Nepal Paper

8/18/2019 Nepal Paper

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Revised, March, 2007

THE ECONOMIC DEVELOPMENT OF NEPAL:

A LONG-TERM PERSPECTIVE

S. R. Osmani and B. B. Bajracar!a

I. A SHORT POLITICAL HISTOR" OF NEPAL

The Kingdom of Nepal was formed in the eighteenth century when KingPrithvi Narayan hah !rought together of a num!er of fiefdoms and small states at thefoot of the "imalayas under his rule# The hah dynasty was, however, soon em!roiledin a protracted power struggle that culminated in the emergence of $ung %ahadur

Rana in &'(), who introduced the system of hereditary prime minister, giving rise tothe powerful Rana oligarchy# *uring the Rana regime, some isolated efforts weremade to !ring a!out progressive political and social changes, !ut these were thwarted

!y conservative elements among the oligarchy that perceived such changes as threatsto their hold on power# %ut eventually, the Rana regime san+ under the weight of itsown unpopularity and was overthrown !y the oint efforts of the hah +ings and the

people in &-.&, heralding the emergence of modern Nepal#The restoration of the hah +ings to power !rought a!out fundamental changes

in the polity and economy of Nepal# /n the political front, the people of Nepal tastedmultiparty democracy for the first time in their history and in the economic spherethey witnessed the first attempts to achieve planned socioeconomic development#

The first ever annual !udget of the country was announced in &-.1 and the firstdevelopment plan was launched in &-.7# nfortunately, the e3periment in multipartydemocracy soon degenerated into interparty as well as intraparty s4ua!!le for power that led to political insta!ility and precluded longlasting economic reforms#

5s the political insta!ility intensified, King Mahendra dismissed thedemocratic government of Nepali 6ongress Party in &-)0 and suspended the

parliament, denouncing# "e assumed all e3ecutive power and esta!lished the Panchayat system in &-)0, which was to remain the dominant form of politicaldispensation in Nepal for three decades# t was a partyless system of pseudodemocracy in which people elected their representatives from different constituencieson an individual !asis, not on the !asis of any political ideology or party#

nder the +ing8s direction, the government instituted a num!er of socialreforms, including moderni9ation of the legal code in &-)2 and land reforms in &-)(#The practice of pursuing socioeconomic development through fiveyear development

plans was consolidated, with emphasis on physical and social infrastructure# Theeconomic regime assumed a distinctly interventionist character as the governmentcame to control many crucial prices, and the monopoly of production activities wasvested in pu!lic corporations, there!y precluding the growth of the private sector#

5fter King Mahendra passed away, his son King %irendra adhered to the politicaleconomic system esta!lished !y his father until the antimonarchistmovement seriously challenged his authority in &-'0# Riots !ro+e out, and in a &-'0

referendum on the form of government, the voters decided to retain the nonparty Panchayat system with certain modifications# :rom then onward, the +ing gradually


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li!eral Panchayat system, followed !y initiation of outwardoriented economic policies and gradual dismantling of the pu!lic sector# The third phase, covering thedecade &--&2000, saw the restoration of multiparty democracy under aconstitutional monarchy and the adoption of a vigorous programme of economicli!erali9ation, privati9ation and glo!ali9ation of the economy# The fourth and final

phase started from around 2000# *uring this phase, a li!eral economic stance wasmaintained !ut its impact was stymied !y an allengulfing political turmoil caused !ya !itter tripartite struggle for power that continued until 200)#

II. ECONOMIC GRO#TH AND THE MACROECONOMIC SCENARIO

II.$ Gr%&' and S'r(c'(r) %* ') Ec%n%m!

*uring the final three decades of the last century the Nepalese economy grewat the average rate of ( per cent per annum# =ith population growing at 2#2 per cent

during the same period, per capita income increased at the rate ' per cent per annum# 6umulated over three decades, this rate of growth translates into a 70 per centincrease in the living standard of an average Nepali within one generation# This is notan insignificant progress, !ut it does represent the slowest growth of per capitaincome in the whole of outh 5sia# The contrast is even sharper with the countries of ?ast and outh?ast 5sia, most of which too+ only &0 to &. years to dou!le their per capita income, something that Nepal was not a!le to do even in 10 years#

The situation was especially !ad in the &-70s, when >*P and population !othgrew at around 2#& per cent per annum, causing stagnation in per capita income# Therewas, however, some improvement in the ne3t two decades, when >*P grew at thefaster rate of a!out . per cent, and per capita income grew at 2#1 per cent# Themomentum of this acceleration was maintained with the advent of the present century,as the growth of >*P rose further to .#. per cent in 200& and the growth of per capitaincome rose to 1#& per cent# "owever, the intensification of internal conflict,com!ined with a downturn in the e3ternal economic environment, too+ a heavy toll of the economy in su!se4uent years, from which the country has yet to recover# Thegrowth rate turned negative in 2002, and although it recovered slightly afterwards itremained well !elow the rates achieved in the &--0s ;Ta!le &*P growth 2#' (#. (#7 2#-

Population growth 2#& 2#1 2#( 2#1

Per capita >*P growth 0#' 2#2 2#( 0#)

Sources@ =orld %an+ ;200.a


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two decades# The improvement in growth that occurred in the &-'0s compared to the&-70s was driven mainly !y agriculture# n the &-70s, agriculture had performeddismally, growing at less than 2 per cent in the first half of the decade ande3periencing negative growth in the second half# %ut there was a significantturnaround in the &-'0s, when agricultural growth rose to a!out (#. per cent, well

a!ove the population growth rate of 2#1 per cent ;Ta!le 2+# The condition of agriculture turned for the worse again in the early &--0s, and although the situationimproved slightly in the second half of the decade, the average growth rate for thedecade as a whole fell to almost half of the rate achieved in the &-'0s# The fact thatoverall >*P growth was nonetheless maintained in the &--0s was due primarily toimproved performance of nonagricultural sectors, especially manufacturing#

Table 2: Sectoral GDP Growth at Constant Prices ;Periodic average growth rate per annum, in percentage<

ectors &-7)'0 &-'&'. &-')-0 &--&-. &--)20 200&0(

A,ric('(r) -$. /.0 1.$ $./ .2 ./

N%n A,ric('(r) 3./ 1.4 /./ 5.$ 2.6 0.0

Mining and Buarrying -#& &.#2 .#. .#' .#- 2#&

Manufacturing 2#& .#1 .#2 &(#0 7#) 0#)

?lectricity, >as and =ater )#7 &(#' &1#- &0#& 7#' &)

6onstruction &7#( 7#1 )#. )#. .#(

Trade, Restaurant C "otel .#) (#- (#( 7#. (#7 0#1

Transport C 6ommunication &2#0 .#1 -#' 7#0 (#(

:inance and Real ?state .#- 2#( .#2 )#( .#7 2#'

5ll others )#1 '#1 )#7 )#' )#2 .#0

GDP a' *ac'%r c%s' 0.1 /.6 1.5 /.6 /.6 0.3

Sources: *eraniyagala et al. ;2001*P# %y 2000,its share had come down to ust a!out (0 per cent# %y contrast, the share of manufacturing, which was a paltry ( per cent in &-7., increased to over - per cent !y

2000# /ther nonagricultural activities such as construction, trade, transportation,finance and real estates have also increased their share of >*P considera!ly duringthe last two and half decades ;Ta!le 1


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Table 3: Strctre of GDP at Crrent Prices ;Percentage share in >*P<

ectors &-7. &-'0 &--0 2000 200(

A,ric('(r) 3$.2 2$.5 /6.2 4./ 5.3

N%n A,ric('(r) 05.1 5.0 14.1 26./ 2$.

