Migration and its effect: A Social Capital Perspective of Nepal

Migration and its effect on Import: A Social Capital Perspective of Nepal.

Every year, the number of people living as migrants is increasing and according to estimates, in 2015, 244 million people lived outside of their country of origin which comprised 3.3 percent of the world population (UN, 2016). International migrants fulfill the demand of labor in industrial countries. In the sending countries, migration and remittance has social, economic and political consequences. Remittance affects the consumption decision of the households while changes the foreign reserve and the output of the trading sector (Guha, 2013).  Existing social networks change or even can deteriorate if people leave the society for a longer time.

Increasing number of people from developing and underdeveloped countries started going abroad for employment, having no or lower paying jobs at home to fulfill the increasing expenditure of the family members, particularly on food, education, clothing and medicines In Nepal, those going abroad are mostly adult men aged between 20 and 45. The increasing out-migration of these people in the most productive age of their lives has loosened the social and economic networks which were developed and perpetuated over a long period of time informally. The members of the society who automatically become the member of political, social and economic networks of the society have left their networks during migration.  This migration has affected these networks in a number of ways with far- and wide-reaching consequences. When a community continuously looses a significant number of people with strong will and arm, the functioning social and economic networks start deteriorating and become minimal. The problem becomes more intense when most active members of these networks migrate and don’t return for a significant period.

Another side effect of mass migration is also seen in the declining traditional knowledge and skill sector. Older generation used to run their livelihood by using different tools and techniques there have been part of their boarder knowledge. But these skills have been transferred from generations to generations without any formalized system. Newer generations used to learn these things by regularly taking part in the socio-economic activities in the localities with their parents’ generation. Personal or household matters or  reserving food and seed grains for the rainy season or for plantation, preserving excess vegetables for another season, producing dairy items like butter, cheese and cream from milk and storing them, soil and water treatment for better production, herding the cattle in large numbers, treating them against diseases to the socio-economic activities of allocating the amount of water among all members of the society for irrigation or for household purpose, constructing, sharing and caring the public infrastructures and resources like discussion houses, water resources, jungle and roadways all was done in a highly organized and systematic fashion but once a generation of people started going away from home, these activities and underlying rules to conduct them could not pass to future generations. Many agricultural tools like the plough and harness, sickles and axes, curd churning drum and plunger, grain-grinding stone, rice beating and etc.

Source: World Bank, World Development Indicators

With the inflow of remittance from migration directly reaching into the hands of other members of the family who are unaware of the sweat and toil of earning the money, but are actively involved in spending it, the remittance money is at the risk of over-spending and mis-utilization. The members of the family, parents, wives and children feel proud that they are receiving money from abroad, and want to show off it through a number of alternative socio-economic activities of consumption and idleness. Most notable of these activities are buying consumer goods, purchasing small piece of land or at times migrating themselves to some city areas leaving their land and house in the village unattended. In a study by Germenji and Seinnen (2005), in Albania, the remittances tended to divert the efforts away from agriculture. Similar conclusion has been drawn in the case of Nepal by Maharjan and et.al (2013) that “most farm households tend to neglect subsistence farming altogether in the presence of alternative sources of income”. Thus in general, the household sending a member out for employment changes from a producing-consuming economic entity to a solely consuming entity with few exceptions.

With large number of households, converting to consuming entities, the total agricultural production declines. Not only the existing consumption is to be fulfilled by buying from the market, but also new consumption demands arise with increased income and introduction of new goods and services like television, electric equipments, mobile telephones, packaged food stuffs and many other daily goods. If the society or country does not have sufficient production in the market for these new demands, it has to import from other countries. This increase in import may be further accentuated by the appreciation of domestic currency which leads to make the imports cheaper. On the other hand the increase in domestic demand and decrease in production causes the domestic prices go higher. This effect of remittance is supported by some empirical studies done in developing countries with high remittance receipt. The Dutch Disease effect of the remittance is also studied by scholars to show the diversion of resources from tradable to non-tradable sector as tradable sector becomes less profitable due to the exchange rate appreciation.

Nepal import export balance data shows increasing trade deficit particularly after the 2000 which is escalating every year. This is interesting to see that the deficit in trade is almost the same as the remittance after 2003 with minor differences. Although trade deficit is not new to Nepal, it has become much larger in the last 15 years.

