$4.4 Billion and How To Proceed

By: Bikal Dhungel 

  

  

Following a 7.8 magnitude earthquake that cost the lives of over 8000 Nepalese, people all over the world donated generously to help Nepal. The total loss in monetary terms is expected to be around $7 billion, one third of Nepal's nominal gross domestic product (GDP). The government held a donor conference in Kathmandu where high ranking officials from national governments and international organizations participated and pledged a fantastic $4.4 billion both as grants and loans. However, the Nepalese government still needs to assess how they can feasibly spend that amount in an effective way to make the most out of it. $4.4 billion is a gigantic amount, more than four times the regular official development assistance (ODA) Nepal receives in a typical year. It is slightly less than the total remittance flow of $5.5 billion that entered the nation through formal channels last year. $4.4 billion divided among the population will give a mere $1700 per person, twice the nominal per capita income. Amount of this size will not generate large outcome but if spent intelligently, the multiplier effect will be huge and is enough to transform the nation. $4.4 billion will be accompanied by another $5.5 billion remittance flow this year and Nepal's own development budget.   

  

The most important question now is how we can spend the money in such a way that we are independent from international support in the future? Example of Haiti shows that mismanaging fund would lead to another disaster that can turn to be worse than the earthquake itself. This disaster can also lead to violence when political parties and groups fight for their share of aid ignoring the overall welfare of the nation, a reason why donor countries prefer to spend aid through INGOs and NGOs instead of giving to recipient government. But there are also examples where international support has been used intelligently to rebuild nations from where Nepal can take lessons.   

  

14th August 1945, the official date of the end of World War II. Two atomic bombs were dropped on the Japanese cities of Hiroshima and Nagasaki. Germany had already surrendered and the biggest war in human history cost the lives of over 70 million people worldwide where more than 50 million were civilians. The losses of properties and the cost to rebuild were immeasurable. Europe was left devastated. Yet, in another decade they again brought the continent in pre-war level and major  

European economies were experiencing economic booms. How did that happen? Taking the example of  

Germany, the country that was hit hardest in terms of material loss, there is much to learn. When Germany surrendered, the victors of World War II, the USA, UK, France and Soviet Union kept their presence in German states and were concerned about its future. They had to make sure that Germany does not start another war like both World War I and II. How to monitor that country to ensure world peace had been a major concern. The USA understood that politically and economically unstable Germany would threaten peace more than an economically powerful Germany integrated to the world economy. Same argument was valid for Europe and Japan. The US foreign minister brought the plan to rebuild European states destroyed by World War II with the name 'Marshall-Plan'. $13 billion was released from which Germany received $1.4 billion, about 2% of its gross domestic product of the year 1945. That amount was tiny in comparison to the support Nepal got this time, which is about 20% of the GDP. How Germany used that amount is remarkable. It cleared the ashes of World War II, rebuilt the critical infrastructures necessary to kick-start growth and after five years, the German economy reached the beginning of the phase called „ Economic Miracle „. From 1949 to 1973, Germany grew at an average of 6.5% per year. The total wealth more than tripled during that period. The economic policy of Finance minister Ludwig Erhard who later became the Chancellor was massive capital accumulation that strengthened production which led to rural to urban migration that in-turn boosted productivity.  

Industrial production grew and Germany immediately became the leading exporter of the world. The German government had to import labour from abroad to work in booming industries. Heavy investment was made in educational sector with more priority on technical education and training schemes, institutions were created that were necessary to create rule of the game of economy, financial institutions grew which worked under a close cooperation with the state, the central bank called 'Deutsche Bundesbank' was formed whose main goal was to maintain currency stability. Other reforms like the progressive tax system, social security system and health care reform was made which helped to grow the economy further and made Germany a stable and robust country. The most important factor was the will of the people to contribute to build their nation and their hard work guided by genuine principles of government which was growth and development oriented. The Germans didn't work for themselves, they worked for their children. They built the country for their children and grandchildren. The history of economic development shows that one generation should always sacrifice their hard work for future generation. It was the case in South Korea, Singapore and elsewhere. It takes a generation to build a nation. What Nepal can learn from Germany is, in order to do something, there should be a strong will, a strong sense of sacrifice. Until we only think about ourselves, it will not contribute to growth and development. Short-sightedness will not generate growth. We need to think about our children and should be ready to sacrifice our effort for their prosperity.  