Mining and Buarrying 0#& 0#2 0#. 0#. 0#.

Manufacturing (#2 (#1 )#0 -#2 7#7

?lectricity, >as and =ater 0#2 0#1 0#. ) 2#1

6onstruction 1#7 7#2 -#0 &0#2 &0#1

Trade, Restaurant C "otel 1#( (#& &0#. & &0#(

Transport C 6ommunication (#1 7#0 .#7 '#0 -#2

:inance and Real ?state )#- '#( -#1 &0#& &0#-

5ll others .#7 )#' 7#- -#2 -#'

T%'a GDP $66 $66 $66 $66 $66

Sources: Khatiwada and harma ;2002*P# :ortunately for Nepal, the effect of declining foreign aid was offset !y vastly increased flow of remittances from

Nepalese wor+ers wor+ing a!road, which !ecame the maor source of financing thegap !etween investment and domestic savings in the &--0s#

Table 4: Sa!in"s an# $n!est%ent Rates: 1970-2004 ;Periodic averageA as percentage of >*P<

&-7&'0 &-'&-0 &--&00 200&0(

nvestment;including stoc+s< &)#1 &-#- 21#1 2)#0

Pu!lic fi3ed investment 1#- 7#7 7#0 7#1

Private fi3ed investment -#2 &0#' &1#7 &2#&

>ross domestic savings -#0 &0#. &2#' &2#(



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ndeed, the growth of remittances has perhaps !een the most significantdevelopment in the Nepalese economy in recent years# The si9e of remittances hasgrown at the remar+a!ly high rate of 10 per cent per annum since the early &--0s,

with important ramifications for economic growth, poverty and ine4uality# 5round200(, some '00,000 wor+ers were employed a!road, mostly in ndia, and their remittances accounted for some &2 per cent of >*P# :or a comparative perspective onthe importance of remittance for the Nepalese economy, it may !e noted that itscontri!ution to the earnings of foreign e3change ;D'00 ml< e3ceeded that of merchandise e3ports ;D)11 ml< and tourism ;D&.. ml< in 200(#

The surge in investment in the &-'0s was led primarily !y pu!lic investment,financed !y increased inflow of foreign aid, and supplemented !y increasing recourseto deficit financing# The share of pu!lic investment in >*P rose from a!out ( per centin the &-70s to over 7 per cent in the &-'0s ;Ta!le (*P rose to &( per cent from the average of && per cent in the

preceding decade# n fact, it was only the growth of private investment that +ept theoverall investment rate rising in the &--0s, as the rate of pu!lic investment remainedstagnant# "owever, as the general investment climate deteriorated at the turn of thecentury with the intensification of Maoist insurgency and downturn in the worldeconomy, private investment predicta!ly declined, recovering only very slowly inrecent years#

II.0 Fisca Tr)nds

The fiscal operations of the government of Nepal have !een severelyconstrained !y its ina!ility to generate ade4uate domestic revenue# n the &-70s, only7 per cent of the >*P was collected as government revenue# Two decades later, in the&--0s, this ratio had risen slowly to &0 per cent# >overnment e3penditure in the meantime rose much faster E from && per cent to &7 per cent of >*P ;Ta!le .*P increased from '#7 per cent in the second half of the

&-70s to &2#) per in the &-'0s# %ut su!se4uently the share of developmente3penditure declined, partly in order to accommodate the growing demands onresources made !y the need to deal with the insurgency pro!lem# %y the turn of the

present century, the share of development e3penditure in >*P had fallen !ac+ even !elow the levels prevailing in the &-70s#

Throughout this period, the !ul+ of Nepal8s development e3penditure wasfinanced !y foreign aid# ndeed, it was the increasing flow of aid that made a risingshare of development e3penditure possi!le despite sluggish growth in domesticrevenue# :rom (#& per cent of >*P in the late &-70s, the amount of foreign aidincreased to 7#) per cent in the late &-'0s# "owever, the ratio declined in the &--0s,and !y the end of the decade, it was only marginally higher than what it was in the

late &-70s# This pattern in the flow of foreign aid E rising in the &-'0s and falling inthe &--0s E was mirrored fully in the trend in development e3penditure, which also


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followed e3actly the same time path E rising in the &-'0s and falling in the ne3tdecade# *evelopment e3penditure has thus !een dou!ly s4uee9ed in recent years E !ythe decline in the relative si9e of foreign aid on the one hand and !y the diversion of resources caused !y the escalation in Maoist insurgency on the other#

The urge to push up development e3penditure in the face of slow revenue

growth caused fiscal im!alances in the &-'0s, which had serious repercussions on theoverall macroeconomic scenario of the country# %udget deficits mounted, clim!ing to)#. per cent of >*P as compared with the average deficit of 2#2 per cent prevailing inthe &-70s ;Ta!le .*P in the &-70s to 2#' per cent in the&-'0s#

Table &: '#"etar( Tren#s) *one( S++l( an# $nflation: 1970-2004 ;Periodic averages<

&-7&'0 &-'&-0 &--&00 200&0(

Total revenue as F of >*P )#. '#. -#' &

Total e3penditure as F of >*P & &7#) &)#. &7#2

*evelopment e3penditure '#7 &2#) &0#& )#-

%udget deficit as F of >*P 2#2 )#. .#1 .#'

oGw *omestic financing & 2#' . 2#1

%road money as F of >*P &)#2 27#2 17#. .1#-

Rate of inflation ;per annum< 7#. &0#) -#1 1#7



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of development e3penditure# :or instance, de!t repayments were e4uivalent to a!out.) per cent of development e3penditure in 2001G0(# The de!t pro!lem for Nepal isthus more of a fiscal pro!lem than a !alance of payments one, !ut a very serious

pro!lem nonetheless#The main reason why Nepal has had to incur huge de!ts in order to finance its

development e3penditure lies in its chronic ina!ility to raise government revenue#There was an upsurge in the growth of revenue in the first half of the &--0s, followingthe adoption !y the government of a num!er of fiscal reforms, !ut it did not last long

E the growth rate was almost halved in the second half of the decade# %y the year 2001G0(, !arely && per cent of >*P was collected as government revenue, as against&7 per cent of >*P !eing spent as government e3penditure#

ndirect ta3es contri!ute the !ul+ of the revenue, as in most other developingcountries# Their share of total revenue remained fairly constant at around ). per centuntil the mid&--0s, after which it declined to less than )0 per cent ;Ta!le )


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21 per cent to 10 per cent of all pu!lic e3penditure# *uring the same period, the shareof economic services has fallen from .& per cent to 1. per cent ;Ta!le 7NP remained at around 20 per centagainst the prescri!ed norm of 2. per cent# imilarly, social sector allocation ratio

stood at 1& per cent as against the re4uired ratio of (0 per cent# ?ven the prioritysector allocation ratio, which remained at satisfactory levels till late &--0s, went down


