Structural Economic Transformation in Nepal a Diagnostic Study Submitted to DFID Nepal
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June 2014 Report Structural economic transformation in Nepal A diagnostic study submitted to DFID Nepal Yurendra Basnett, Giles Henley, John Howell, Harry Jones, Alberto Lemma and Posh Raj Pandey Low levels of productivity undermine meaningful structural economic transformation. Effective public administration is vital for managing the transformation process. Rural infrastructure is vital for agricultural growth. Poor coordination of policies on fertilisers, irrigation and trade constrain delivery of agricultural inputs and services. Energy sector growth hinges on better market information systems and regulatory reforms to the electricity authority. Make labour markets work better for migrant workers. Financial intermediation can help translate remittances into productive investment Tourism and agriculture would benefit from institutional strengthening of public private partnerships. Catalysing economic development at a subnational level is a key opportunity in the current context. Shaping policy for development odi.org Acknowledgements This report has benefited from the comments, suggestions and support provided by Miguel Laric, Dirk Willem te Velde, Shaleen Khanal, Vincent Tang, Paul Kaiser, Mohan Manandhar, Charla Britt, Jackie Leslie, Luke Crimi, Mobolaji Oyeniji, Victoria Cox and Ritwika Sen. We would like to thank DFID-Nepal and SAWTEE for providing support during the national consultations held in Kathmandu from October to November 2013. We would like to thank the participants in the donor roundtable and high level panel discussion held at DFID-Nepal in October 2013. We would like to thank Millennium Challenge Corporation, Social Impact, Niti Foundation, Centre for Inclusive Growth, International Finance Corporation for sharing information and analysis on constraint to growth in Nepal. This report has been enriched by the insights and experience shared by a number of policy makers and opinion formers in Nepal. We would like thank Bharat Mohan Adhikary, Abhinab Basnyat, Joydeb Chakraborty, Kanak Dixit, Ganesh Gurung, Dilli Khanal, Bimal Koirala, Davendra Raj Panday, Surendra Pandey, Amir Rana, Mohan Man Sainju, Chandan Sapkota, Gagan Thapa and Deepak Thapa. The views presented in this paper are those of the author(s) and do not necessarily represent the views of ODI and DFID. Table of contents Acknowledgements ii Abbreviations iv Executive summary v 1 Introduction 1 2 Constraints to economic growth in Nepal 3 2.1 Economic growth performance 4 2.2 Structural economic transformation 7 2.3 Overview of constraints to growth 13 3 Coordination failure 17 3.1 Brief history of economic policy in Nepal 18 3.2 Sources of coordination failure in Nepal 20 4 Evolving politics & implications for inclusive growth in Nepal 28 4.1 Key features 29 4.2 Priorities and programming principles 35 5 Agriculture 39 5.1 Overview 39 5.2 Context of Nepal’s agriculture sector 39 5.3 Performance of the agricultural sector 41 5.4 Identifying constraints 43 5.5 Opportunities for transformation 53 5.6 Programme options for agriculture 57 5.7 Programme options matrix for agriculture 60 6 Energy 63 6.1 Evaluating performance 63 6.2 Identifying constraints 66 6.3 The potential for renewable energy 73 6.4 Energy sector problem tree 75 6.5 Opportunities for transformation 76 6.6 Programme options for energy 78 6.7 Programme options matrix for energy 82 7 Transport 87 7.1 Evaluating performance 88 7.2 Challenges 91 7.3 Opportunities for transformation 98 7.4 Programme options for economic transport 100 7.5 Programme options matrix for economic transport 104 8 Tourism 112 Structural economic transformation in Nepal i 8.1 Evaluating performance 112 8.2 Identifying constraints 114 8.3 Opportunities for transformation 124 8.4 Programme options for tourism 128 8.5 Programme options matrix for tourism 134 9 Labour migration & remittance 137 9.1 Evaluating performance 137 9.2 Identifying constraints 139 9.3 Opportunities for transformation 146 9.4 Programme options for labour migration & remittances 152 9.5 Programme options matrix for labour migration 157 10 Leveraging Nepal’s natural resources 160 10.1 Overview 160 10.2 Water 161 10.3 Forestry 165 10.4 Climate change & risks to economic transformation in Nepal 168 11 Programme options for structural transformation 171 11.1 Programme narrative 171 11.2 Programme focus 172 11.3 Programme delivery 176 12 Conclusion 181 References 183 Appendix: Donor Mapping 194 Figures Figure 1: Real GDP annual growth (in percentage) over the past 45 year period (1974 – 2012; constant 2005 US$) 4 Figure 2: Real GDP per capita (average annual growth; constant local currency unit) 5 Figure 3: Real value added by economic sectors (average annual