   

Nepal today resembles with Germany in a sense that Germany also didn't have a constitution. The German constitution is a random collection of paragraphs that were added and removed and again added, neglected and again brought to life time and again in the last 60 years. There was never such thing like constitution assembly. They also didn't need a constitution. They needed development and development needs a genuine development policy. Constitution alone without a feasible development policy will not bring change. Without a robust economic development, neither democracy nor peace will sustain. Where there is poverty, there will be violence, there will be war. The Germans understood this and decided to focus on development first and constitution later. However, a basic political foundation is also vital to development. If Germany were unstable, with various social and economic problems, they would not have achieved development. Here the question arises why political stability and supporting institutions are necessary for development. The history of the United Kingdom gives an answer of this question. Why industrialization started in England and not in Japan, South Africa, Spain or Russia has been a question researchers took long time to reach a consensus and that it is the political foundations that supported industrialization in England. Daron Acemoglu and James Robinson mention in their book  

‘Why Nations Fail’ that prior to seventeenth century, European states were full of aristocrats that resembled the political structure of typical under-developed countries like Nepal. Prosperity was limited to few, landlords had full control over their peasants, slavery was usual, wealth was concentrated on aristocrats and most importantly, there were heavy restrictions on economic activities. Consequently, broad majority of people suffered from poverty and deprivation. However, England managed to breakthrough from the system. The revolution of 1688 gave birth to economic and political institutions that were successful in providing incentives for business, trade and innovation. The property rights law was brought which guaranteed fruits to creative minds whose inventions was saved from being copied by free riders. Monopolies were reduced giving rise to competitors. Roads, canals and infra-structures supporting economic activities were built. Educational institutions were built to provide high quality of education in that time. These foundations created a way for industrial revolution which later spread to other parts of Europe as well. The short history of 17th century England teaches 21st century Nepal that without creating or reforming institutions that pave the way for technological advances, growth will not follow. Institutions that ensure wealth redistribution for social security and education must be present. Also institutions that ensure a rule of the game in terms of finance and trade are pivotal. On the other hand, in the presence of extractive institutions, authorities and governments to enrich the few will postpone development. Acemoglu and Robinson give example of Eastern Europe and Russia during the time of industrialization. These nations managed to disrupt economic activities which put the ruling aristocrats in power whereas the majority suffered, a story that is valid in Nepal of 21st century.  

   

  

  

From 17th century England and 20th century Germany, Nepal should learn that building a robust political foundation and then feasible economic policy is eminent to welfare growth. Making the existing institutions powerful and creating ones that are necessary in the field of finance, education, health and others is vital. Infra-structures should be built in areas that are critical to growth. Critical bottlenecks of development should be determined and they should be removed. In education sector, best practices from the world adapted to local conditions should be integrated to the curriculum. To summarize, Nepal should focus on following points: maintain political stability, create an environment for domestic and foreign investment, create institutions, reform education policy, work on the efficiency of public sector, guarantee property rights, reduce credit constraints for the poor and for small scale entrepreneurs, support the entrepreneurs, closely co-operate with the private sector, make technological learning in all fields a priority and minimize market distortions.   

$4.4 billion will surely be not enough to reform everything but it is enough to initiate the change. These were the policies that countries with rapid growth had in common. These were the foundations upon which double digit growth was achieved. Germany was able to initiate these changes with only a cash injection of 2% of its GDP, Nepal is getting much bigger share. Same thing is also true for South Korea, Taiwan or Botswana. So, if there is a strong will, Nepal can become another Asian Tiger in the coming decades.   

   

  

  

  

  

Notes on Refugee Crisis

By: Bikal Dhungel 

Over 50 million people have left their houses due to war, violence, repression, climate change and so on. 20 million of them have left their country and are living in refugee camps. From Kibera to Lebanon, Turkey, South Sudan to elsewhere, there is a big crisis going on. It has already reached Europe. More than 1.5 million refugees are expected to reach Europe at the end of this year. In Germany alone, there will probably be more than 800,000 refugees. So, few quick notes on this issue.

