View Point (Spotlight Weekly)

The Nepalese Economy and Its Future

— Dr. Rabindra K. Shakya
Statesboro, Georgia, USA

Years after the reinstallation of multi-party democracy in 1990 and the start of economic reforms in 1992, Nepal has to make a crucial decision at this critical juncture whether to initiate immediately the process of political and economic reforms or let the process become standstill and allow situations to go out of hand and be rendered beyond control with no possibility of emergence of political and economic development. Caught amid a quagmire of eighth year of political violence and lack of development, there are only few agenda that need to be attended to: restoring peace and security, reinstalling the broader democratic process as early as possible and fostering economic development activities. All this can happen if Nepal provides an illuminating example of a functional constitutional monarchy, says Rabindra K. Shakya, a well-known career development economist and planner.

I. Introduction

Nepal a small country situated between two big neighbours – China and India- is in the midst of acute political crises, threatening all those ideals democracy stands for.

The Maoists insurgency movement since 1996 has unleashed the forces of destruction and violence and has deeply affected all group of people and all aspects of national life. Nepal has been a victim of internal armed conflicts, violence, arson, looting and so forth by Maoists who claim that they are fighting people’s war for creating a new democratic state to ensure people’s right and welfare. Recently, the incidents occurring in several prominent places including the most recent attacks in Bhojpur in the eastern part and Beni, Myagdi, in the western part causing a huge damage to the lives and the property of people, provides indications on the state of politics and economics in Nepal, today. The rebels even have declared that they have plans to attack towns in a “disintegrated and centralized manner”. The incidents have triggered waves of terror and sense of insecurity among the Nepalese. This provides an example of state of law and security the common people in Nepal are compelled to live with. This is all because of the political crises that have evolved due largely to the failure to meet the rising expectations of majority of people.

II. Development Scenario

Based on the review by the Committee for Development Policy, UN in 2003, Nepal is classified as a least developed country with a low per capita income (GNI) of around US$ 240 (2003), the human assets index (HAI, the composite index of nutrition, health and education) 4.7 and the economic variability index (EVI, which includes merchandise export concentration, instability of export earnings, instability of agriculture production, share of manufacturing and modern services in GDP, and population size) of 31.0. Nepal started planned economic development as early as mid- fifties with the launching of the First Five Year Plan in 1956.

(a) Pre-1996

It may be recalled that after the reinstallation of multi-party democracy, development efforts took a new turn with the execution of the Eighth Plan, 1992-97 which was the handiwork of the first democratic government led by Nepali Congress and had a target to bring the level of poverty to 42 from 49 percent (defined as a level of income enough to consume 2124 calories of food and other minimum non-food items.). The process of economic reforms in the country soon followed with ramifications to development in almost all the sectors of the economy.

The first three years of the Eighth Plan proved to be the most effective planning regime in the country after the reinstallation of multi-party democracy; many far-reaching policy reform initiatives were executed; development activities were implemented which reinvigorated people’s enthusiasm, and the general faith in planning process was restored.

Many important policy measures were introduced in line with the free market- oriented liberal economic policy. The private sector’s dominant role in development was recognized, with the public sector’s role, largely confined to that of a facilitator, motivator and regulator and one of creating a conducive environment for the growth and development to take place. The trade policy in the changed context had the objective of reducing the trade imbalance through improved import management, export promotion and diversification; industrial policy was reformed for giving a boost to the process of industrial development, and environmental policy for sustainable development was introduced. Besides, a wide-ranging financial reform measures were carried out to strengthen the liberalization process. Nepali currency was made fully convertible in all current account transactions. Monetary policy was improved to increase domestic resource mobilization, enhance efficiency of capital and provide credit to the priority and productive sectors. In short, many of the policy requirements that were necessary to subsequently provide the base for carrying the process of socio economic reforms and development forward were set up.

