Econ-ity » August 26, 2014

Daily Archives: August 26, 2014

Why I won’t spend my remittance on you

nepali migrant workersPoliticians and opinion leaders, often vociferously comment over the utilization of remittance in consumption and the fact of it not being channeled to productive sectors. Claims are, the country is facing decline of manufacturing and competitiveness, rising wage rates, shortage of labourers in the domestic markets, increasing imports, higher disposable income and conspicuous consumption – in short, signs of Dutch Disease. Living Standards Survey adds, 78.9% of this remittance goes into consumption while capital formation amounts to only 2.9%. The Economic Survey of Nepal 2013/14 reads, “… its utilization in productive sector has been a major concern.”

If we look at the ground realities, on the other hand, it can be clearly understood why things have been going the way they are. And what is more, it is perfectly rational on the consumers’ side that they are consuming and not contributing to capital formation.

Here are some of the reasons why:

– Lots of Nepalese people still face problems like hunger and lack of access to education, health, drinking water, entertainment and more. Irrespective of the poverty rates (which has been brought down by a considerable measure, thanks to remittance), a large chunk of Nepalese populace still has poor standards of living in addition to lack of access to opportunities that can lift them out of their kind of lifestyle (if not for foreign-employment). Therefore, many youngsters acquire loans from friends, family and other networks and head for the foreign land in search of job opportunities. When one has to worry about the fulfillment of his basic needs and repayment of loans he has acquired just to be able to go abroad, it does not require knowledge of rocket science to tell that the person will spend on his basic necessities and loan repayment and not worry about macro-economic indicators of the country.

– The next major sector where the remittance money is spent is on health and education. Although these are not direct forms of capital accumulation, one cannot simply discount the fact that current investment in good education will create an educated future generation that can contribute to the country’s economic growth in the long run. An investment in education today holds the key to prosperity in the future.

– After health and education, what follows is, what is commonly known as “conspicuous consumption” – spending in buying luxury items, cars and land. Considering the fact that saving in banks gives a negative real return in saving (due to higher inflation as compared to the interest rates offered by the banks), it makes more sense to spend the money today and realize its full value than to save money and see its worth decline day by day. Given that the land and vehicle prices generally go up in our country, such spending offers prospect of better returns in future than the returns from saving in financial institutions.

Therefore, if we look at things from an individual’s or a family’s perspective, it is sensible that the remittance money is goes on basic consumption and not on capital accumulation. Individuals have the best knowledge of what their necessities are – better than any opinion leader or any planner – and they make rational choices based on their needs.

Thus, if one expects that remittance money should be channeled to productive sector, instead of making investment in buying a car or a house or even land in one of the cities of the country for that matter, relevant changes need to be made in the policy environment of Nepal. There are no alternative avenues to save at the moment. Doing business is difficult thing in Nepal. Doing Business Report 2014 (World Bank) puts Nepal in 105th position out of 189 countries. If this were easy, people would enterprise in Nepal itself which would create job opportunities for many, leading to mobilization of the youth, creating wealth and reducing the income and social inequalities in Nepal.

Another possible mechanism to channel this money could be that the government issue lucrative bonds (meaning positive real returns) for specific infrastructure projects like hydropower or roads. There have been initiatives of this sort in the past but these have failed utterly in the absence of right marketing and penetration ability. Nepal receives remittance that equals the fiscal budget of the nation. This shows that if there is prospect of return, people have money that could be channeled to capital accumulation. But the current case in Nepal is one of lack of sufficient homework in the part of the state.

Akash Shrestha

About Akash Shrestha

Akash Shrestha is Coordinator of the Research Department at Samriddhi, The Prosperity Foundation where his focus areas are petroleum trade and public enterprises. He also writes newspaper articles, blogs and radio capsules, based on the findings of the studies conducted by The Foundation.

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