Let's begin by raising a question. What are the major challenges of Nepal's growth and development? I anticipate that many of us have a list of challenges, such as poverty, illiteracy, unemployment, and the list goes on. But, these answers are banal and superficial. Read this article to delve a step further.
I am fascinated by two economists, Tyler Cowen and Alex Tabarro, who uncovered the concept of growth puzzle in one of the YouTube videos. The growth puzzle has four pieces that when combined will form a complete puzzle. The four pieces are factors of production, incentives, institutions, and culture.
We get on with the first piece of the puzzle, factors of production. Factors of production are the rudimentary elements of production. Factors of production incorporate human capital, physical capital, technology, and innovations. What is human capital? Is human capital the same as population? Though human capital and population seem alike, they are completely different. Human capital is the skills, knowledge, and experience possessed by an individual or population, viewed in terms of their value to a country. Countries with planned investment in human capital eventually strengthen physical capital, expand access to technology, and lead innovations. Advanced economies, as classified by the IMF, produce similar products to developing countries, but they produce them efficiently bolstering their productivity. Advanced economies have well-developed factors of production. These economies have seamlessly integrated skill-enhancing and innovation-enabling educational systems that produce creamed human capital.
As stated earlier, advanced economies have well-developed factors of production. But why? A simple answer is "Incentive Matters". Incentives are rewards or benefits that motivate people to act in certain ways. They can be monetary or non-monetary, and they can vary depending on the context and the goals of the person, organization, or country offering them. Governments also provide incentives to their citizens to provide a specific behavior that promotes sustainable socio-economic development. Advanced economies have developed a formidable incentive system that enhances long-term growth and stability. To illustrate the importance of incentives, we consider the period between the 1950s and 1960s when the Chinese government embraced strict communism, resulting in the confiscation of private properties. This action had a detrimental effect on innovation and economic progress in China during that time. Subsequently, correcting this mistake transformed modern China into an inexorable superpower.
Why do some countries have better incentives? We have a straightforward answer. They have good institutions. Institutions encompass a wide array of components, such as property rights, a dependable legal system, quality education, a robust health system, and honest government. Secure and well-defined property rights provide individuals and businesses with the assurance that their assets and investments are protected. Likewise, a dependable legal system ensures fairness, justice, and the enforcement of contracts, creating a conducive environment for economic activities. Notably, quality education is a fundamental institution that equips individuals with the necessary skills and knowledge, fostering innovation and economic development. Similarly, a robust health system contributes to a productive workforce, reducing absenteeism and promoting overall well-being. Lastly, an honest and accountable government fosters trust, encourages investment, and ensures that public resources are used efficiently for the benefit of society. Inevitably, institutions are responsible for enhancing productivity and building trust. Quality institutions produce formed minds rather than filled minds. These formed minds enact plans and policies that stimulate innovation and safeguard inventions through a dependable legal system and well-defined property rights. We stated that advanced economies have well-developed factors of production. But why? Because they have better institutions.
Our last piece of the puzzle is culture. Culture refers to the values, ideologies, and philosophies that have been inscribed to a person. Culture shapes an individual's belief system and form attitude. Good institutions flourish in countries with good culture. Why is the United States of America, Japan, or other advanced economies leading the world? The burgeoning power of these economies can be attributed to their socio-economic development, rooted in a culture that valued work irrespective of its nature. I would like to borrow an idea presented by eminent sociologist Emile Durkheim on religion. According to Durkheim, "Religion can make people rich or poor". Religion that promotes respect for work and promotes innovations has accumulated wealth, thereby expanding their influence. As a data enthusiast, I would like to share an example related to data availability. The Federal Reserve Bank of America has consistently maintained daily data on interest rates and other macroeconomic variables. Nobel Laureate Milton Friedman utilized this data to investigate the causes of the Great Depression. His analysis revealed that the tepid response of the Federal Reserve was the primary factor prolonging the Great Depression for several years. It's worth noting that a culture of preserving and storing data has empowered individuals to extract insights from historical incidents and formulate new theories. This example elucidates why theories get propounded for advanced economies or why most Noble Laureates are from advanced economies. Individuals born in advanced economies do not inherently possess ascribed talent or innate intellectual development. Instead, those born in advanced economies are immersed in a culture that embraces innovation, institutions that foster intellectuality, and incentives that encourage inventions.
These detailed discussions about the growth puzzles elucidate that a country's development is the seamless integration of culture, institutions, and incentives. The relationships between them are subtle yet undeniable. Poverty, inequality, inadequate infrastructure, illiteracy, and others are not the actual problems or obstacles, but they are the ramifications of poor institutions, unlucrative incentives, and adulterated culture. Nepal's overall growth and development will definitely take an uptick trajectory with an undivided focus on pieces of the growth puzzle. Therefore, Nepal should invest in human capital formation by expanding the accessibility and availability of quality education and healthcare services. Accordingly, the Government of Nepal shall further strengthen the incentive programs by establishing proper supervision and control mechanisms to ensure that only target groups have access to the incentives. Likewise, legal institutions shall be strengthened by emphasizing a dependable legal as domestic and foreign investors prioritize the safety of their investment. A poor legal system may engender suspicion among foreign investors that poses a threat to a nation's credibility in the global arena.
Lastly, growth is an outcome of the synergy of multiple elements, such as culture, institutions, incentives, and factors of production. Countries with culture fostering innovations, quality institutions, and proper incentives produce productive human capital that utilizes other factors of production efficiently thereby bolstering a burgeoning economic growth. Therefore, growth is not a linear process as stated by Rostow, but a non-linear process imbued with complex intertwine among the various measurable and immeasurable components of an economy.
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