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Kamala Sarup: Nepals Macroeconomic Policy

Nepal – Macroeconomic Policy Is Essential

By Kamala Sarup

Given such a strong concern for human development and a promise to eliminate the worst forms of human deprivations, what has been Nepal's performance on the poverty front? To what extent has poverty reduction occurred? What are some factors that have limited the expansion of human capabilities? Above all, what are the country's prospects?

I suppose it would be better to say, there has always been macroeconomic policy, and good macroeconomic policy, is essential for economic growth. It also is essential if one is going to avoid very high rates of inflation, and there is plenty of evidence, of course, that both of those things are directly and importantly linked to poverty alleviation. To a first approximation, real incomes go up approximately at the same rate across the spectrum. On the other hand, there are things in addition to simply raising real incomes that can make a difference. And, of course, there is lots we need to learn both in terms of what has been effective and what has not been effective.

I want to talk about the design of policy and I'll specifically talk about pro-poor growth-and the assessment of policy, which is particularly poverty impact analysis. So design and assessment, and they're obviously complementary, and they should obviously be based on evidence. So let me take policy design and particularly look at that in terms of pro-poor growth. On the other hand, special schemes to unearth black money and assets should be introduced.

Poverty remains a serious concern in Nepal. The poor still number over thousands. Under the bubble phenomenon, the dissonance between the country's real economy and its financial sector has scaled dizzy heights. Growth has become more lop-sided, and mal-distribution, always notorious in hierarchical Nepal, has worsened. Agriculture, central to people's survival, has stagnated. And the structure of industry has become more skewed. As the economy registers an artificial boom, Nepal's savings and investment rates decrease by three percentage points and the government's profligacy reaches new peaks.

Nepal is macro-economically back to the critical situation , which triggered severe neo-liberal restructuring. Public services are collapsing, hitting the poor. The government is not spending on agricultural programs, and rural employment and anti-poverty schemes, as well as health, drinking water supply, education and sanitation are also getting less attention. Income growth in the rural areas, where 70% of people live, has sharply declined. Real wages of rural workers has also decreased. Infant mortality rates are rising. But luxury consumption is booming within the upper crust. The finance minister failed to tax the rich. The government money has not gone into modernization, workers' retraining or the infrastructure, but into unproductive government consumption. The infrastructure is in an advanced state of decay.

Even Government has pledged millions of dollars to tackle poverty. Given the fiscal crises in Nepali economy and the economic slowdown, the expectations from this year's budget were very high. The health sector also had a lot of expectations from this budget, especially the private health sector and private insurance. While all expectations were perhaps not addressed, the budget has given the health sector a fair share of attention.

Food security mainly relates with the production, distribution and pricing of food grains and thus brings agriculture, Public Distribution System and the subsidy structure in to focus. The reform measures that predominantly affect them are reduction of fiscal deficit, reduction of subsidies, devaluation of rupee, export orientation and reduction of agricultural credit. The price rise in food-grains owing to the cuts in the food and fertiliser subsidies and consequent adjustments have particularly been harsh. We can not forget how the contraction in public expenditure and the consequent reduction in aggregate demand could not but adversely affect employment in the unorganised sector, whether non-agricultural rural employment or urban informal sector employment.

In Nepali governmental definition of poverty is based on the sole criterion of minimum food requirement for survival. We have questions how the higher level of social consumption with relatively better distribution of incomes and wealth vastly widened the demand of those economies and facilitated more broad based development. At the same time, there is need to review these programmes, sharpen their focus, improve their delivery system and involve the poor in their implementation.

Now, let me just say something fairly briefly about policy assessment and poverty impact assessment in particular. If we declare for reduction in poverty, which we do, of course, we ought to be able to assess ex ante and ex post the impact of our policies on poverty. We must be very careful, of course, to do that in a long-term, dynamic way as well as short-term. You cannot, for example, look at the impact of education on poverty and income distribution by just looking at what happens over the next couple of years. The impact of education on poverty and income distribution obviously has a very long gestation period. So that's just one of the problems.

Higher literacy and health standards were the most crucial factors in enhancing labour productivity which in turn went to facilitate significant import substitution and export promotion.

We have seen quite a bit on private consumption, but the emphasis also needs to be put on what are the adjustment implications on the provision of public goods, particularly public health, nutrition, education, because these not only have immediate effects on consumption, but they have long-term effects on the poor. And the reaction of the public sector to the crisis can make the crisis worse from the point of view of the poor. The reaction of the public sector to the crisis can actually make the situation a little bit more manageable.

Now, if you look at some developing countries - and, again, I don't want to generalize, but at least the case of Mexico and very many other countries in Latin America - what you see is that there are multiple mechanisms for income transfers. There are tax exemptions for some basic commodities. There are sometimes price controls on telephones. There are sometimes price controls on transportation. There are food subsidies. There is sometimes free delivery of goods. There's a multiple set of mechanisms through which these mechanisms work.

In most developing countries, there's something that I would call a missing political alliance between the poor and the non-rich. Now, who are the non-rich? They are a lot of people. They are the people who were poor a year or two ago and are not poor now, the people who will be poor a year or two hence and are not poor now. They are the people who are at risk in the working class. They're the rising, emerging entrepreneurial people who run small businesses and who rely on not too tight an economy in order to have jobs and to generate jobs. The point is that these make the majority in most developing countries.

So the point I want to make is that most people in Nepal are at risk in one way or another, even if they're not poor today. But we don't see any sign, oddly enough, of this missing political alliance in Nepal between the poor and this huge vulnerable group of non-rich.

Is there then hope for them? What does Nepal need to do? At the same time, we also need to learn and act. If human poverty has to be eradicated, attention must shift from income poverty to the poverty and inequality of opportunities - economic, social and political. Nepal needs sustained public action to be guided by strong human development priorities. Further reforms are needed in agriculture, industry and services. All subsidies should be targeted sharply at the poor and the truly needy like small and marginal farmers, farm labour and the urban poor.


(Kamala Sarup is editor to )

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