Source: World Bank, World Development Indicators, 2016

The widening gap between import and export or the trade imbalance of Nepalese economy can be more explained by this framework of gradually degrading social and economic networks in the society and increasing consumptive behavior of the remittance receiving households. It is the year 1996 when the insurgency started and intensified during 1999-2005. We can see a clear upsurge in the import of goods and services. If we compare this trend with the remittance data, it becomes clearer that remittances actually started increasing in the same period. It seems more logical that the money received from these migrant workers has contributed significantly in the consumption pattern of the people. To be more precise, remittances started to increase dramatically after 1999-2000 which was the full intensified insurgency period when the Maoist guerillas attacked the army barracks. In the later phase of the most violent conflict, there were blockades on the roads almost everywhere which might have caused the trade decline. Factories were vandalized, power houses were shut down and many public facilities including schools, banks, and government buildings were closed down or moved to the district headquarters. This had a very bad impact on the production and export sector of the economy which was already in the initial phase of progress. That is why when once insurgency is finished and a kind of internal peace was restored, people who have gone out did not come back, rather many people started going out following the path of their seniors. Thus the trade gap became wider and wider.

Is this sustainable or vulnerable?

While remittances are useful to reducing poverty and enhancing the livelihood of the people, it has also been found that remittances can have a negative impact on the economy in medium and long term as remittances can cause inflation, reduce labor participation and also cause to defer the government action towards implementing macroeconomic policies. These negative effects of remittances can be compensated by transferring some portion of the remittances to capital investment, which in turn can have multiplier effect to the development. If this fails and remittances continue to go in unproductive sector, those negative impacts start to show up. The economy relies more and more on remittances exposing to vulnerability in case the remittances fall because the size of remittances is not fully dependent on domestic factors.

Theory of Institution provides a good background to understand why competitive market environment with fullest availability of information to each of the participants work more efficiently than those with limited market information. North (1991) gives the example of Suq in Middle East and North Africa that characterize the type of setting with limited market information, no or very limited institutions and rules to foster competition among people and only a face-to-face transactions and discusses why this system of trading did not evolve to exploit the full potential of the trade. While on the other hand, market with “institutions devoted to assembling and distributing market information”, pricing, quotation and standardization have developed the economy. These types of institutions are important to take advantage from trade and competition, continuously evolving and improving through innovation in risk spreading, mobility of capital and lowering the transaction costs.

The issue vulnerability, in the case of Nepal can be anticipated in two aspects.  Firstly, assuming that remittances will continue flowing in, more and more people will be going for employment, - at least for now, the government policies seem promoting it - , the same situation of increasing imports and decreasing exports continues. For how long can an economy run with this never ending trade imbalance, decreasing exports and increasing imports? How much trade deficit can be considered good if it is compensated by remittances? If the remittances are used for creating investment capital and enhancing production for consumption and export, i.e. if they are contributing the economy to grow, then it is arguable that they are sustainable. But, if the remittances are increasing import and making just dull consumers out of the people, decreasing the production, then it can’t be considered sustainable. The existing social and economic network of production and transaction are loosened in Nepal due to migration, new systems based on the modern method of production and transaction should have taken over them but that did not happen in the case of Nepal economic activities are scattered in pieces, market is not organized and there is no industrialization or commercialization of the economic activities. Most of the people are not in the economic and manufacturing value chain. It looks like this is not going to be so sustainable in Nepal. Migration has been causing a kind of brain drain, if we think that these people would have been involved in productive activities if they were at home.

The second aspect of the issue is also not less disappointing. The question is: What happens if the inflow of remittances decreases significantly? This will have a multiplicity of negative effects: unemployment will rise as migrants will be returning to homeland and perspective migrants will fail to go abroad. Source of income of the households will fall down rapidly but their consumption habits will not adjust immediately. Consumption tax revenue of the government will start fall. This will create imbalance in the economy. If this happens in large scale due to some problems in host countries, especially in the gulf, this will leave a severe problem in the Nepalese economy. Symptoms of such phenomenon are gradually seen in the gulf.

A World Bank press release in April 2017 reads , “Low oil prices and weak economic growth in the Gulf Cooperation Council (GCC) countries and the Russian Federation are taking a toll on remittance flows to South Asia and Central Asia” (WB, 2017) . In Nepal, receipt of personal remittances in 2016 declined by almost 7% than in 2015. The recent conflict between Qatar and other gulf countries is not a welcoming signal for the countries like Nepal to heavily rely on remittance for running the economy at micro and macro level.

