STRUCTURAL TRANSFORMATION PROCES OF NEPALESE ECONOMY KRISHNA PRASAD

Master program in Economic History

STRUCTURAL TRANSFORMATION PROCES OF NEPALESE ECONOMY

KRISHNA PRASAD POUDEL

[email protected]

Abstracts: Nepal is still an underdeveloped country; have only from 1950 entered into modern

political and economic system. The economic development state speed is not remained

satisfactorily; therefore it is effort to analysis about fifty years development process of Nepalese

economic with the perspective of structural transformation process. The structural transformation

could be reflecting to economic transformation and socio-economic development of the country. In

this study found that the structural transformation process seems relatively slow and weakly

associated to other economic factors. There needs to further research for more proper

investigation of Nepalese economy.

Key words: Economic Growth and Development, Structural transformation, Structural shift share of

GDP and Labor force or employment, Gross domestic production (GDP), per capita GDP

EKHR13

Master thesis (30 credits ECTS)

November 2010

Supervisor: Anders Nilsson

Examiner: Jonas Ljungberg

Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University

II

Acknowledgement:

This study is undertaken for master program of economic history, in economic history department,

Lund University’s School of Economics and Management. In this context, I would like to express my

sincere gratitude and heartily thanks to my thesis supervisor pro.Anders Nilsson for his invaluable

guidance, inspiration and supervision. I would like to thanks special to my program director

pro.Jonas Ljungberg for his valuable suggestion and inspiration. Thanks to staffs and colleagues the

economic history department and program for the supports and sharing knowledge and

experience.

This study is dedicated to my beloved children, thanks them for being the great source of

inspiration to conduct the study and thanks to my dear better-half Laxmi for patient sacrifice to

provide the environment of the study. I would like to extend my special gratitude to my parents.

Finally, I would like to thanks to all friends and best wishers who have supported directly and

indirectly to me for this job.


III

Table of Contents

Titles page no.

Title pages I

Abstracts I

Acknowledgement II

Table of contents III

List of Tables VI

List of graph-figures VI

Abbreviations VII

Flag and Map of Nepal IX

Chapter -1 Introduction 1

1.1 Back ground 1

1.2 A glance on the study area 2

1.3 Review of previous study 4

1.4 Statement of problem 16

1.5 Research questions 17

1.6 Theoretical framework 17

1.7 Hypothesis 24

1.8 Research methodology 25

1.8.1 Research design 25

1.8.2 Data sources 25

1.8.3 Analytical approach 25

1.8.4 Variables 25

1.8.5 Model specification 26

1.9 Delimitation of the study 27

1.10 Structure of this paper 27

Chapter -2 Comparative Analysis of Nepalese economy 28

2.1 Population 28

2.2 Population growth 29

2.3 Life expectancy 31


IV

2.4 GDP growth 32

2.5 Per capita growth 34

2.6 Gross capital formation 36

2.7 Exports of goods and services 37

2.8 Imports of goods and services 39

2.9Summery 40

Chapter -3 Macroeconomic performance of Nepal 41

3.1 Population features 42

3.1.1 Size of population 42

3.1.2 Population growth rate 43

3.1.3 Fertility rate 44

3.1.4 Life expectancy 44

3.2 Economic outputs 45

3.2.1 Gross domestic growth level 45

3.2.2 GDP growth rate 46

3.2.3 GDP per capita level 47

3.2.4 GDP per capita growth rate 47

3.3 Industrial performance 48

3.3.1 Sector wise production 48

3.3.2 Agriculture and forestry 49

3.3.3 Manufacturing industry 50

3.3.4 Construction industry 51

3.3.5 Service sectors 51

3.4 Structural pattern of Nepalese economy 52

3.4.1 Urbanization 53

3.4.2 Sector wise share in GDP 54

3.4.3Agriculture value added ratio 55


V

3.4.4Industrial value added ratio 56

3.4.5 Service sector value added ratio 56

3.4.6 Employment share 57

3.4.7 Sector wise productivity 58

3.4.8 Gross capital formation 60

3.4.8 Foreign trade 61

3.5 fiscal public expenditure 62

3.6 infrastructure 63

3.6.1 Electricity 63

3.6.2 Road 64

3.6.3 Telephone 65

3.7 summery 65

Chapter-4 Empirical analysis of the economic factors 68

4.1 variables 68

4.2 correlation matrix 69

4.3 effect on GDP per capita 69

4.4 impact on shift share of GDP 71

4.5 influence on employment shift share 71

4.6 effect on life expectancy 72

Chapter-5 Concluding remarks 75

References 79

Appendix 81


VI

List of Tables

Titles page no.

2.1 comparative figure of total population 29

2.2 average population growth rate 30

2.3 life expectancy 31

2.4 average GDP growth rate 32

2.5 average GDP per capita rate 35

2.6 Average gross capital formation ratio 36

2.7 average exports ratio 38

2.8 average imports ratio 39

3 comparative figures of Nepal between historical time points 41

List of Graph-figures

Titles page no.

2.1 comparative population growth rates 30

2.2 comp. life expectancy 32

2.3 comp. GDP growth 34

2.4 comp. GDP per capita level 35

2.5 comp. gross capital formation ratio 37

2.6 comp. exports ratio 38

2.7 comp. imports ratio 39

3.1 total population of Nepal 43

3.2 population growth rate in Nepal 43

3.3 total fertility rate in Nepal 44

3.4 life expectancy in Nepal 44

3.5 GDP level 45


VII

3.6 GDP growth rate 46

3.7 GDP per capita level 47

3.8 GDP per capita growth rate 48

3.9 sector wise GDP growth 49

3.10 Agriculture, hunting ……..growth 50

3.11 manufacturing growth 50

3.12 construction sector growth 51

3.13 services sector growth 52

3.14 ratio of rural and urban population 53

3.15 sector wise share in GDP 54

3.16 agriculture value added ratio 55

3.17 industrial value added ratio 56

3.18 services sector vale added ratio 57

3.19 employment share in non-agricultural sector 58

3.20 sector wise productivity 59

3.21 gross capital formation ratio 60

3.22 foreign trade ratios 61

3.23 fiscal public expenditure 62

3.24 ration of development and regular public expenditure 63

3.25 electric power consumption 64

3.26 road extension 64

3.27 telephone line extension 65


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Abbreviations

ADB - Asian Development Bank

BDG – Bangladesh

CBS – Central Bureau of Statistics

FDI – Foreign Direct Investment

FY – Fiscal Years

GDP – Gross Domestic Production

GNI – Gross National Income

ICOR – Investment Capital Output Ratio

IMF – International Monetary Fund

IS – Investment and Savings

KM – Kilometers

KWH – kilowatt/Hours

LKA – Sri Lanka

MW – Megawatts

MYS – Malaysia

R&D – Research and Development

RIDA – Research Institutes of development Assistance

TFP – Total Factor Productivity

THA - Thailand

UNDP – United Nation Development program

US$ - Currency of United State America (US Dollars)


IX

National flag of Nepal

Map of Nepal


1

Structural Transformation Process of Nepalese Economy

CHAPTER-1

Introduction

1.1. Background

Economic development’s speed and process to the context of developing countries is a hot issue in

global political and economic phenomena. There is big debate in terms of theory and strategies for

the question of how to pick up them from poverty trap and economic backward conditions. There

are various hypothesis and experience on about success and failure of historical development

process for specially African and South Asian countries: which are still remained very least

developed state, facing several kinds of socio economic crisis and problems. Nepal, a south Asian

nation is an example of a least developed country; wandering in development process; suffering

from sequential problem and crisis, despite internal efforts and heavy external supports for

economic enhancement. It has completed 10th five development planning terms; however, there

are still more than half population dependants on traditional subsistence type agricultural sector.

Average per capita is remained at very low level and economic growth rate is relatively slow. Now

youth and educated manpower’s unemployment problem is being serious; which is a main reason

for huge number of out migration for foreign job and study. Though, there was modern

development process started only from 1950, after then also it is suffering from political instability,

autocracy and arm conflict over the period. Nepal is, perhaps, newest republican nation in the

world up to now. And new constitution still is in forming process. It means politically Nepal yet to

settle. The economic version problems of Nepal are as: almost externally dependency, growing

trade deficit, surpasses regular cost to capital cost of government budget. Inflation and corruption

are as ordinary characteristic and high poverty and growing economic disparity are common

problem as least developed countries such as in Nepal. In other word, there is a bunch of problem

in Nepal; those could be categorized political, social, and economic and so on. There require

scientific analysis of Nepalese economy. Therefore the main aim of the study is analyze the state of

economic structure and causing factors, which are most influencing on that. It is an effort to

explain the structural transformation process of Nepalese economy with light of theory of modern


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economic growth and other relevant theories to the context of least developed countries. This is

particularly focused in historical trend of economic transformation; structural shift, in terms of

labor force and GDP share sector wise; with categorizing agriculture and non-agricultural sectors,

to examine effects on structural shift of other related variable and to assess the major obstacles of

economic progress in Nepal.

This study depends on officially recorded data of Nepalese economy which are available in website

of national and international data base agency. Qualitative and quantitative both approaches are

applied to analyze and describe the findings. This introduction part begin with background follow

short identification of study area, statement of problem, declaration of research question,

discussion on theoretical framework, literature review of previous study on the selected field,

Research methods, delimitation and structure of paper.

1.2. A glance on the study area

Nepal is a small country, in terms of geographical size with total area 147,181 square km, located in

south Asia, between giant nations India and China. It is a land locked countries, three sides: east,

west and south surrounded by India and in northern side bordered by china. Geographically it is

divided into three regions: mountain region (15 percent), hilly region (68 percent) and Tarai region

(17 percent). The Himalayan mountain range stretches east to west. There contain eight peaks

having more than 8000 meter height, including Mount Everest. The hill and Tarai (plane land)

region also expanded east to west likely parallel. The country is assumed rich in water resources,

with more than 6000 permanent flowing rivers, carrying potentiality more than 83,000 MW hydro

electricity productions, whereas, current generation is only 650MW.(CBS, Nepal in figure 2008)

Total population is recorded around 23 million, according to national census report of 2001 and es-

timation for 2008 is about 29 million. Main races of the inhabitant are indo-Aryan/Caucasoid and

Tibeto-Burman/magnoliad. By religiously: Hindus are 80percent, Buddhist 10 percent, Islam 4 and

rest others. Languages are speaking mainly of Indo-European family, Tibeto-Burman family and in

tiny number found Munds and Dravidian family too. Official language is Nepalese, have mother

tongue of about half of the population and common contact language of almost Nepalese of more


3

than 60 language speakers. Numbers of ethnicity and cast system are another identity of Nepalese

society. (CBS, Nepal in figure 2008)

Present territory of Nepal was founded by national integration, initiated by king of shah dynasty,

Prithvi Narayan shah, in 18th century. The latest shape of area was fixed by Sugauli treaty between

British India and Nepal after Anglo- Nepal war; consequence, lost one third parts of existing

territory of Nepal to British India. After then, Nepal sank into internal disputes among ruling elite

rank, that situation became the main cause for establishment of autocratic Rana’s family regime

lasted 104 years up to 1950. During the period, Nepal stagnant into medieval types closed socio-

economic system and harsh political dictatorship of Rana’s family. It was isolated state from rest of

the world. People were deprived from educational right along with other modern development

facilities. The country was remained, like prison of the rulers. In 1950, after demise of Rana regime;

there was established political system of constitution monarchy and multi-party democracy. In

1959, first parliamentary election conducted and first elected government formed in Nepal’s

political history. But within a short time, then king took over the state power, suspended

government and parliament and started Party-less Panchayati regime with active monarchy. There

was banned on activities of political parties and democratic activities of peoples since 1960. That

panchayati system lasted up to 1990; the people’s movement of 1990 restored the multi-party

democracy and the constitutional monarchy. Unfortunately, since 1996 Maoist arm insurgency

emerged into country and intense the violent conflict over the country. In this context, royal took

over again occurred in 2005, with sidelining main stream political parties. That incident made

alliance between rebellion Maoist and parliamentary parties against king’s political step.

Ultimately, king compels to bow to peaceful people’s movement of April 2006 and gave up the

power to political parties. The rebellion Maoist party also came into peace process and signed in

peace agreement. Election of constitution assembly conducted in April 2008 and the elected

assemble abolished the monarchy system and declared federal republican Nepal in first of June

2008. The new constitution forming work is under the process into constitutional assembly. In this

way Nepal witnessed political upheaval even after modern history from 1950 too.(Basnet,2009)

Only after 1950, in Nepal introduced modern economic development process as well as began of

modern political history. At that time there were available very limited modern infrastructural


4

facilities: 335 telephone lines, 376 km motor able road (only in capital city) and 3 MW electricity,

those were only comfort for ruling family. The first public budget was announced in 1952, five years

development planning system implemented since 1956 and central bank also established in same

year.(Devkota, 2007). In 1985 IMF provided loan to Nepal and implemented of an economic

stabilization policy. From 1987, there started of the first structural adjustment policy and

introduced new industrial enterprising act. In 1989, ruptured the trade and transit agreement

negotiation with India then India started the economic blacked. That blacked was removed after

restoration of multiparty democracy in Nepal. In 1991 the Nepalese rupees devaluated by 17

percent against US$ trade and transit agreement with India signed. In 1992, was introduced the

second structural adjustment policy and promulgation of the industrial enterprise act and

technology and foreign investment and technology act. 1996 started of the agricultural perspective

plan (1996-2015)(RIDA,1997).

1.3. Review of previous studies

On the development process of Nepalese economy, scholarly studies and analysis are conducted by

individuals and institutional level. Some of them might be relevant to grasp the key reflections in

the context of this study. In 1988, the paper was published by Sukhdev Shah; on the topic of

‘Nepal’s economic development; problems and prospects’. Shah examined with this work; the

probable causes of Nepal's low economic growth rate period of the 1965 to 1985 along with that

he evaluated the country's economic prospects for the rest of the century. In 1985, Nepal’s

government had targeted development goal that raising the Nepalese people’s living standard to

the average of Asian standard by the year2000. On the government’s goal, the paper pointed out

that the goal would be difficult to achieve without an improvement of efficiency in the use of

resources and further commented as; Nepal presents a classic case of country caught in the

poverty gap. The concluding remark of the paper is; in Nepal beginning in the mid 1970’s an

increasing larger proportion of the greatly enhance level of total investment has come to be

invested in productive sector of the economy; however, no comparable shift in the economy’s

growth performance seems to have occurred. In this way apparent lack of association between

input supply and output growth suggests that inefficiency in the use of resources rather than their

actual shortage has emerged as the major constraint to improving living conditions in Nepal (Shah,


5

1988). Shah has explored that inefficiency to economic resources has been serious problem in

development process for Nepalese economy.

A paper has made by Kishor Sharma, published in 1997on the issue of liberalization, which policy

was fully adopted in Nepal, with the title of ‘economic liberalization and manufacturing

productivity’. The paper tried to explain the impact of trade orientation policy on manufacturing

productivity. Sharma mentioned the hypothesis that has confirmed by the study of higher income

nations that ‘outward oriented economy grows faster than inward oriented economies because

there could be utilized resources more efficiently’. However the experiences of higher income

countries cannot be generalized to lower income countries due to the level of human capital, state

of physical infrastructure, and level of R&D are substantially lower in those developing countries.

Nepal adopted an outward oriented strategy from mid 1980. There has been calculated the

comparative state Total factor productivity of manufacturing sector between the two policy regime

periods, before and after the liberalization, to observe the influence of liberalization on the

manufacturing sector. According to the paper Nepal’s overall manufacturing TFP declined both

before and after the economic reform of the mid 1980s, the smaller decline in the latter period

that fact provides some support for the claim that liberalization may lead to higher TFP. The

continued falling of TFP rate show that liberalization is not a sufficient condition for rapid

productivity growth in the developing economies. Therefore the reforms have had little impact on

the macroeconomic front in the context of Nepal. The appropriate investment policies to improve

human capital and infrastructure appear to be essential if the potential benefits of the

liberalization are to be fully achieved (Sharma, 1997). The Sharma’s findings on the study is weak

aspect of total factor productivity that also justify the conclusion of former shah’s paper

inefficiency is the major problem of Nepalese economic performance, because TFP also reflect the

efficiency aspect of economic performance. As that the manufacturing sector could be benefited

from liberalization opportunity due to lack of sufficient efficiency.