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in su!se4uent years# This has resulted in a reduction in the level of humandevelopment e3penditure E amounting to ust &. per cent of pu!lic e3penditure and 1

per cent of >NP in 2000 compared with the prescri!ed norms of 20 per cent and . per cent respectively#

*uring the past decade and a half, the government of Nepal has made

conscious attempts to impart a propoor stance to pu!lic e3penditure, with mi3edsuccess# t has !een estimated that a!out onethird of total pu!lic spending goes into

propoor programmes# :urther, one third of spending goes for social services andmore than half of it has !een allocated to the social priority sectors# 5t the same time,fiscal decentralisation has !een pursued as an active instrument of promoting propoor spending# t has !een o!served that a!out .0 per cent of the e3penditure underta+en

!y illage *evelopment 6ouncils ;*6< was spent on social priority areas in the late&--0s# "owever, the poor 4uality of services rendered !y much of these locallevele3penditures has remained a matter of a!iding concern#1

II. M%n)! and In*a'i%n

The conduct of monetary policy is severely restricted in Nepal !ecause of itse3change rate regime# n order to facilitate free and e3panding trade with ndia, Nepalhas maintained a policy of fi3ed peg and free converti!ility !etween its own rupee andthe ndian rupee# %ut this has had the conse4uence of severely circumscri!ing themonetary autonomy of Nepal# n particular, Nepal is o!liged to align its interest ratesclosely to those of ndia so as to avoid any desta!ili9ing capital flight !etween the twocountries# ince the mid&-70Js, Nepal had !een pursuing a policy of maintaining itsdeposit rates slightly a!ove those of ndia in order to ensure that savings do not flowout of the country# "owever, following financial li!erali9ation carried out since the

5 mismatch !etween the interest rate structures of Nepal and ndia !egan toemerge in early &--0Js, when interest rates tended to rise in ndia and yet they tendedto fall in Nepal due to e3cess li4uidity in the !an+ing system caused mainly !y higher volumes of capital inflow# 5s a result, the Nepalese interest rates remained lower thanin ndia# 5s this differential in interest rates posed a threat of capital flight towardsndia, the Nepalese !an+s !egan to revise the deposit rates upwards since the mid&--0s so as to converge them with the ndian ones# 5s a conse4uence of theseadustments, the deposit rate structure in Nepal is now on the whole !ac+ in line withthat of ndia#

Nepal8s inflationary e3perience has !een similar to that of the rest of outh

5sia E a moderate rate of inflation mar+ed !y periodic fluctuations# The average rateof inflation during the last three decades and a half was a!out - per cent# n the &-)0s,the inflation rate was actually 4uite low E averaging a!out . per cent# The oil crisis of the early &-70s gave a temporary push to inflationary pressures in Nepal, as the rateof inflation entered dou!le digit figures for the first time, !ut !y the end of the decadeit had fallen !ac+ to the . per cent mar+#

5fter &-'0, Nepal entered what might !e descri!ed as a phase of relativelyhigh inflation, when for nearly a decade and a half the rate of inflation remained a!ove&0 per cent ;Ta!le .


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!alance of payments deficits, which prompted a &. per cent devaluation in the mid&-'0s, which in turn sto+ed up further inflationary pressure in the second half of thedecade# nflation continued to remain high in the first half of the &--0s, than+s partlyto a 2& per cent devaluation that was made necessary !y a similar devaluation !yndia, with which Nepal has close economic ties#

t was only after the mid&--0s that the inflation rate !egan to clim! down#?specially since &--- there has !een a significant progress in the price situation# Theaverage inflation in the four years since 2000 stood at 1#7 per cent compared to theaverage of -#1 per cent in the second half of the &--0s# The recent slow down ininflation is attri!uted partly to low import prices and partly to the economic slowdownin the country# Nepal has a long and open !order with ndia, allowing free flow of goods and services across the !order !ased on free converti!ility of the twocurrencies# 6ross !order flows of daily consumption goods help to e4uali9e cross

!order prices# 5s a result, low food prices that have recently prevailed in ndia haveresulted in depressed food prices in Nepal as well# This, together with depresseddomestic demand for nonfood items owing to economic slowdown, has resulted in

low inflation since 2000#

II.1 Tr)nd and S'r(c'(r) %* ') E8')rna S)c'%r

=hen Nepal first em!ar+ed on the path of modern economic development inthe &-.0s, ndia was almost its sole trading partner, accounting for more than -. per cent of all its trade# /ver time, the trade regime of Nepal has e3periencedconsidera!le diversification, although ndia still remains its most important trading

partner# The regime of fi3ed e3change rate and free converti!ility with the ndianrupee, coupled with a large and porous !order !etween ndia and Nepal, have helpedmaintain a large share of ndia in Nepal8s foreign trade# Let, in the twenty years

!etween the mid&-70s and mid&--0s, there was a gradual decline in the importanceof ndia as a trading partner, as its share had fallen to ust &. per cent of Nepal8se3ports and 11 per cent of its imports# "owever, this trend was reversed after the mid&---s, when the new Trade Treaty signed !etween the two countries in &--) gave afresh impetus to ndoNepalese trade !y further li!eralising trade with each other# Themost recent ndoNepal Treaty renewed in 2002 has, however, introduced several newrestrictions in the form of tighter rules of origin re4uirement and documentation, andalso in the form of traderelated 4uotas to !e triggered !y e3port volume#

Nevertheless, ndia currently accounts for a!out half of Nepal8s e3port and imports#

Moreover, it is not ust on account of merchandise trade that ndia looms large in theinternational transactions of Nepal# More than onethird of its foreign directinvestment ;:*< comes in the form of oint ventures with ndia and more than 70 per cent of Nepal8s la!our force a!road wor+s in ndia, which means that remittanceincome, which has come to play such a prominent role in the Nepalese economy, alsooriginates mostly from ndia#

5long with diversification in trading partners, Nepal has also e3periencedsignificant increases in the volume of its foreign trade# Trade ratio, measured as thesum of e3ports and imports as a percentage of >*P, has increased from &- per cent inthe second half of the &-70s to almost (0 per cent during 200&0(, ma+ing Nepal oneof the most open economies of outh 5sia ;Ta!le '*P ratio hasalmost e3actly dou!led E rising from ) per cent in the second half of the &-70s to


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a!out &2 per cent in 200&0(, while the imports to >*P ratio has increased from &1 per cent to 27 per cent during the same period#

Trade deficit meanwhile increased sharply from 7 per cent in the second half of the &-70s to 2& per cent in the second half of the &--0s !efore falling off slightly to&. per cent in the ne3t four years# :ortunately, however, despite widening trade deficit

the current account has improved since &--0, !ecause of growing contri!utions fromservice and transfer income, especially from wor+ers8 remittances# The overall

!alance of payments has also remained in surplus most of the time, resulting in acomforta!le cushion of foreign e3change reserves#

The structure of Nepal8s e3ports has undergone significant transformation over the decades# The most remar+a!le feature is the growing importance of manufacturede3ports# %etween &-'0 and 200&, the share of primary goods e3ports declined fromnearly 70 per cent to &7 per cent, whereas the share of manufactured e3ports increasedfrom 10 per cent to 7. per cent during the same period# Let, it has to !e recogni9edthat Nepal8s e3port sector is mar+ed !y serious structural wea+nesses# The main

pro!lem is that the e3port sector is very narrowly concentrated in a few products E

garments, carpets and pashmina wool E which accounted for around .0 per cent of alle3port earnings in 200 Nepalese e3ports are also characterised !y a very high levelof mar+et concentration, ma+ing the country especially vulnera!le to e3ternal shoc+s#