• European Union is based on solidarity: A big joke. European countries present their solidarity when it is about getting billions of Euros but not when getting the refugees. Greece, Portugal, Ireland, Italy and others were pointing on solidarity in times of crisis and also got billions of cash injection from Germany but when Germany is asking them to take their fair share of Refugees, they don't care.
• Fixed Quote for refugees according to population size and economy of member state: Although high ranking officials and governments including the European Commission is calling for quotas but I am sure, it will fail. Why ? Refugees enter the EU from few countries, Greece, Malta, Spain, Italy, Poland and Hungary. Those arriving in a boat will land either in Greece, Spain, Italy or Malta. Those coming from Russia , Georgia or Ukraine will arrive first in Poland. These countries are member of European Union. So, when we introduce quota system, Greece, Italy, Spain, Poland and Hungary should also take their share of Refugees. But when they refugees were already there first and from there they came to Germany or other economically strong nations, who believes that these migrants will agree to return to these countries ? If they were happy there, they would not come to Germany in the beginning. Moreover, Hungary, Greece or Spain themselves have high unemployment rates. Refugees will not get any job either. So, sooner or later, they will have to come to better countries anyway. Hence, wasting time discussing about fixed quota is useless.
• Why do people , hundreds of thousands are coming from Balkans ( Serbia, Kosovo, Macedonia, Bosnia, Albania ) even though there is no war or violence and they are even EU candidates ? : Simple economics. When the average income of Balkan states is less than 250 Euros per month, and when Refugees get in average over 400 Euros per month without working at all, who is the stupid person still living there ? All of them will come to Europe even though they know that they wont get asylum. Europe is a free cash machine. Politicians from Balkan countries are telling to stop paying cash to people from Balkan. Only free foods will stop their incentive from moving away from their country. When large number of youths are moving out of the country, its bad for their economy.
• Why so many want to come to Germany ? - The over warmheartedness. This is good in the first stance but when it spreads well across international media, over night, it can turn into a disaster. We saw in the news, also people who were in Hungary, applying for asylum , when they heard that Germany is giving residence permits to Syrians, they took the trains over night to Germany. In such cases, due to immense pressure, the welcoming habits of Germans can have an end within a short time. Two years ago, in a survey, 70% Germans expressed that their government should help refugees from war torn countries. Now, due to massive inflow, they feel that their country cannot handle it anymore. So, only 49% thinks that Germany can accept more refugees.
• Isnt 800,000 a small number in a country of 82 million ? - in the first sense yes, its 1% of population. But we should also see the future, in 2015 its 800,000. What about 2016,17,18 and later ? Are the social infrastructure enough ? Are they capable to handle in a short time ? Answer is no. The capacity of schools, universities should be increased, there should be enough housing, public transportation should support the growing population, local authorities should be able to handle them. Otherwise, the constitutional democracy will collapse when its overcrowded.
• What about social impact ? Almost since a year I am following the news, that local authorities in Germany are concerned about refugees. They are doing nothing else than looking for a place to house refugees, giving them foods etc. Their capacity is limited and they are overwhelmed. The national state cannot help either because they too are in problem. It can radicalize the local population that, their representatives are focusing on refugees and have no time for social issues, things about local people, local schools, infra-structures etc. Charity can only be limited. See the earthquake in Nepal. In the first two weeks, people from around the world rushed to help, donated lots of money and the international media covered the news from Nepal. Soon after that, they returned to their business as usual, and the world forgot Nepal. Now its the turn of Nepalese themselves to help. But in the case of Refugees, they are continually coming, so when local authorities focus on this for long time, it will impede development and impact on their own economy which will radicalize the people and they will start to see Refugees as threat to their existence. Then they start to throw stones to refugee houses and in extreme case, attempt to kill them. Germany already has a dark past. Terrible pictures from Rostock Lichtenhagen, Hoyerswerda, Mölln, Solingen and elsewhere shows that public opinion cannot be neglected.
• 
  