A Journal article by Kishor Sharma entitled liberalization and structural change evidence from

Nepalese manufacturing: examined the consequence of liberalization and structural change in

Nepalese economy. This article pointed out that liberalization may not solve the problems of low

income developing countries strong due mainly to low supplied elasticity and early stage of


6

industrialization. The result suggests that some structural change in manufacturing output and

trade oriented, however no significant improvement was recorded in the overall productivity

growth and spatial distribution of manufacturing, which appear to be due mainly to the lack of

basic infrastructure and shortage of skilled manpower. This appropriate investment policies to

improve human capital and infrastructure appear to be essential if the potential benefits of

liberalization are to be fully achieved.(Sharma,2000)

A research paper from (RIDA) Japan, in the title of Future challenge of Nepalese economy explain

the Macroeconomic indicators, those have been favorable after liberalization, the GDP has been on

expanding trend in the 1990 which was supported by growth of the industrial and services sector.

This paper points out problem of the market system, which has been introduce in Nepal, however

the system does not function effectively, one reason is that Nepal still on the process of forming of

unified market. There has many structural problem of economic development such as dependency

on Indian economy and numbers of constraints in macro economy. Therefore, Marginal propensity

of import to GDP is extremely high at 66 percent due to weakness of domestic industries much of

domestic demand has leaked to overseas. The paper suggests: Nepal should make efforts to

improve the economic infrastructure that is essential for industrialization and it also should expand

gradually its domestic market and develop domestic enterprise through development of agriculture

and tourism goods that plays the role of supplying investment funds. At the second stage it should

aim at export oriented industry by introducing FDI. Nepal should overcome various bottlenecks to

follow the path above mentioned. It will particularly be necessary to resolve problem relating to

low level of developmental management capacity in the government and efficiency of the financial

system. (RIDA, 1997).

The paper has divided the Nepalese economic development history into three periods after 1950

and evaluated comparatively macro economic performance between the periods. According the

paper the three periods are as: the low economic growth was in first period under the active

monarch until 1984; the second was transitional period from partial liberalization in 1985 to 1990

and the third period in which the government carried out economic liberalization policies on a full

scale after 1991. The first period has remained under the semi- feudal system, the economic

growth seems slow despite continuous implementation of economic plans, the growth rate of real


7

annual GDP per capita was around 1 percent and the pace of industrialization was slow . As a

result, the gap of both fiscal and trade balances had been deteriorating. Facing the crisis of the

balance of international payments, Nepal tired to find a way out through partial implementation of

economic liberalization after 1985. The implemented policies were the stabilization policies mainly

consisting of improving the trade balance supported by the IMF and the World Bank. In 1987 Nepal

started the first structural adjustment program with implementing financial reform, reform of

public enterprises and trade liberalization. In 1992 Nepal implemented the second structural

adjustment program consisting tax system reform designed to expand tax revenue sources, trade

liberalization including reduction of customs duties and abolition of quantitative restriction of

import, reform of public enterprise through privatization development of the capital market and

deregulation on foreign direct investment. As the government of Nepal rapidly promoted these

reforms the market economy system has been gradually introduced in the country.(RIDA,1997)

GDP has been on an expanding trend in the 1990s, supported by the growth of industrial and

services sectors. The real GDP annual growth rate per capita, 2.9 during the 10 years between 1985

and 1994 was much higher performance as compared to -1.1 percent for the average of other low

income countries. The export volume has been expanding by 11 percent annually during the same

period. However following structure problems still remains, on the industrial structure the ratio of

primary industry to GDP still remained 42percent with no major changes in the economic structure

in which the agriculture sector produces the major portion of GDP. Nepal as a land locked country

has historically been heavily influence on Indian economy and its neighboring country, India, its

border with India has become an open border permitting small lots smuggling and capital transfer.

However for a trade policy a more complex policy is necessary aiming at strengthening

competitiveness to export to the third countries taking into account the fact that trade with India

has comparably decreased in the recent years (RIDA, 1997).

The article of John Cockburn on the issue of impacts of liberalization on poverty reduction ,

computable general equilibrium micro micro-simulation Analysis focus on the impacts on income

distribution and poverty of macroeconomic policies such as first reform and trade liberalization .

The writer’s findings are that trade liberalization has quite complex poverty and distributional

impacts, which can only be properly understood in this type of fully disaggregated model. Urban

households are the big winners as initial tariffs were highest in agricultural sectors. Poverty falls in


8

urban areas and increases in rural areas, particularly among the moderately poor. The strength of

the impacts increases with the level of income and especially strong, mostly positive, effects are

observed in the highest income levels. This may explain the apparent increase in income inequality

in the urban and rural hills and mountains region. Poverty falls in urban areas and appears to

increase in rural areas, particularly among the moderately poor as opposed to the very poorest.

The absolute impact of trade liberalization whether it is positive (in the urban areas) or negative (in

the rural areas), generally increases the level of income. Indeed, there appear to be very strong,

mostly positive, impacts on the very richest individuals. This may explain our finding of increased

income inequality in the urban and hills/mountains regions.(Cockburn,2001)

Nepal: country study Report (Khatiwada and Sharma, 2002): reviewed the overall performance of

Nepalese economy. This study has examined the sources of growth in Nepal and explores the

empirical relationship between economic growth, capital accumulation, labor force and total factor

productivity. Major findings of the study on economic growth and nature are as: Nepal has

historically low growth country with average growth rate less than 4 percent during the three

decades and half, growth constraint by low agricultural productivity, land locked with limited

natural resources and poor human resources, have further slowed the pace of economic growth.

The paper Major problem identified as: high population growth rate low saving rate, less than 15

percent of GDP, private sector shaving not satisfactory due to more people remained in poor state

and public sector saving seems negative and very slow. This growth rate has been very erratic and

investment ratio has more than saving. Investment saving gap level seems high 11.4 in the latter

half of the 1990. The Nepalese economy is relatively open with the trade-GDP ratio at more than

40 percent; Nepal has been facing a trade deficit which rose to as high as 20 percent of GDP toward

the second half of the 1990; despite that the country maintained a balance of payment surplus for

most of years (Khatiwada and Sharma, 2002). The study pointed out on public finance that

government expenditure growth has seemed sluggish even with the budget deficit due to very low

level revenue mobilization. The study found that growth of output in Nepal is contributed basically

from accumulation on capital; whereas, the total factor productivity does not contribute much to

the countries growth process. There was manifested in the negative value of the change has to

productivity for this sample period as a whole. According to the study, Nepal could not gain the


9

return of structural adjustment policy, so quickly, due to absence of stable political environment.

new investment has remained in sluggish notion and the pervasive weakness in fiscal and financial

sector has persuaded and backdrop for frustrated economic growth. The report pointed out on

economic environments of country as that: repeated threats to business and industrial community

and growing industrial insecurity have added uncertainty to long terms investment in the country.

On about the fiscal sector it is strategically vulnerable owing to low level of revenue mobilization

for finance government activities, high dependency of development budget on foreign financing

and continued deficit in the budget. The performance of budget implementation aspect, it has

remained a permanent feature with less than 80 percent of targeted budget being spent. Similarly,

the foreign aid utilization also seems problematic with aid disbursement remain for below than

commitment. The consequence of Low development spending also translated upon poor growth

performance of the economy. Nepal’s external sector is basically weak with perpetually increasing

trade deficit.( Khatiwada and Sharma,2002)

To the evaluation of structural aspect the economic growth of the country is contingent upon

performance of agricultural sector which affected by weather condition. The overall growth rate of

the economy during the past three decades averaged 4.3 percent suppressed by the growth rate in

agriculture which stood at less than 3 percent averages. On accounting the major sources of

growth is basically the capital accumulation process however the total factor productivity therefore

does not contribute much. The paper suggests to the growth process promotion of high economic

growth is possible through enhancing factor productivity in country, in the East Asia also that was

experienced by factor productivity. Nepal also need achieves its level of education facility and skill

development activities for Reaping the benefits of information technology revolution is equally

necessary to enhance total factor productivity in the economic growth process. .( Khatiwada and

Sharma,2002)

Maoist insurgency in Nepal dates back to February 1996 when the “people’s war” was first

launched in the hills of mid-western Nepal by the underground Communist Party of Nepal–Maoist

(CPNM), which rejects the fundamental premises of Nepal’s constitutional monarchy and

parliamentary system. The insurgency sharply escalated in 2001 and has adversely affected

economic performance since then. Economic growth slowed to an average of 1.9percent over the


10

fiscal year (FY) 2002–FY2004 period compared to 4.9percent in the decade preceding that.

Economic performance has been affected through different channels. More than 12,000 lives have

been lost and physical infrastructures worth at least $250 million have been destroyed. Conflict

related disruptions, such as strikes, security checks; blockades, shutdowns, and extortion have

increased the costs of economic activity and contributed to an economic slowdown. The conflict

has caused internal and external displacement of people. Nearly 400,000 rural families have been

internally displaced while thousands of others have crossed over to India in search of work. The

private investment rate has declined from 15.4percent in 1996 to 12.6percent in 2004, as private

investors have desisted from making investments and foreign investors have stayed away the

economic costs of conflict, focusing particularly on the impact of continued decline in development

expenditures on gross domestic product (GDP) growth. The Nepal Macro econometric Model is

used to estimate GDP growth under different conflict and no-conflict scenarios of development

expenditures. Scenario analysis indicates that if development expenditures decline at the current

rate (4.2percent), the total GDP growth loss is 8.3percent for the period between the fiscal years

2005 and 2009, an average loss of 1.7percent of growth per annum. If the conflict intensifies and

development expenditures decline at twice the current rate (8.4percent), total GDP growth lost is

10.3percent, an average loss of 2.1percent of growth per annum. If the FY2001–FY2004 patterns of

growth are assumed for the FY2005–FY2009 period, the simulations show that up to 57percent of

the loss in economic growth could be due to the decline in development expenditures. It is

observed that the annual costs increase with each successive year of conflict. This is because the

effects of decline in development expenditures accumulate each year, affecting GDP growth more

as the conflict lengthens (Ra& Singh, 2005)

A study on Nepal Macro econometric Model was undertaken by Sung sup Ra and Chang Yong Rhee

on the behalf of ADB this paper describes a medium-sized Keynesian income expenditure model of

the Nepalese economy. The forecasting results show that political stability and the inflow of foreign

borrowings are very important Factors in determining the long run growth prospects for the

Nepalese economy.(Ra and Rhee,2005)


11

The study paper by Kundan Majagaiya focuses on the linkage between FDI and economic growth in

case of Nepal. The study employs with the relationship between foreign direct investments and

economic growth using annual data for the period 1980- 2006. The empirical analysis on basis of

ordinary least square method suggests that there is positive but small relationship even considered

negligible where as unit root test suggested that variables that used in this are non-stationary in

their levels, the Johansen co-integration test suggests that there is remained long-run equilibrium

relationship among the variables and the Granger Causality test shows that casual effects of

Foreign Direct Investment on the Gross Domestic Product seems after four year. There seems no

direct association between FDI and GDP in Nepal. Therefore, the Nepalese Gross Domestic Product

is not influenced significantly by FDI. (Majagaiya, 2007)

A study conducted by Surendra Raj Devekota (2007) with the topic: socio economic development

in Nepal past mistakes and future possibilities. This paper pointed out that, past five decades Nepal

has witnessed the growth of rent seeking elites and increased income inequality in spite of huge

national and international expenditure. Devkota remarks that historical process as socio economic

development of Nepal as; the second half of the fifty which of the period of a reform but this was

interrupted by king Mahindra’s unfortunate political coup of 1960. The economic growth in the

period of 1961 to 1990 was very sluggish and that progress after 1990 seems encouraging but real

achievement has been over-shadowed by the weakness of the politico-economic characters of

ruling classes. In spite of few positive incidence of economic growth development in general has

yet to satisfy the large mass of people who are struggling with stagnant agricultural yields

increasing number of hungry people and widening income disparity. That paper concluded as Nepal

needs a holistic structural change in its socio-political and economic system (Devkota, 2007). This

paper evaluated the Nepalese economy with the perspective of political and institutional economy

pointing that unfavorable political system contributes to hindrance on economic progress and

weakness of the political –economic characteristics of ruling elite also is the constraint even the

political system is democratic and open which was witnessed after 1990 in Nepal and the realized

that in needs holistic structural change in socio political and economic system. It means that the

main problem of Nepalese economy is insisted in overall structure of socio-economic and political


12

structure. Which is main source of inefficiency of Nepalese economic performance that also

indicated by former articles.

A paper on Inclusive Growth in Nepal by Magnus Halfback Nepal has had a good economic growth

since the mid 1980s and throughout the 1990s. This has led to increased inequality, but in general

the poor have also benefited economically. The exception is some ethnic groups of the central and

eastern hills, where labor migration has been more limited. Poverty was still high in 2003 in

particular within the Tamang and Rai communities. Poverty has declined among hill Dalits, and

probably also among terai Dalits, which can be explained by labor migration to India. However,

poverty rates are still high among the Dalits. The main pathways out of poverty from 1995 to 2003

have been landless farm workers who became subsistence farmers, construction or manufacturing

workers, and subsistence farmers who value added to their income by working in the same trades

of construction and manufacturing industries, or as migrants to India. A number of policy

interventions may support an inclusive growth process. Education and training programs leads to

improved human capital. Subsidized health services insure people against major risks, which, in

turn, allow them to make profitable investments rather than investments that make them able to

handle different types of risk. Investments in physical capital, like transmission lines, roads and

irrigation is necessary for economic growth, and a broad-based tax system is necessary to finance

these and other costs. Finally, some targeted programs may be beneficiary, such as land

redistribution to landless Dalits in remote villages of terai, and experiments with a rural

employment guarantee in the same areas (Hatlebakk, 2008)

A work on Geography, Poverty and Conflict in Nepal by Quy-Toan Do, Lakshmi Iyer, and This paper

conducts an empirical analysis of the geographic, economic and social factors that contributed to

the spread of civil war in Nepal over the period 1996-2006. This within-country analysis

complements existing cross-country studies on the same subject. Using a detailed dataset to track

civil war casualties across space and over time, several patterns are documented. Conflict-related

deaths are significantly higher in poorer districts, and in geographical locations that favor

insurgents, such as mountains and forests; a 10 percentage point increase in poverty is associated

with 25-27 additional conflict related deaths. This result is similar to that documented in cross-

country studies. In addition, the relationship with poverty and geography is similar for deaths


13

caused by the insurgents and deaths caused by the state. Furthermore, poorer districts are likely to

be drawn into the insurgency earlier, consistent with the theory that a lower cost of recruiting

rebels is an important factor in starting conflict (Do &Lyer, 2009).

