Social Science Baha

Remittances, Stability, and Stagnation in Nepal

Jacob Rinck

This article examines Nepal’s political economy from a rentier state perspective to explore the political implications of its remittance dependency. Remittances have contributed significantly to the reduction of poverty over the last two decades, but this article argues that they – together with foreign aid – also function as external rents which help to keep Nepal’s patronage democracy viable and militate against its transformation. The state derives a quarter of its budget income from external loans and grants, and more than one third from import and consumption taxes, largely driven by remittances. Therefore it is relatively autonomous from taxes on domestic production, and has little need to encourage domestic economic growth. At the same time, remittance based growth sustains the widespread rent-seeking by politicians and bureaucrats that has become self-perpetuating as the basis for the patronage relations at the heart of Nepali politics. The business sector’s incentives to press for change are mixed, too. While the regulatory uncertainty inherent in the system is detrimental to long-term economic investment, remittance induced consumption has helped fuel rapid growth in the service sector, and rents from illegal business practices such as cartelisation indeed depend on the state’s flexibility. As importantly, labour migration helps to limit wider popular pressure on the state – it offers an exit opportunity for many young people who would otherwise be likely to stake their claims in the country, and has so far led to a steady rise in the the living standard of a sizeable part of the population. By sustaining the current political settlement, labour migration and remittances have therefore become an important factor for Nepal’s political and economic stability and stagnation.