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Critical Development Constraints Nepal’S Pace of Growth and Poverty Reduction Has Lagged Behind That of Other South Asian Countries

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Critical Development Constraints Nepal’S Pace of Growth and Poverty Reduction Has Lagged Behind That of Other South Asian Countries Nepal: Critical Development Constraints Nepal’s pace of growth and poverty reduction has lagged behind that of other South Asian countries. The country diagnostic study—Nepal: Critical Development Constraints—inquires into the causes for Nepal ’s slow growth vis-à-vis that of other South Asian economies by posing three questions: • What are the critical factors constraining investments, both domestic and foreign? • What should policy makers do to revive investment, particularly by the private sector? • How can the growth be made more inclusive? The inquiry and the results thereof aim to assist the work of government, development agencies, and the private sector to achieve a higher, more equitable growth path to benefit the people of Nepal. About the Asian Development Bank ADB’s vision is an Asia and Pacific region free of poverty. Its mission is to help its developing member countries substantially reduce poverty and improve the quality of life of their people. Despite the region’s many successes, it remains home to two thirds of the world’s poor: 1.8 billion people who live on less than $2 a day, with 903 million struggling on less than $1.25 a day. ADB is committed to reducing poverty through inclusive economic growth, environmentally sustainable growth, and regional integration. Based in Manila, ADB is owned by 67 members, including 48 from the region. Its main instruments Nepal for helping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants, and technical assistance. About the United Kingdom’s Department for International Development Critical One in six people in the world today, almost 1 billion people, live in poverty on less than $1 a day. DFID supports long-term programs to help eliminate the underlying causes of poverty. DFID also responds to emergencies. DFID works in partnership with governments, civil society, the private sector and research- ers. It also works with multilateral institutions, including the Asian Development Bank and International Labour Organization. Development About the International Labour Organization ILO is devoted to advancing opportunities for women and men to obtain decent and productive work in conditions of freedom, equity, security, and human dignity. Its main aims are to promote rights at work, Constraints encourage decent employment opportunities, enhance social protection, and strengthen dialogue in handling work-related issues. ILO was founded in 1919 to pursue a vision based on the premise that universal, lasting peace can be established only if it is based upon decent treatment of working people. In 1946, ILO became the United Nations’ first specialized agency. Country Studies Diagnostics Asian Development Bank Department for International Labour Organization 6 ADB Avenue, Mandaluyong City International Development 4 route des Morillons 1550 Metro Manila, Philippines 1 Palace Street London SW1E 5HE, CH-1211 Genève 22 Tel +63 2 632 4444 United Kingdom Geneva, Switzerland Fax +63 2 636 2444 Tel 44 845 300 4100 Tel +41 22 799 6111 www.adb.org/economics www.dfid.gov.uk/ Fax +41 22 798 8685 [email protected] [email protected] www.ilo.org [email protected] Country Diagnostics Studies Nepal: Critical Development Constraints © 2009 Asian Development Bank (ADB), Department for International Development (DFID), and International Labour Organization (ILO) All rights reserved. Published 2009. ISBN 978-971-561-803-8 Publication Stock No. RPT090743 Cataloguing-In-Publication Data ADB, DFID, and ILO. Nepal: critical development constraints. Mandaluyong City, Philippines: Asian Development Bank, 2009. 1. Economic development. 2. Nepal. I. Asian Development Bank. II. Department for International Development. III. International Labour Organization. The views expressed in this publication do not necessarily reflect the views of ADB or its Board of Governors or the governments they represent, DFID, or ILO. ADB, DFID, and ILO do not guarantee the accuracy of data included in this publication and accept no responsibility for any consequence of their use. In this report, “$” refers to US dollars unless otherwise specified. Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines Tel: +63 2 632 4444 Fax: +63 2 636 2444 www.adb.org/economics Department for International Development 1 Palace Street London SW1E 5HE, United Kingdom Tel: 44 845 300 4100 www.dfid.gov.uk/ International Labour Organization 4 route des Morillons CH-1211 Genève 22 Geneva, Switzerland Tel: +41 22 799 6111 Fax: +41 22 798 8685 www.ilo.org Foreword lmost three years into the home-grown peace process, the crucial agenda before Nepal is to ensure sustainable peace. This is just not possible by only finding political solutions to many problems that Nepal is facing. It is necessary for us to Aaccelerate development, achieve higher and inclusive economic growth. Nepal’s development lost momentum during decade-long conflict. Since Fiscal Year 2007/08, the economy is