Sager Raj Sharma on Role of Private Sector in Nepal's Transformation, The purpose of this paper is

to initiate a debate of the role of private sector and foreign direct investment in conflict

transformation. Development in Nepal has miserably failed so far because of various factors, such

as over dependence on foreign aid, failure of donors to ensure the proper use of their funds and

effective coordination of their activities, centralization in Kathmandu of both government and

private structures, widespread corruption and abuse of authority by bureaucrats and politicians,

and the exclusion of large sections of the population from a role in devising policy and program

development, to name a few. This paper argues that instead of continuing to rely heavily on foreign

aid, Nepal should now focus on the roles private sector actors can play in transforming this country

and mitigating possibilities of future conflicts. It argues that effective and positive roles for the

private sector can be learned from the experience of countries like Sri Lanka. The paper thus argues

that private sector actors in Nepal should also ensure that their activities are consonant with

sustainable peace, which has not always been the case. They should concentrate on finding ways to

support efforts to develop suitable conflict prevention policies and practices, recognizing the

interrelationships between conflict and social, political, economic and cultural factors. The debate

on this topic has got to a stage at which there is a degree of consensus that business has a role to

play in a sphere of activity that remains dominated by civil society and government actors. Private

companies are both part of the problem and also potentially part of the solution

The previous study of Nepalese economy which are mentioned above, conducted with various

perspective on economic development. Shah evaluated the performance of Nepalese economy

with perspective of capital investment and resource utilizations. He pointed out that inefficiency in

utilization of resource is main problem of Nepalese economy rather than the shortages of the

resources. According to the diagnosis of shah only increase in investment in Nepalese economy is

not sufficient. Mobilization of resource does not give optimum output without improvement in

efficiency. Some studies are conducted with perspective of economic liberalization and


14

reformation. Nepalese economy had started partially liberalization from1985 and after 1991, there

was fully liberalized. Sharma has tried to assess the impact of the liberalization policy in Nepal. His

conclusion is that there is on relevancy of the hypothesis that outward oriented economy growth

faster than inward oriented economy. He agrees with the argument that the hypothesis cannot be

generalized to lower income country like Nepal. Therefore Nepal being a lower income country, it

has not been benefited by the outward oriented economic policy despite highly liberalized on

international trade in reformation of internal economic policy. According to the study the impact of

liberalization on manufacturing industry seems that over all manufacturing TFP declined both

before and after the economic reform. Therefore it is experienced that liberalization may not

sufficient condition for rapid productivity growth despite little positive impact on Nepalese

economy. Improvement in human capital and infrastructure seems most necessary for proper

economic growth in Nepal. Jhon Cockburne’s study was on impacts of economic liberalization on

income distribution and poverty reduction. According to that poverty had decreased in urban area

but increased in rural area. There was apparent increase in income inequality in urban and rural

both areas. A Khatiwada and Sharm’s finding is historical low growth in Nepal. There is assessed

major constraint of Nepalese economy such as: low agricultural growth, land locked situation of

the country, limit natural resources, poor human capital state, sluggish public expenditure growth,

increase trade deficit, output growth depend on only contribution of capital accumulation, security

problem due to Maoist insurgency, low level of revenue mobilization, foreign aid disbursement far

below than commitment, weather dependant agriculture. There are some analyses of problems of

Nepalese economy by political economic perspective. Autocratic rule and political instability

indentified as hindrance of economic progress of Nepal. In later period Maoist insurgency seems

main cause of disturbance for economic environment in the country.

Therefore the literatures are found related to explain the Nepalese economy with perspective of

capital investment, economic liberalization and reformation, political economy. On the issue of

economic growth performance of Nepal: Shah examined the hypothesis that investment is key

factor for the economic growth. The study result could not support the hypothesis and he suggests

that efficiency for resource utilization should have improved. Sharma discussed on implication of

liberalization policy which would have strong positive influence on economic growth and


15

productivity. It has justified that liberalization is not sufficient condition for development in Nepal

and human capital and infrastructural development must. Khatiwada et al’s experience shows that

the structural adjustment policy could not provide quick return for economic output. There are

pointed out numbers of problem and obstacles in Nepalese economy such as: low agricultural

productivity, lack of natural resource, deficiency of human resources, inadequate investment level,

political instability, low ratio of revenue collection, weak performance in public budget and

program implementation, growing trade deficit. There is suggested the development strategy for

Nepal as to focus on education and catch up the information technology properly. Ra & Singh has

observed the Nepalese economic development process with insight of political environment as

determining factor for economic transformation. The economic development process of Nepal

seems adversely affected by Bad political environment of Nepal such as instability of government

and Maoist insurgency. Political stability and foreign borrowing are suggested as best strategies for

Nepalese economic development. Majgaiya has examined foreign direct investment (FDI)’s role for

economic growth of Nepalese. The study result did not show the desirable effect of FDI on

economic growth of Nepal. Devekota has evaluated the Nepalese economy with perspective of

political regime and democratic system seems best for economic development in Nepal. Jhon

Cockburne has studied the poverty and inequality issue in Nepal with relating to liberalization and

the result has found that the economic liberalization in Nepal has not supported to reduce the

existing poverty and inequality. According to study of Hatlebakk, employment opportunity for

lower income or socio-economically exclusive social groups, created by manufacturing sector and

construction projects has benefited nicely. Foreign employment also is contributing to economic

enhancement of lower income class people. The poor groups and regions are base of political

rebellions such as Maoist rebellion in Nepal; it is findings of Do & Iyer’s study. By the review of

above literature it can be concluded that hypothesis that investment, economic liberalization and

foreign direct investment factors can play decisive role for rapid economic growth; the studies have

not justified the hypothesis in the context of Nepalese economy. The hypothesis that political

stability and democratic regime can provides positive environment for economic prosperity in a

country; which has been supported by the study results. In this way it is justified that poverty is

main reason for social conflict and violence. The Previous studies show that some major

economic development hypothesis such as investment, liberalization and external supports are not


16

seem so more relevant to analyze the economic problem of Nepal. There may have yet to

investigate and diagnosis proper problems of the economy, for that it is need to further studies

with various dimensions and angles. There seems lack of that wide ranges study in this field for

Nepal as well as structure transformation perspective. It is important to study the historical

structural pattern of Nepalese economy due to economic development outcome of economic

transformation; the economic transformation is reflection of structural transformation. Therefore

this paper is attempted to study the Nepalese economy with the hypothesis of structural

transformation process is the almost reflection of economic development.

1.4. Statement of problem

Nepal still remained as one of least developed county in terms of social economic indicators GDP

per capita ranked at 175th Out of 185($427,world bank,2009), Gini-coefficient at 32th out of

130,(47.17,2004), human development index 137th out of 178(UNDP,2006). There are several

constraints to economic progress; still major parts of population depend on agricultural primary

sector, lack of industrialization, burden of trade deficit, low development expenditure high regular

expenditure, growing unemployment, underemployment political instability, growing inequality,

insecurity, corruption and growing disparity inflation. Such kinds of crisis are deepening further. To

Identify Root causes of the crisis for slow pace of economic growth and find out the way to

overcome from the vicious cycle of crisis, need to analysis of related factors of problems. The

proper identification of effective causes of problem can be helpful to find out the remedy of those.

There are different approaches for analysis of different aspect of the economy. The fundamental

aspect of economy ,is structural shift process, in terms of population economically dependence

share out of total population and GDP share out of total GDP of the country transferring from

agriculture sector to non- agricultural sector. For the desirable speed of economic growth there

should have a proper speed of structural shift process of labor forces from traditional agricultural

sector to modern non-agricultural sector such as manufacturing and services. In Nepal agriculture

sector share about 33 percent of GDP (Economics survey, 2010) and according to 2001th national

census 67 percent population is dependent on the agricultural sector (CBS). The agriculture sector

prevail zero marginal productivity of labor and consist hidden unemployment or underemployment


17

condition. This is the evidence of underdevelopment nature of the nation. To gain prosperity of

economy there should be structural transform from agro base to non- agro base sector. This

structural transformation process is still incomplete and running with slow pace. Therefore, the

causes of slow economic growth of Nepalese economy should be identified by investigation in this

aspect of the economy

1.5. Research question

To address the afore mentioned problem in the study is directed by following research question

1) how is speed of structural transformation process of Nepalese economy

2) what are the most effective factors for the process

3) which are the obstacles to the process

1.6. Theoretical framework

There are several theoretical insights to analyze economic phenomenon of the developing nations.

There are re-statements of some economic growth and development theory related structural

transformation aspect of economic system

Economic growth is regarded as a steady increase in national income and per capita income of the

society over time and the terms of economic development give more wide sense of economic

progress. There is big distinction between the two. Economic growth refers to the increase in an

economy’s real gross domestic product (GDP) and income over time. Real GDP is the economy’s

total output of goods and services usually measured over of one year. The amount of achievable

economic growth would depend on the human resource acquisition of the economy technological

improvement, amount of capital investment, natural resource endowment and degree of its

exploitation and the managerial know how in the economy(Potter, 2008). Economic growth is

defined in terms of increase in per capita real output or per capita income. To reflect economic

development, Development encompasses the process through which societies or nations or

regions raise their per capita output and income by improvements and growth in productivity and

how these translate into per capita economic well-being in the society(Kuznet,1973).


18

Economic growth is regarded as outcome of structural transformation in economy due to economic

development. For development, not only the economic growth is important but sufficient

structural changes require in economy for translating the growth in to development. Those

countries with lower middle and upper middle incomes has per capita gross national income (GNI)

between 756$US to $US 9266 has characterized as the ‘developing countries’. The concept of the

developing countries is not confined only to per capita national income but other considerations

are also very important such as; level of education, health facilities, human resource development

and human rights status in countries. For the specifying the level of the development various

components have been given for portrayal of structural diversity of developing nations. These

components are very important considering the socio economic development and culture of a

country. the following component are considered important in the context of the economic

development such size of the country, its historical and colonial background, physical human

resource endowments, ethnic and religious composition, the relative importance of its public and

private sectors, the nature of its industrial structure, its degree of dependence on external

economic and political forces and the distribution of power and the institutional political structure

with in the nation. In the present day world the development of a country is determined by the

UNDP Human Development Index (HDI).

Economic growth is a positive change in the level of production and services over a certain period

of time. Nominal growth is defined as economic growth including inflation while real growth is

nominal growth minus inflation. Economic growth is usually brought by technological innovations,

human resources and positive external forces; the most accepted definition of economic growth is

given by Simon Kuznets. According to Simon Kuznets, modern economic growth is: a country’s

growth may be defined as a long term rise in capacity to supply increasingly diverse economic

goods to its population. This growing capacity based on advancing technology, institutional and

ideological adjustment that is demand. Advance technology is to the promising sources of

economic growth. It is necessary conditions, if technology is to be employed efficient and widely

institutional and ideological adjustment must be made to affect the proper use of innovation

generated by advancing stock of human knowledge. he mentioned the six characteristic of modern

economic growth : first – high rates of growth of per capita product , second rise in productivity

rate of factors; third high rate of structural transformation, fourth ideological change such as


19

urbanization and secularization, five technology change such as means of transportation and

communication, Sixth internationalization of domestic economy.(Kuznet,1973)

Simon Kuznets warned the possible problems emerge in the process of structural change and

society and suggested the responsibility of modern state to resolve the problems without

unnecessary cost. He defined the structural change and pointed out the probable conflicts into

society and risk of break out severe internal civil war if not have managed conflicts which produce

in the structural transformation process. The Structural change is that it represents shifts in the

relative shares in the economy of the specific population groups attached to particular production

sectors. Since economic engagement represents a dominant influence in the life of people, the shift

in the share of a specific sector. Economic growth perforce brings about a decline in the relative

position of one group after another-of farmers, of small scale producers, of landowners change not

easily accepted. The continuous disturbance of preexisting relative position of the several

economic groups is pregnant with conflict-despite the rises in absolute income or product common

to all groups. In some cases, these conflicts did break out into overt civil war. Only if such conflicts

are resolved without excessive costs, and certainly without a long-term weakening of the political

fabric of the society, is modern economic growth possible. The modern national state-plays a

crucial role in peacefully resolving such growth-induced conflicts this is not the only economic

function of the state; it can also stimulate growth and structural change. (Kuznets, 1973)

The economic growth naturally triggers development reflected in macro-economic indicators,

growth and development are mutually inclusive and natural bed fellows. The term economic

development though refers to some economic structure changes such as change in industrial

production change in occupational structure change in foreign trade, technological progress along

with change in national income and GDP. Economic development is the basic factor of keeping the

pace of economic growth. the objective of economic development is to raise GNP, poverty

reduction, greater employment opportunities, equal distribution of income, better health facility

etc. in strictly economic terns the traditional development was considered to be the capacity of

national economy whose initial economic condition has been more or less static for a long time to

generate and sustain an annual increase in its gross national product of GDP at rate of 5 to 7


20

percent or more. Economic development now also includes and redefines in terms of reduction or

eliminating of poverty, inequality and unemployment within the context of a growing economy.

The rostow’s concept of economic development is called five stage theory of the stage of the

economic steps of modernization. According to the theory the first stage of economic society is

traditional agricultural system. It is the pre- industrialized feudalism society, second stage: pre-

condition of takeoff; happen initiation of dynamic development efforts with high rate of

investment expansion of industrialization and lobar force transforming from primary sector to

secondary and tertiary sector, third is: take off stage; characterized by self-sustain growth when

no needs of exogenous inputs , fourth stage is: drive to maturity; occurred continue investment

by 40 to 60 percent of GDP; economic and technical progress dominants this stage and last stage

is: age of mass consumption. According to the theory underdevelopment with its poverty are the

effects of dualism, between strategies and socio- economic structure. It is result of endogenous

factors to development that has to be taken initiation from outside (Potter, 2008). According to the

theory those stages are not merely a way of generalizing certain factual observation about the

sequence s of development of modern societies. They have an inner logic and continuity. The

advanced economies had all passed the stages of take-off in to self sustaining growth but the

underdeveloped countries were still either in the traditional society or followed a certain set of rule

of development. Therefore, he suggested that as a principle and precondition for takeoff the

mobilization of domestic and foreign saving in order to generate sufficient investment to accelerate

economic growth is necessary(Todaro,2003). The economic mechanism that more investment leads

to more growth described by Harrod-Domar Growth Model ,which suggested that every economy

must save a certain proportion of its national income, however in order to grow it needs a new

investment representing net additions to the capital stock. These stages- of-growth strategies had

its inherent constraints for the attaining the sustainable growth. As per analysis of the Todaro a

country which can save 15 percent to 20 percent of GNP could develop at much faster pace as

compared to that country which saves less. So in this model development revolved around the

saving and investment ratio. New independent countries having low capital formation and want to

grow for instance 7 percent year should generate 21 percent saving investment ratio of national

income and who could save only up to 15 percent. This 6 percent gap has to be managed through


21

aid or private investment. In this way massive capital and technical assistance was transferred from

developed to developing countries.

The Lewis model of Structural transformation concentrated on mechanism by which developing

economies convert their domestic economic structure to a modern economy as most of the

developing economies were agro based. This model argued for development that transformation of

feudal society into industrial can bring development. As per the model the over populated rural

sector is characterized as underdevelopment sector because it has zero marginal labor productivity,

it has the surplus labor which cannot be utilized in agriculture as well as modern urban industrial

sector. The transfer of labor from the underdeveloped sector of agriculture to the modern sector is

the focus in this model. The velocity of the labor transformation is determined by the industrial

investment and capital accumulation in the modern sector. Therefore the modern sector is

considered a key to the self sustaining growth and employment expansion from the traditional

sector to modern is assumed to continue till all the surplus rural labor is absorbed in the modern

industrial sector. The traditional sector in agriculture can also be withdrawn but on high cost

because now the marginal product of the rural labor is no longer zero. Therefore the structural

transformation for the economy will keep the balance of economic activity while shifting from one

traditional sector to the modern sector

There are critics to the structural transformation model whether it is sufficient to explain present

context of underdevelopment countries’ economic transformation. Though historical growth and

development of Europe manifested the success of two sector model but generally there are strong

concerns of the contemporary developing countries on its key assumption that it does not fit in the

institutional and economic realities. for instance the model assumes that the rate of labor transfer

and employment generation in the modern sector is determined by the capital formation but if the

capital is reinvested in the labor saving capital equipment rather than duplicating the existing

capital as implied by this model the total would raise but it will do little improvement I aggregate

social welfare measured. The second assumption in the model which also found to be divergent to

reality is that there is surplus labor in rural area and full employment in the urban areas. Economist

based on the empirical research found that there is little surplus in rural location. One can conclude

that this model needs modification keeping in view the labor saving bias of most modern


22

technological transfer, non-existence of rural surplus gowning prevalence of urban surplus labor.

However, this model was exemplary on a conceptual description of the development process.

(Todaro, 2003)

According to the neocolonial dependence theory certain elite groups in developing countries such

as landlords, military elite groups and bureaucrats enjoy the benefits due to perpetuations of

international capital system of inequality. The multi –national corporation and Aid agencies like the

World Bank or the international monetary Fund which always emphasized for the continuation of

capitalist system through introduction of reforms do not serve the wider population but their

beneficiaries are the selected persons of the elite classes. Resultantly general reforms efforts are

not made and new colonial view of underdevelopment attributes a large part of developing world

to continue worsening poverty to the policies of the industrialist capitalist countries. These types of

policy they achieve through their extension in the form of the small but powerful groups (Todaro,

2003).

In this context, false –paradigm model is attributed to the international dependence approach. As

per this model the adviser /experts from developed countries offers sophisticated concepts

theoretical structure and complex econometric models of development which lead development

countries to an incorrect economic policies (Todaro, 2003).