The first three years of the Plan period was thus a triumphant success. Economic growth recorded reached a level of 4.65 percent, despite the negative agriculture growth for two years – 1992/94 and 1995/96 (see table 1). The shortfall was compensated by a consistent growth in non-agriculture particularly in manufacturing and services sector. The number of cottage and small-scale industries, an important source of employment and value addition in the manufacturing sector, grew at an annual rate of 11 percent and the fixed capital investment at the rate of around 24 percent. Tourism, which is the backbone of the Nepalese economy, grew at an average annual rate of six and half percent during the period (table 1). Nepal was thus poised to accelerate and sustain the growth process over the long term.

(b) Post-1996

The year1995/96 of the Eighth Plan proved to be the beginning of political instability, subsequently followed by a period in which there were several short-lived governments within the period of 14 years since 1990. The quick changes in the ministers and high-ranking officers in the administration, the frequent demonstrations in the streets, bandhs, and strikes by political parties, the internal conflicts and dissensions in major political parties leading ultimately to the bifurcation of these parties all exerted a damaging impact on economic growth and its future prospects. The lack of policy instability further added insult to the injury.

A series of scandals—in defense procurement, civil and police administration, customs collection and widely prevalent corruption, politicization of educational institutions — all had paralyzed the government and heightened ordinary Nepalese contempt for the institutions that govern them. Even the professional organizations such as that of civil servants, the lawyers, the teachers, and the financial institutions were all organized and acted on the basis of their allegiance to political parties. The political influence had been widespread to the extent of rendering these professional organizations less meaningful for the objectives that they stand for.

Government bureaucracy suffered from lack of discipline, integrity and commitment for delivery of services. Administrative reform measures were designed but seldom followed in a systematic manner. Most often, ad hoc and piecemeal amendments were executed. Planning was reduced to largely an academic exercise, with little influence on implementation and weak monitoring system, and the National Planning Commission, the supposedly National Think Tank, was reduced to an ornamental body in place of an independent professional agency. The legacy still continues.

All these had the most damaging impact on development. To take a few examples, the GDP declined to 0.96 percent in the period 1996/97-2001/02, Tourism suffered a set back, falling the tourists’ arrival to a negative growth rate of around 5 percent. Foreign exchange earnings from tourism during the period , which was around 3.9 percent of GDP, declined to 2.9. The national urban consumer price index (base year 1995/96 =100) increased to 142.1 in 2001/02.The current account deficit jumped. Industrial productivity suffered a decline also because of strikes largely carried out at the instigation of labor unions which are also guided by their sister political organizations.

These maladies, detrimental as they are, point to deeper ills. Such worries show up in an investment rate well below what is needed to lift Nepal’s growth rate from slow to respectable. The appalling deficits of the government have depressed public-sector investment. Private investment slowed down. The trend of foreign direct investment was almost stagnant. Basic ingredients of development – Nepal’s international competitiveness, the integrity of its institutions, the quality of its infrastructure, its zeal for further economic reforms and the will and commitment for development- all are in question.

Currently, the country has an ambitious long-term development plan. With an objective to create a society – competitive, competent, cultured and technologically oriented- by 2016/17, the development efforts are supposedly guided by a series of major quantitative targets, that include reducing the number of people below poverty level to 10 percent, reducing underemployed to 10 percent of the economically active labor force, enhancing the adult literacy rate to one hundred percent, reducing population growth rate to 1.5 percent, to link all the district headquarters by a road network, to provide drinking water facilities to all the population, increasing the economic growth rate to 8.3 percent and so forth. These are indeed formidable promises that presuppose many conditions for their fulfillment, which hardly exist.

III. The Maoists Movement

Indicators are large enough to ascertain that Nepal’s efforts to raise the level of an impoverished group of people who are in the acute level of poverty have remained barely successful. Yet, a glance at the frenetic construction works, particularly of residential buildings, the upcoming market in certain urban areas, thriving with human activity, and a sudden change in the economic status of some people tells one that although certain group may be thriving at the cost of others, Nepal on the whole remains poor.

Poverty is providing a fertile ground for the disorder, which in turn is pushing the economy on to a downward spiral, undermining its capacity to vigorously pursue the poverty reduction agenda. Further, the present turmoil is such that it is a ‘bigger destabilizing factor”, through increased insecurity, amidst the total loss of somewhere around 9000 lives both from the actions of Maoists and the security agencies and massive destruction of physical assets/infrastructures. The unprecedented spree of violence that is taking place in Nepal is one, which Nepal has never experienced in the past. In addition, the indiscriminate destruction of many vital installations that were created by years of toil and troubles has severely threatened Nepal’s development process. These losses have pushed Nepal’s development backward by years and its impact would continue to be felt for years to come.