Table : Tren#s of ./+orts an# $%+orts: 197,-2004 ;Periodic averageA in percentage of >*P<

&-7)'0 &-'&'. &-')-0 &--&-. &--)20 200&0(

Total trade &'#- 2- 21#7 11#) (0#7 1'#7 ?3port )#0 (#- .#1 -#0 &0#& &

mport &2#- &7#0 &'#( 2(#) 10#) 27#0

Trade !alance )#- &2#& &1#& &.#7 20#. &.#2

6urrent account !alance 0#2 1#0 )#2 )#2 (#. 2#)

Sources: Khatiwada and harma ;2002iven the


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noncompara!ility of data, it is !est to study the evolution of poverty in Nepal in parts E first for the pre&--. period and then for the post&--. period#

:or the pre&--. period, =orld %an+ ;&---< made an attempt to derivecompara!le estimates of poverty over time !y applying the same definitions of

poverty line, income, and consumption across the surveys# ince the definitions

employed in the Nepal Hiving tandards urvey of &--.G-) are in many wayssuperior to the ones used earlier, it would have !een ideal to apply these definitions tothe earlier data sets, !ut this was not possi!le due to the nonavaila!ility of raw data of the earlier surveys# o the researchers had to adopt the less satisfactory approach of applying the definitions employed in earlier surveys to the data for &--.G-)# 5t least,this procedure had the merit of yielding estimates for different points in time that werecompara!le to each other#

Ta!le - presents two sets of such estimates# The first set ta+es the e3isting poverty estimates for &-7)G77, and uses the definitions employed in &-7)G77 survey toderive compara!le poverty estimates for &--.G-)# The second set ta+es the e3isting

poverty estimates for &-'(G'., and uses the definitions employed in &-'(G'. survey to

derive compara!le poverty estimates for &--.G-)# The first set thus ena!les us tocompare &-7)G77 with &--.G-) and the second set to compare &-'(G'. with &--.G-)#

The most stri+ing result to emerge from these estimates is that the incidence of poverty clearly increased in Nepal !etween &-7)G77 and &--.G-) E from 11 per centto (2 per cent# 5lthough the e3act figures are not entirely relia!le !ecause of the4uestiona!le definitions used, one can have a greater degree of confidence in thedirection of change as revealed !y them# The e3tent to which poverty worsened alsoappears to !e su!stantial E far !eyond any plausi!le margin of error arising fromsampling and nonsampling sources#

Table 9: .!oltion of Po!ert( in e+al: 197,77 199&9, ;in percentages<

6omparison of headcount ratios

6omparison of headcount ratios &-77 &--.G-) &-'(G'. &--.G-)

Rural 11#0 ((#0 (1#& ()#)

r!an 22#0 20#0 &-#2 &7#'

Nepal 11#0 (2#0 (( ((#)

ource@ =orld %an+ ;&---<

The second noteworthy feature is that the worsening of poverty was entirely arural phenomenon# r!an poverty appears to have declined, al!eit marginally# Thethird point of note is that the worsening of rural poverty appears to have occurredmainly in the decade preceding &-'(G'.# This is indicated !y the fact that !etween&-'(G'. and &--.G-) there was only a small increase in rural poverty# :urthermore,whatever small improvement in ur!an poverty is o!served since &-77 appears to haveoccurred mostly after &-'(G'.# Thus, on the whole, the Nepalese economy appears tohave performed !etter on the poverty front in the decade following &-'(G'. comparedto the preceding decade#

6omparison !etween &--& and &--.G-) lends further support to the thesis that performance on the poverty front was !etter in the second half of the period# %y


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applying consistent definitions to the data o!tained from the &--& Rural 6redit urveyand the &--.G-) Hiving tandard urvey, =orld %an+ ;&---< has found that rural

poverty at !est fell slightly and at worst did not rise at all in the first half of the &--0s#:urther analysis of data showed that it was mainly the rural areas surrounding theKathmandu valley and the rural Terai ;southern plains< region that e3perienced

improvement in the &--0sA the rest of rural Nepal actually !ecame worse off#The overall pattern that emerges from the evidence presented a!ove can !e

summed up as follows# ntil the mid&--0s, the growth process of the Nepaleseeconomy mostly !ypassed the rural poor# ome improvement did occur in the ur!ansector, however, and the pull of the growing ur!an economy may also have had a

positive spillover effect on some of the neigh!ouring rural areas, !ut the rest of rural Nepal e3perienced increasing poverty in the decade !etween mid&-70s and mid&-'0s and at !est unchanged poverty in the following decade#

These findings are !roadly consistent with the overall growth pattern of the Nepalese economy# n the decades following the mid70s, agricultural growth !arelye3ceeded the population growth rate of 2#) per cent# t is, therefore, hardly surprising

that rural poverty intensified during this period# %y contrast, the ur!an!ased nonagricultural sector grew fairly respecta!ly, at least after the mid&-'0sA as a result,ur!an poverty came down to some e3tent# t is plausi!le to argue that ur!an povertywould have declined much more su!stantially !ut for ruraltour!an migration#"owever, the same migration phenomenon, coupled with other tric+ledownmechanisms, has also meant that rural areas in the vicinity of the growing ur!ancentres ;mainly in the Kathmandu valley< were a!le to gain from the growth process#%ut o!viously the tric+le down effect of ur!an!iased growth was much too fee!le toma+e any apprecia!le dent in rural poverty further afield#

The picture for the post&--. period is !ased on much firmer ground, as datafrom the compara!le Hiving tandard urveys of &--.G-) and 2001G0( can !e used toderive consistent estimates of poverty# ?stimates derived !y applying the samemethodology on data from these two surveys show that poverty has declinedapprecia!ly !etween &--.G-) and 2001G0(, with the headcount ratio going down from(2 per cent to 1& per cent ;Ta!le &0


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/ne apparent pro!lem with these estimates is that the magnitude of povertyreduction appears to !e far too dramatic in the light of what one would e3pect from

the national accounts statistics# The reason is that household surveys, on the !asis of which poverty estimates are made, indicate a much !igger improvement in privateconsumption than what is indicated !y national accounts statistics# Thus, the estimatesyielded !y the national accounts statistics show a &2 per cent increase in real per capita private consumption over the period from &--.G-) to 2001G0(, whereashousehold survey data show a (2 per cent increase over the same period# $udged !ythe national accounts data, therefore, the e3tent of poverty reduction would appear to

!e grossly overstated#There are, however, good reasons to !elieve that the actual rate of

improvement in private consumption would !e higher than what the national accountsreveal, although whether it would !e as high as survey!ased estimates is a moot