The neo-classical counter –revolution theory focuses on frees markets and dismantling public

ownerships and government regulations of economic activities .this theory is supported by world

bank and international monitory fund .for success of this theory they quote example of south

Korea, Taiwan and Singapore and failures in African and Latin America where the theory was not

adopted . Free market approach says that market is alone efficient which signals for investment in

new activity ultimately leading to upward growth. The neo liberal theory is an extension of the

market policy of he developed countries where the products of the developing and under

developing countries cannot compete in the international markets and thus indigenous industry is

crippled. It is considered another policy of the developed countries for the continuation imperialist.

(Todaro, 2003)


23

It is summarization of above discussed theoretical issues and argument. The term of ‘economic

growth’ is major concern in modern economy and developed world. However to explain the

economic progress of underdeveloped country the concept of ‘economic growth’ is not sufficient.

In this context the term ‘economic development’ is used in which consist more wide concept than

the ‘economic growth’. According to the economic growth concept ; the major determining factors

of economic growth are: technological improvement, human resources, amount of capital

investment, natural resources endowment, and degree of its exploitation ,managerial know how

for that. The per capita GDP is the main indicator of economic growth. The economic growth is

assumed the outcome of structural transformation due to development. According to Simon

Kuznets the characteristics of modern economic growth are: high rate of per capita product, high

productivity of factors, high rate of structural transformation, urbanizations and secularization,

internationalization. According to Todaro for sustain growth need to GDP growth of 5 to 7 percent

annual. The concept of economic development embraces sense more than economic growth. The

important components of economic development are; public and private sector, the nature of

industrial structure, degree of dependency on external economy, institutional and political

structure. The economic development refers that the some structural change such are industrial

production change, occupational structural change. The objectives of the development are taken as

growth with equality, social justice and welfare, common approach to education and health care

etc. According to Rostow to upgrade the underdevelopment country to developed state has to

reach on takeoff stages. The transitional stage of developing stages to developed stages is defined

as pre-condition of take off. The major characteristics of pre-condition to take off are; initiation of

dynamic development efforts with high rate of investment, expansion of industrialization, and

labor force transformation from primary sector to secondary and tertiary sector. For that have to

mobilize the domestic and foreign saving and has to generate sufficient investment to accelerate

the economic growth. The domestic saving should have 15 to 20 percent of GDP. The structural

shift model explain that the development state measure by transformation state from agro-base

feudal society into industrial modern society. The labor transfer to modern sector from tradition

agricultural sector is the transformation process. The velocity of the labor transformation is

determined by the investment and capital accumulation. Neo-colonial theory says that the

prescription of international development agencies and export may not relevant to proper


24

development of underdevelopment country and the support of those might be benefited mostly

elite group than grass root people. The neo-classical free market theory refers dismantling public

ownership and regulation of government on economic activities. Its assumption is that market is

alone efficient with signals for investment in new activities, ultimately leading to upward growth.

There is criticism of liberalization in the context of underdeveloped country that products of

developing and underdeveloped countries cannot compete the international markets and thus

indigenous industry are victimized to be crippled. Simon Kuznets has emphasized the role of state

to resolve and manage the internal conflict peacefully and efficiently which can emerge due to

relative position change of social groups in the structural transformation process and stimulate

development adopting suitable policy measures.

1.7. Hypothesis

On the basis of afore mentioned research question theoretical frameworks, there can be

formulated following hypothesis to examine empirical facts.

1. Shifting rate of labor force share towards non-agricultural modern economic sector has

positive impact on GDP per-capita growth rate.

2. Capital investment has positive impact on structural shift of labor force towards modern

sector.

3. Pace of Infrastructural development such as Road, electricity and communication is

positively correlated to the structural transformation speed.

4. Sector wise growth rate also is positively related to economic transformation

5. The structural transformation has positive impact on living standard which is indicated by

average expectancy.

6. Political factor heavily influence on economic performance.


25

1.8. Research methodology

1.8.1. Research design

This Research designed for case study of structural transformation process of Nepalese economy. It

aims to explore nature and characteristics of the transformation process. Qualitative and

quantitative both approaches are applied in the analytical description in the study

1.8.2. Data sources

The data and factual information is collected from online version data base of national and

international level agency. Main sources of electronic version data base are as: central bureau of

statistics, Nepal; Ministry of finance, Nepal; central bank of Nepal; United Nation statistical division;

World Bank; other web sites: Nation Master .com, Almost data are available from 1970 to 2008.

Basically for comparative study and historical review are done on the basis of latest version of the

world data base. The time series economic data of Nepal almost variables from 1961 to 2008 were

obtained from the World Bank data base. The time series data of national account and GDP shares

years from 1971 to 2008 are taken from the united state statistical division’s data base. Web pages

are visited of finance ministry of Nepal, central statistical bureau of Nepal, central bank Nepal to

collect relevant data and information. The data of sector employment share not available in yearly

basis those yearly data are compiled from ten yearly based data collected from various sources and

literature.

1.8.3. Analytical approach

The data and factual information are described with use of tabulation and graphical observation.

For quantitative analysis and empirical test of the hypothesis correlation and simple least square

regression model are applied.

1.8.4. Variables

Symbols Variables Description of variables

X1 1stdlnGDPC logged first different Real GDP per capita level (in US$),

X2 1stdlnNn-agri.empl logged first different Employment share in non agricultural sector(percentof


26

total)

X3 1stdlnElectricconspc logged first different Electric consumption per capita (in KWH)

X4 1stdlnRoad logged first different Road extension(in K.M.)

X5 1stdgcapi.form. logged first different Gross capital formation ratio (inpercent of GDP)

X6 1stdnnagrigdp

logged first different on Agriculture share in total GDP(in percent of

gdp)

X7 1stlnlifeexp. logged first different Life Expectancy at birth(in years)

X8 1stdlnforaid logged first different Foreign Aid receipt ,million US$(in current price)

X9 1stdlngcapi.expense

logged first different Development expenditure of government

(in ten million rupees)

1.8.5. Model specification

For regression analysis models are specified as following way

Model. I

The following model is specified to examine the effect the employment share shift to non-

agriculture sector and GDP share shift change to non-agriculture sector on GDP per capita

�� = � + �� + �� +

In the models positive effects of independent variables on dependant are expected

Model. II

The following model is specified to examine the effect of electricity and Road extension and

Gross capital formation, foreign aid, capital expenditure of government on GDP share shift

change to non-agricultural sector.

�� = � + �� + �� + �� + �� + �� +

In the model positive effects of independent variables are expected on dependant variable

Model.III


27

The following model is specified to examine the effect of electricity, Road extension, Gross

capital formation, foreign aid, capital expenditure of government on employment share

shift to non-agricultural sector from agricultural sector.

�� = � + �� + �� + �� + �� + �� +


Model .IV

The following models are specified to examine the effect of GDP share shift to non-

agricultural sector, GDP per capita, employment share shift to non-agricultural sector on life

expectancy

�� = � + �� + �� +


1.9. Delimitation of the study

This is limited by time and resource, and content of subject matter. This study is focused mainly on

structural transformation process and its some related factors which are mentioned in the text. The

result and conclusion are made on the basis of applied data sets. The technological and

institutional factors are skipped in the study even being influence of the factors on the economic

growth.

1.10 structure of this paper

This paper starts with introduction chapter including study back ground, review of previous studies,

and theoretical framework, and research question, statement of problem and research

methodology. The second chapter is related to comparative study of Nepalese economy with other

four Asian developing countries, the third chapter is on about macroeconomic performance of

Nepal, in fourth chapter empirical study of Nepalese economy and fifth, the last concluding

remarks.


28

CHAPTER-2

Comparative analysis of Nepalese economy

In this paper, the pre-assumption has that Nepal is still is in underdeveloped condition, economic

development speed and structural transformation process has remained in sluggish nature. Even

after the initiation of modern and planned development effort the macro economic performance

of Nepal seems inefficient and weaker. How and what extent Nepalese economic development

performance has been remaining relatively behind and slow that could justify from comparative

analysis with some neighboring country. To understand relative change in Nepalese economy there

are selected comparative figures of other four Asian neighboring countries along with Nepal. They

are two countries from South Asia such as Sri Lanka and Bangladesh and two from south East Asia

such as Thailand and Malaysia those were emerge after 2nd world war and progress late 20th

century, modern economic history started similar time as Nepal. The comparative analysis has

done on the basis of some major variable which can represent key aspect of the economy of

respective country. Those variables are GDP growth rate, GDP per capita growth, life expectancy,

population growth, ratio of gross capital formation out of GDP, export-import growth. The data set

for the study was extracted from World Bank online database. The World Bank database is highly

trusted source in international economic analysis. To comparative study is conducted on the basis

normal exchange rate US$ terms, however for the comparative study PPP may have more relevant,

but the PPP (purchasing power parity) form data could not find of the required period for this study

in the World Bank data base and other accessible sources. There are selected few major indicators

selected in this comparative analysis which can represent overall picture of the respective

economy. Those indicators and variables are related to population demography, economic growth

and GDP per capita, gross capital formation and internationally openness.

2.1 Total population

The total volume of the population indicates the size of the economy but it is not fixed as

geographical size. It is changing to growing trend generally. Population is very important

component of the nations. It is the ends and means of economic development. Population stability


29

is taken as favorable conditions to development in modern economy. The high density and growth

of the population size are further problems of the economy

Therefore, it is important to analysis comparative population pattern as well as economic aspects.

The following table presents comparative figures of the five countries on different time points.

Following table presents size of the population volume in different time points.

Table 2.1

Population

Population, total in million

Country/years 1961 1971 1981 1991 2001 2008 Change %1961-

2008

Bangladesh 55 71 93 118 143 160 189

Malaysia 8 11 14 19 24 27 222

Nepal 10 12 15 20 25 29 192

Sri Lanka 10 13 15 17 19 20 103

Thailand 29 38 48 57 63 67 136

Data source: World Bank, 2010

By the above table it is informed that Bangladesh is largest in terms of population size with 160

million populations on 2008 and Thailand seems second position since 67 million in 2008. Other

three countries: Nepal, Malaysia and Sri Lanka are in similar rank in terms of population size ranged

20 to 29 million in 2008. In 1961 this was ranged 8 to 10 million. During the period of 1961 to 2008,

the population size change in percentages form seems highest that of Malaysia by 222 percent and

Nepal stand in second place with 192 percent change and the Sri Land seems least change only by

103 percent

2.2 Population growth

Following table provides comparative figure of population average annual growth rate in different

period of these countries.


30

Table2.2

Population growth rate

Average Population growth (annual average %)

Country/periods 1961-70 1971-80 1981-90 1991-2000 2001-08 1961-2008

Bangladesh 2.45 2.68 2.46 1.97 1.60 2.26

Malaysia 2.88 2.38 2.74 2.51 1.86 2.50

Nepal 2.05 2.36 2.38 2.46 2.06 2.27

Sri Lanka 2.41 1.91 1.36 0.89 0.93 1.52

Thailand 2.97 2.40 1.82 0.95 0.97 1.86


The population growth rate indicates the level of demographic transition of the nations. The

demographic transition state also is an important indicator of social change. Low level of the

population growth rate is positive symptom of advance society. The average population growth

rate of Nepal remained high, with similar level of Malaysia and Bangladesh. By the table we know

that the annual average growth rate of Nepal , Bangladesh , Malaysia , Thailand and Sri Lanka are

2.27 percent, 2.26 percent, 2.5 percent , 1.86 percent , 1.52 percent respectively in the whole

period. By the different periods wise annual average population growth rate, in initial period Nepal

was at lowest level in the group of the countries, the growth rate was gradual decreased in

succeeding periods in case of Malaysia, Sri Lanka and Thailand however in case of Nepal that was

slightly increasing up to 1990s decade.

Line graph 2.1


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BGD

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The line graph indicates the comparative demographic transition pattern. By the trend lines

population growth rate of Nepal was relatively lowest in 1961 that position has changed and come

in last in 2008. The rate was gradually increasing until mid 1990s after then started to decline. The

declining rate no so fast; so that contribute to hold at first position in relatively highest point

despite the falling absolute term. That unique shape of the trend of the Nepal explains that

demographic transition process was started only in the 90th period and still yet to complete.

Growth rate decline is remarkable of Thailand and Sri Lanka. That is seen similar pattern of

transition of Nepal and Bangladesh by the indicator Nepal is remained behind also in terms of

demographic transition

2.3 Life expectancy

These indicators, life expectancy at birth level, reflect over all living standard and health care

condition of the countries.

Table 2.3

Life expectancy at birth, (years)

Country/years 1961 1971 1981 1991 2001 2008 Changed

(1961-2008)

Bangladesh 41 44 48 55 62 66 25

Malaysia 55 62 67 70 73 74 20

Nepal 39 43 49 55 62 67 28

Sri Lanka 58 63 68 70 72 74 16

Thailand 55 60 67 69 68 69 14


The table, it seem that, Nepal is in low position in term of life expectancy among the observe

nations along with Bangladesh in each point of time. In 1961 Nepal’s life expectancy was only 39

year that is stand at 67 in 2008. Nepal has surpassed only to Bangladesh by one year in the last year

of the period. However progress of Nepal in this aspect remains highest by 28 years from 1961 to

2008, whereas Bangladesh by 25 years, Malaysia by 20 years Sri Lanka by 16 and Thailand by 14

years.


32

Line graph 2.2


The trend lines of life expectancy are rising over time period , that demonstrate ; there was big

differences of the level up to mid 1980, however in latest period the trend lines are coming to

closer distance on higher level . Life expectancy is rapidly converging in Asia. It is very positive

aspect of Nepalese society in case of this indicator than other socio economic indicator among the

observe nations.

2.4 GDP growth

The following table presents comparative figure of real average annual GDP growth rate in

different periods wise.

Table 2.4

Average GDP growth (period wise average %)

1961-70 1971-80 1981-90 1991-2000 2001-008 1961-2008

Bangladesh 4.06 1.04 3.73 4.80 5.80 3.81

Malaysia 6.49 7.87 6.03 7.23 5.07 6.60

Nepal 2.52 2.11 4.79 5.00 3.64 3.61

Sri Lanka 4.58 4.43 4.20 5.22 5.06 4.68

Thailand 8.17 6.89 7.89 4.63 4.76 6.54


30

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Life expectancy at birth, total (years)

BGD

MYS

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33

The above table shows GDP annual growth rate in period wise average form about ten years

periods from 1961 to 2008 and overall average of the whole observed period. The GDP annual

average growth rate in initial period has remained in lowest at 2.52 percent average, in second

period lowest after Bangladesh but lower than previous period of Nepal itself only at 2.11 percent

annual average, in 80’s decade the rate has remained higher than Bangladesh and Sri Lanka and

even higher than previous periods own average growth rate at 4.79 percent. In the period of 1991-

2000, the rate was still higher than Bangladesh and slightly below than Sri Lanka at 5 percent

average , this rate is highest of Nepal the among all observed periods, that can take as golden age

period of Nepalese economy for ever . In the latest period the average rate downed sharply to

lowest in the group of the country at only 3.64 percent level. The overall average annual growth

rate seems lowest in the group at 3.61 percent in average. These facts indicate that Nepal had

very low level economic growth speed than rest of the countries since least average growth rate

only 3.61 percent annual during period of 1961 to 2008, whereas the rate of Malaysia and Thailand

are more than 6.5 percent annual and 4.68 percent of the Sri Lanka. Nepal has behind by 0.20

percentage point annual to the Bangladesh. The set backed of growth in latest period is caused of

violence conflict due to Maoist insurgency in Nepal. However every country has suffered from

some kinds of abnormal political and economic situation such as Sri Lank bitterly victimized from

Tamil’s separatist war for 3 decades, the Bangladesh also experience freedom war from Pakistan in

1970s decade and suffering from political instability and army coup. Thailand and Malaysia also

were not free from any political and economic disturbance in the period. Therefore, the Maoist

arm conflict was not wholly responsible for whole period’s economic stagnation time in domestic

economy of Nepal.

The following line graph presents whole period state of GDP annual growth trend of the countries.

The graph shows the gaps between lines are relatively higher in earlier stages and those seem

slightly converging in latest period. The growth rate lines are highly fluctuating likely stable trend

before 1990. By the trend line growth rate of Nepal seems that frequently touching and crossing

the zero level growth rates before 1990. That indicate Nepal has so many economic crisis and

stagnation during the period even politically normal situation. After 1990 Nepal experience rather

stable growth in moderate level despite around 2001.


