Economic growth in Nepal has not been consistent across the board. Agriculture has been languishing for decades. The Maoist conflict and power shortage caused a further decline in agriculture, as well as manufacturing. Fortunately, education, construction and the newly rejuvenated banking sector have provided a sense of normalcy and stability. However, there are still three broad hiccups in the administration of development activities in Nepal.
First, our planning capacity is weak. There are many able and competent planners at the national level. However, people with significant and competent planning and implementation skills are few and far between at the local level. Second, our fund flows are irregular. The central government allocates funds for development, but it reaches the destination only after a few months. In addition, funds vary drastically from one year to another, which causes confusion during ground-level implementation.
Third, the capacity to absorb development funds is very low. When funds are distributed, there is a pre-condition attached with the fund, especially regarding how and where it can be used. In some cases, funds are insufficient, while in other instances, the funds could be in excess. In case of excess funds, the surplus cannot be diverted to other projects or programs due to binding pre-conditions attached with the funds. Therefore, if the person working on the ground feels that funds from one program should be diverted to another more pressing area, they are unable to do so. This causes funds to go unused or end up being distributed though corrupt means.
While Nepal has made significant progress in defining and enforcing the concept of property rights on public goods and resources, as is evident from the success of community forestry, there are many areas where property rights for environmental resources have not been well defined. Unused land owned by the Nepal government exists even in areas where famine and hunger risks are persistent—for example, the Far-west region. These should be used in productive ways, similar to community forestry so that people can use it for income generation and ensuring food security. Once that is successfully implemented, the government should improve transport infrastructure to reduce the transaction costs of their produce. Increase in economic activities and production serves no purpose if markets are inaccessible.
In terms of economic activities, it has to be ensured that every player in the market has equal chances of succeeding. One group of producers should not be able to dominate the market and dictate rules. Economists use the Hirschman-Herfindahl Index to observe if any single producer or a group of producers is unfairly dictating terms in the market. For the Nepali airlines industry, this index could help us identify if Buddha Airways, the largest airline in Nepal, is charging the highest price simply due to the fact that it is the largest domestic airline. In such cases, the government needs to intervene.
However, government interventions are going to be trickier once Nepal gets federalized. Some development concepts like ‘horizontal equity rationale’ will continue to be discussed. It has greater appeal than vertical equity because it ensures equity across different regions. In theory, it ensures that equals are treated equally. But even if federal states of Nepal are considered equal by the constitution or any other mandate, it is inevitable that some states will end up with richer endowment of natural or other resources essential for development. Horizontal equity in that situation is impossible, although it may be desirable.
Government interventions have to consider the resource argument, especially because economic development rests on the shoulders of available resources. Residents of Manang are killing residents from neighboring Gorkha district who came to “steal” their yarchagumba (a medicinal herb). Hence, we cannot guarantee that violence over the rights to a particular resource will not flare up when Nepal gets federalized. Despite these battles over natural resources, development practitioners know that capital is the most important resource because absence of capital renders other resources almost unusable.
On one hand, according to law of diminishing marginal returns, if capital is taken to capital-deficit areas, i.e. the poorer areas, the marginal productivity of that capital will be higher than if it were invested in an already prosperous area. This argument suggests that capital should go where labor is abundant. An example of this is the miraculous growth of China where favorable policies created by the government ensured that investors brought their money and established factories because there was no shortage of cheap labor in China.
Weak planning, poor absorbing capacity and irregular fund flow are hiccups in the administration of development activities.
On the other hand, poorer regions have low marginal as well as average productivity. Therefore, moving capital and spending it in areas with low productivity is wasteful because that capital could instead be used for accomplishing significant economic growth in areas with higher productivity. This argument suggests that labor should go where capital is abundant. The movement of people from all over Nepal to urban areas and cities for jobs and opportunities is an example.
However, this second economic thought overlooks the fact that urban areas are expanding each year due to migration from rural areas. This phenomenon creates ‘urban giants’ that often suffer from stretched public service delivery scenarios where delivery of even essential services becomes a logistical nightmare. Kathmandu has been suffering from ‘urban giant-ism’ for some time now. This approach to development is not desirable.
Economies of agglomeration are useful in the sense that cities foster economic growth due to proximity to jobs, labor, capital and infrastructure. However, Nepali cities and urban areas are getting stretched to their functioning limits and are now bursting at the seams. The right approach towards development in Nepal is to take capital to the rural and poorer areas where resources essential for economic growth, like land and labor, are cheap and abundant.
The author is an economist
mukhanal@gmail.com
Related story
The changing face of Nepali Cinema
_20240311121839.jpg)