showing signs of improvement, but there are many impediments to faster growth and equitable distribution. The conflict is not over yet, as many groups spread in different parts of the country are staking claims for their rightful place in politics and economy. Without faster development and perceptible change in the lives of ordinary people, we cannot possibly overcome this post-conflict turbulence. We need to move tactfully, clearly identifying the obstacles, implementing reforms that minimize the obstacles, and at the same time using a development strategy that can work even amidst turbulence and obstacles. The present report does part of what is outlined in the above paragraph. It identifies critical development constraints and recommends a series of measures that can minimize them. Therefore, the government welcomes this report. The diagnostic framework used in the study is an attempt to establish priorities among many candidate policies and institutional reforms aimed at sustained and inclusive growth. The analyses and the informed recommendations geared to fostering growth and overcome poverty, inequality, and other unwanted economic and social outcomes are of immense value to the government. Nepal, as the report notes, has implemented a number of important policy reforms during the past three decades. Today, Nepal has a thriving financial sector with a vibrant stock market, and a growing tourism sector. It is actively pursuing a policy of converting itself from an electricity deficient nation to a key source of electricity to its fast growing neighbors in the north and the south. In the area of social development, Nepal adopted the Millennium Development Goals and has made some impressive progress in reducing the poverty levels despite low levels of economic growth. The government, however, is aware that poverty, exclusion, under-employment, and income disparities are persistent reminders of the difficulties that some of our countrymen are still experiencing. The report is, thus, very timely and will be a source of valuable inputs in formulating the country’s next development strategy. The report provides insights that can enrich cooperation between the government of Nepal and development partners, especially the Asian Development Bank (ADB), Department for International Development (DFID), and International Labor Organization (ILO). In particular, we are highly appreciative of the consultative process that the study adopted to ensure that views of all the key stakeholders were taken into account in the diagnosis and formulation of the policy recommendations. The findings and recommendations of the report can form part of the basis for joint work with the development partners toward a common objective of enhancing inclusive and sustainable growth in Nepal. The high priority given, for example, to fiscal management is bound to improve the conduct of official development assistance. The government gratefully acknowledges ADB, DFID, and ILO for the timely conduct of the study. Rameshore P. Khanal Secretary Ministry of Finance Preface epal’s performance on the economic development front since the turn of the century has lagged behind that of the other South Asian economies. In terms of per capita gross domestic product (GDP), Nepal is now where Sri Lanka was in N1960, Pakistan was in 1970, and India and Bhutan were in 1980. This lackluster economic performance has occurred despite some very important reforms during the 1990s and 2000s. Although the poverty incidence declined from 42% in 1995/96 to about 31% in 2003/2004, it remains high and may climb further if the global recession reduces remittance flows. Another emerging concern is the sharp rise in inequality from 1995/96 to 2003/04. Although GDP registered an impressive 5.6% growth in 2007/08 compared with 3.0% in 2006/07, the surge was largely due to timely rains leading to a good harvest of the main agricultural crops and to a rise in tourism arrivals—not due to major improvements in economic fundamentals. This raises the question of how Nepal can improve its pace of growth and poverty reduction. Thus the report attempts to identify the most critical constraints that the country faces—constraints that, when removed, can yield the highest welfare gains. The report also attempts to answer how the constraints can be converted into opportunities for long-term growth and how the benefits of economic growth can be translated into faster poverty reduction. Nepal: Critical Development Constraints presents a diagnosis of Nepal’s economy. The diagnosis was led by the Asian Development Bank (ADB) and jointly undertaken with the United Kingdom’s Department for International Development (DFID) and the International Labour Organization (ILO). The work at ADB was led by Muhammad Ehsan Khan; Juzhong Zhuang, assistant chief economist, Economic Analysis and Operations Support Division, Economics and Research Department, provided the oversight and overall direction. DFID’s work on the study was coordinated by Matthew Greenslade, and ILO’s was coordinated by Shengjie Li and Duncan Campbell. The report was prepared by Muhammad Ehsan Khan, Yoko Niimi, and Ma. Rowena M. Cham with contributions from Peter Owen and Duncan Campbell.
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