In Nepal, the average annual expenditure in transport, communication and hydropower during the period 1998 through 2005/06 stood at 22.5 percent. Nepal’s expenditure in roads is less than 1 percent of Gross Domestic Product (GDP), which is below Bhutan (2.5 percent) and many other developing countries that spend roughly 2 percent of their GDP. There is a huge resource gap in funding for major physical infrastructures. This gap is close to Rs 20 billion annually.
There is no denying that infrastructure development has been a key factor in sustaining country’s growth momentum. The problem is the cost factor. Inadequate resources and technology on the part of the government has limited the extent of their involvement in these initiatives. Landlocked Nepal’s rugged terrain has significantly increased transportation cost by increasing opportunity cost in agriculture and non-agriculture products. It is estimated that landlocked developing countries have to bear, on an average, 50 percent higher international transport costs than their neighboring coastal countries.
Higher transportation cost and weaker policy framework to involve private sector meaningfully in the development of physical infrastructure has reduced Nepal’s transport competitiveness index below its South Asian partners. The prolonged political uncertainty and weak and fragile governance has also failed to guarantee investors that they can recover their costs and the cost of capital. It is only in government’s official document that private players are allowed to build and manage the infrastructure and let the users pay for the costs.
Public-private partnership (PPP) has not yet practically begun in Nepal. This initiative has not materialized even in those projects where PPP for mutual benefit was agreed. The Three-Year Interim Plan (2008-2010) had given priority to increase the level of investment in infrastructure like roads, communications, health, education, drinking water, and sanitation. The government’s failure to execute PPP-friendly financing policy limited the scope to facilitate this initiative by offering incentives to banks and financial institutions to provide financing to infrastructure projects. A strong political will is therefore warranted to initiate model PPP projects, which can be replicated both in urban and rural sectors.
Development economists like Rosenstein-Rodan have stressed on heavy investment in social overhead capital especially in underdeveloped countries. This recommendation has the strength to yield positive result in the countries that do not face resource constraints. Literature shows that 1 percent increase in the stock of infrastructure is associated with a 1 percent increase in GDP across all countries. Capital inadequacy and poor resource management has limited Nepal’s prospect to cash this opportunity.
Access to road is a major constraint to growth after electricity. Central Bureau of Statistics states that access is more difficult for the poor than for the rich. Data shows that only one fifth of the poorest 20 percent people can reach the nearest paved road within 30 minutes.
Access to road is a major constraint to growth after electricity. Central Bureau of Statistics states that access is more difficult for the poor than for the rich. Data shows that only one fifth of the poorest 20 percent people can reach the nearest paved road within 30 minutes while more than two-thirds of the richest 20 percent can. This also indicates higher opportunity cost to the poorest 20 percent.
Role of infrastructure lies at the root of growth theories. Neoclassical growth theory emphasized the role of capital labor ratio for economic growth. The recommendation of this theory is to invest more in underdeveloped economies in order to achieve high return on investment. But this prescription did not work in the underdeveloped countries to bring long-term high growth rate largely because of inadequate capital, skill, innovation and technology.
Neoclassical theory was therefore displaced by Endogenous growth theory, which explains the factors that determine the rate of growth of GDP that is left unexplained and exogenously determined in Solow neoclassical growth equation. Endogenous growth theory calls for the investment in both physical and human capital that becomes the basis for technological progress through externalities that arises through knowledge spillover. This theory has expanded the determinants of growth from capital and labor to new knowledge, innovation and public infrastructure, openness to trade institutions and other factors.
If new determinants to growth are neglected, infrastructure will incur high cost to the economy. Literature reveals technical inefficiencies in infrastructure such as roads, railways, power and water alone had caused a loss of $55 billion a year or twice the annual budget for financing infrastructure in the developing economies during the early 1990s.
The positive co-relationship between infrastructure and growth and rising budgetary constraints necessitate finding out what particular infrastructure is crucial for Nepal. Development economists have shown that public transport and communication investment was positively correlated with growth, with an estimated elasticity of 0.16. Public investment in transport and communication significantly raise private investment levels in the cross-national evidence, which indicates that public capital and private capital are complementary. Similarly in a study of 21 Organization for Economic Co-operation and Development countries over a 20-year period, empirical result shows a significant positive causal link between telecommunications and economic growth, under the condition that there is critical mass of telecommunications infrastructure.
It is, however, advisable to take such findings with caution. For example, all available studies do not confirm the aforementioned results. Out of 140 specifications from 64 papers, 43 papers were peer reviewed. The review found that 63 percent specification showed positive link between infrastructure and development while 31 percent were insignificant and 6 percent showed significant negative impact. Five potential reasons for such contradictory results are widely acknowledged. For example, relationship between public capital and output may be non-linear. The reasons were the presence of crowd-out effects from public investment; endogeneity of infrastructure measures; public capital may not exercise its impact on output directly, but rather indirectly by raising the marginal product of private sector capital; and aggregate measures of infrastructure come to hide the productivity impact of infrastructure at a more disaggregated level.
To precisely understand the constraints, policymakers should have the explicit vision for growth and skill to plan for the long-term growth. The uncertain and distorted political environment has weakened political will to make firm commitments on priority development agenda. To boost investors’ confidence, an additional investment in education is necessary, which makes human capital productive.
bishwambher@yahoo.com
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