34

Line graph 2.3


By observation GDP growth rate figure Nepal has remained in weakest in terms of average growth

and moderate in growth rate level in special in later period. The moderate growth rate after 1990

was not enough to break the vicious cycle of Nepalese economy further more it become victim of

arm insurgency and security emergency during the moderate growth period around 2001, still yet

to overcome from severe the consequence of the shock.

2.5 Per capita growth

GDP per capita is a major indicator of economic well being state of any country. It is average

income of a citizen in the country at a particular time period. By the indicator there can measure

main economic development level and comparable economic state between nations and between

time periods in a country. To raise the GDP per capita is being the main target point of the

economic development effort of the nations. The following table presents comparative figures of

real GDP per capita level at constant price of 2000 in US$.

-15.00

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GDP growth (annual %)

Bangladesh Malaysia Nepal Sri Lanka Thailand


35

Table 2.5

Average GDP per capita (constant 2000 US$)

1961-70 1971-80 1981-90 1991-2000 2001-08 1961-2008

Bangladesh 258.96 222.56 239.63 292.12 397.23 277.30

Malaysia 992.83 1536.25 2230.95 3523.93 4542.26 2482.87

Nepal 143.57 143.22 160.05 203.12 237.30 174.96

Sri Lanka 305.49 375.73 515.03 722.82 1005.48 567.39

Thailand 407.43 645.77 1017.81 1849.22 2333.45 1205.62


The above table provide the information us the state and change of real GDP per capita annual

average level periods wise in US$ term at price of 2000. By the table, that comes to know that,

Nepal has remained at least rank in terms of average annual real per capita GDP out of the observe

country in each time periods. It has very low level of the GDP per capita since beginning to the

latest periods. The per capita is very disappointing level in both absolute and relative terms. The

relative difference also has widened highly between the first and last years of the study period. In

191960s decade the average GDP per capita of Malaysia was about six times, Thailand and Sri

Lanka were around two times higher than of Nepal. Where as in latest period (2000-08) , the

Malaysia about 20 times , Thailand nearly 10 times and Sri Lanka about 4 times higher than the

level of Nepal.

Line graph 2.4


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GDP per capita (constant 2000 US$)

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The above line graph depicts the variation of the per capita GDP growth trend of the observed

countries group. When we look line graph, the gap the level is smaller at initial period but those

differences increase continuously in subsequent years. The trend lines are running farther away

from zero level base line of Malaysia , Thailand even the Sri Lanka but in case of Nepal that trend

line running likely parallel to the base line. The GDP per capita levels are highly divergent among

Asia and south Asian countries too. Nepal is lagging behind more and more to the Asian neighbor.

2.6 Gross capital formation ratio to GDP

Growth rate of the economy depend on investment and capital formation of the economy, high

investment lead economy to higher level of growth. If there is expectation of high growth rate in

GDP there should have higher ratio in capital formation to GDP. The following table provides the

facts of gross capital formation rates out of GDP of respective countries along with Nepal

Table 2.6

Gross capital formation

Gross capital formation (% of GDP annual average)

Country/periods 1961-70 1971-80 1981-90 1991-2000 2001-08 1961-2008

Bangladesh 11.08 9.38 16.75 19.72 23.94 15.85

Malaysia 17.90 23.66 28.26 35.76 22.55 25.28

Nepal 5.46 13.11 19.90 23.33 25.44 16.66

Sri Lanka 16.03 18.97 25.08 25.46 24.79 20.61

Thailand 21.54 26.17 30.66 34.44 26.83 27.98


The above table shows the comparative figure of gross capital formation rate out of GDP ,

according to that In initial stage Nepal has very low level of average annual capital formation rate

at only 5.46 percent, that seems increasing trend in succeeding periods: 13.11 percent,19.90

percent ,23.33 percent and 25.44 percent in 1970s ,1980s, , 90th decades and latest period

respectively. The average whole period average has remained at 16.66 percent level. Whereas,

Thailand, Malaysia and Sri Lanka have witnessed 27.98 percent, 25.28 and 20.61 percent annual

average in total period. In this aspect Nepal remained least after Bangladesh. However Nepal has

stood highest position at 25.44 after Thailand percent out of the GDP which is slightly above than


37

others. There find differences of capital formation rate as differences of economic growth. That can

be justified that the slow economic growth was contributed by low level of capital formation’

Line graph 2.5


The above line graphs presents trend lines of capital formation ratio shows that before 1998 there

was remarkable high capital formation rate occurred in Malaysia and Thailand; up to mid 1980, Sri

Lanka has experienced high capital formation ratio. However Bangladesh and Nepal remain of

similar pattern trend gradual increase. In this case Nepal remains higher than Bangladesh in overall

trend. The tendency of the ratio is converging in later period especially after 1999.

2.7 Exports of goods & services (percent of GDP)

Export is an important indicator of economic performance in external sector. The following table

present level of exports out of respective nation’s GDP. Exports of goods and services indicate

productive and competitive capacity of the economy. Exports are a major source of economic

strengthening by earning foreign currency and various aspects. The table informs us that

comparative higher ratio of export volume of the economy to GDP as in percentages

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Table 2.7

Exports of goods and services (% of GDP)

Country/periods 1961-70 1971-80 1981-90 1991-2000 2001-08 1961-2008

Bangladesh 9.56 5.40 5.31 10.67 16.88 9.26

Malaysia 41.68 45.66 59.03 95.77 112.20 66.81

Nepal 6.51 8.85 11.34 20.80 15.70 11.97

Sri Lanka 23.89 28.88 27.14 34.60 32.34 29.24

Thailand 16.24 19.95 26.86 46.28 70.36 34.50


The above table provides period wise annual average percentages of export to GDP of respective

countries. According to the information the ratio of export is remained at lowest level after

Bangladesh almost period, even in the latest period that is lower than that of the Bangladesh. The

whole average figure also seems lowest after Bangladesh at 11.97 percent. The best annual

average performance in export seems in the period of 1991-2000 at 20.80 among the periods. It

find that economically speedily growing country have high ratio on exports out of GDP such as

Malaysia and Thailand. Malaysia evidences export dependency, has exported 112 percentages in

annual average of GDP in the latest period and the Thailand also exported about 70 percentage

annual averages in the periods. Sri Lanka also exports far higher than Nepal in term of percentage

of GDP. Therefore Nepal has very poor performance in export sector in terms of percentage of

GDP.

Line graph 2.6


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The line graph shows trend of exports of the countries over the period. The trend line of the export

performance has remained nearly stable level up to 1991. After that there was improvement from

1991, however from 1998 that was turned to downward direction continuously up to the end.

According to the graph exports performance of Malaysia and followed by Thailand was remained in

sky rocketing path in terms of ratio of GDP. In conclusion the exports trend of other country is

growing more and less but Nepal could not maintain the increasing trend later time that seems

falling in the export.

2.8 Imports of goods and services

Table 2.8

Imports of goods and services (% of GDP)

Country/periods 1961-70 1971-80 1981-90 1991-2000 2001-08 1961-2008

Bangladesh 12.27 13.39 13.55 16.28 23.14 15.42

Malaysia 37.89 41.66 56.57 89.71 92.19 60.49

Nepal 9.28 13.00 20.67 31.30 30.33 19.75

Sri Lanka 26.34 34.66 38.96 43.75 41.25 36.81

Thailand 18.41 23.68 29.96 45.70 65.66 35.47


By the table we know that imports ratio of Nepal seem lower than Malaysia, Thailand and Sri Lanka

but it is always higher than own export ratio.

Line graph 2.7


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Imports of goods &services (% of GDP)

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The line graph show that imports ratio trend of the countries is found as similar pattern to export.

High export oriented country has high in imports. That is evidences highly openness of economy.

Highly opened country has more export capacity and benefited by positive trade balance. Nepal is

seemed least in trade internationalization and highly suffered from growing negative foreign trade

balance.

2.9 Summery

In summing up, Average GDP growth of Nepal from 1961 to 2008 is 3.61 percent; it is the least out

of the five observed countries. The GDP growth rate has improved from 1985 as a slight reflection

of liberalization. It has been declined in the political crisis event. Real per capita GDP of Nepal has

changed only by 81 percent from 1961 to 2008 with 1.61 percent annual; it is also least among the

countries. Nepal is remained far behind from many Asian neighboring nation and economic

disparities are growing among the countries. In term of life expectancy, Nepal is not more behind

than, differences are narrowing. Nepal has improved highest by 28 years of average life expectancy

during the period of 1961 to 2008. Population growth is still highest among the countries at 1.83

percent annual in 2008, but in 1961 it was lowest in similar rate. The rate was increased in middle

in the period and in later time it has declined gradually. The total population stand bout 29 million

in 2008, the number was only 10 million 48 years ago. The gross capital formation was historically

low rate than others; however it is highest at 28 percent of GDP in 2008. The export ratio to the

GDP seems historically weak, even declining later period. Imports also is comparatively low after

Bangladesh, it is very high than export portion. Nepal bear highest ratio trade deficit among the

observe nations. Nepal seems far behind in internationalization of economy, however, an import is

increasing continuously in later time.

By the comparative study the Nepalese economy along with the four Asian countries that seems at

least state in development level and slowest in speed of almost aspect of social economic progress.

Therefore that required further investigation to identify root causes which are affecting to stagnant

the Nepalese economy over the modern historical period.


41

CHAPTER-3

Macro economic performance of Nepal

Comparatively Nepalese economic transformation speed was slow and development level seems

low. This is the conclusion of the previous chapter ‘the comparative analysis of Nepalese

economic’. The comparison was with the least developed to developed South Asian and south East

Asian countries. In this chapter, it is going to be observed more detail aspect of Nepalese economy.

This is historical overview of economic growth factors, structural pattern, determining factors of

economic growth level and structure, sector wise performance and some major demographic figure

and the observation of changing trend and rate of the variable over the periods. Following table

provides a glimpse of major comparative macroeconomic indicators on historical point.

Table 3

Comparative figure of socio economic indicators between historical time points

Source: Devkota,2007

Note: n.a. - not available

The above table presents comparative figure of socioeconomic indicators of historical time points.

The indicators of 1950/51’s and 1960/61’s show the economic picture of Nepalese economy of

beginning stages of modern development initiation. The 2003/04 represents latest period’s state of

Indicators Unit 1950–51 1960–61 2003–04

Population ( in million) 8.23 9.4 23.15

Population growth rate(in Percentages) 2.3 1.65 2.24

GDP Million Rupees (current prices) 3950 5081 533, 54

Per capita GDP (in Rupees ) 480 540 21,091

Urban population Per cent of total n. a. 3.1 16.1

Agriculture dependent population Per cent n.a. 97.1 65

Roads (in Kilometer ) 376 1193 15,458

Telephones(Number of lines ) 335 1120 275,558

Power (Hydro,in Megawatts ) 3 4.8 556.8

Yield (Food crops) Tons/ hectare 1.786 1.8 2.3

Export (Million Rupees ) 10 210 313,92

Import (Million Rupees ) n.a. 0.4 751,77

Literacy rate (Percentage) 2 4 54

(35percentwomen)


42

Nepalese economy. The 1950 is historical event, when Nepal entered in modern multi-party

democratic political system with demise of the autocratic Rana’s regime. The 1960 is another

turning point of Nepalese political history starting of the Party-less Panchayati rule with active

command of absolute by royal takeover on 10 years old multiparty democracy and beginning stage

of economic development initiation in Nepal. By the historical comparative socio-economic Nepal

witness very low level of economic foundation in beginning of modern economy. There was

accounted only 3950 million Nepalese Rupees total nominal GDP in 1950-51 and 5091 million

rupees in 1960-61. That stands in 2009-10, 1183 billion rupees. In terms of GDP per capita nominal

were only 480 and 540 rupees in 1950-51 and 1960-61, in 2010 that accounted 41,851 rupees in

current prices. The urban population was only 3.1 percent of total in 1960-61 and agricultural

dependency of population was 97.1 percent in 1960-61. Total export was 10 million rupees in 1950-

51 and 210 million in 1960-61 but import was negligible at that time. The literacy was 2 and 4

percent in 1950-51 and 1960-61. The current level of development depends on changing trend of

economic activity along with initial foundation. Now there are some variables to observe the trend

of the progress of Nepalese economy

3.1 Population features

Population is both means and ends of economic development. Therefore, it is relevant to overview

in beginning on major demographic features of the study area. There are historical time series

figures presented by line graph of total population, annual population growth rate, ratio of urban

population, total fertility and life expectancy.

31.1 Size of population

The following line graph presents total population growth trend of Nepal.


43

Line graph 3.1


3.1.2 Population growth

The line graph shows the total population in Nepal from 1961 to 2008. The growth trend is steady

state. The number population was only 10 million in 1961 that stood at 27 million in 2008.

Line Graph 3.2


The above graphs show the annual growth rate of population. We can see on the graph in first half

of 1960 the growth rate was under 2 percent and the line is running over the time period with

slightly increasing trend up to first half of 1990 which stood at 2.5 percent level from the second

half of 1990 the rate started to decline gradually. Therefore demographic transition still is under

process in Nepal.

0

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44

3.1.3 Fertility rate

Graph 3.3


The line graph shows the state of total fertility rate per woman from 1961 to 2008. By the graph we

know that the TFR was remained more than 6 births per woman up to first half of 1970. From

second half the decades the TFR started to decline gradually. At the latest year that stood at below

than three births per woman. The fertility transition started since late twentieth and sill is high than

developed nations.

3.1.4 Life expectancy

Line Graph 3.4


01234567

Fertility rate, total (births per woman)

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Life expectancy at birth, total (years)


45

The above line graph represents the level of the life expectancy at birth in Nepal from 1961 to

2008. The line is growing in steadily upward over the period. There seems well progress in the

aspect of life expectancy than other economic and demographic factor

3.2 economic outputs

3.2.1 GDP level

The time series data of the annual GDP level inform that historical sequence of economic growth. It

is deficiency of Nepalese economic analysis there are available only short periods economic data.

Now we have the data set of GDP level from 1960 in World Bank data base. Therefore it is difficult

to long term historical analysis of Nepalese economy with quantitative approach. The following

graph presents the historical series of real GDP level in US$ terms of 2000th price and nominal GDP

level in current price in US$ terms.

Line graph 3.5

Gross domestic production


Above line graphs presents trends of total GDP growth volume from 1960 to 2008. The graph

presents real and nominal GDP level in US$ terms. On the graph we can see that the real GDP

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GDP Level in US$in million

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US$)


46

growth remain very slow speed up to mid 1980s after that raise rather fast than before. The mid

1980 was a turning point of the economy adopted partially liberalization policy. The economic

liberalization is reflected slightly on total GDP growth speed.

3.2.2 GDP growth rate

The following line graph presents annual real GDP growth rate in Nepal.

Line graph 3.6


The GDP level growth depends on the annual growth rate of the GDP. The line graph presents

trends annual growth of GDP in Nepal. The pattern of growth rate line is fluctuating at like stable

trend. Up to mid 1980 that is highly fluctuating at lower level average these seems 6 times the rate

was fell down below in the minus level. After the mid 1980s the line is normally fluctuating at

higher level average than before. In this period only in 2002 set back the line at touched the zero

level line. The five year average line has shifted slightly above from the mid 1980s. The higher GDP

growth rate contributed the higher total GDP growth in later period. The growth rate average

seems slightly down after 2000 due to intensive of arm conflict and political turmoil in this period in

Nepal. That is evidence of the internal conflict and political instability adversely affects in smooth

economic progress.

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3.2.3 GDP per capita

GDP per capita level indicate average living standard of the population. The following line graph

presents GDP per capita level of both real and nominal in US$ terms.

Line graph 3.7

GDP per capita level


The above line graphs present GDP per capita level growth of Nepal, from 1961 to 2008 time span.

The graph depict real and nominal per capita level over the period real and nominal GDP per capita

level in US $ term. The trend line pattern of GDP seem similar to GDP level slightly more stable due

to population growth rate reduce the per capita growth level to catch up the GDP growth level. The

per capita growth also slightly improved after mid 1980s

3.2.4 GDP per capita growth

The following graphs presents the real GDP per capita growth rate of Nepal.