How to deal with this situation is a matter of serious concern to the future of all the Nepalese. Nepal’s decision, in 1992, to pursue open and liberal market economic policies brought about some positive changes but remained far short of what is required for bringing about structural changes in the economy. It has enriched a few privileged but left the overwhelming majority of the poor as wretched as ever. The areas, which were little touched by the changes, brought about by the economic and development policies ultimately became the breeding ground for Maoist movement to take root. The discrepancy between levels of development and types of development between regions and groups of people lies at the heart of present political crises. Nepal now provides an example of a country where failures of development paradigms have led to the emergence of a violent political force.

Appeasement of leaders who cannot restore peace and who block growth and development does not help sustain democracy. The very political process would have to be such that they are sidelined in the process of political reform, giving ways to a new set who can reestablish peace and promote development -those whom the people regard as the clean, honest, dedicated and competent enough to lead. No other reform is as urgent as in the political process. In Nepal, a political leader can be anybody – an unqualified, a corrupt, an illiterate, but extremely few of them are dedicated and honest.

Seekers after economic truth usually turn to numbers, but even Nepal’s statistics are less clear-cut. Recent figures showing that poverty fell sharply during the 1990s were celebrated by advocates of economic reform—and just as fiercely contested by the opponents and sometimes by their own colleagues simply because he/she happens to subscribe to a different political culture, philosophy and policy. The country’s official statistics are subject to frequent and unexpected revisions. There were examples when even the sitting member of the National Planning Commission openly doubted the accuracy of the national accounts statistics that were presented by one of his colleagues for the consideration of the Commission, despite the fact that the issues should have been settled in-house before the document was widely debated. Nepal’s variety of information and vagueness conspire to frustrate anyone who tries to be objective in charting the effects of development over the past decade.

IV. The future - a journey towards unknown destination…

Peace and tranquility are critically important for development; and development can only be sustained in an environment of peace and tranquility. It is also true that all people seem to realize the importance of principles of democratic values in the governance of the country and emphasize it during their innumerable formal and informal speeches but seldom put into practice either in the street or in the seat of the government. Development is unlikely to take place unless the excitement, enthusiasm and zeal of the early 1990s are rekindled. And that, in turn, depends on Nepal’s leaders at least getting the message that the preservation of peace is important for the promotion of economic development and reform. Violence has never been a solution for any political problems, nor is good for Nepal and the Nepalese.

What is good for Nepal needs to be considered as ultimately good for leaders and the general people rather than the satisfaction of their petty self- interests.

Nepal is at the crossroad of total disintegration. Following the eight-year-old Maoists movement, the country has been rendered most volatile and insecure. Establishing peace, law and order and accelerating development at this juncture are the most challenging tasks. Uncommon as these problems are, these require an uncommon wisdom and effort on the part of the Nepalese leaders for their resolution.

Delivering in today’s Nepal means restoring peace and tranquility, establishing a popular government based on people’s will, accelerating growth process and creating gainful job opportunities. The New Nepal has to be one full of opportunities and choices and hopes for the better. That is a job for any leader who claims that he is capable of leading Nepal into future.

Nepal is wanting to be guided by a visionary leader who is popular and liked by all- a leader who can bring all the Nepalese together and bind them by a common thread, and unite them all, a leader who can articulate a bolder vision for the future of the country and the people, a leader who can feel and sense the future of the country now in jeopardy. Leadership is all about this vision that extends beyond the horizon of most of the voters and creating demand for needed reform.

It should be remembered that no violent struggle, now matter how lofty the goals are, could safely be allowed to carry forward to dangerous extremes. Nepal and the Nepalese have already suffered tremendous losses. How long and how much more they have to suffer before wisdom prevails among the political forces?

(The author is former Senior Economic Advisor to the Minister of Finance and a former Secretary to HMG/N. He is currently on a visit to the US)