  Are the people coming to Europe real refugees or are they really looking to live in a peaceful place ? - May be no. In every country, when there is war, people who are effected the most are poor people. In the cases of extreme violence, they are displaced within a nation or in some cases they flee to neighbouring countries and live in camps. Those who make their way to better countries are mostly from high class. They can afford to pay the traffickers to come to Europe. Although there is war, who is the one that needs most security ? It is the poorest, not higher class. During the Civil War in Nepal, 200,000 people were displaced within the country. People from higher class knew about a thing called asylum and made their way to Belgium or US or UK and claimed asylum. Their demand was genuine and also got the protection status. On the other hand, the real vulnerable ones continually suffer. This is why I personally prefer the UNHCR to choose most vulnerable refugees from war torn area and re-settle them in third countries. UNHCR chooses the ones in need and not the upper class who can afford to go to Europe.
  Second point that they only want to live in peace is not true in most cases. Take the example of refugees arriving via Turkey or Hungary to Germany. Turkey is peaceful, Hungary is peaceful, even Serbia is peaceful. They could have resided there if peace is all they wanted. But why they choose Germany ? Because their intention is to make more money, which is understandable in basic sense but this is not what Asylum is about. A wish to live a better life is not and should not be a reason to apply for asylum.
  
  
• Long term impact of going away – Germany was totally destroyed after World War II. Had they opt to move away, there would have been massive outflow to other countries and probably Germany would still be as poor. But the politicians had a plan to rebuild, with support from other countries as well. They made the people work hard, they cleared off the ashes and made way for economic development. Within 10 years, they had a fantastic economy. If there is a problem, it should be solved. Running away from the problem will not achieve anything.
• How to help refugees in cost efficient way ? - There are many ways. The cost of processing asylum applications, housing and lodging refugees and other cost will reach a total of 4 billion Euro for Germany this year. 4 billion Euro for 800,000 people gives 5000 Euro per person per year. If you invest this amount in refugee camps, it is enough to provide a decent living. It is possible to build a nation from this amount if financial support from other countries are combined. In refugee camps in Lebanon, if you invest this amount in schools, building markets, building roads and creating employment, it will give incentive for people to remain there. Nation-building approach must be well thought. There will still be people who might not find jobs but then take one person from each household and educate them or let them work in the EU and send money back home, and that money could be invested to generate income. Doing this in massive scale will help the refugees where they reside and the support in European societies will increase as well. Like people who invested their toys and cloths in Munich central station, send these cloths to refugee camps. It will save costs for them. There are many such things that can be done.
• But how to go further immediately ? Actually the west can solve the problem but they dont seem to be interested in it. Unlike Egypt, Libya or Tunisia, the first war in Syria lasted almost 1.5 years. The rebels failed to topple down the government of Bashir Al Assad. This is a clear proof that there was a wide support for Al Asad in Syria. It was also thought that the rebels were brought from foreign countries with the help of foreign secret services. And then western nations decided to bomb Syria. It still did not help. Syrian Army is still fighting with rebels. Now the rebels are also the cadets of Islamic State, which is much worse than a dictatorship. The west has realised that Asad was good for Syria at least in terms of peace. The war continued and has no sign of ending soon. Now, the west can learn from its mistake and talk with Asad, which Russia is already doing. Talking with Asad, Iran ( which is helping Syria with weapons ) and Russia can help to drive out or destroy the IS fighters and rebel groups in Syria. The war will then be over and more refugee flow will stop. With financial support, Syria can then be rebuilt and the displaced refugees might return. If the west fail in this diplomacy, they will have to calculate with more refugees in the future, both from Syria and from camps in Lebanon or Jordan. In addition, when the west sells weapons to Saudi Arabia or other rich gulf states, they can raise the issue. They can tell them not to finance the war or terrorism based on political interest. And of course they should take the refugees. Gulf region is underpopulated and vast amount of wealth is available. If there is political will in these countries, Syrian people will find easier to adapt due to similar culture.
• What to learn – I think , at last the citizens of the west should understand, if your country bomb a nation, you should also take refugees. Those who raise war should face consequences. It is a scandal, when countries like USA go to war in Iraq or elsewhere for own self interest and then the refugees will come to Europe, due to its close geographical location and they bear all the cost. It is a scandal. That is why, before the US raise any war, Europe should take stance and say, we will not participate in this war unless it is vitally necessary. Same is valid for European states that participate in such war. It is a shame that UK is reluctant to take refugees. UK bombed Libya, Syria and others but only took 200 syrian refugees till date. If there is enough public pressure to avoid war, the refugee flow will be lower.
      