What can be done? : Preparedness

For the proper utilization of the resources available from the migration, assuming that they will continue to flow in, channeling the remittances through formal financial and banking sector for capital generation and wise investment policies are crucial for employment generation and infrastructure development. Projects can be devised which can be funded by the remittances money. People will feel more confidence in the government once employment opportunities rise and development plants kick start with their money. A comprehensive training and skill management system can be placed at work to capture the knowledge and skill of the returnee migrants and to use it for further dissemination, training or utilization in respective sectors. This will also help in entrepreneurship development among the returnee migrants and their close acquaintances.

To fight with the disaster relating to the second aspect, the government has to take steps to develop resilience through diversification of destination countries. South Korea has been a newly explored host nation from Nepal and there are very good prospects. We have to increase our production base of the goods and services so that employment becomes available locally and youths find less and less incentives to leave the homeland. Government policies are to be devised which contribute to employment, investment and entrepreneurship rather that selling more and more passports and labor permits. Migration and remittances income does not seem a long lasting phenomenon of the Nepalese economy but its decline will do good or bad depends on how we manage the opportunities created by it and how we become prepared to face the challenges posed to us.

Composition of Imports

Total imports for Nepal in the year 2015 amounted to 6.61 billion US dollars. It had increased by almost 21% in the year 2014 and declined by almost 11% point in 2015 due to the massive earthquake and the border sanctions after the promulgation of the new constitution. Largest share of the imports is of petroleum products which consists almost 11% of the total import. Other major imports are iron and steel(12%), silver and gold (6.9%) vegetables and foodstuffs(11.2%). This shows that a large part of the import goes to non-capital goods or consumption goods.

The top 10 category list of HS code for import to Nepal from year 2009 to 2016 shows that Fuels has remained first during the whole period while vegetable oil, animal products, cereals, electronic goods, vehicles and jewelry have repeatedly shown in the list. In my observation, only one category that is in the list which can be considered a capital good is iron and steel. Even that, in the case of Nepal is mostly imported to construct houses of the individuals and families. Imports to Nepal are mostly finished and final goods rather than the raw materials while exports are mostly the raw materials, agriculture goods and handicrafts.

Table: 2-digit HS category code and the rank of them in the total import value (2009-2016)

HS category	Description	Year
		2009	2010	2011	2012	2013	2014	2015	2016
27	Mineral fuels, oils, waxes & bituminous sub	1	1	1	1	1	1	1	1
72	Iron & steel	3	2	2	2	2	2	2	3
85	Electrical machinery & equip. & parts, television ...	5	3	3	3	3	3	3	5
84	, Machinery & mechanical appliances, computers	6	5	4	5	5	4	4	4
87	Vehicles other than railway or tramway rolling stock	4	4	6	6	6	5	5	2
15	Animal or vegetable, fats, oils & waxes	8	9	8	8	9	9	10	8
39	Plastics & articles thereof	10	10	7	7	7	8	8	7
71	Pearls, stones, prec. Metals, imitation jewelry, coins	2	6	5	4	4	6	6	10
30	Pharmaceutical products	9	8	10	10	-	10	9	9

Source: Trade and Export Promotion Center (TEPC), www.tepc.gov.np . Aug, 2017

By looking at the table above, it can be observed that the pattern of imports has not much changed since 2009. Almost the same category of goods has remained in the top ten lists for that period. In fact, 8 categories appear every year in the top ten lists. From 2^nd position in 2009, “pearls and stones” has come down to 10^th position in 2016. It may be useful to compare the annual import of this category with other categories to find the actual volume and value of import. Position of vehicles has increased which is logical for the fuels being in first position because Nepal imports all the vehicles and all the fuels.

By looking the above facts and figures, it can be concluded that Nepal has not been able to harness the benefits of remittance from migration. Furthermore, our traditional social and economic networks are on the way to crumble due to the mass migration of the people of working age. If Nepal wants to take advantage of the remittance and the skills and knowledge from the migration, it’s high time to devise sound policies to convert the remittance money into investment and to create a knowledge network of the migrant workers home and abroad to promote entrepreneurship, create employment and foster development.

References:

Guha, P. (2013). Macroeconomic effects of international remittances: the case of developing economies. Economic Modelling, 33, 292-305.

Maharjan, A., Bauer, S., & Knerr, B. (2013). Migration for labour and its impact on farm production in Nepal. Kathmandu, Nepal: Centre for the Study of Labour and Mobility.

North, D. C. (1990). Institutions, institutional change and economic performance.

Pant, B. (2008). Mobilizing remittances for productive use: A policy-oriented approach. Nepal Rastra Bank, Research Department Working Paper, 4.

Solimano, A. (2003). Remittances by emigrants: issues and evidence. Santiago de Chile.