Labour and capital are two key factors of production that reflect an aggregate division of inputs for any economic activity and are also two tiers of the economy. If one is imbalanced, another automatically distorts its pace of efficiency. This is a universal fact: every economy depends on labour, capital, and technology. Therefore, most of the advanced economies are focused on market-based human resource development, low costs of capital, and efficient technology to maintain economic growth and a sustainable living standard for people. The USA, China, Japan, Germany, South Korea, India, and other big economies are investing huge amounts of money in both human capital development and technological advancement.
The USA spent the highest amount of money in research and development with 679.4 billion USD in fiscal year 2022, followed by China (551.1 billion USD), Japan (182.2 billion USD), Germany (143.1 billion USD), and South Korea (106.1 billion USD) as the fifth highest research and development investment country in the world. Our two big border-sharing economies, China and India, are in second and seventh positions on the list of the world's highest investment countries in research and development activities, respectively. If you compare the R&D budgets of these countries, Nepal's GDP is just 5.89 per cent of the USA's, 7.26 per cent of China's, and 61.35 per cent of India's gross R&D budgets.
Nepal's population between the ages of 15 and 39, which is considered the most dynamic and productive age group, accounts for 42.51 per cent of the total population. Additionally, another 19.45 per cent of the population is gradually aging.
The decreasing fertility rate and low population growth, combined with increasing life expectancy, highlight the dominance of the young population. This presents a significant advantage for the economy, but also puts pressure on the aging population and increases the social security obligations to the state.
No doubt we have demographic advantage for economic growth and development. But the question is, are we rationally capitalising on this advantage to boost economic activity and industrialisation? Are they all engaged in productive activities? And are they associated with the formal economic channel? Nepal is not effectively utilising its labour resources to drive economic activities, and this trend is unlikely to change in the next five years. The government is actively promoting labour migration to foreign markets, with around 60,000 citizens obtaining work permits and nearly 80,000 students seeking study visas each month. As a result, approximately 140,000 people leave the country monthly, amounting to 1.68 million annually.
If this pattern persists, in 5.6 years, around 9.4 million people, assuming a zero-return expectation, will have left the country. However, only 33 per cent of migrants are expected to return, while 67 per cent, especially those eligible for NOCs are unlikely to come back to Nepal. The economically sensitive NOC group, comprising both labour and study visa migrants, contributes indirectly through remittances, but the tendency for study visa migrants to retain their assets, cash, and skills abroad poses significant challenges and threats to the economy and government.
The brain and labour drain is rising rapidly amid expected high economic growth in a highly pressurised and worsening economic situation. On the other hand, fertility rates and population growth are declining. The next generation is gradually increasing at a decreasing rate. The Nepali market is already in a labour crisis. Industries and corporate houses are not getting the human resources they need. They are hiring labour from India, Bangladesh, and other countries at a high labour cost. In 87 countries, workers are working in Nepal at different levels of capacity.
However, Nepal is sending labourers to 170 economies, ignoring the fact that their demand in Nepali market is high, and still the government officials are competing to increase the labour market in foreign markets instead of boosting employment opportunities within Nepal. Nepal’s economy has been shifting from agronomics to a service economy. The contribution of the primary and secondary sectors to the GDP is not satisfactory, and as a result, the service sector is dominating. It is good to see the service sector expanding, but the quality and sustainability of this sector are in question.
Irrational tax policy
The government has imposed an irrational tax policy but given nothing in return. Recurrent expenditure has overtaken capital expenditure, and very soon financial expenditure will also cross capital expenditure if we don’t exercise caution in the economic system. An empirical analysis shows that an investment in human capital is negatively correlated with economic growth. Why did this situation happen, and how can we balance the labour crisis for the economy? The labour crisis will rise badly in the next 7–8 years.
To overcome the impact of the labour crisis in the coming days, there is no option but to balance between human capital development and technological adoption for all economic sectors. For now, the government has to work to encourage youths to stay and motivate them to return to Nepal by promoting research, invention, and the development of technology, the development of market-based skilled human resources, and a well-established social security system that connects productivity and rational utilisation of resources by controlling corruption and maintaining transparency in public policy.
(The author is a Ph.D. scholar in economics at the University of International Business and Economics, Beijing, China.)