• How Europe can profit from immigration – European population is ageing. With the same growth rate and no immigration, German population will fall to 73 million in 2050 from 81 million today. They have the lowest birth rate of the world. Other European states are not far. 15 out of 28 European states will face population decline until the mid century. In the case of Germany, researchers in the University of Coburg calculated that every year, there should be a net immigration of 500,000 until 2030 to maintain the population stable. Failure to do so will reduce the quality of life because more and more money should be spent on old age homes and the pensions of older people. When the number of youths will be reduced, tax should increase. This will reduce incentive to work and will cause negative impact in the economy. Japan and other advanced nations are suffering with this problem. For this reason, Japan is allowing further immigration. Western Europe is dependent on eastern Europe to fill its labour gap but eastern Europe cannot support for a long term. Because lots of polish are moving away to western Europe for employment, scarcity of labour is common in Poland now. It is allowing immigration from non-European countries and will be a major destination in the coming days. So, supports of education and training fo refugees will help Europe in the longer term.
• How to go forward now – Resolve the bottlenecks. The main cause of chaos in the society is due to existing system. There are 400 people in Germany who listen to the refugees and decide either they are allowed to stay or not. 400 people for 800,000 refugees this year is far too few. The 40% refugees who are recognized as refugees or get temporary protection can stay and everything is ok. But the remaining 60% can appeal, they can take a lawyer, go to the court and in this cases, these 400 workers are required to provide details about the application process and on which ground the people were rejected. This is why, the application process in Germany take years and in best case, 6 months. In the Netherlands and Switzerland, they are dealt within few days. Those who are rejected will be sent back easier. In Germany, it takes place rarely. In 2013, only 4000 out of 200,000 rejected refugees were sent back. Others stay anyway. This does not make any sense. The state should not make decision based on their heart rather on minds. The balloon of heart and mind can be dangerous and costly. At the present, if the success rate of Syrians are 90% anyway, why dont the government give them temporary protection immediately without going through all the process of asylum ? This would relax the bureaucracy and they can come to job market faster, they wont need any government support and they even pay tax which is good for the nation. Most importantly, other asylum application can be dealt faster. Of course there are also problems with it. Not all people who claim themselves as Syrians are actually Syrians. They can be Moroccans, Tunisians or Egyptians. In the past, many Indians, Pakistanis etc have claimed asylum in the name of Afghans because there is war going on in Afghanistan and they have higher acceptance rate as refugees than the Indians or Pakistanis. Similarly, many Nepalis have claimed asylum in the name of Tibetans or Bhutanese. This is a serious challenge and hard to detect as they speak similar language and look similar physically. Still, as a whole, the policy of exempting Syrians in the first place can help to normalize the crisis.    

Deaths of Nepalese Migrant Workers Abroad

By: Bikal Dhungel

Over 2 million Nepalese reside in foreign countries for employment purposes and this number is expected to rise further. The recent earthquake has pushed many into financial ruin. The total destruction and the reconstruction cost is expected to be around 30% of the GDP. International migration is the only lifeline for many to earn bread in order to survive. In this situation, the duty of the government is to facilitate this process by better policies for example by lowering the cost of migration. The statistical data shows that the poorest 20% of Nepalese receive only 8% of the remittance flow whereas the richest 40% receive 60%. The data also shows that the richest 20% do not reside in the Gulf rather in Western Europe, North America, Australia or Japan. Hence, helping the poorest to migrate is vital for poverty reduction. 

The average cost of migration to the Gulf is 80k excluding personal expenses. Reducing this cost is important to enable the poor to migrate. Majority of migrant workers are employed in construction sites in the Gulf. Construction works are relatively dangerous. Consequently, several dead bodies return to Nepal in daily basis. The figure below summarizes the total deaths in given years.

The figure shows that majority of death occurs in Malaysia, Saudi Arabia and Qatar. However, all deaths are not work related. There are suicide, death through road traffic accidents, murder and so on.

It is also important to compare the deaths in foreign countries with the ones in country. The figure below, published by the University of Washington Panel of health data collection, shows the number of years lost in a year. 