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Line graph 3.8


The lines graphs is present annual percentage growth rate of GDP per capita of Nepal of the study

period. On the graph we can see that before the mid 1980s the line is fluctuating highly around

zero level average. After the mid 1980s the line is moderately fluctuating at higher level average

than before. That was set backed in 2002 which fell down below the minus level the average level

also slightly downed after that. The five years average was below the minus level in first half of the

1970s. After second half of the 1980s that shifted above than before and slightly downed after

2002 and at latest time that is rising to upward. The per capita GDP trend also reflect the historical

economic and effect to political situation of the country.

3.3 Industrial development

3.3.1 Sector wise production

Gross domestic production is comprises of sector wise production in an economy, similarly total

growth rate of an economy depend on sector wise growth performance. Industrial development is

driving force to economic development. To analysis an economy has to observe sector wise

contribution and performance of the economy. The following line graph presents sector wise

contribution and growth over the period of 1970 to 2008 of the Nepalese economy in constant

price of 1990 in US$ terms

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GDP per capita growth (annual %)

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Line graph 3.9

Data source: United Nation, Statistical Division,2010

The line graph presents picture of sector wise real economic growth trend in US $ term of Nepalese

economy from 1970 to 2008. The over all sectors growth trend is likely stable in 1970s after that

growing gradually. The growth volume seems higher rate of agriculture sector and others services

sector. Manufacturing and construction sectors growth is slow and low level and the transport and

communication sector’s growth seem slightly faster growth in later period. In case of trades and

hotel-restaurant sector, it was growing along with other sector up to 1999 but after then the

growth stagnate up to now. the decreasing of tourism due to arm conflict and security problem

contribute the downed and stagnate the hotel/restaurant and transport sector which is yet to

overcome the former trend.

3.3.2 Growth rate of Agriculture & forestry

The agriculture sector has been remained largest contributor to Nepalese economy. Growth

performance of this sector heavily influence on overall growth performance of the economy.

Following line graph presents growth rate of the sector over the period.

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Line graph 3.10

Data source: United Nation, Statistical Division, 2010

The above line graph shows trend of agricultural sectors value added annual growth rate from 1971

to 2008. The value added growth trends seem very erratic up to 1993 with stable average higher

level than later. After that the trend line fluctuating moderate to down ward trend. There is

decreasing in industrial value added growth in later period gradually.

3.3.3 Manufacturing industry

Manufacturing sector is very important aspect of economic transformation of a country. Following

line graph presents growth rate trend of manufacturing industry in Nepalese economy.

Line graph 3.11


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The line graph shows the trend of manufacturing value added growth. That is also highly fluctuating

up to 90th in latest period that falling sharply. Therefore industrial and manufacturing growth

hindrances and set back seem major defect in Nepalese economic development process. The

economic liberalization did not support the industrial development in Nepal even hampered due to

lack of efficiency and competitiveness to foreign industry. The falling trend of manufacturing

growth is main factor to contribute increasing foreign trade deficit of the country.

3.3.4 Construction industry

The construction activities indicate building trend of infrastructure and physical structure in a

nation. Speed of construction means that speed of expansion physical capital in the country which

fundamental component of economic acceleration. The following line graph presents trend of

construction sector growth rate in Nepalese economy

Line graph 3.12


3.3.5 Services sector

The services sector of in an economy is indicate modernization. Increasing trend of this sector is

latest form of structural transformation of economy. In Nepal services sector stand as the largest

share contributor to GDP in latest period, more than 50 percent this sector contributes. Therefore,

it is important to observe growth rate of service sector of the economy. The following line graph

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presents annual growth rate of the services sector over the period. From only mid 1980s this

sector’s information available in further break down form in to trade , restaurants and hotels ,

transport and communication , and other activities. On the graph we can see that this sector

growth has remained normal not as need for developing country should have more than that

Line graph 3.13


The above line graph show growth trend of the service in Nepalese economy. Around 1984 this

had downed to negative magnitude and from 2000, trade restaurants and hotels sector’s growth

rate seems bitterly disturbed. This time was peak of arm conflict in Nepal, which was reason for

nearly collapse of tourism industry due to highly unsecure situation of the country.

3.4 Structural pattern of Nepalese economy

The economic structure is particular composition of economy it has various dimension. Category of

economic structure could be characterized by domination of particular type of sector in economy.

The structure of economy can be measured by different perspectives. GDP source, employment

engagement, residential location pattern are some of them which are mentioned in this paper.

Major share in GDP, major share in employment of the agricultural or primary sector, majority

share of rural population in total population characterize the economic structure traditional,

underdeveloped and backward economy. Contrary of that: major share in GDP and employment of

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Trade, restaurants and hotels Transport and communication Other Activities


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industry and services or modern sector and urban population majority ratio indicate modern,

developed and forward economic structure. Therefore transformation from traditional sector and

area’s domination to modern sector domination or majority is called structural transformation of

economy. Modern structure of economy is taken as developed state of economy and country.

Structure transformation theory explains the development process with perspective of structural

shift process from traditional to modern sector. Nepal is a developing country; it is on the way of

structural transformation process traditional to modernization in every aspect of socio-economic

life the country. This paper also is an attempt to study of Nepalese economic development process

with the perspective of structure transformation. Structural transformation can understand as

sense of economic transformation. There are selected three dimension of structure shift process of

Nepalese economy such as sector wise contribution share to GDP, employment share to the

sectors and level of urbanization of population.

3.4.1 Urbanization

Urbanization means ratio of urban residential population in total population. it is an important

dimension of socio-economic structure. Following line graph presents ratio of urban and rural

population over the period.

Graph 3.14

Source: World Bank, 2010

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Rural population (% of total)

Urban population (% of total)


54

The above graph shows that rural/urban population ratio and changing trend of the ratio over the

period. According to the graph there was negligible portion people (3.5%) lived in urban area in

1960 and the decades. Increment trend of urban population ratio in Nepal seems very slow. In

2008 that the ratio is only 17 percent of total population, it means more than 80 percent Nepalese

people are still living in rural area. Therefore, Nepal has remained far behind from modernization in

the aspect of urbanization.

3.4.2 Sector wise share in GDP

The structural pattern as the contributing source of the GDP is an important aspect to analyze the

economic status of a country. The higher Share to GDP of non-agriculture sector is assumed to

desirable condition of modern economy. The shifting share of GDP from agriculture sector to non

agricultural sector such as industry and service sector is called structural transformation of the

economy. The speed of the structural transformation determined the speed of economic growth

the economy.

Graph 3.15


The above area graph shows shifting trend of structural pattern of the Nepalese economy in term

of GDP share. By the graph we know that the GDP share of agriculture sector is around 70 percent

in 1970 that scenario seems likely opposite in 2008 with nearly 30 percent share of the sector. In

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the graph the area of agriculture is decreasing and non agricultural sectors increasing gradually

over the period. In the non-agricultural sector, the ratio of manufacturing and construction sector

increasing slightly and the trade and other services sector‘s ratio is increasing more rapidly. There is

evidence of less contribute of industrial manufacturing sector in increment of the GDP ratio of non-

agricultural sector. There is still remarkable share of agriculture sector in Nepalese economy.

3.4.3 Agricultural value added

Following line graph presents changing share ratio in percentage of agricultural sector in Nepalese

economy.

Line graph 3.16


The above line graph shows that share of agricultural added to GDP decreasing gradually over the

period. The ratio of agriculture value to the GDP seem nearly constant up to mid 1970s decades

around 70 percent level ,from that started to fall against non-agricultural sector and at 2008 the

share of agriculture value added stands about 34 percent of the GDP. Therefore contribution of

the primary sector to the GDP is decreasing continuously, however, it is yet to come to the

developed countries level.

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3.4.3 Industrial sector share

Industrial sector represent modern sector of economy. The following graph present share shift

trend of Nepalese industry.

Line graph 3.17


The above line graph shows the industrial value share ratio over the period. According to that, up

to mid 1970s decade, industrial value added share to GDP was remained at only about 10 percents.

In first half of 1990s that was stood around 25 percent, now days that industrial sector downed to

17 percent of GDP.

3.4.4 Services sector value added share

Services sector domination is main characteristic of modern economy. Share of GDP and

employment shift from agriculture to industry is taken as first stage of structural transformation

and shift from industry to services sector is called second stage of the transformation. Therefore a

services sector activity is important to modern economy. The following table presents service

sector share in GDP and shifting the share ratio over the period.

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Line graph 3.18


The above table shows that contribution share of service sector to GDP and changing trend of the

share from 1965 to 2008. On the graph it can be seen from mid 1960s to mid 1970s share of service

sector was around 20 percent of the GDP, after the mid 70 the share of the sector has been shifting

higher level gradually and in 2008 that the service sector share stood around 50 percent to the

GDP. Services sector seems flourishing and viable to Nepalese economy.

3.4.5 Employment share in Nepalese economy

Composition of employment share is another dimension to evaluate of Structural pattern in the

economy. Labor force transfer to modern sector such industry and service is an important indicator

of economic transformation or development. therefore it seems very important explain the

structural transformation process of Nepalese economy with the perspective of sector wise labor

force share and shifting nature from agriculture sector to non-agriculture sector. However, there

found problem of historical time series data of sector wise labor force engagement in Nepalese

economy, that is not available in officially recorded form. Therefore the time series data of

employment share was extracted from compiling different time point’s data and collected from

second hand articles. There was available ten yearly interval’s information of employment and that

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was modified yearly time series form with average distribution in the gaping years. The following

line graph presents employment share in non-agricultural sector.

Line graph 3.19

Data source: Basnet-2009, Devekota-2007

The above line graph depicts the portion increment of employment to non-agricultural sector. The

employment share seems less than GDP share of the non-agricultural sector and the structural shift

from agriculture to non-agricultural sector in terms of employment is slow than in term of GDP

shared. The share of employment in non-agriculture sector only 3 percent of the total that stand in

2008 at 46 percent. The traditional agriculture sector contributes to GDP only about 33 percent

which still provide employment for 54 percent of total employee. That is major characteristics of

Nepalese economy the agriculture sector produce less but bear high dependency of employment

share. Therefore, labor productivity is low in the agriculture sector and remains relatively higher in

non-agriculture sector

3.4.6 Sector wise productivity shift

Following line graph presents relative productivity shift due to labor force share shift in Nepalese

economy.

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Line graph 3.20


The above table presents average productivity of per one percent employment to the percent

share of GDP in both agriculture and non-agriculture sector. There is trend of structural shifting

process from agriculture to non-agriculture in term of GDP share and employment share. The

shifting process of former term seems faster than later. The non-agriculture sector contribute

about 68 percent share in GDP but it provide only 44 percent shares in total employment in 2008.

In this way per one percent employment who engages in non agriculture sector more than 1

percent of the GDP in 2008. But in the contest of 1965 there engage only about 3 percent of total

employment in non-agriculture sector where as they produce about 30 percent parts of the GDP in

this way the productivity of per one percent employee who engage in non agricultural sector they

produce about 10 percent part of the GDP in 1965. The line graph shows that decreasing average

productivity of per one percent employee more in non agricultural and nearly stable in agriculture.

Average productivity is less than 1 percent in agriculture sector and more than 1 percent in non-

agriculture sector that difference is the space which can still provide incentive to transfer labor

force to non agricultural sector.

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3.4.7 Gross capital formation ratio to GDP

Overall economic growth rate of Nepalese economy seems poor than expectation and required. A

major determining factor of growth acceleration of economy is capacity and real performance of

investment or capital formation in the economy. The gross capital formation ratio to GDP indicates

the investment trend and nature of the economy. The following line graph provides the historical

trend of gross capital formation ratio to GDP in Nepal.

Line graph 3.21


The gross capital formation ratio to GDP is a determining factor of economic growth. The line graph

shows the trend of gross capital formation ratio of Nepal over the period. The ratio is very low

before the 1970s. In 1970s decades there seem steeply rising in the ratio of the gross capital

formation and 1980s decades the increment remained in moderate growth trend that was set back

in around 1990 that was time of trading problem with India and people’s movement that

consequences to end of partyless Panchayati system of active monarch and established multiparty

democracy and constitutional monarchy. Despite slight decrease at 1990, in this decade the ratio

was rising faster and at the end of the decades again the ratio downed due to intense arm conflict

and political dispute in Nepal and the latest period that seem again raising trend to upward.

Despite the raising trend of the gross capital formation ratio to the GDP level that was no sufficient

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to break the stagnate rate of economic growth that was very far below than East Asian miracle

economy.

3.4.8 Foreign trade

Volume and ratio of international trade in the economy indicate openness and internationalization

of the economy. Open economy is assumed favorable to development of country. It is important

dimension to measure economic modernization. The following line graph presents foreign trade

ratio to GDP along with export and import break down.

Line graph 3.22


The line graphs show the scenario of foreign trade portion to GDP of Nepal over the period. That

portion is increasing up to 1997. At that time the ratio was picked up to more than 64 percent of

GDP but after then gradually falling the percent of foreign trade of Nepal. The trend line is

combined volume of export and imports both. Up to 1997 there is gradual increment both export

and import factor after that export is falling gradually and import portion raising slightly that was

downed in 1999. Another characteristic of foreign trade of Nepal is that import portion always

remains higher than export. The gap of export-import is increasing generally over the period that

seem slightly narrowing around 1999 but after 2000 the gap widening rapidly due to continuously

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62

falling trend of export and raising trend of imports. Therefore increasing trade foreign trade deficit

is being very severe problem of Nepalese economy in latest time period.

3.5 Fiscal public expenditure

Government is taken as the main agent for the economic growth in specially developing country

like Nepal. A major contribution government to the development is the policy and plan of fiscal

expenditure by public budget. Governments can create incentive and favorable environment by

investing in infrastructure and other developing work. Therefore the part of development

expenditure of government is a determining factor of economic development.

Line graph 3.23

Source: Finance ministry of Nepal, economic survey, 2010

The line graphs presents amount of total public expenditure along with regular and development

expenditure. The graph shows the volume of nominal public expenditure raise steeply from

2004/2005. The regular expenditure has surpassed the development expenditure from 1997/1998.

The following graph shows ratio of development of regular expenditure of government of Nepal

from 1974/75 to 2009/10. The ratio of development or capital expenditure seems higher than

regular expenditure up to 1993/94 share of development expenditure stood more than 60 percent

out of total expenditure but the scenario become opposite after 1998 . The share of development

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expenditure falls down rapidly. From 2001 to 2006 the regular expenditure share remained more

than 70 percent of the total expenditure. After 2006 there seem slightly improve in development

expense share.

Line graph 3.24


The reason of raising regular expenditure than capital expenditure was the intensifying Maoist

insurgency in Nepal after 1998 especially by heavy increase in security expenditure and shrinking

developing expenditure.

3.6 Infrastructural development

Economic developments depend on infrastructural development. The power, transport and

communication are basic infrastructure of in the society. Electricity, road and telephone are main

modern means of power, transport and communication in the context of Nepal.

3.6.1 Electricity

The following line graph present progress the electric power consumption in KWH per capita over

the time period in Nepal. There is very low level the per capita electric power consumption up to

1970s decades. From 1980s decades there seems starting the progress in this sector. The growth is

steadily up war up to 2004, after that the levels remain constant. The reason of stable level in latest

period is due to unstable the political situation and security threat stopped the implement the new

01020304050607080

Perecent share between development &regular expenditure out of

total public expense

Development

Regular


64

large scale hydro electricity project in former year so the nation could not added the electricity

power more in this period.

Line graph 3.25


3.6.2 Road

The following graph shows the motor able road expansion trend during the period of 1975 to 2008.

The progress in road expansion remained high in the 1990s decade after that seems stagnates in

the expansion. This sector also seems disturbed by political disturbance of the country.

Line graph 3.25


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1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

Electric power consumption (kWh per capita)

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3.6.3 Telephone

Line graph 3.27


By the graph we know that , the expansion of telephone took speed from second half of the 1990

that was steeply raise from 2005. The steeply raising is the contribution of mass level mass service

introduction in specially city by Telecom Company in latest period. Therefore this sector is

progressing speedily despite political turmoil in the country.

