This week in New York, I continue the Fragile to Frontier (F2F) discourse. Three years ago at the Global Private Equity Conference, I had presented my thoughts—captured in my column ‘Fragile to frontier’ in this daily—on how erstwhile fragile countries are becoming frontier destinations for investment. In these three years, Rwanda has emerged as one of the top investment destinations in Africa. Ethiopia and Ivory Coast are now in the race. Liberia and Sierra Leone, countries hit by the Ebola crisis, are trying to rebuild themselves. In Southeast Asia, Laos and Cambodia are slowly but surely gaining the ability to spend money on infrastructure projects to boost growth. Erstwhile war-torn eastern European countries are now proudly talking about putting their problems behind and advancing prosperity. We gather again to learn lessons from different countries.
It’s The Asset, Stupid
Nepal, battered by an earthquake, blockade and constant political uncertainty, continuously slips into the hands of the crony capitalists and political oligarchs. However, the country, despite its problems, continues to move on. Nepal does not rely on income that goes into the measurement of economic growth. Remittances and capital gains from assets sale, be it land or gold, does not feature in the Gross Domestic Product (GDP). The swelling of market capitalisation by nearly 50 percent or $5billion in the past year or 25 percent of GDP does not get reflected in the computations. Nepal does not rely on the government to push growth, as people have no expectation from it. No government has been able to spend its full budget, and now it stands at $10 billion with a revenue of $5 billion. It is always interesting to hear former finance ministers who did not deliver on budgetary promises criticise the same mistakes the present incumbent makes. There is no analysis of how the economy sustains itself.
Like many countries, more and more of us in the F2F discourse feel that income is probably not the only measurement required to look at nations. In Nepal, income from assets does not matter. Therefore, people are more than happy to stash gold and let the prices go up. In the stock market, people do not think of cash dividends; for them capital gains through the issuing of bonus shares or the increased value of shares becomes more important. Rental on properties is a small fraction of their value. In the US, one earns each year about six to ten percent of the value of the assets as rent. In Nepal it is less than two percent as people do not link rents to income streams. The disposal of assets is important when expenses are to be incurred, be they for a wedding of a family member, international school fees or medical emergencies. If expenses were paid for only with income, how do we explain close to 50,000 students going out each year for higher education to countries where the fee structures are about the lifetime income of an average Nepali? Further, when any disposable income is channeled into buying assets, it does not matter whether it is unproductive land or gold that stays inside the vault. Therefore, the significance of asset value and its spiraling increase are important to understand how fragile countries cope with and become ready for investments. We cannot forget that the number of cows is an indicator of wealth in many African countries and the milk that is produced is inconsequential like per capita income.
Role Of Consumption
In the US, the economy is mostly about consumption, which makes up 70 percent of the economy. It is all about 300 million people who are consuming food, clothing, automobiles, devices, etc. It is similar in F2F countries. In Nepal, it is 30 million people consuming 60 million meals a day. Okay, let’s say five million are poor and consume only one meal—that is still 55 million meals a day. Then they need to be clothed. Seven million children buy books and school uniforms, and spend on nibbles. All these people buy automobiles or use transportation services. They need water and energy in various forms. They spend on healthcare, making private service providers a big player. With communication becoming increasingly important, they spend on different means of communication, however inefficient they might be. Despite political problems, life goes on and the economy continues to roll. The story is similar in many countries.
Therefore it has become important to look at asset building and consumption as two key components while judging economies. Even ordinary people judge the success of politicians based on how much assets they have accumulated and how their consumption patterns have changed after coming into power.
Accept New Realities
Many economists do not see this. Perhaps they are good at telling you what went wrong; seldom do you hear people talk about what will go wrong! Branko Milanovic, in his book Global Inequality: A New Approach for the Age of Globalization, talks about how the economists of the 1960s, 70s and even 80s never assumed the rise of China as a formidable economic force. Neither did they see technology helping many fragile nations in their quest to become frontier destinations. He argues for the free movement of labour like the free movements of goods and services. Migration and remittances in the 21st century continue to be the backbone of many countries’ economies. And it is not only about migrating to foreign countries, but internal migration too, with better access to infrastructure, be it roads or communication network.
Branko also states that it was only in 1990 that the World Health Organisation (WHO) removed homosexuality from the list of mental disorders. Therefore, it is important for global organisations to evolve, embrace new realities, and discard many of the lenses that worked in the past.
Talking about income poverty has been the easiest way out for economists to explain about nations. It is time we used a new set of lenses to look at issues, be they prosperity, asset accumulation and augmentation of its value, the consumption push, migration or the role of open borders and giant neighbours that are competing for prosperity.