Based on this figure, 5323,000 years are lost every year in Nepal. Considering a life expectancy of 70 years, slightly more than 76,000 people die due to above mentioned reason. This is equivalent to 0.271% of the Nepalese population of 28 million. Based on 2014 figure, about 2 million Nepalese are working abroad. Calculating 0.271% of 2 million gives a total number of 5420 (0.271/100 x 2000000). This means, with the death rate of Nepal, 5420 people should have dead per year but the rate is around 3400, which is 0.17%. 

However, this number is not a good comparison as there are disease like Preterm birth complications are also included which can not be the case with migrant workers. Also, migrants are generally healthier than the average population as they require a healthy body to perform physical tasks. Still, several research has shown that migrants often die of diseases that they were not aware of. The medical check up system in Nepal to acquire a foreign employment permit is not efficient and the authorities giving the medical certificate without any check up is business as usual. 

The message from this article is simple: while we blame foreign countries for the deaths of migrant workers, we often ignore the higher number of deaths at home. Of course it is necessary to ensure a safe working conditions but these are often the things we as migrant senders cannot influence. What we can do is to ensure that medical check ups are performed well and the migrant is aware of any health issue he or she is facing and from the government level, it is necessary to pressure the receiving government to enact safety measures. One death is too many and everything should be done to avoid it but we should never transfer the blame to others while not fulfilling our duties. Economically, migrant death means huge burden to the country. Suppose an only bread winner of a family dies in Gulf. His family and children are likely to be pushed into poverty trap because they might have invested heavily for the migrant's trip and other costs. So, several people will be pushed to poverty due to one death. A recommendation for the government is also to initiate an insurance scheme so that the migrant family should not suffer with economical consequences. This is equally valid for the death within Nepal. 

Aid, Inflation and Entrepreneurship

By; Bikal Dhungel 

Global official development assistance (ODA) is not without criticism. In the last 5 decades, over one trillion dollar has been given as aid. Still, many countries especially in sub-Saharan Africa are poorer than 40 years ago. Per capita income did not rise there.  Based on this figures, the backlash on aid has been rampant recently. People are grouped into three categories. First, those who support aid unconditionally (like Jeffrey Sachs), second, who thinks aid should be conditional (Esther Duflo ) and third, who think aid does not work at all (Dambisa Moyo, William Easterly). All three groups have robust data and well-grounded reasoning. Whatsoever, the initial reason for development aid, (to foster development) could not be realised. Otherwise over 1 billion people living below $1.25 a day would not be a reality today. However, it does not necessarily mean that aid has completely failed. As Esther Duflo puts it, ‘Aid might have helped to avoid even bigger disaster’.

The portion of poor people worldwide has decreased but this decrease mainly took place in South East Asia, especially in China. In least developed countries, the situation has not changed much. Despite huge amount of aid, development failed. The figure below shows aid as a percentage of government expenditure. From the figure it can be concluded that countries receiving highest amount of aid are in Africa and three in Asia, which includes a war torn Afghanistan, Cambodia and Nepal.

Source: World Bank, 2012

Also in the past these countries have been receiving a high amount of aid per capita. So, what was the role of aid in these countries? Has aid been fruitful at all?

There is no single answer to these questions. There are many unique factors that caused under-development. Some of the countries mentioned above are landlocked. Landlocked countries are in comparison poorer than countries that have access to the see. They also trade less especially due to the high cost of trading. A recent survey has showed that the cost of shipping good is 19% of the total price in Africa whereas it is less than 5% in the US. Why I mentioned trade is because trade is about trading goods and services. To trade, it is necessary to produce these goods and services. Producing goods and services means creating employment and that will eventually contribute to development. This is where the role of aid comes. First, what happens when aid is pumped into a country that produces less and trades less? A recent case study in Mogadishu, Somalia showed that the influx of aid has caused massive price hikes for basic goods that the most vulnerable were unable to afford it. With increased aid and remittance inflow but with a constant supply of goods, price normally goes up. When aid and remittance doesn’t go hand in hand with increased supply of goods and services, the money will be lost in inflation. So, even a well-intentioned support can worsen the situation further. A similar pattern is visible in Nepal. The high inflow of remittances has caused the price level to go up. From the year 2000 to 2013, inflation averaged 6.8% whereas GDP grew only by 4.1% in average. At the same time manufacturing and agricultural yield shrank but import sky-rocketed. Hence, it will be correct to conclude that remittance and aid has increased our foreign dependency but caused our manufacturing sector to vanish. This phenomenon is also called ‘The Dutch Disease’. Moreover, it also caused a price hike in non-tradable goods like real-state and housing. Such development puts Nepal in a vulnerable situation especially when the remittance and aid flow is disturbed by economic crisis.

