Rebalancing the Economy

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Rebalancing the Economy

The developing trend of the Nepali economy does not pose a rosy picture since manufacturing sector is losing its ground and services sector is mainly dominated by the non-tradable sub-sector.


The role of government is key to promote employment opportunities and economic growth of a country. Increasing government spending on public infrastructures and social capitals and creating conditions conducive to private sector investment are considered as twin enabling factors for attracting investment in the productive sector of the economy. Liberal economists like Joseph Schumpeter opine that innovators and entrepreneurs are not only the vector of economic recovery, but also are kingpin of the economic growth. 

Industrialisation accelerated from European countries as Great Britain and Germany took the lead in manufacturing during the 18th and 19th century, based on mechanisation and specialisation of production. United States of America and other western countries followed the suit for enhancing efficiency of their production. Growing industrialisation transformed the economies shifting from agrarian societies into one characterised by the factories owned and operated by the affluent people of the society. Increased outputs of the factories and manufacturing created pressure on trade transactions and nudged the concept of free trade across the countries. Famous economists like Adam Smith, David Ricardo and Irving Fisher propounded the theories of free trade and its implications on overall welfare gains for the countries. This also helped in developing a sense of inter-dependency among participating countries through specialisation of production and exchange of goods. The emergence of General Agreement on Tariff and Trade (GATT), and its successor the World Trade Organization (WTO), was the result of the natural propensity of the countries to go for a freer trade by removing the barriers.

De-Industrialisation & Re-Industrialisation
Another phase in international trade is the shift in the structures of trade from the goods to the services or so called "de-industrialisation". As the markets opened up for competition, the highly industrialised countries in the west, transformed to service trade from the manufacturing which in turn shifted to the developing and newly emerging countries in Asia. China, South Korea, India, Malaysia, Vietnam, and recently Bangladesh are taking up the lead in manufacturing of consumable products while the European Union, United States and Canada are either in the business of manufacturing high value products or in the services sector. Education, finance, business, legal, accounting, communication and IT related services are the major tradable areas pursued by the developed economies. In the European Union, services makes up 70 percent of the national outputs. Despite a shift towards the service-oriented economy, there is increasing realisation among the economies that manufacturing should be bought to the center stage in order to enhance and sustain growth. The slogan "Buy American, Hire American" espoused by President Donald Trump and the axioms "Make in India" by Prime Minister Narendra Modi are based on the notion of giving a boost to the manufacturing sector and increasing its share in the national economy. India aims at increasing the share of manufacturing to 25 percent by 2025 while in China manufacturing sector covers a whopping 40 percent of the domestic economy. The industrial output has contributed to maintaining huge trade surplus of China with other countries of the world.

Nepal has seen the growth of its manufacturing sector from the 1960s, particularly with the opening of public sector industries that were mostly established under grant assistance of other countries. Those industries were largely running under the protection of the government and with monopolistic operations. The changes in 1990 not only introduced the political pluralism but also intensified the participation of the private sectors in the interplay of economy. Consequently, manufacturing sectors faced a slowdown reaching a tipping point of 5.5 percent of GDP in the recent years, although it was more than 12 percent around two decades ago.

Nepal's Structural Change
Nepali economy has gone through structural changes as the share of services is increasing at the cost of manufacturing and agriculture over the last couple of decades. There is no doubt that the size of economy is growing, but the shift has been towards services skipping the secondary sector or premature deindustrialization, as it has been a common feature among many developing countries around the world. Nepal's service export in 2016-17 has reached Rs 158 billion which is double of the goods export in that particular year. Import of services was around Rs 155 billion in 2016/17 which is on constant rise, particularly due to large number of students going abroad for higher studies every year and the growing number of middle class traveling to other countries for vacation and visiting their children living abroad. The recent move of the Nepal Rastra Bank to limit the amount of foreign currency people can take with them for travelling abroad signals the decreasing amount of the foreign currency reserve with the government. 

The developing trend of the Nepali economy does not poses a rosy picture since manufacturing sector is losing its ground and services sector is mainly dominated by the non-tradable sub-sector. Agriculture as the mainstay of the economy is marred by decreasing agricultural land and shrinking production. A large number of young people are out of country helping to increase the production of host countries at the cost of declining domestic production. Import of luxurious goods and higher inflation of consumer goods is fueled by the remittance. 

Higher volume of remittance inflow, associated with the import of luxury goods may be lucrative to the government from the viewpoint of collecting more revenue. But the question is about its sustainability. How long the economy could tread along such risky path? There is need of giving a serious thought to such problems. The government should not make further delays in bringing out a pragmatic and concrete plan for rebalancing the economy. Such a plan need to focus on developing industries of comparative advantages on one side, while also considering leveraging the Nepali industries by linking them in the value chain of the manufacturing units of the neighboring countries. In its true sense, the bilateral trade agreements with India and China can benefit Nepal only from the development of manufacturing. Without industrial outputs for trade, the agreement would turn into a fiasco.

Ojha is the former Commerce Secretary of the Government of Nepal. Views are personal.

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