Despite Nepal’s laissez-faire economy, economic liberalisation has so far failed. Only very sluggish growth is being experienced while the manufacturing and industry sectors have diminished after liberalisation and deregulation.
Economic reforms have not been able to yield growth because of a lack of competitive capacity, entrepreneurship and economic efficiency in the private sector. As a result, vertical, spatial and horizontal inequalities are rampant.
How much growth has been achieved is not worth discussing; far more important is the question about how economic growth has been distributed among the people.
Vertical economic inequality is generally measured in terms of income and wealth. Among various indicators, I have applied decile and quantile tables, the Gini coefficient, and Kuznet’s ratio. The resulting statistics show the colossal economic inequalities within Nepal.
First, let’s consider the decile data. In 1985, the poorest 10 per cent of the population shared 4.04 per cent of the national income. This figure plummeted to 1.7 per cent in 1996 and the number increased only marginally to 2.1 per cent in 2003-2004 before plunging to 1.5 per cent in 2010-2011. At the opposite end, the richest 10 per cent shared 25 per cent of the wealth in 1985. This increased to 34.9 per cent and 37.7 per cent in 1996 and 2003-2004, respectively. In 2011, it reached a record-high of 39.5 per cent.
Quantile data shows that the poorest 20 per cent of the population shared 9.1 per cent of the national income in 1985. This figure dropped to 5.3 per cent in 1996 and further sank to 4.1 per cent in 2010-2011. Conversely, the richest 20 per cent of the population shared 39.5 per cent in 1985 and 50.2 per cent in 1996. The figure increased to 53.4 per cent in 2003-204 and 56.2 per cent in 2010-2011.
This clearly indicates that the poor and lower classes have failed to profit from post-liberalisation growth.
The total income shared by the first to eighth decile has continuously decreased over the same period. It can thus be concluded that economic liberalisation has made the rich richer and the poor poorer. Economic deregulation, it seems, is only favourable for rich people.
Let’s take the Gini coefficient, which is a common means to measure inequality. The closer it is to 100 per cent, the higher the inequality between the groups looked at. The Gini coefficient reached 29.55 per cent in 1985. It increased to 42.76 per cent in 1996, 45.54 per cent in 2003-2004 and 49.42 per cent in 2010-2011. After China, Nepal has one of the highest Gini coefficients in the world.
Fourth, Kuznet’s ratio – a ratio between the income of the richest 20 per cent and the income of the poorest 40 per cent – was 1.79 in 1985. It increased to 3.28 in 1996 and 4.72 in 2010-2011. These figures help us understand that economic reforms have helped the rich accumulate more income while at the same time reducing the wealth of the poor.
What policy conclusions can we draw from these findings? First, the labour share of the national income has declined over time while the share of capital has rapidly increased. Karl Marx’s conclusion about the income share in capitalist societies obviously holds true for Nepal.
The decline in the share of income of the poorest 40 per cent is due to the decline in agricultural growth. The agriculture sector declined due to cuts in agricultural subsidies combined with a hike in agricultural input prices.
A second policy conclusion is that our government has failed to take fiscal measures to reduce income inequality. Monetary measures such as providing cheap and easy credit to the poor have been largely ineffective.
Another impact of economic deregulation has been massive spatial inequality. Inequalities in the standard of living, physical infrastructure, bank/financial services, education and heath facilities increased greatly after economic reforms. The UN’s Human Development Report 2009 put Nepal’s national Human Poverty Index (HPI) at 35.4. In urban areas it is 20.7, whereas in rural areas it is 38.2. Worst off is the Karnali region, with an HPI of 60.1.
Similarly, the Human Development Index (HDI) of Kathmandu in 2009 was 0.65, whereas in Mugu, Bajura and Dolpa it hovers around 0.30. Similarly, literacy rates, life expectancy and per capita income also differ spatially. Economists like Mansoob Murshed and Scott Gates have attributed the 10-year Maoist insurgency to prevailing poverty and income and spatial inequalities in Nepal.
The Human Development Report 2009 concludes that inequalities in educational attainment, income, life expectancy and other socio-economic attainments can be witnessed among the same caste, ethnic, gender and religious groups and also across these groups. It is often said that this kind of inequality cannot be observed in a free market economy. However, horizontal inequalities of this kind have only increased since Nepal’s economic deregulation.
What lessons can be learned from such studies on vertical, spatial and horizontal inequalities? The findings raise questions that need to be answered by politicians and policy-makers. What kind of society are they shaping for the future? What legacy do they want to leave for future generations?
If only 20 per cent of the population is profiting from economic policies and 80 per cent is being left behind, can there still be peace, harmony, stability and prosperity for all? The current situation only offers fertile ground for anti-social elements.
To rectify income inequalities, the agriculture sector needs to be heavily subsidised. Labour-intensive technologies should be adopted to develop new infrastructure. Fiscal measures such as a progressive taxation system could transfer wealth to low-income groups in the form of food, housing and energy subsidies.
The development that perpetuates today’s inequalities is not sustainable. More attention needs to be paid to poverty reduction, ensuring social justice and presenting sustainable economic policies. It is obvious that the free market alone cannot bring social justice and desirable socio-economic development; the state needs to play its role. Adam Smith knew this when he said, “No society can surely be flourishing and happy of which by far the greater part of the numbers are poor and miserable.”