Waamax

The policymakers are eager to submit Nepal Development Strategy Paper (NDSP) to the donor community on May 15 in order to entice more aid and investment in the economy. The development strategy paper reflects the core economic and political beliefs of the Maoists government. In the next three years, the government aims to attain an average growth rate of 7.6 percent and reduce national poverty level to 21.5 percent. Additionally, it aims to achieve agricultural and non-agricultural growth rate of over five percent and 8.5 percent respectively.

Like in previous cases, these targets are unrealistic and do not reflect the ground economic realities. It seems the policymakers who drafted this paper are ignorant of labor disputes, power cuts, and loss of competitiveness of exportable goods, among other issues. The strategy paper is unclear about how it will help the economy make a transition to new productive activities, leading to production of goods and services that could be exported with comparative advantage.

It is debatable to what extent the agendas should be changed to make NDSP a consensus document and reflective of the current state of the ailing economy. Whatever the ideological orientation of final NDSP would be, given the critical and binding constraints on economic growth, policies that are consistent with the following strategies, in no particular order, would potentially help attain a moderate growth rate in the coming years.

First, given the geographical disadvantage, domestic policies should be synchronized with India’s and China’s economic policies in order to maximize neighborhood growth spillovers. Statistical evidence shows that the faster neighbors grow, the faster the landlocked country will grow. It has been shown that when neighbors grow at an additional one percentage point, growth of landlocked country raises by 0.4 percent. Also, low income countries tend to grow faster if they export goods and services typically exported by countries substantially richer than themselves. However, it is not realized in the case of Nepal because of the absence of critical complementary factors like transport infrastructure, governance, appropriability of returns to investment and ad hoc arbitrary policies that are often in conflict with prior economic objectives.

Second, rather than exclusively focusing on markets in the EU and the US, policies should be designed to maximize trading with our neighbors, India and China—the two emerging giants in the global economy. Tapping the untapped markets along the bordering states, where the transportation costs are low, by producing goods and services that are within the reach of the people residing there would be a fruitful exercise. The Indian state of UP alone presents a huge market of more than 190 million people, which is seven times the total population of Nepal. Some investors are already taking advantage of these markets. For instance, after loss of markets in the US and the EU, Nepali textile and clothing exporters are now looking at the Indian market. The amount of export of textile and clothing to India increased from NRs 365.9 million in 2004/05 to NRs 1137.3 million in 2005/06. Similarly, aligning tourism policies with that of Tibet could turn out to be fruitful and profitable. Additionally, policymakers should seriously work on designing policies that would project Nepal as a transit nation for trade between India and China.

Third, design policies to entice FDI in transport infrastructure and large- and small-scale hydropower projects. The government could substantially ease regulatory structure, ensure security of returns to investment and consistency of hydropower policy, resolve labor disputes, build grids to enhance connectivity and share risks with the private sector, among others. Given high consumption demand and low supply of electricity, hydropower could potentially be the most beneficial and profitable sector for investment. Convincing the donors and the banking industry to focus on large-scale projects and encouraging domestic enterprises and entrepreneurs to invest in small-scale projects could be an appropriate strategy.

Fourth, to give the struggling industrial sector a breathing space so that they can compete in price and quality in the international market, the government should implement the provisions outlined in Investment Board and SEZ ordinances, which were recently passed by the cabinet. Even though the WTO allows low-income countries with weak industrial base to establish SEZs and GPZs, so far this has not materialized due to political bickering, leading to delay in establishing backward and forward linkages in the industrial sector.

Fifth, the government should facilitate foreign investment in the tourism sector. Increasing visibility in the international tourism market, easing of visa restrictions, ensuring security, and, most importantly, improving tourism infrastructure such as road transport, airways, and ICT would help a lot. Note that in the Travel and Tourism Competitiveness Index 2008, Nepal ranks 116 out of 130 countries, which shows the lack of competitiveness of the Nepali tourism industry.

Sixth, the government should also facilitate foreign employment and inflow of remittances. Not much needs to be said about the role of remittances, which already account for almost 20 percent of GDP.

Seventh, the policymakers should not forget that the high population growth rate is also constraining increase in GDP per capita. Either jobs creation in the industrial sector should be rapid enough to outpace the rate at which youths are entering the job market or the government should initiate measures to lower population growth rate.

These strategies are not comprehensive. However, focusing policies on these strategies would help kick-start the growth engine and attain a modest and sustained growth rate.

Chandan Sapkota
sapkotac@dickinson.edu