Difference in rates of growth: Significance for Nepal

Rakesh Wadhwa

With the right policies prosperity can come to Nepal in little more than a generation. You don’t believe me? Let’s take a look at the recent economic history of the world.

During World War II, Germany, Italy and Japan attacked and devastated half of the world’s economies. By the end of the War the combined allied forces had destroyed Germany and Italy. Japan stood vanquished; two of its cities flattened by the first and only use of nuclear weapons ever.

What happened next?

Countries which were economically free achieved higher rates of growth than countries which were stifled by government regulations and taxes. The annual growth rates varied from negative, zero or India’s 2% (dubbed the Hindu rate of growth) to 5-10% achieved by countries like Germany, Japan, Taiwan, South Korea, Singapore and Hong Kong.

The results were startling. Small differences in annual growth rates resulted in immense differences in per capita incomes with the passage of years. We have the spectacle of countries starting at the same point after World War II but after 5 decades the differences are stark: starving North Korea vs a prosperous South which can afford to hold the Football World Cup; East Germany ceased to exist and was taken over by Europe’s powerhouse West Germany; India, Bangladesh and Nepal remain mired in poverty while Thailand and Malaysia raced ahead and substantially eliminated poverty; Singapore and Hong Kong came from behind and overtook in per capita income the older established countries like U.K, Australia and Canada.

What accounts for these differences? Differential rates of growth result in vast differences in wealth over an extended period of time. Let us take a hypothetical example: Suppose, from 2002 to 2032 i.e. over the next 30 years, Nepal, follows a high growth path: free trade, low taxes, small government, secure property rights, stable monetary policy and achieves a galloping 12% annual increase in its per capita income. During the same period let’s assume Bangladesh pursues a radically different path: its economy is caught in a straitjacket of government controls and hence per capita income crawls at just 2% per annum: Let’s see what happens.

We see that Nepalese become almost 30 times as rich as they are today while people in Bangladesh remain poor. This will happen even though Bangladesh’s per capita income is higher today than Nepal’s. By 2032 Nepal’s would be 10 times higher.

This is exactly what happened in the past and is the reason for the difference in wealth levels of people in different countries. Let us go to an actual comparison between Argentina and Japan

In 1960, Argentina’s per capita income of US$ 3,690 was higher than Japan’s US$ 2,967. By 1990, i.e. 30 years later, Japan’s per capita income at US$ 14,926 was 3.7 times higher than Argentina’s US$ 4,083. Argentina with its fertile lands, natural resources and a low population density of only 13 persons per sq. km. stagnated (annual growth rate averaged 0.34%) under the heavy hand of its all-powerful government. Japan with almost no natural resources and a population density of 335 people per sq. km. (26 times higher than Argentina) but with a relatively open economy, a strong convertible currency and secure property rights grew at 5.53% annually, overtook Argentina in no time and was the world’s envy up to the 1980’s.

Ultimately even a country which grows at 1% per year will become rich, but it has to wait a very long time. Nepal at 1% growth rate would achieve Switzerland’s per capita income of US$ 45,000 in 532 years, while the same wealth would be every Nepali’s in just 69 years at a growth rate of 8%.

So what will actually happen? Will Nepal grow at 1%, 8% or 12%? Will Nepal eliminate poverty in a few years, or will it take decades or centuries? No one knows, but the policies laid down today by the government of Nepal will impact the future prosperity and growth of every citizen.

Basic economics tell us that low taxes, freedom of exchange, competitive open markets, and monetary stability are the bedrock of economic prosperity. It would be wise to remember Nobel laureate, economist, and advisor to US Presidents, Milton Friedman’s famous words uttered in 1980’s "Economic freedom leads to wealth creation".

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