficult to integrate into global markets for any product that requires a lot of transport, so forget manufacturing- which to date has been the most reliable driver of rapid development”. This means, if the coastal neighbor has extremely efficient transportation system, it is favorable for its landlocked neighboring country.

Maybe it is too quick to judge if such Summits will ‘Transform Logistics Landscape’. Some points to consider why:

The Summit is clearly an expression of Nepal’s needs rather than India’s in terms of wanting to improve its logistics landscape. Hence, there is a clear asymmetry in terms of interests expressed between Nepal and India. Take for instance, from the Indian side the highest-ranking official was the Indian Ambassador to Nepal, accompanied by the Special Secretary (Logistics), Ministry of Commerce and Industry. This asymmetry necessitates Nepal to continually take initiation even when India may not proportionally reciprocate.

While the speakers and representatives from both the countries did focus on the need to improve connectivity, there was no mention of what potentially could be traded. What can Nepal possibly export is another discussion that has also come to be associated with the China-Nepal railway projects. With billions of dollars in investment, while China would inundate Nepali market with its exports, but how would Nepal take advantage of its access to Chinese markets in terms of exports? If the costs of exporting these goods come at a prohibitive cost, it hardly makes economic sense to go ahead with such projects. The discussion about improving Nepal’s industrial productivity should go hand in hand with improving its logistics infrastructure. The implication is, if trade is limited, investors will hardly find it attractive to finance in logistics infrastructure.

Key Implications

1. On the whole, the Summit is a positive initiative. It indicates that Nepali entities other than the Government are willing to take initiative and bring the government on board eventually. Although, it needs to be considered that logistics is closely tied with the general infrastructure of a country, more than just improvement of physical connectivity. Meaning, without the Nepal Government spearheading it, there is less scope for wide-spread improvement in the logistics landscape, as the task would entail involvement of numerous ministries, central and the provincial governments.
2. While it is laudable that organizers such as the FNCCI did initiate this important Summit, it was hard to come across any coherent plan that integrates Nepal and India’s logistics landscape- neither reflected in the presentations made by the speakers from the Indian side nor FNCCI or Government authorities. What one can find after reading these presentations and other provided documents is, they are all based on individual opinions (which does not amount to much in terms of making things happen on the ground). Nothing substantial or concrete were brought on the table, especially in terms of G2G collaboration between India and Nepal.

References

1. Arvis, J., Ojala, L., Wiederer, C., Shepherd, B., Raj, A., Dairabayeva, K., & Kiiski, T. (2018). Connecting to compete 2018 : Trade logistics in the global economy. ().World Bank, Washington, DC. Retrieved from http://documents.worldbank.org/curated/en/576061531492034646/pdf/128355-WP-P164390-PUBLIC-LPIfullreportwithcover.pdf
2. Collier, P. (2008). The bottom billion: Why the poorest countries are failing and what can be done about it. New York: Oxford University Press.
3. World Bank. (2019, Aug 08). Logistics Performance Index. Retrieved from https://lpi.worldbank.org/

Contributor’s Note: All the presentations, key messages, other program and proceedings can be found here.