3.7 Summery

In summarization, the real GDP level growth seems gradual it is 7305 million US$ in 2008, at

constant price of 2000. The nominal GDP stands at 12612 million US$ in 22008 The GDP growth

rate was remained low average before 1985 after that it was improved in average. It was highly

volatile in the Panchayati era, six times declined below into minus rate but after 1990 only in 2002

the growth was declined close to zero. The growth in per capita GDP was some time in minus in

191970s, that was improved after liberalization and democracy. The gross capital formation ratio

also was increased in later period, despite some decline in 1990 and 2002. The ratio of foreign

trade was gradually increasing up to 1998, after that slightly declining. It was above than 60

percent of GDP in around 1998 but in 2008 just above only 40 percent of the GDP. Both export and

import ratio declined after 1998, the export declined more than import. The export ratio is

continuously declined where as import again started to rise. The increasing trend in imports and

0

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1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

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decreasing trend in export that has contributed sharply increasing in trade deficit in latest period,

that is around 20 percent of the GDP. The agricultural growth rate was highly fluctuating over the

period, the growth rate of this sector is heavily influenced by natural climate situation, and good

harvest is depended on mercy of nature. The manufacturing sector growth rate seems also

irregular fluctuating, very volatile it is also heavily influenced by political climate of the nation. The

construction sector growth rate is also highly fluctuated in the past, some time it up to 50 percent

and sometime downed to 15 percent annual growth. After the 1990, it is likely stable with around

5 percent annual growth. The service sector growth rates after 1990 seem more than 5 percent. In

the pick time of the Maoist insurgency, the trade and hotel-restaurant business bitterly set backed

up to minus more than 10 percent. After the peace process from 2006, it seems improving trend.

The structural pattern of the Nepalese economy, it is informed by sector wise share of GDP. The

share GDP gradually shifting to modern non-agriculture sector from traditional agricultural sector

during period of 1961 to 2008. In the latest stage largest share is from service sector about 50

percent, the agricultural sectors remain in second position with around 32 percent and the

industrial sector covers rest part the share. The share of agricultural sector was about 70 percent

up to mid 191970s decade. The value share of GDP in industry was increasing steadily from mid

1970s but in the second half of the 1990s its’ ratio became stable, after that it is declining by

remarkable ratio, this decline share trend is continuous in later period. The service sector share

was started to increase gradually from the second half of the 191970s decade. It is increasing

steadily in average up to current period. The sector wise real GDP level growth is normally upward

growing with slight variation. In case of trade and hotel-restaurant it has diverted to down ward

direction after 1998, it was due security crisis in this period prevailed in Nepal. The employment

share to non agricultural is increasing steadily specially from 191980s; in 2008 it stood

approximately 46 percent, where as in 1961 it was only less than 4 percent. The sector wise

productivity of one percent employment seems high in non agriculture than agricultural sector.

But average rate of productivity is gradual declining of the non agriculture sector still is above than

unite. The public sector, the ratio of development or capital expenditure is remained below than

regular expenditure after 1999. The ratio of urban population is increasing gradually; in 2008 it

seems about 16 percent. Total fertility rate and population of growth is declining in later period.

The life expectancy is increasing gradually over the timed. The per capita electric consumption


67

increased up to 2005, after that it became stable. The road extension increased gradually up to

2001 after that the extension nearly stopped after 2006, it is again started to rise. The telephone

expansion was vertically rising after 2006; it was mass expansion of mobile phone. It was increase

by 3.5 million within the 3 years.

In conclusion, overall macro economic factors were comparatively favorable after liberalization and

democratization, in rather than authoritarian political regime. But unfortunately due to intensified

violence conflicts and political disputes in at around 2002 adversely affected economic progress in

every walk of economic life. The share of GDP and lobar force from agriculture sector to non

agricultural sector is continuing gradually over the period. Therefore, the structural transformation

process in Nepalese economy is still running, the acceleration of the process is slightly growing in

later years.


68

CHAPTER-4

Empirical analysis of the economic factors

This chapter is related to statistical relationship among the selected economic variables. It is an

effort of verifying the hypothesis by statistical evidence. Condition and structural state of economy

should have own historical back ground and causing factors. The factors and their nature of effect

can be assessing from the empirical calculation with appropriate statistical tools. In the context of

Nepal in former chapter, it has been overviewed the historical growth trend of Nepalese economy

and its’ important major component. In this chapter it is going to calculate empirical relationship

between following variable by which can be examined the theoretical hypothesis of cause and

effect sequence in the context of Nepalese economy. The impact of structural shift on GDP pc and

life expectancy and leg year effect of economic input variable such as infrastructure, capital

formation, foreign aid and government’s contribution on structural shift in terms of employment

share and GDP share to modern sector.

4.1 Variables

Following variables are used to the empirical analysis of economic transformation process.

Symbols Variables Description of variables

X1 1stdlnGDPC logged first different Real GDP per capita level (in US$),

X2 1stdlnNn-agri.empl logged first different Employment share in non agricultural sector(percent of total)

X3 1stdlnElectricconspc logged first different Electric consumption per capita (in KWH)

X4 1stdlnRoad Logged first different Road extension (in K.M.)

X5 1stdgcapi.form. logged first different Gross capital formation ratio (in percent of GDP)

X6 1stdnnagrigdp

logged first different on non-Agriculture share in total GDP(in percent of

gdp)

X7 1stlnlifeexp. logged first different Life Expectancy at birth(in years)

X8 1stdlnforaid logged first different Foreign Aid receipt ,million US$(in current price)

X9 1stdlngcapi.expense

logged first different Development expenditure of government

(in ten million rupees)

Respective historical data from 1976 to 2007 are used for the calculation. Those data also has

presented on graph and described in previous chapter the historical macro economic performance

of Nepal. Due to missing data of some variables before 1975 and 2008, there could not include the


69

whole time span data which have displayed in graphical and tabulation presentation. The time

series time has modified by logged then taking first difference. Following table presents correlation

coefficient of the afore mentioned variables which are going to use in empirical analysis

2.4 Correlation matrix

X1 X2 X3 X4 X5 X6 X7 X8 X9

1stdlnGDPC X1 1.00

1stdlnNn-agri.empl X2 0.03 1.00

1stdlnElectricconspc X3 0.01 0.14 1.00

1stdlnRoad X4 0.13 -0.04 0.30 1.00

1stdgcapi.form. X5 -0.08 0.03 -0.07 -0.40 1.00

1stdnnagrigdp X6 -0.08 0.00 0.15 -0.02 0.52 1.00

1stlnlifeexp. X7 0.04 0.21 0.09 0.19 -0.08 -0.03 1.00

1stdlnforaid X8 -0.04 -0.18 0.07 -0.07 0.00 0.22 -0.23 1.00

1stdlngcapi.expense X9 0.07 0.09 0.12 0.16 0.08 0.05 -0.35 0.22 1.00

By the correlation matrix it is known that almost pair of the variables has weak and unexpected

negative correlation coefficient. Therefore the table show that the major variables are poorly

associated each other the hypothesis of strong and positive correlation between economic input-

output factors and structural transformation of Nepalese economy is not supported by the

correlation parameters. However, there are regression model which could be considerable

economically.

4.3 Effect on GDP per capita

The GDP per capita is the main indicators of economic prosperity. The state of living standard is

compared with indicator in comparative analysis of the international economy. The low level of the

GDP per capita of Nepal indicates that low economic development. Therefore one of major aim of

the development effort remains to raise the GDP per capita. For that there can be observed the

empirical relationship between GDP per capita and structural shift process in terms of employment

share and GDP share to non-agricultural or modern sector.

It is taken the GDP per capita as dependant variable in simple regression model. That is the

hypothesis that structural shift agricultural sector to non agricultural sector is positive way of

economic progress. The speeds of development depend on the velocity of structural shift. The


70

structural pattern of economy measure mainly in terms of GDP share ratio and employment share

ratio the GDP per capita level variable represent economic progress and GDP share and

Employments share shift are represents structural shift variable

This model for examine of employment share and GDP share shift on per capita GDP

�̂� = 0.0156 + 0.0437�� − 0.0394��

1stdlnGDPC

Coefficients

Standard

Error t Stat P-value R Square Observations

Intercept 0.015641 0.015432 1.013586 0.319163 0.007242 32

1stdlnNn-agri.empl 0.043671 0.251342 0.17375 0.863269

1stdnnagrigdp -0.03936 0.092528 -0.42542 0.673672

By the result of the regression calculation with excel; since positive beta coefficient of employment

share shift to non-agricultural sector indicates the positive effect on GDP per capita change the

dependant variable. It supports the hypothesis positive influence of the employment share shift to

non-agriculture on economic growth on per capita GDP growth. However, since insignificant p

value and weak R square it seems that no significant relationship between the variable.

Hence , negative beta coefficient p value insignificant at 5 percent, of the independent variable

indicate that shift share of GDP to modern-non agriculture sector has insignificant weak negative

effect on GDP per capita. It is unexpected sign the coefficient instead the normal hypothesis that

positive influence of structural shift to modern sector on economic. This result does not support

the hypothesis however since insignificant p value and very weak R square value it can conclude

that there is no more association between the variable. This result tells us economic growth of

Nepal has not been contributed by the structural shift

By the evidence of the above model explain that the structural transformation process has no

reflected on economic growth.

4.4 Impact on shift share of GDP


71

Higher share of non-agricultural sectors on GDP indicate in level of modernization of the economy.

The modernization process of Nepalese economy is yet to complete. Therefore, the following

model is specified to examine contribution of infrastructural development, gross capital

formation, foreign aid and government’s development efforts of on the transformation process.

�̂�� = 0.0552 + 0.0519�� + 0.3734�� − 0.04544�� + 0.0135� � + 0.0278��

1stdnnagrigdp

Coefficients

Standard


Intercept 0.055203 0.006333 8.716374 4.75E-09

0.217209 31

1stdlnElectricconspc 0.051894 0.119977 0.432534 0.669062

1stdlnRoad 0.37335 0.209996 1.777892 0.087589

1stdgcapi.form. -0.04544 0.09532 -0.4767 0.637717

1stdlnforaid 0.013471 0.055231 0.24391 0.809291

1stdlngcapi.expense 0.027765 0.076408 0.363377 0.719378

This model is specified on the basis of one year leg effect of the independent variables on the

dependent variables. There are five independent variables but not conducted validity test of model

specification due to some technical limitation. The regression calculation result shows that the beta

coefficients are not statistically significant since higher p value normal confident level. However

sign of coefficients is positive except gross capital formation. Therefore it is hard to conclude that

the empirical test strongly support the hypothesis of economic investment in different forms

positively contribute to the modernization the economy in the context of Nepalese economy. The

road expansion factor seems better effective than other aspects of input activities. The total capital

formation ratio factor seem opposite than expectation.

4.5 Influence on Employment share shift

Employment structure is another aspect of economy, higher share of employment in non-

agricultural sector or modern is taken as favorable situation for economic prosperity. In Nepal

majority portion of people are still involving in traditional agricultural primary sector. The

transformation on employment share seem slow, there is more space remained to be as level of

developed country. Therefore, it is needed to examine the more influencing factor to speed up the


72

process. The following model is formulated to test the factors with assumption of positive effect.

The independent variables are same as previous model for GDP share shift transformation test.

This Model is specified on the basis of least squared regression calculation for Effect on

employment share shift to non-agricultural sector

�̂̂�� = 0.055203 + 0.039�� − 0.0679�� − 0.015�� − 0.0258� � + 0.0558��

1stdlnNn-agri.empl

Coefficients

Standard


Intercept 0.055203 0.006333 8.716374 4.75E-09

1stdlnElectricconspc 0.039 0.046 0.846597 0.405251

0.172938 31

1stdlnRoad -0.0679 0.0806 -0.84295 0.407251

1stdgcapi.form. -0.015 0.0366 -0.41088 0.68466

1stdlnforaid -0.0258 0.0212 -1.21742 0.234813

1stdlngcapi.expense 0.0558 0.0293 1.90305 0.06861

The specified model for estimation of employment share shift process on the basis of one year

lagged effect, seems different from expectation. Beta coefficient’s sign of three variables out of five

obtained negative which is opposite from expectation, only two variables: electric consumption

and government’s capital expenditures show positive impact. The development expenditure seems

better effect on the model since smallest p value than other independent variables. The

preciousness of the model seems similar as previous model almost variables insignificant p values

in normal confidence level. The model misspecification test also has skipped therefore the

estimation model not well support to the hypothesis, positive association of the dependent and

independent variable in case of the model.

4.6 Effect on life expectancy

The models with dependant variable as the life expectancy is a purpose of examine the effect of

economic variable to social variable. The life expectancy represents the social demographic variable

which is assumed to be closely relative to economic variable. The following model to estimate and


73

test of impact of structural transformation level in terms of employment share and GDP share to

modern sector on life expectancy according empirical fact of Nepal.

Effect structural shift to non-agricultural sector on life expectancy

�̂� = 0.011 + 0.017�� − 0.001��

1stlnlifeexp.

Coefficients

Standard


Intercept 0.010907 0.0009176 11.88637 1.14E-12

0.044505 32

1stdlnNn-

agri.empl 0.017145 0.0149453 1.147198 0.260677

1stdnnagrigdp -0.00101 0.0055019 -0.1834 0.855762

The result shows the positive influence of non agriculture employment share on the life expectancy

however the parameters seems statistically insignificant at 5 percent level and the model seem

very weak since very low R square value and there seems unexpected negative sign of coefficient of

GDP share shift variable. Since insignificant coefficient and weak model, there seem no evidence of

the directly relationship between the variables .Despite the expected sign of employment share

shift variable’s the coefficient, the model seems statistically insignificant.

4.7 Summery

In summing up, according the results of simple regression analysis of the variables which are listed

above, those represents major indicators in economic life of Nepal respective parameters almost

are not statistically significant even one year leg. Very weak R square coefficient and in some case

opposite sign of beta coefficient than expected as the theoretical hypothesis and assumptions. This

failure result to estimate the casualties of those economic variables might have improper approach

of calculation. The time serious analysis may be suitable for that due to various limitation here

could not apply other approach of quantitative analysis of the economic tendency. Even though the

statistically insignificant parameters which are unable to explain corresponding independent

variable for the dependant variable in quantities way, however, the results are economically

considerable. The very weak and negative correlation association between economic variables tells


74

that economic stimulating factors such as gross capital formation, infrastructures, and foreign aid

have not produced sensitive effect or are not utilized properly those resources. Structure

transformation process is not enough reflected on economic growth. In conclusion, the influence

of determining factors for economic growth and structural transformation like investment,

infrastructural development and international supports seems very weak effective and inefficient

and statistically insignificant.


75

CHAPTER-5

Concluding remarks

The economic transformation of Nepalese economy is found relatively sluggish by the evidence of

growth rate. The trend of the GDP growth rate seems historically slows. It has remained below than

the growth rate condition that according to Todaro; to sustain growth of the economy which is

required 5 to 7 percent annual growth. The structural aspect of Nepalese economy still is not

transformed to modern state. More than 55 percent population economically depended on

traditional agricultural sector and this sector still provides about one third part to GDP. The speed

of the transformation of economic structure, agriculture domination to modern sector domination,

in term of GDP share and employment share, is found relatively slow.However; the existing speed

of the transformation is not seen the reflection on economic growth, on the basis of the

transformation should have more high GDP growth than present level. Without high productivity in

both agricultural sector and modern sector the transformation could not provide the expected

economic growth, due to structural transformation. The empirical evidence tells that the structural

share shift to non agricultural sector is not sufficient condition for high economic growth in the

context of Nepalese economy

The most effective factors for the economic transformation are performance of production sector

such as agriculture and manufacturing industry those seem very volatile. The agricultural

production depend on natural climate mostly, and the manufacturing production heavily affected

by political environment of the country. The effect of economic liberalization seems hampering the

domestic manufacturing of Nepal. Manufacturing growth rate and its GDP share ratio is declining

after 1990. Due to low productivity and weak competitiveness of the domestic industry which

could not sustain in open market economy are adversely affected by liberalization and openness.

The trade and hotel-restaurant sector nearly crashed in the time of intensive violent conflict due to

climax of Maoist insurgency. Therefore lack of favorable security situation was nearly collapsed the

tourism industry in Nepal that is why the hotel-restaurant sector victimized in the conflict situation.