growth) 5 Figure 4: Trends in industry, manufacturing and gross capital formation (percent of GDP) 6 Figure 5: Gross national income per capita (atlas method) 9 Figure 6: Real value added by economic sector (percent of GDP) 9 Figure 7: Real value added by economic sectors (constant local currency units; in 000,000s) 10 Figure 8: Value added per worker by economic sectors (constant, USD2000) 11 Figure 9: Comparison with developing countries in the region (values as percentage of GDP, 2005 - 2010) 11 Figure 10: Electricity production from hydroelectric sources (in kilowatt hours (000,000s), left axis) and percentage change in production (right axis) 14 Figure 11: Electricity power consumption (kWh per capita) 14 Figure 12: Value of agricultural sub-sector output 1970 and 2010. 41 Figure 13: Agricultural production in Nepal (2010) 41 Figure 14: Agricultural growth rates, 1968-2012 42 Figure 15: Productivity per agricultural worker, 1990-2010 43 Figure 16: Problem tree for low yields 45 Figure 17: Problem tree for low value added in high value/export crop 50 Figure 18: Returns to investments in agriculture in India 1960s-1990s 54 Figure 19: Electricity production for Nepal GWh (2012) 64 Figure 20: Electricity total availability MW (2012) 64 Figure 21: Electricity consumption by sector (GWh) 64 Structural economic transformation in Nepal ii Figure 22: Electricity load forecast for Nepal 65 Figure 23: License system impacts on IPP investments 71 Figure 24: Problem tree for the energy sector 76 Figure 25: Effects of high cost of transport 91 Figure 26: Problem tree for high cost of air transport 94 Figure 27: Figure Problem tree for lack of railway development 97 Figure 28: Average spend per tourist (current US$) 114 Figure 29: Tourism sector problem tree 127 Figure 30: Problem tree for high social and economic costs of migration 146 Figure 31: Problem tree for unrealised benefits 151 Figure 32: Water to economic transformation theory of change 164 Figure 33: Forests to economic transformation theory of change 167 Figure 34: Estimated economic damages (RHS) & people affected (LHS) reported by disaster type (1980-2010) 168 Figure 35: Potential impacts of climate change on power generation & cost of hydropower (WECS 2012) 169 Tables Table 1: Real GDP growth and sectoral value added (constant 2005 US$) 6 Table 2: Comparison of Nepal with select countries on some economic development indicators 12 Table 3: Cost of starting business in Sri Lanka and Nepal 16 Table 4: Government expenditure in infrastructure (share in percent) 22 Table 5: Governance indicators 22 Table 6: Aid fragmentation in Nepal 26 Table 7: Cropping patterns in Nepal 40 Table 8: Land holdings in Nepal 40 Table 9: Crop yields in Nepal, 2008 42 Table 10: Importance of transport for development 87 Table 11: Transport infrastructure 89 Table 12: Quality of transport infrastructure 89 Table 13: Cost of transport 90 Table 14: Ecosystem services & economic benefits from forests 165 Table A1: Agriculture 195 Table A2: Energy 208 Table A3: Economic transport 215 Table A4: Tourism 217 Table A5: Labour migration 218 Boxes Spaces for joining the flying geese ......................................................................... 7 Improvements in doing business .......................................................................... 15 Political economy analysis .................................................................................... 29 Constraints to the ginger subsector ...................................................................... 52 Conditions necessary for agricultural development .............................................. 54 The ILO 169 convention ....................................................................................... 70 CDM energy projects in Nepal .............................................................................. 74 Hydropower potential for low carbon growth ...................................................... 161 Assumptions ....................................................................................................... 164 Climate finance ................................................................................................... 165 Assumptions ....................................................................................................... 167 Structural economic transformation in Nepal iii Abbreviations ADB Asian Development Bank AEPC Alternative Energy Promotion Centre CBS Central Bureau of Statistics CNI Confederation of Nepalese Industries DFID Department for International Development DoED Department of Electricity Development FNCCI Federation of Nepalese Chambers of Commerce and Industry GoN Government of Nepal GWh Gigawatt hour IPP Independent Power Producer JICA Japan International Cooperation Agency KWh Kilowatt hour MoF Ministry of Finance