The National Living Standard Survey 2010/11 shows that almost 80% of remittance is used for consumption and less than 5% is used for income generation. As mentioned above, once remittance flow reduces, it is likely that more people will be pushed below poverty line due to the lack of saving and income source. So, putting aside some remittance for investment is a form of insurance for rainy days. Moreover, the government has a role to play to avoid any inflationary tendency so that the remittances are not simply lost in price rise. Some countries including Nepal have introduced the instrument called remittance bond but it has failed to generate any positive result in Nepalese case. In terms of Aid, how they are spent is not known. The government spending process is in-transparent.  Still, like remittance, more inflow without accompanied by more production, there will be no long term gain.

Hence, main focus should be on entrepreneurship. If aid and remittance are invested, they create jobs and will help the people to sustain even without them in the future. Simply giving more and more aid both in the form of cash and goods is harmful in the long run. The famous story of mosquito nets clarifies this.

Malaria is one of the largest causes of death worldwide. According to the World Health Organisation, in 2013 alone, almost one million people died due to Malaria. But Malaria can be easily prevented, for example by vaccination or by using mosquito nets. So, an aid organisation decided to distribute mosquito nets for free in some rural area. Before the distribution, there was an entrepreneur who produced mosquito nets. She had 20 employees who could support ten family members each by their job. Now the aid organisation has distributed mosquito nets for free in the whole area and the local net producer was out of business. 20 employees and their family members lost their income source. In the short term it was still good for the general public because they all got free mosquito nets. After few years, the nets become old and cannot be used anymore. So, again the aid organisation should come and give them free nets. If they cannot do it anymore due to whatever reason, prevalence of malaria will again rise. Had they built the capacity of local net producer, the supply of nets in the absence of aid had continued but now the local net producer has gone out of business and the donor agency cannot give aid anymore. So, everybody is worse off.  The vicious circle of aid goes on like this. Aid should be given again and again.

How aid can be used in order to boost sustainable economic growth depends on how the receiving government chooses to use it. In the aftermath of World War II, the famous Marshall Plan was initiated with a total of $14 billion to rebuild Europe. The amount was used to build critical infra-structures that were vital for growth. Within five years, Europe built a robust economy and the period of ‘Economic Miracle’ started in Germany. The only difference between the Marshall Plan and Development Aid today is, Marshall Fund was perceived as a ‘one time’ support whereas recipients of Development Aid get it in yearly basis without having used it efficiently in the previous year. Marshall Fund was spent responsibly with targeted investments whereas Development Aid mostly vanishes within the recipient government and bureaucracy.

The lesson to take is simple: when the donors teach how to fish and actively support in the process until the capacity is built, no aid is required in the future. In contrast, if aid is given for the sake of giving, first it can cause inflation putting the vulnerable in even more risk and second it should continue further as it kicks small scale entrepreneurs out of business, like the story of mosquito nets. 

Better Economics

By: Bikal Dhungel

There is an international movement to ban Economics. It was accused to be against the egalitarian principle as the main intention of economics is to serve the rich, which is not true. Economics is a way of thinking. It is a science that has a certain purpose to guide policy making, be it in health, finance, agriculture or international development. Some of the arguments that opponents of economics make are true for example when they say ' If economists knew better, how come we have frequent crisis ? How come they are unable to address inequality or poverty or sustainable development ?'. These are legitimate questions but financial crisis are not quite related to economics itself. It is the policy that is bad. When financial sector is so deregulated, which sometimes goes against the principle of economics, crisis will follow. This was what happened in the US. Similarly, when nation states solely finance their expenses with debt without a robust economical base, sooner or later, crisis will follow, a Greek story. Crisis elsewhere has some origin, it can be in public finance system, wealth concentration, undisciplined financial sector and so on. How to deal with such problems has been the main concentration nowadays.