The gross capital formation seems higher than theoretically refers which is at least 21 percent of

GDP. In later period, it has been about 28 percent of the GDP. The empirical evidence show that it

has positive influence on structural shift share of GDP to modern sector but not strongly correlated


76

to GDP per capita growth. The productivity of capital investment seems very low as mentioned in

previous studies. The infrastructures development impact has not seemed effective on structural

shift and economic growth, it is seems same nature of foreign aid investment, so there is question

of productive utilization of the infrastructure and the foreign resources.

By the overview of historical trend of macroeconomic performance of Nepal the political situation

seems strong determining factor of economic transformation of Nepal. The authoritarian political

regime such like Party-less Panchayati system, direct rule of king and violence conflict such as

Maoist insurgency in Nepal, are bad luck for Nepalese economy. It is justified the relevancy of state

should plays role to manage the social conflict peacefully, preventing those from to break out into

violence war and stimulating development. In the context of Nepal the state, political institution

and the leadership has failed to play the roles properly. It can accept the assumption by the

evidence of the Maoist insurgency was the outcome of the management failure of the state which

is contributing heavily paralyzed the economic development of Nepal. The conflict which can

emerge in the process of structural transformation due to change in relative position of social

group that should have success in resolution in peaceful way without heavy cost is the function

and efficiency of the state. The political instability and inefficiency seems a major obstacle of

Nepalese economy. Lack of productivity and efficiency in production sector seems serious

drawbacks of Nepalese economy. The lack of efficiency in managerial capacity Nepal could not

utilized the resources properly and could not capture the advantage of internationalization and

open market. The lacks of the competitiveness of Nepalese industrial sector reflect on declining

export and sharp raising the trade deficit.

It can conclude by the study that the scientific investigation of problems and prospective of the

Nepalese economy and proper diagnosis of the root causes of economic problems; the structural

transformation perspective also seems inadequate since insignificantly weak association between

economic variables and structural shift rate. The problem is not only in uncompleted structural

transformation for expected development of the economy. There is so much complexity of

Nepalese economy and contemporary socio-economic environment in the world. It is clear that

Historical weak economic growth performance is remained major characteristics of Nepalese

economy. The almost results of previous study are supported by results of this study. According to


77

that lack of capital investment, lack of economic reformation or liberalization and lack foreign aid

and investment are not major reason for the slow transformation pace of Nepalese economy. The

political environment aspect seems decisive factor of Nepalese economy. The non-democratic

political regime, political instable sate and violence conflict situation seems major obstacles for

smooth economic development in Nepal. The findings of this study have not contradicted to

previous study. Since the structural transformation hypothesis also not significantly reflected on

economic growth in this study. Therefore it is important to consider on the suggestion and

recommendation in the previous research; such as low agricultural productivity, lack of human

resources, lack of suitable political environment, weak public sector performance, growing trade

deficit and inefficiency to utilize economic resources seem major causes for economic development

problem which should have solved. Nepal is a least developed country; therefore numbers of

economic problems remains interconnected and sequential form. The economic problems derived

from social and political problems. The vicious cycle situation prevails in the underdevelopment

countries like Nepal. The cause effect sequence of problems seems deepening in to spiral way.

Therefore proper diagnosis and find out the possible remedy of the depth problems need wide and

depth research which is out from the limitation of this course thesis paper. The previous studies in

some extent have tried to investigate of the chronic economic problems with social and political

prospective. There found an example of cause and effects sequential chain problems such as;

poverty and inequality fueled the violence conflict, the conflict create security problems and

discouraged economic activities and hampered on developmental problems, which contribute to

economic stagnation, that economic stagnation and negative growth creates unemployment,

further poverty and inequality. The deepening security problem creates political instability and the

political instability resulted economic stagnation and negative growth in some important sectors.

In this situation difficult to identify the main and derived problems and same difficult to find out

the best way of the solution .There are some important recommendations that improvement in the

efficiency and capability to utilize resource, development of human capital, and maintain the

political stability, proper utilization of information technology. This study also re-enforce on the

suggestion and recommendations to Nepalese economy. Out of them the concept ‘efficiency’ can

be assumed as key measure for Nepalese context. The relative level of efficient quality and

capability is inevitable to the every walk of social life such in economy, politics and management. In


78

lack of proper efficiency contribute to wastage resource and time. The political and bureaucratic

corruption and inefficiency misuse and underuse the available resources. That further discourage

to receive external and internal supports which make deficiency to manage the necessary fund for

infrastructure and human capital development and lack of infrastructure and human resources

could not gain the expected economic growth and development despite the investment and other

efforts. The inefficiency is root causes for less association between investment supply and output in

Nepalese economy. On the basis of this study and along with the above mentioned literature there

could be raised the crucial question that why not Nepalese society could not gain yet the required

efficiency to settle the political problems and proper economic management. To look the answer of

the question there need further research for Nepalese economy with implication other hypothesis,

perspective and approaches. Specially institutional and political economic theory may have more

relevant to analyze the Nepalese economy.


79

References;

Basnet, Yugendra (2009); from politicization of grievances political violence: An analysis of the

Maoist movement in Nepal, Development studies institutes, London school of economic and

political science

CBS, Central Statistical Bureau of Nepal, http://www.cbs.gov.np/

Central Bank of Nepal, http://www.nrb.org.np/

Cockburn, John (20008), trade liberalization and poverty in Nepal, center for the study of African

and Nuffield College (Oxford University) and CREFA

Devkota, Surendra Raj (2007); Socio-economic Development in Nepal: Past Mistakes and Future

Possibilities, South Asia Economic Journal 2007

Economic Survey (2010), Ministry of finance, Nepal

Hatlebakk, Magnus (2008), Inclusive growth in Nepal, www.cmi.no/staff/?magnus-hatlebakk.com

Iyer, Lakshmi & Quy Toan Do (2009), Geography, poverty and conflict in Nepal, Harvard Business

School, working paper,07-065

Khatiwada, YubaRaj; Sharma, Suman (2002), Nepal: country Report, Global Research Project,

South Asia Network of Economic research Institute (SANEI), November 2002

Kuznets, Simon (1971) Modern Economic Growth: Findings and Reflections The American Economic

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Majagaiya, Kundan Pokhrel (2007), A time series analysis of foreign direct investment and

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University, Shanghai, China

Ministry of finance, Nepal, http://www.mof.gov.np/

Nation Master’s website http://www.nationmaster.com/graph/eco_gin_ind-economy-gini-index,

Potter ,Robert B. Tony Binns, Jennifer A. Elliott, David Smith(2008); Geography of Development , An

introduction to Development studies , Pearson Education Limited , England, third edition , 2008


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Ra, Sungsup and Bipul Singh (2005), measuring the economic cost of conflict, Working Paper Series

No. 2 Nepal Resident Mission, June 2005 ADB

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RIDA (1997); The future challenges for Nepalese economy, march 1997, the research institute of

development assistance (RIDA), the overseas economic cooperation fund (OECF), Tokyo Japan

Sharma, Kishor (1997), Economic liberalization and manufacturing productivity in Nepal, Agenda,

volume 4, Number 2, 1997, pages 177-184

Sharma, Kishor (2000); Liberalization and Structural Change: Evidence from Nepalese, Economic

Growth Center, YALE UNIVERSITY, and Center Discussion paper no. 812

Sharma, Sagar Raj (2008), Role of private sector in Nepal’s transformation, Human and Natural

Resources Studies Centre , Kathmandu University

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28, No. 9 (Sep., 1988), pp. 945-957 Published by: University of California Press Stable URL:

http://www.jstor.org

Todaro, Michael, Stephen C. Smith (2003), Economic Development, Pearson Education Limited,

England, third edition, 2003

United Nation Statistics Division, National Account aggregate, database

http://unstats.un.org/unsd/snaama/dnlList.asp,

World Bank, Nepal Data base, http://data.worldbank.org/country/nepal


81

Appendix

The data set used in empirical analysis

years

1stdlnG

DPC

1stdln

Nn-

agri.e

mpl

1stdlnElectri

cconspc

1stdln

Road

1stdgcapi.

form.

1stdnnag

rigdp

1stlnlife

exp.

1stdlnf

oraid

1stdlngcapi.e

xpense

1976 0.02 0.05 0.33 0.18 0.04 0.08 0.01 0.13 0.19

1977 0.01 0.04 0.09 0.11 0.06 0.16 0.01 0.45 0.19

1978 0.02 0.04 0.09 0.02 0.13 0.02 0.01 -0.02 0.09

1979 0.00 0.04 0.04 0.05 -0.14 -0.04 0.01 0.57 0.15

1980 -0.05 0.04 0.07 0.02 0.14 0.07 0.01 0.18 0.17

1981 0.06 0.04 0.13 0.05 -0.04 0.02 0.01 0.11 0.31

1982 0.01 0.11 0.21 0.05 -0.03 0.00 0.01 0.10 0.29

1983 -0.05 0.10 0.06 0.03 0.14 0.02 0.01 0.01 0.04

1984 0.07 0.09 0.07 0.04 -0.05 -0.02 0.01 -0.02 0.06

1985 0.04 0.08 0.10 0.02 0.19 0.21 0.01 0.17 0.12

1986 0.02 0.08 0.22 0.04 -0.11 0.00 0.01 0.25 0.17

1987 -0.01 0.07 0.10 0.05 0.04 0.02 0.01 0.17 0.25

1988 0.05 0.07 -0.12 0.00 0.05 0.00 0.01 0.15 0.27

1989 0.02 0.06 0.18 0.01 -0.04 0.01 0.01 0.20 0.05

1990 0.02 0.06 0.07 0.22 -0.17 -0.03 0.01 -0.16 0.21

1991 0.04 0.05 0.06 0.06 0.11 0.09 0.01 0.06 0.03

1992 0.02 0.08 0.00 0.05 0.02 0.04 0.01 -0.04 0.16

1993 0.01 0.07 0.04 0.04 0.09 0.05 0.01 -0.18 0.09

1994 0.05 0.07 0.07 0.10 -0.01 -0.01 0.01 0.21 -0.07

1995 0.01 0.06 0.06 0.05 0.12 0.02 0.01 -0.04 0.23

1996 0.03 0.06 0.10 0.04 0.08 0.00 0.01 -0.10 0.06

1997 0.02 0.06 -0.03 0.12 -0.07 0.00 0.01 0.03 0.09

1998 0.01 0.05 0.03 0.04 -0.02 0.03 0.01 0.00 -0.23

1999 0.02 0.05 0.11 0.11 -0.19 -0.02 0.01 -0.14 0.10

2000 0.04 0.05 0.06 0.03 0.17 0.01 0.01 0.11 0.11

2001 0.02 0.05 0.09 0.07 -0.01 0.02 0.01 0.02 -0.13

2002 -0.02 0.04 0.04 0.01 -0.18 0.02 0.01 -0.08 -0.10

2003 0.02 0.04 0.04 0.01 0.06 0.02 0.01 0.26 0.00

2004 0.02 0.04 0.12 0.01 0.14 0.01 0.01 -0.09 0.03

2005 0.01 0.04 0.04 0.01 0.08 0.01 0.01 0.00 0.17

2006 0.02 0.04 0.01 0.02 0.02 0.03 0.01 0.19 0.08

2007 0.01 0.04 0.01 0.07 0.05 0.02 0.01 0.16 0.29


82

Foreign Trade in Ratio of GDP

years

Trade (% of

GDP)

Imports of goods

and services (% of

GDP)

Exports of goods

and services (% of

GDP)

Trade dificit

%of GDP

1965 21.69 13.92 7.77 6.16

1966 14.40 8.76 5.64 3.11

1967 13.83 6.95 6.87 0.08

1968 14.35 7.50 6.85 0.66

1969 17.23 10.22 7.01 3.21

1970 13.21 8.30 4.90 3.40

1971 14.53 9.13 5.40 3.73

1972 13.58 7.92 5.66 2.26

1973 16.98 10.37 6.61 3.76

1974 16.00 10.55 5.45 5.10

1975 22.27 13.37 8.90 4.47

1976 24.95 14.18 10.77 3.40

1977 26.11 14.32 11.79 2.53

1978 26.04 15.47 10.57 4.90

1979 27.75 15.97 11.78 4.18

1980 30.27 18.73 11.54 7.19

1981 32.52 19.62 12.90 6.72

1982 30.40 18.81 11.59 7.22

1983 31.55 21.32 10.23 11.08

1984 30.10 19.45 10.65 8.80

1985 31.53 20.00 11.53 8.47

1986 31.97 20.30 11.66 8.64

1987 32.72 20.91 11.81 9.09

1988 33.83 22.38 11.45 10.93

1989 33.35 22.28 11.07 11.22

1990 32.19 21.66 10.53 11.13

1991 34.68 23.18 11.49 11.69

1992 41.70 25.74 15.96 9.78

1993 47.19 28.76 18.43 10.32

1994 50.43 31.44 18.99 12.44

1995 59.49 34.52 24.97 9.54

1996 58.46 35.64 22.82 12.82

1997 64.04 37.71 26.33 11.38

1998 56.71 33.89 22.82 11.07

1999 52.57 29.72 22.85 6.87

2000 55.71 32.43 23.28 9.14

2001 53.72 31.39 22.33 9.07


83

2002 46.23 28.49 17.74 10.76

2003 44.25 28.55 15.70 12.85

2004 46.15 29.46 16.68 12.78

2005 44.06 29.48 14.58 14.90

2006 44.76 31.32 13.45 17.87

2007 44.34 31.30 13.04 18.25

2008 44.74 32.66 12.08 20.58

GDP, remittance and Foreign aid

years

GDP (constant

2000 US$)in

million

GDP (current

US$)in

million

GDP (constant

LCU)in million

GDP (current

LCU)in million

Foreign

Aid(in

current

US$)in

million

remittance

(current

US$)

1960 1355 516 103879 3873 8.62 -

1961 1381 532 105861 4053 10.73 -

1962 1407 574 107883 4374 9.04 -

1963 1434 606 109928 4616 16.22 -

1964 1542 659 118208 5023 19.49 -

1965 1523 735 116786 5602 17.88 -

1966 1630 907 125008 6909 15.18 -

1967 1605 842 123044 6415 13.97 -

1968 1615 772 123875 7173 10.90 -

1969 1688 789 129404 7985 10.84 -

1970 1731 866 132737 8768 23.43 -

1971 1710 883 131151 8938 23.84 -

1972 1764 1024 135240 10369 30.13 -

1973 1755 972 134595 9969 35.20 -

1974 1866 1218 143120 12808 32.02 -

1975 1894 1576 145205 16571 43.66 -

1976 1977 1453 151591 17394 49.63 -

1977 2037 1382 156165 17280 77.48 -

1978 2126 1604 163045 19732 75.79 -

1979 2177 1851 166907 22215 133.76 -

1980 2126 1946 163036 23351 159.99 -

1981 2304 2276 176637 27307 178.22 -

1982 2391 2395 183312 30988 196.79 -

1983 2319 2447 177854 33760 197.87 -


84

1984 2544 2581 195073 39390 193.93 -

1985 2700 2620 207060 46586 230.62 -

1986 2824 2851 216513 55724 295.01 -

1987 2871 2957 220185 63864 349.95 -

1988 3093 3487 237132 76906 408.35 -

1989 3226 3525 247399 89269 497.89 -

1990 3376 3628 258866 103416 422.84 -

1991 3591 3921 275351 123801 448.76 -

1992 3738 3401 286658 152714 430.11 -

1993 3882 3660 297694 175682 360.84 54825100

1994 4201 4067 322152 199272 445.82 50118520

1995 4347 4401 333326 219175 428.59 56822670

1996 4579 4522 351087 248913 388.42 44160130

1997 4810 4919 368812 280513 401.88 49458060

1998 4955 4856 379936 300845 400.76 67504910

1999 5173 5034 396701 342036 348.39 83462780

2000 5494 5494 421297 379488 387.23 111498200

2001 5758 5596 441519 411275 393.09 146985200

2002 5765 6051 442048 459443 361.52 678485900

2003 5992 6330 459488 492231 466.58 771072100

2004 6273 7274 481004 536749 425.09 822608900

2005 6469 8130 496026 589412 424.13 1211823000

2006 6709 9074 514460 654055 510.59 1453231000

2007 6934 10283 531682 728178 602.10 1733859000

2008 7305 12615 560124 818401 716.31 2727141000

Documents

STRUCTURAL TRANSFORMATION PROCES OF NEPALESE ECONOMY KRISHNA PRASAD