4uestion# n the first place, the >*P growth rate in Nepal is !elieved to !eunderestimated, especially in such industries as trade, construction, livestoc+, anddairy products# More importantly, national income estimates do not fully capture thegrowth in remittances sent !y Nepalese wor+ers wor+ing a!road# Remittances haveassumed an important position in the Nepalese economy, amounting to as much as &2

per cent of >*P in 2002G01, and have undou!tedly played a maor role in reducing poverty in Nepal# The growth in remittances pic+ed up in the late &--0s, andhousehold surveys are li+ely to capture this growth far !etter than national incomedata# The rapidity at which poverty has declined is, therefore, not as implausi!le as itmay otherwise appear# %esides, estimates of su!ective poverty, derived from

perception data gathered !y the same household surveys, reveal an almost identicalmagnitude of reduction# /!ective estimates of rural wages also confirm all roundimprovement in the conditions of the poor#( Thus, all in all, while the precision of

poverty estimates may well !e 4uestioned, there is little reason to dou!t that Nepal hase3perienced a su!stantial decline in poverty over the last decade#

The decline in poverty has !een remar+a!ly !road!ased, although far fromuniform, across occupational, regional and ethnic divides# People across the wholespectrum of occupations e3perienced reduced poverty after &--.G-) E the selfemployed as well as wage earners, and agriculturists as well as those engaged inmanufacturing and service# The only e3ception were the landless agriculturalla!ourers, constituting a!out &0 per cent of la!our force in Nepal, whose poverty

remained essentially unchanged ;=orld %an+ 200.!, Ta!le (#


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reduction of poverty in the Mountains, so much so that !y 2001G0( the e3tent of poverty was slightly lower in this !elt ;11 per cent< than in the "ills ;1. per cent< andnot much higher than in Terai ;2' per cent


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Table 12: .thnic an# Caste Distribtion of Po!ert(: 199&9,-200304 ;in percentages<

"eadcount ratio *istri!ution of poor *istri!ution of people&--.G-) 2001G0( &--.G-) 2001G0( &--.G-) 2001G0(

pper 6astes 1(#& &'#( 2)#7 &.#7 12#7 2)#1

!ada"s 2'#7 2 2#- - (#2 2#'

Ne#ar .7#' (.#. &0#) &0#- 7#7 7#(

Dalits &-#1 &(#0 2#. 1#( .#. 7#.

"ill $anajati ('#7 ((#0 &-#7 27#' &)#- &-#.

Terai $anajati .1#( 1.#( &0#( -#2 '#2 '#&

Muslims (1#7 ( .#7 '#7 .#( )#.

%thers ()#& 1 2( 22#1 &-#( 2-

Total (' 10#' &00#0 &00#0 &00#0 &00#0

Source: =orld %an+ ;200.!


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The Hiving tandard urveys show that in the country as a whole the proportion of households receiving remittances increased from 21 per cent in &--.G-) to 12 per centin 2001G0(, and, more significantly, per capita remittance increased !y more than &.0

per cent in real terms during this period# Moreover, semiur!an and rural areas sharedin this !onan9a no less than ur!an Nepal# n fact, for the Kathmandu region the direct

!enefit of remittances was less than the national average E the rest of Nepal gainedrelatively more# t was thus the com!ined effect of remittances and increasedemployment opportunities opened up !y the nonagricultural economy that e3plainsthe success in reducing poverty across rural regions in Nepal after &--.#

Table 13: Sorces of Real $nco%e Growth of the 'otto% 40 +er cent

of the Po+lation: 199&9,-200304&--.G-) 2001G0( 5!solute

6hange6ontri!ution

to growth ;F<

& 2 1 2 & (:arm income &-7) &-21 .1 '#7

5gricultural wage income '0' 77( 1( .#)

Nonagricultural wage income .'' '-. 107 .0#)

ncome from nonagr enterprises 2-( 1)& )7 &

Remittance income 217 .2& 2'( ()#'

/ther income 111 1)- 1) .#-

Total income (21) ('(1 )07 &00#0

Sources@ 6omputed from =orld %an+ ;200.!ini coefficient of consumption e3penditure has increased sharply from 0#1( in &--.G-) to 0#(& in2001G0( ;Ta!le &0ini coefficient has remained practically constant at around 0#(1,while the rural >ini has increased from 0#1& to 0#1.#

The fact that the overall >ini coefficient has increased so much more than theur!an and rural coefficients ta+en separately suggests that growing disparity !etweenur!an and rural areas has acted as the maor une4ualising force in Nepal# Two related

forces have !een wor+ing here# :irst, ur!an income, which was already much higher than rural income, has grown much faster than rural income# Thus, during the period !etween &--.G-) and 2001G0(, ur!an per capita e3penditure has grown at an annualrate of (#. per cent as against 1 per cent in rural areas, there!y e3acer!ating ur!anrural disparity# econd, ur!an population has also !een growing much faster than rural

population# n the eight years after &--., the share of ur!an areas in total populationmore than dou!led from 7 per cent to &. per cent# ince the ur!an areas have a muchhigher degree of ine4uality than rural areas, this process of ur!ani9ation hasaccentuated overall ine4uality in the classical Ku9net9ian fashion#

>rowing ine4uality within rural Nepal has also contri!uted to rising overalline4uality in Nepal# There are several reasons !ehind this phenomenon# :irst, it is

growing ine4uality within rural Nepal is closely lin+ed to deeprooted ethnicdisparities# t was noted earlier that while poverty has declined for all ethnic groups


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!etween &--.G-) and 2001G0(, it has declined much more slowly for the lower castescompared to the rest of the society# ince the lower castes already comprise the

poorest segment of the society, such an une4ual pace of poverty reduction has madethe e3isting ine4ualities even sharper#

econdly, growing ine4uality of land ownership has made matters worse# The

Hiving tandards urveys show that the proportion of households with less than onehectare of land has gone up during the period from &--.G-) and 2001G0( ;=orld %an+ 200.!, Ta!le (#&


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Progress has also !een made on the education front, even though the rate of improvement has not !een 4uite as impressive as in the case of health# Net enrolmentat the primary level has increased from )0 per cent in the early &-'0s to '( per cent in

2001, and adult literacy rate has gone up from 22 per cent to (' per cent during thesame period ;Ta!le &.ross secondary enrolment rate 27 n#a# 12

Louth literacy rate n#a# (7 )2

5dult literacy rate 22 10 ('

Sources@ NP6 ;2002


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These disparities along ethnic divides are also reflected in disparities acrossecological regions# Thus, in the Mountains, where most of the janajatis and dalits

live, average life e3pectancy was only .0 years in 2000, compared to an average of )0years for Nepal as a whole# imilarly, during the &--0s average rate of infantmortality was &&2 in the Mountains compared to 77 in the whole of Nepal ;N*P200&, Ta!le (#7 and 5nne3 &*P in thesecond half of the &-70s to &2#( per cent in the first half of the &-'0s, !ut government


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revenue struggled to rise from 7#7 per cent of >*P to ust '#7 per cent during the same period# 5s a result, !udget deficit more than dou!led E from 1#& per cent to )#7 per cent of >*P# 5t the same, money supply also increased rapidly, with the supply of

