Is remittance the Dutch Disease of Nepal?

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Sun, Mar 10, 2019 2:21 PM on Economy, Exclusive, Recommended,

Aakriti Thakali

William Shakespeare said, “A rose by any other name would smell as sweet” thereby pointing the insignificance of a name into decribing what something is or who someone is. Could that be true for everything, like a Universal Truth?

My Economics teacher says that Historical events are given catchy names and acronyms for two major purposes. One, to make it stick in the memory of the people. Two, to make the subject more interesting.  So, names aren’t that insignificant afterall, right?

 “Dutch Disease”

The Dutch Disease was first diagnosed in Netherlands and hence the name “Dutch Disease”. It started from the year 1959 after the discovery of Groningen Natural Gas Field and its impact on the manufacturing sector of Netherland. The term “Dutch Disease” was later coined by The Economist in 1977.

So, what really happened?

 The discovery of “Groningen Natural Gas Field” suddenly bumped the revenue coming in from that sector. This was good but only for so long, as negative impacts started to be seen in other sectors.

There certainly are some sectors that provides an economy comparative advantage, which is their core strength, but the situation becomes dire when the growth of one sector induces the fall of some other sectors and that is precisely how the Dutch Disease emerged.

The growth in export of Natural gas increased the demand and strength of Guilder (then currency of Netherland) in the foreign market. This appreciation was good for the export of Gas, but the other products and services became less and less competitive in the world market. Therefore, it indirectly led to demise of manufacturing and trading sector of Netherlands.

All the while, the Guilder kept appreciating and to control the speed of appreciation, they kept the interest rates low. And I think we know what happens when interest rates are low.

First, the foreign investors find the economy not so attractive for investment. Second, and an even worse scenario, the internal funds start to flow outwards. This then leads to a simultaneous negative impact on the employment ratio of that economy.

Therefore, the rise in unemployment rate in Netherlands can be attributed to two causes.

  1. The outflow of investments and demise of manufacturing and trading sector.
  2. The capital intensive nature of Gas Extraction industry that didn’t create new employment opportunities

            This was the basics of what happened in Netherlands, how the Dutch disease emerged and spread like a wildfire. But almost 6 decades has passed since then, and like a virus this disease has also evolved.

The evolved form of Dutch Disease has expanded its scope and by definition it refers to the negative results that can be seen through the heavy appreciation in a nation’s currency. The original Dutch Disease was associated with the discovery of a natural resource, but the evolved Dutch Disease can be associated a heavy inflow of foreign currency in the economy. This can be in the form of Foreign Direct Investment (FDI), Foreign aids and donations and rise in the prices of natural resources.

There still is no specific formula to detect a Dutch Disease but the early symptoms include, decline in the competitiveness of country’s exports and increase in the import quantity.

Now the million-dollar question is,

Is the inflowing Dollar in form of remittance, the Dutch Disease of our country?

Every sound argument is based on logic and facts and we wouldn’t want to deviate from that, right? So, before jumping into any conclusion lets check out the facts. In order to do that, lets break down our analysis into three parts

  1. Remittance (of course)
  2. Export
  3. Import

The value of Nepali currency would have also been a part of this analysis but unfortunately given the currency peg with Indian Rupee, we really don’t have an independent exchange rate. So, moving on to our first pillar:

Remittance

Remittance is and has been a major pillar of our economy’s GDP and because of that I don’t really think that a definition is required. Nonetheless, for the sake of formale, Remittance is the money sent in form of payment or gift both inside the country and from abroad. However, here we’ll be considering the money sent from abroad.

The below table shows the amount of remittance we’ve been receiving since the year 1974/75. In the course of 4.5 decades, the amount of remittance has been continuously growing, whereas the growth rate has been negative only 3 times.

So, what does it say? Well, it says that even after countering the effects of inflation, our dependence in remittance is in an increasing trend.

It is still too soon to jump a conclusion, as we have two more pillars to look at.

Export and Import

The below table comprises the amount of export and import and their growth rate from 1974/75 till 2017/18. As we can see, the amount of export has increased, but it doesn’t express the same tenacity as the remittance. However, imports on the other hand are increasing with much more consistency than the exports.

Looking at the table given below, I think now its safe to say that export isn’t our strength, but we live in a world of duality and a balance between the two extremes. Import and export are the dichotomous in nature and thus a balance is required. But is there a balance?

As seen in the table above, the data of Export and Import for the last 4.5 decades show that the balance is absent and more alarmingly, the gap is widening.

Verdict

The remittances are rising and so are the imports, but the exports are rising. There certainly are other avenues and sectors to be looked at but through a bird’s eye view, we can see that the foreign currencies coming in as remittance are going out for imports and where does that leave us? A Transit Economy?

Our Human resource is creating real output somewhere else and sending us money. Then, the rest of us are spending that money on imports some as trivial as roses for Valentines Day. If that remittance had transformed into investment in manufacturing sector or agriculture, we could have seen a real impact in our GDP but that seems utopic vision now.

So, would you say Remittance is our Dutch Disease? Or are we strong enough to change the fate our economy?