The study compares Nepal with five other South Asian countries namely Bangladesh, Bhutan, India, Pakistan and Sri Lanka. The main findings are: (i) Nepal has witnessed higher political instability (measured by the number of cabinet changes) in comparison to other countries in the region; (ii) average growth rates in Nepal have been around 1 percentage point to 1.5 percentage points lower than the region for the sample period; (iii) political instability can account for roughly 0.5 to 0.75 percentage point difference in average growth rates; and (iv) political instability in Nepal does not seem to have led to higher public deficits and inflation.
Nepal had achieved satisfactory growth beginning 1990 after initiating macroeconomic reform programs but the instability and mistrust among major political parties raised unemployment and rural-urban inequality.
The decline in growth is attributed to political instability but it had only moderate impact on deficit and inflation, which is lower than the regional average. The reason for less impact of the potential negative effect of political instability on inflation should have been the exchange-rate peg with the Indian rupee.
Available information shows that Nepal had achieved satisfactory growth beginning 1990 after initiating macroeconomic reform programs. However, the instability and mistrust among major political parties encouraged corruption, eliminated marginalized group of people, raised unemployment and rural-urban inequality. Therefore, it was widely accepted that the relative deprivation and related economic grievances were the key causal factors for the eruption of Maoist-led civil war in 1996.
Since the policies for economic adjustment often conflict with political adjustment towards peace, scholars view an integrated approach between politics, economics and peace agenda is important. But, if we seriously assess recent escalation of inter-party and intra-party conflict, it will be difficult to believe that consensus will be arrived to pursue this agenda uninterruptedly. Therefore, in Nepal, I suspect there is a link between long-term political instability and low level of economic and social achievements.
CHALLENGES
One of the challenges is fiscal management and revenue sharing in the changing political context between the center and local governments especially to sustain development activities and reducing poverty. Unless the working of central and local units is properly studied, the right-size physical structure and the burning question of fiscal implications under the new federal structure cannot be investigated. Increasing security expenses, declining development expenditure, contraction in revenue source, ineffective aid utilization and declining foreign direct investment are some of the factors that have made public expenditure management extremely difficult in Nepal.
Public investments in drinking water and sanitation are inadequate, constituting less than 1 percent of GDP. The prevalence of water-borne diseases is higher among the children of illiterate or less educated mothers.
Nepal’s climate, natural beauty, simplicity of the people, declining risk profile and huge market potential in the large economies of China and India is actually constrained by weak investment promotion programs coupled with weak administrative practices and conservative attitudes towards business, inadequate linkages with national firms and absence of longer-term plans to increase competitiveness. Some significant constraints include infrastructure, weak financial sector and capital market, education and human resource development.
Increased FDI has not played a very significant role in the growth of Nepali GDP in absolute as well as in relative sense. Complex government procedures and restrictions on most capital transactions has put much of Nepal’s economy off-limits to foreign capital. The index of cost competitiveness indicators is not very encouraging either. The average cost per worker, value added per unit of labour and labour cost per unit of output in manufacturing remains the same (100 each). Nepal’s domestic problems have also limited the scope for attracting foreign capital. Nepal is still constrained with inadequate modern technology, better management and opportunities for accessing international market.
PRIVATE SECTOR
Since private sector contribution in Nepal’s overall development also exceeds public sector contribution, the specific modality of their participation in the economic policies should be explicitly identified. The authors’ work on the micro impact of conflict in Nepal shows that the private sector had a positive impact even in the high-risk regions during conflict. Their contribution is all the more important at a time when the resources of government and international institutions are overstretched. However, the private sector is not in itself a panacea. This sector will not take the considerable risks of investing without appropriate economic incentives.
ACCESS TO GROWTH OPPORTUNITIES
Access to growth is in fact access to the possibility for making investments and creating gainful employment opportunities to raise income and contribute to national revenues. Various reforms and strategies were designed to open up development opportunities. These measures included fiscal incentives (tax concessions, cash grants and specific subsidies), improvements in domestic infrastructure, programs for enhancing the skills of domestic workers, commitments for strict compliance of regulatory measures and governance reforms. However, the pace of development was exceptionally slow because of the political uncertainties, absence of locally-elected representatives and deteriorating security regime.
The review of government’s policy announcements show that there are additional areas where development assistance may be desired to enhance competitiveness in priority sectors for widening the growth opportunities. These sectors include data processing, software development and computer consultancy services, generation and transmission of electricity, manufacture of paper and paper products, manufacture of motorcycles and scooters and parts thereof and establishment and management of educational and health institutions.
The expectation of uninterrupted resource allocation, efficiency and competitiveness from market economy is asking too much as firms possess miserably weak capabilities. The best way to play within the framework of free market game is to take control of and protect our own market. This is where a need and priority-based policy is recommended where local beneficiaries are the principal actors of development planning and execution.
The challenge is therefore to sustain growth at least for one decade through medium-term programs to reduce the risk of conflict from reoccurring. Efforts should be made to transform fragile institutions with illegitimate power structures into institutions that intend to promote economic and social interactions among all the actors of development.
bishwambher@yahoo.com
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