!road money rising from &)#2 per cent of >*P to 27#2 per cent#The adoption of e3pansionary fiscal and monetary policies did help !ring

a!out an acceleration in economic growth, led !y the nontrada!le sectors, especiallyconstruction# %ut it also made the growth unsustaina!le !y fuelling inflation andadversely affecting the !alance of payments# :or the first time since planneddevelopment started in the &-.0s, inflation remained persistently at the dou!le digitlevel# :rom an average of 7#. per cent in the &-70s, the rate of inflation went up to anaverage of &0#) per cent in the &-'0s# 5s the real e3change rate appreciated withrising inflation, the !alance of payments situation also deteriorated# ?3ports

plummeted from )#0 per cent of >*P in the second half of the &-70s to (#- per cent inthe first half of the &-'0s, while imports shot up from &2#- per cent of >*P to &7 per cent# 5s a result, the !alance of trade worsened from )#- per cent to &2#& per cent of >*P, while the current account !alance deteriorated from a near !alance to 1 per

cent#The emergence of these macroeconomic im!alances led first to the adoption of

a sta!ilisation programme in &-'., followed !y a structural adustment programme in&-'7# The reforms did not, however, ta+e place all at a time in a !ig !ang fashion#nstead, they were spread out over more than a decade, evolving in the lights of eventsas they unfolded# :our distinct phases of policy reforms can !e identified#

n the first reform episode ;&-'.')< focused mainly on standard sta!ili9ationmeasures, !ut without much success# /n the contrary, devaluation made things worse

!y triggering further inflation# Real e3change rate did depreciate despite risinginflation, which helped raise e3ports, !ut imports went up even faster, resulting in afurther worsening of the current account in the second half of the &-'0s# There wasn8tmuch oy on the fiscal front either, as !udget deficit edged up slightly from )#7 per cent of >*P in the first half of the &-'0s to 7#' per cent in the second half of thedecade# /verall, the macroeconomic situation continued to remain grave#

5 much more serious attempt at macroeconomic reform came in the second phase, starting in the early &--0s, when a popularly elected democratic governmentassumed power# *uring this phase, the ta3 !ase was !roadened, revenueadministration improved, and trade and industrial policies were further li!erali9ed# 5

programme of steady reduction in tariffs was launched and 4uantitative restrictionsvirtually dismantled# :oreign e3change system was unified and current account madeconverti!le# nterest rates were li!eralised and !an+ing sector entry was facilitated#

The third reform episode started around &--7# ts maor components wereli!erali9ation of the agricultural sector, introduction of a neutral 5T, andstrengthening of local governments# The fourth episode, which started around 2000,was more in the nature of governance reform than macroeconomic reform# *uring this

phase, the government tried to improve ta3 policy and administration, introduced amediumterm e3penditure framewor+, restructured the management of Nepal8s twomain commercial !an+s, and strengthened financial sector regulations and anticorruption efforts#

The most important component of the second phase of reforms initiated !y thenew democratic government involved trade policy, aiming simultaneously toaccelerate the process of trade li!erali9ation and provide incentive to e3porters

through a range of incentives# The average tariff rates were cut from 12 per cent in theearly &--0s to &( per cent in 2000, while the pea+ !asic tariff was reduced from 200


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per cent to &&0 per cent, and the num!er of tariff sla!s was reduced from more than&00 rates ust . !y 200&G02# Moreover, 4uantitative restrictions were almostcompletely eliminated# 5s a result of these measures, the effective rate of protection inmanufacturing fell from &&( per cent in &-'- to '#. per cent in &--)# The level of agricultural tariffs in Nepal is also relatively low, ranging !etween . and 2. per cent#

The e3change rate system was completely overhauled in the process of reform#Partial converti!ility in the current account was introduced in &--2, followed !y fullconverti!ility in &--1# The prevalent dual e3change rate system was a!olished and thee3change rate against converti!le currencies was allowed to !e mar+etdetermined#"owever, the e3change rate against the ndian Rupee continued to !e officiallydetermined#

?3porters were offered incentives of various +inds in order to neutralise thee3port !ias of the previous trade regime# teps were also ta+en to attract foreign directinvestment, permitting &00 per cent foreign ownership in most sectors# n addition,foreign investors were allowed to own up to 2. per cent of listed companies# 5 newtrade treaty was signed with ndia in &--), which eliminated most nontariff !arriers

to trade with ndia including the value added re4uirement, which re4uired Nepalese or ndian raw material content to !e at least .0 per cent as a condition for getting dutyfree access in the ndian mar+et# 5long with this, ndian investment in Nepal wasalmost fully li!erali9ed#

Ta+en together, these measures signified a fundamental departure from theearlier regime of trade restrictions# Nepal could now claim to have a higher degree of openness compared to most other developing countries# This was evidenced !y thefact that in terms of the M: inde3 of trade restrictiveness, Nepal scored 2 on a scalefrom 0 to &0, where a lower value signifies a greater degree of openness#

5nother maor component of the second phase of reforms initiated in the early&--0s consisted of privati9ation and allowing private sector entry into activitieshitherto reserved for the pu!lic sector# The latter included initially the !an+ing sector which e3perienced a surge of private sector participation especially under ointventures, and the energy sector where private capital has !een encouraged to developsmallscale hydropower proects to meet local needs# n the third phase of reform,

private sector was also encouraged to participate more vigorously in agriculture, !yta+ing part in the distri!ution of inputs which had hitherto !een a preserve of government agencies and !y engaging in commercial agriculture#

The reform process initiated in the early &--0s did seem to yield some tangi!leresults# :or instance, the reforms in trade and e3change rate regime succeeded ingenerating rapid e3port growth, with the result that the share of e3ports in >*P

almost dou!led from . per cent of >*P in the &-'0s to close to &0 per cent in the&--0s# mports also went up strongly at the same time, and the overall trade>*Pratio increased from 21 per cent in the &-'0s to an impressive 1' per cent in the&--0s# 5lthough trade deficit increased sharply from &1 per cent of >*P in the secondhalf of the &-'0s to 2& per cent in the second half of the &--0s, the current accountdeficit came down from )#2 per cent of >*P to (#. per cent during the same period#"igher e3port earnings, com!ined with remittances and tourism earnings, helpedimprove current account and reserves and allowed steady increase in the import of capital goods at the rate of &0 per cent per annum during the &--0s#

Let another indictor of the positive effects of reforms is the upsurge in privatesector investment# 5fter stagnating at around &0 per cent of >*P in the prereform

decades, the share of private investment surged to a!out &( per cent in the &--0s, evenas the share of pu!lic sector investment stagnated around 7 per cent# Privati9ation,


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coupled with many incentives given to the private sector, apparently did spur ahealthy growth in private investment, at least until the escalation of insurgencyvitiated the !usiness environment at the turn of the present century#

The 4uestion, however, remains as to how far all these improvements added upto a decisive shift in the trend of longterm growth of Nepal# The %reton =oods

institutions have argued that the reform pac+age ta+en as a whole did mar+ a !rea+ inlong term trend, putting the economy on a higher growth path# n a recent review of the Nepalese economy, for e3ample, the =orld %an+ has made this case !y comparingthe growth rates !etween what it has called the prereform period &-).&-'. and the

post reform period &-'.2000# This comparison shows that the postreform growthrate was clearly higher than the prereform one ;=orld %an+, 200.a


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?ven this mild claim, however, has to !e tempered !y two other considerations# The first relates to the impact of rapidly rising remittances and thesecond to the new Trade Treaty signed with ndia in &--), !oth of which must have

played !ig role in stimulating manufacturing growth, independently of macroeconomic reforms# 5fter isolating these two effects, what remains of the impact

of economic reforms on manufacturing is a moot 4uestion# =hat can !e said moreconfidently, though, is that these reforms helped render economic growth moresustaina!le !y !asing it on sounder macroeconomic footing# The macroeconomicfundamentals clearly improved in the postreform period# %udget deficits came down,inflation fell !ac+ to single digit from the dou!le digit levels of the &-'0s, and the