There is also a wide outcry that the world is not fair because we have more inequality than ever, because the payment system is not ethical as the CEOs get paid over proportionally, student debt issue is serious, poverty is rampant worldwide, trade deals are not necessarily pro labours, lack of healthcare for everybody etc. Again these are genuine claims. Hence, the group of intellectuals have published a report called „ Rewriting the rules of American Economy: An agenda for growth and shared prosperity „. The proposed reforms can be generalised in many other advanced economies. The aim of this article is to summarize these proposals and they are:

• Regulate shadow banking
• Make the financial sector more transparent
  
• Improve competition for credit and debit card providors
  
• Impose stricter rules for corporations and companies that break the rules
  
• Improve governance in central banking
  
• Increase transparency in CEO payment
  
• Bring financial transaction tax for short term trading and incentivize long term investment
  
• Restore balanced intellectual property rights in order to encourage innovation and entrepreneurship
  
• Increase transparency in global trade agreements.
  
• Include environmental and labour protection in trade agreements
  
• Provide healthcare cost controlling mechanisms
  
• Raise top marginal rate of tax
  
• Increase tax on capital and dividend gains
  
• Reform monetary policy and target full employment
  
• More public investment for long term growth
  
• More investment in innovation
  
• Investment in public transportation to promote access to jobs and opportunity
  
• Stricter law enforcement for violators of labour standards
  
• Raise nationwide minimum wage
  
• Reform sick leave
  
• Subsidize child care benefits
  
• Promote pay equities
  
• Protect women's access to reproductive health services
  
• Increase access to higher education by relaxing financial burdens
  
• Introduce a universal healthcare for all
  
• Expand banking services
  
• Expand social security system
  

Policies to develop Nepal: A very brief summary

By: Bikal Dhungel

First there should be a political will to develop. Policy makers must want a prosperous nation. Then create a political foundation, which means ensuring political and macroeconomic stability and creating inclusive institutions that safeguard rule of the game. Why industrial revolution took place in England and not in Russia or South Africa or elsewhere is because of the Glorious Revolution of 1688 that installed inclusive institutions, created a political foundation which in turn gave incentives to people, as a result of which great minds like James Watt could launch their innovation that had enormous spill-over effects in the economy. Reform the education sector, import ideas and best practices from abroad but check for its feasibility in local culture before integrating it to the curriculum. The East Asian economic success could be attributed to its world class education system in the initial stage of growth. Social security is vital. Recognize who are real poor and guarantee the basic education and healthcare for them and their children. Don’t say you cannot afford, you can. Germany was much poorer than Nepal in terms of purchasing power parity when it introduced social security system. If you fall short of money, then save in security expenses and unnecessary benefits for the politicians. Liberalize the economy but not text book liberalisation but be strategic. Protect the industries and help them grow where you think there is a future. However, as soon as you recognize that they are not progressing, pull out the fund. For hi-tech sector, liberalize, guarantee tax free imports of technological goods. Liberalize financial sector and expand credit availability especially for the poor and small scale entrepreneurs however, create a separate institution to monitor financial institution because undisciplined financial institution can ruin the nation. See financial crisis of 2007/2008. You don’t need roads to every corner of the nation. Focus on cost-effectiveness. Incentivize rural dwellers to immigrate to urban areas and be prepared for that, which means design an intelligent city, green and sustainable. Otherwise, there will be slums everywhere. Reform the “sarbajanik kharid yin”, the current system is crap, it is impeding growth. Reform the “Tender” system. Don’t give the project to lowest bid. Advanced nations don’t give to the lowest bid. You should not be transparent in this matter. Ensure a high class public service. When a citizen should spend 5 days to get a job done in any public authority, you have a serious problem. Guarantee property rights, provide physical security and end all forms of discrimination on ethnic, sexual or religious ground. Once you think on these issues, growth will follow but remember that there are dozens of steps and they do not take place overnight. State should be in a position to enforce law. Justice system and central banking should remain without political influence and teach your citizen not to be blind followers of their history and culture. Culture that do not suit with modern scientific way of life based on humanity and international solidarity, your education system needs correction that teaches it. Finally, respect work, be selfless, praise creativity and hard work, and most importantly end nepotism. Imagine that the son of a good football player always gets a place in national team based on his father's performance and not the person who plays better. This is the same when capable people are barred from a particular job but incapable ones rule.