Nepal’s economy is almost entirely dependent on the service industry (including tourism) and remittances—49 percent and 28 percent of gross domestic product (GDP), respectively—and will take decades to recover from last month’s earthquake, in part due to the country’s lack of economic freedom.
The 7.8-magnitude quake that hit the country’s capital, Kathmandu, early on April 25 has claimed over 5,000 lives and displaced a half million people with those numbers continuing to rise. The quake also destroyed four of the country’s United Nations Educational, Scientific and Cultural Organization World Heritage sites, some of which dated back more than 1,700 years.
In addition to the loss of life and property, serious damage was done to Nepal’s economic infrastructure, a major setback for the lesser-developed country. Preliminary estimates by the U.S. Geological Survey suggest economic losses from $1 billion to $10 billion and assign a 42 percent likelihood that losses could exceed the country’s GDP of $19 billion.
Already ranked the 7th most unstable country in Asia by the Fund for Peace’s 2013 Failed States Index, Nepal is one of the poorest countries in the world with a per capita income of less than $1,000 and about a quarter of its population living in extreme poverty (defined as less than $1.25/day). The earthquake will exacerbate the already wretched living conditions of the Nepalese, eight million of whom have been affected to some extent by the quake, according to a U.N. report.
The 2015 Index of Economic Freedom published by The Heritage Foundation in collaboration with The Wall Street Journal contains more bad news for the Nepalese: The country hovers just above the lowest Index category—repressed—with a score of 51.3, significantly below the world average (60.4) and the regional average (58.8). Nepal is a country marred by a long history of cronyism and massive corruption at all levels of the government and judicial systems, with little investment freedom and weak financial markets.
After decades of political repression, Nepal’s 239-year-old monarchy was overthrown in 2008, but the result has been perpetual instability, precious little true democracy, and no economic freedom. The economy teeters on the brink of collapse, surviving only because of the $4 billion in remittances that Nepalis working oversees send home. In fact, Nepal’s GDP was forecast to grow more slowly than most South Asian countries, with unemployment rates nearing 50 percent of the working-age population.
The earthquake, too, was a disaster waiting to happen; located on the fault line between Eurasian and South Asian tectonic plates, Nepal has always been a high-risk region. In fact, GeoHazards International cited Kathmandu as the city with the greatest potential for earthquake lethality in Asia. Seismic experts predicted that such an earthquake was inevitable. Lacking rule of law and political will and absent the proper safeguards, Nepal’s track record of poor governance and weak economic freedom doomed the nation to maximum earthquake damage vulnerability.
Aside from the sizable relief and recovery, reconstruction, and rehabilitation costs—rehabilitation costs alone are estimated to be more than $5 billion—Nepal will likely experience a hit on its tourism industry, which accounts for half a million jobs in the country. In addition, already deterred by poor business and an unfavorable investment environment, Chinese investors may pull the plug on the once-promising $1.6 billion hydroelectric project in the Himalayas that could generate 750 megawatts of power.
Even though relief funds are flowing in—with contributions of $10 million from the U.S., $8 million from Japan, and $15 million from the U.N., among many others—donations will provide only immediate humanitarian relief.
If they are to have any hope of resuscitating the economy in the long run, Nepalese politicians are going to have to forge a new consensus on how best to organize the country’s economic system, a consensus in favor of economic freedom. First steps should include serious efforts to reduce endemic corruption, a streamlined business code, and greater openness to foreign investment to encourage diversification (into slow-growing manufacturing, for example), job growth, and productivity gains.
The old economic model has left Nepal virtually defenseless in the face of a predictable natural disaster. Robust growth is the only long-term solution, and policies that respect the principles of economic freedom are the only sure path to sustainable development.