!alance of payments improved# o, even if the rate of economic growth did notimprove a great deal following reforms, at least it !ecame more sustaina!le, unli+e thegrowth of the &-'0s generated artificially !y unsustaina!le e3pansion of demand#

5n indication of greater sustaina!ility of growth in the postreform period is provided !y the evidence on the sources of growth !efore and after reforms# ?venthough the growth rate of the postreform period ;the &--0s< was not su!stantially

different from that of the prereform period ;the &-'0s*P grew at the rate of ust 2#. per cent, ust a!ove the populationgrowth of 2#2 per cent, while overall >*P was growing at the rate of 1#' per cent per annum#

The result was a virtual stagnation in per capita agricultural production on theone hand, and a rapid decline in the relative contri!ution of agriculture to overall >*P

on the other# :rom &-7. to 2000, agriculture8s share in >*P came down from 72 per cent to (0 per cent# The proportion of wor+force engaged in agriculture did notdecline in the same proportion, however# :rom over -0 per cent it declined to a!out ))

per cent or so, indicating a secular decline in la!our productivity in agriculture, whichhas remained a serious impediment to Nepal8s a!ility to speed up economic growthand reduce poverty over the longer term#

The pro3imate cause of slow productivity growth lies in the low level of inputuse and continued reliance on primitive technology# :or instance, only (0 per cent of farm land was irrigated !y 2002, even though twothirds of total cultiva!le area of

Nepal is potentially irriga!le, and only &7 per cent received yearround irrigation# Partof the pro!lem lies in the rugged and mountainous terrain of Nepal, which ma+es it

difficult to e3tend irrigation at afforda!le costs# That8s why, more than twothirds of irrigated land lies in the plain terrain of Terai, and only &) per cent in the hills# %ut


26/35

even in Terai yearround irrigation is limited to only 20 per cent of land, well !elowthe potential# Moreover, the facilities that e3ist are not maintained well# t has !eenestimated that governmentmanaged irrigation schemes, which account for the maor

part of the irrigation system in Nepal, have a cost recovery rate ust over & per cent;=orld %an+, 200.a


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efficiency through specialisation according to regional comparative advantage andensuring that the poor people of all the regions could !enefit from the growth process#The essence of this strategy was to pursue two different sets of policies for the twomain ecological regions of Nepal E vi9#, the plains of Terai and the hillsGmountains#Terai was to !e targeted for the production of !asic food staples, while the hills and

mountains were to !e targeted for the promotion of livestoc+ and highervaluedcommercial crops, and the two regions were to grow in a complementary manner !y

providing demand for each other#n practice, the Perspective Plan was only partially implemented, and it was

soon overta+en !y the second phase of reforms that were lin+ed to the econd5gricultural Program Hoan of the 5sian *evelopment %an+ signed in &--'# =hile thenew set of reforms continued to support the differentiated growth strategy !ased onregional comparative advantage, it mar+ed a decisive shift towards mar+etli!eralisation as opposed to government intervention as the primary instrument of growth# >overnment monopoly in the import and distri!ution of essential inputs suchas fertiliser and irrigation e4uipment was a!olished, ma+ing room for increased

participation of the private sector in the distri!ution chain# 5t the same time, prices of fertiliser and irrigation e4uipment were decontrolled at the retail level and su!sidieswere eliminated, although a small amount of transport su!sidy was retained in order to encourage the flow of inputs into remote areas#

The impact of these reforms on agricultural performance has remained amatter of some de!ate, however# n some respects, the performance of the agriculturalsector certainly improved in the second half of the &--0s, as agricultural growthaccelerated from . per cent in &--&-. to 1#) per cent in &--)0& ;Ta!le 2


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escalated since 200 %ut the weight of all the evidence put together warrants at leastthe mild conclusion that despite the attempted reforms the structural pro!lems

!esetting Nepalese agriculture remain stu!!ornly resistant to change#

IV. P%7)r'! A)7ia'i%n Pr%,ramm)s and D)c)n'rai=a'i%n4

5s in other countries in the region, Nepal has pursued a whole range of targeted interventions for the !enefit of specific groups of poor and marginali9ed

people# These programmes can !e classified into three categories E those targeted atspecific areas, those targeted to specific population groups, and those that chose aspecific entry point ;e#g# credit< in order to reach the intended !eneficiaries# *espitesome overlap among these categories, this classification provides a convenientframewor+ for discussing the multitude of targeted interventions pursued in Nepal#

5rea!ased programmes have !een implemented over those districts that have !een identified as !eing relatively more !ac+ward, remote, isolated and endowed with

a lower level of socioeconomic infrastructure# /ne of the maor programmes of this+ind is the Remote 5rea *evelopment Programme ;R5*P< initiated in &--2# %y thelate &--0s, this programme covered twenty two districts, with maor emphasis on thedevelopment of infrastructure# There were also provisions for s+ill development,training of women, and training in horticulture and vegeta!le farming# This

programme was supposed to complement the process of decentrali9ation that thegovernment of Nepal attempted to reinvigorate at the same time# 5s such, resourcesset aside for this programme were allocated and dis!ursed to respective illage*evelopment 6ommittees ;*6< from the

centre# There was, however, little or no participation of people at the grassroots level#

The pecial 5rea *evelopment Programme ;5*P< was introduced in &--' asa political response to people8s display of disenchantment and frustration withuna!ated economic hardship, which in some districts too+ the form of violenteruptions# 5 total of 2. districts were selected, of which 22 were already included inthe R5*P, !y applying the criteria of !ac+wardness, remoteness, low levels of socioeconomic infrastructure andGor ongoing Maoist activities# The focus of the programmewas !roader than that of R5*P, as it sought to promote agriculture and livestoc+ inaddition to infrastructure#

The targetgroup oriented programmes have !een launched, primarily for indigenous people ; janajati<include !onded la!our ;&amaiyas', migrant households ; su&um(asis', marginalfarmers and landless peasants, disa!led people, senior citi9ens, and certain !ac+wardethnic groups who do not fall under the janajati list# The programmes for this groupinclude the Kamaiya *e!t Relief Programme and Kamaiya +ill Training Programmefor !onded la!ourers, land resettlement schemes for su&um(asis and landlessGmarginal

peasants, and various safety net programmes for the senior citi9ens, widows, anddisa!led people# Most of these programmes are, however, very small in si9e and verylittle is +nown a!out their impact#

pecific policies and programmes for women were introduced for the firsttime in Nepal during the i3th Plan ;&-'0'.< in the form of a National Plan of 5ction


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for =omen in &-' :rom a long term perspective, the most important actionunderta+en so far is the granting of scholarships to girl students# /ther programmeshave aimed at economic upliftment of women# These include credit provided !y fiveregional !an+s, >rameen%an+ type replications as well as 6ommunity *evelopmentProgrammes run !y N>/s, and several programmes run !y the Ministry of Hocal

*evelopment vi9# =omen :armers Programme, Production 6redit for Rural =omen;P6R=


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attempt to address poverty alleviation at the local level# The mall :armers*evelopment Programme, introduced in &-7., is the first programme of this +ind in

