The Government of Nepal has proposed stringent laws to regulate the alcohol consumption in the country. The government officials, through this executive order, claim that the influence of advertising on underage drinking as well as incidents of violence and crime will plummet. The new bill, if enacted, will prohibit liquor advertisements in both print and electronic media. The directive also bars the manufacturers of alcoholic beverages to sponsor sporting events, concerts and other public events. Continue reading
It is hardly news for us that Nepal is one of the largest recipients of remittance (relative to the Gross Domestic Product); inbound remittance is equivalent to 30% of Nepal’s GDP, and continues to grow by the year. Yet, not much of this money is being channeled to productive activities, and that, many argue is a worrisome event for Nepal. But why could that be happening? According to one of the recent updates published in national daily, much of this money is spent on loan repayment, daily consumption, education and health, and some bit is being saved. A closer look at these headings clearly reflects Nepal’s ground realities, and offers cues to why not much is going into productive sector.
25% on loan repayment
The primary reason behind so many young people migrating to foreign lands is a search for economic opportunities—opportunities that are not available for most of them in Nepal. This migration, however, does not come free of cost. Since most of these economic migrants come from poor families that also do not have much savings in the first place, they acquire loans in hundreds of thousands to get themselves into these foreign lands. Obviously then, the first priority for them is to repay their loans so that they can secure greater disposable transfers for their families as soon as they can.
24% on daily consumption
Around 25 percent of Nepalese are living below the poverty line. For most of these people, it is daily battle—meeting their basic needs. Therefore, when the level of income increases, a large portion of the disposable income is spent on daily consumption. People cannot be expected to make huge proportions of saving and invest it while they do not even have a decent arrangement regarding their basic needs of food, clothing and shelter. And that is what we see so many poor Nepalese people doing with growing remittances. When disposable income increases, it’s a basic human behavior to uplift living standard for better and healthy life.
10% on education and health
While a large portion of Nepal’s budget is spent on health and education sector, access of people to quality health and education services are not satisfactory to say the least. The number of free public schools is high but large numbers of students are now slowly moving to privately-run schools for quality education. This is a manifestation of the fact that parents believe that quality education is a pre-condition for their children’s secure future, and that they perceive private schools as better educators.
Similarly, public health services are not accessible to all. That is not to mean that private health services are, however, the same services that the government has committed to offer to the people for free are non-existent in a lot of places, and people have to spend a substantial chunk of their income on accessing these facilities.
Combined, these expenses reflect the inefficiency of state institutions, and poor quality of whatever little services are available to the people.
28% on savings
The above-three major headings and some others (including trade, cultural and religious activities, etc.) account for 72% of remittances, leaving behind only 28% for savings. This is the amount that could actually go to productive sectors in the form of investments. And that is where the catch is, for Nepal. If nothing else changes, most of this money will go into purchasing land and gold as these assets guarantee a certain amount of return (which substantially greater than investing in other economic sectors in Nepal). However, if the goal is to have this money channeled to productive sectors, then Nepal will have to rethink its policies such that there are respectable returns to be earned from the productive sectors as well. And this will come through building a conducive environment for doing business, meaning stable and market-friendly policies that allow people to start their businesses with ease, protect their private properties, guarantee contract enforcement, allow for easy exit from the market, and ensure rule of law.
Politicians 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.