Nepal# ts focus was on group formation at the local level for the purpose of creditdelivery and other services# n the early stage of its implementation, a maor pro!lemappeared to !e inade4uate 4uality of group formation, as most of the groups lac+ed

sufficient training and e3pertise, leading to poor management of loans, low recoveryof loans, etc# To address this shortcoming, :*P increasingly em!odied the conceptof nstitutional *evelopment Programme ;*P< with the o!ective of strengtheningthe institutional management capa!ilities of small farmers8 organi9ations# sing thisnew concept, :*P !egan an e3perimental proect called the mall :armers86ooperative Himited ;:6H< in &-'7G'', which e3panded rapidly in other parts of thecountry# 6ompared to the performance of the :*P the repayment rate was found to

!e higher in :6H, overhead cost to !e lower, and the density of coverage andmo!ili9ation of local resources greater#

The period since 2000 has seen two maor initiatives in the sphere of targetedinterventions# The first initiative was !ased on the recognition that past programmes

and policies had failed to address the fundamental pro!lems of social e3clusion faceda num!er of population groups# These groups included women, constituting half of the population, people living in the =estern to :ar =estern "ills accounting for 22 per cent of the population and providing the hot!ed of Maoist insurgency, and theuntoucha!les ;dalits< and indigenous peoples ; janajatis/s and 6%/s as support groups# 6ommunity


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su!proects are to !e implemented mainly through partner organi9ations ;P/s/s or private sector, !ut all would have todemonstrate a proven record of wor+ing with the target populations locally andenoying their trust# P/s will also !e responsi!le for assisting communities in

preparing su!proect proposals and su!mitting them to P5:, monitoring the 4uality of

participation and interacting with government agencies and other programmes#%eneficiaries would need to form groups to !enefit from P5:# :or e3ample, e3istingcommunity organi9ations, selfhelp groups, forest users groups, water users groups,and other groups formed around economic activities can !e supported !y thesu!proects# nfortunately, li+e most other activities in Nepal the operation of P5:has also !een !adly hampered !y the Maoist insurgency and continuing politicaluncertainty#

t is clear from the preceding discussion that Nepal has had the opportunity toe3periment with a large variety of targeted interventions for the poor# ndependentevaluations show, however, that most of them failed to achieve their stated goals in asustained manner# The rare success stories include the mall :armers8 *evelopment

Programme ;:*P5< &---, whose principles weresu!se4uently em!edded in the Ninth and Tenth Plans#

t was recogni9ed that for decentralisation to wor+ for the !enefit of the poor,the people must !e empowered at the grassroots level and that such empowermentcould only come if they were mo!ilised into autonomous community organisations# nthis regard, a strong impetus came from N*P, which conceptuali9ed andimplemented programmes li+e the Participatory *istrict *evelopment Programme;P**P< and Hocal >overnance Programme ;H>Povernment !egan to implement fiscal decentrali9ation !y providing development grants to local !odies to carry out local level developmentactivities and !y !uilding their institutional capacity# everal government services

such as primary education, !asic healthcare, and agricultural e3tension and livestoc+ services were transferred to local !odies# The local !odies were also entrusted with theresponsi!ilities of providing for smallscale drin+ing water and irrigation facilities,construction of agricultural roads and maintenance of district and ur!an roads#

Notwithstanding these initiatives, progress has !een stymied !y domesticuncertainties as well as difficulties inherent in the decentrali9ation process# TheMaoist insurgency seriously impaired the a!ility of local !odies to function effectively

!y causing damage or destruction of physical infrastructure# 5t the same time, the political tug of war !etween the King on the one hand and the opposition parties andthe Maoists on the other left the local !odies without elected representatives for several years# n the a!sence of elected representatives, locallevel government

officials carried out the responsi!ilities entrusted to local !odies, which amounted to a


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serious retrogression of participatory decentrali9ation that Nepal had so !oldlyinitiated in the &--0s#

V. CONCLDING OBSERVATIONS

Nepal em!ar+ed on the path of modern economic development in the &-)0sunder a particularly trying set of initial conditions# The challenges it faced rangedwidely involving geography, history, and culture# >eographically, Nepal had tocontend with the disadvantages of !eing a landloc+ed country and having a difficultterrain that rises steeply from the plains of Terai in the outh to the middle hills andthe "imalayan range in the North# "istorically, it had to !ear the legacy of more thana century of rule !y a rapacious dynasty that thrived on the e3traction of resourcesfrom the land and the people and repressed any political or economic threat to its

power# 6ulturally, it had to deal with a fragmented society vitiated !y caste and ethnicdivisions# These pro!lems were compounded in the first few decades of planneddevelopment !y an e3cessively interventionist policy regime that undermined the

prospects of development !y encouraging rentsee+ing !y the elite on the one handand discouraging private enterprise on the other#

5fter &--0, there were signs that the economy was finally wa+ing up from along slum!er# n the mar+et place there were stirrings of a new enterprise that had the

potential of ta+ing the economy to a higher growth traectory, and in the sphere of governance there was a decisive move towards a participatory and decentrali9eddecisionma+ing process that had the potential of reorienting development towards of the disadvantaged segments of the society# %ut the potential !enefits of theseinitiatives were largely dissipated as a conse4uence of a protracted political vacuumcaused !y a tripartite power struggle !etween the King, the main political parties, andMaoist insurgents#

The Maoist insurgency that !egan in &--) and escalated viciously after 200&,inviting an e4ually vicious response from the government, put a stranglehold on theeconomy and the society at large# Buite apart from the human tragedy it has caused interms of loss of human lives&0, it has also seriously hampered the process of economicand social development in Nepal# The areas worst affected !y the insurgency haveo!viously suffered the most# t has !een revealed, for e3ample, !y the Nepal Hivingtandard urveys that even though the small farmers in the western hills, which fall

within the worst affected areas, had the highest levels of land and la!our productivityin &--.G-) compared to farmers of similar si9e in the rest of the country, !y 2001G0(they had the lowest productivity of all# The pro3imate reason for this decline lies inrelative lac+ of access to essential inputs and mar+et owing to the disruptions caused

!y insurgency# =hile average irrigated area increased !etween &--.G-) and 2001G0(for all other groups of farmers, it remained stagnant on small farms in the =est "illsAonly () per cent of them reported usage of fertiliser compared to 70 per cent in the?ast "illsA the proportion of small farmers using improved seeds for paddy was alsothe least in the =est "illsA and the region was also the least commerciali9ed 6learly,the insurgencyrelated disruption in mar+et transactions is !lighting the livelihood

prospects of many a poor farmer in the affected regions#

t has also !een o!served that the level of human development across regionsis inversely correlated with the intensity of conflict# t has !een estimated, for


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e3ample, that the worst affected districts had a human development inde3 of 0#27 ascompared with an inde3 of 0#1' for the most lightly affected ones ;=orld %an+ 200.a,Ta!le (


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R EFERENCES

*eraniyagala, #, L# Khatiwada, # harma, R# Roy and 5# *eshpande ;2001rowth@ =ashington *# 6#

M/: ;200(overnment of Nepal,Kathmandu#

NP6 ;2002overnment of Nepal, Kathmandu#

/smani, # R#, %# %aracharya, and # harma ;&---


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&N%')s

The characterisation of the first three phases follows closely the description given in Khatiwada and harma ;2002

Documents

Nepal Paper