Economic models during political transitions

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Economic Models During Political Transitions
a Samriddhi Publication
www.samriddhi.org
ECONOMIC MODELS DURING
POLITICAL TRANSITIONS
JULY
2011
Samriddhi, The Prosperity Foundation
DISCUSSION PAPER

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© Samriddhi, The Prosperity Foundation
CONTENTS
1. Introduction to the issue
2. Rationale
3. Status Updates
4. Legal Framework overview
5. Government Initiative and its impact
5.1 Panchayat Era
5.2 Liberalization Era
6. International Experiences
6.1 India
6.2 China
6.3 East European Countries
7. Challenges and Opportunities for Nepal
8. Issues to be Resolved
9. Issues to be further discussed
References
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Introduction to the issue
The people’s movement of April 2006 significantly changed the political and socio-economic landscape of Nepal.
Nepal saw a peaceful end of a decade long civil war that claimed more than 13,000 lives and the power structure
that had been dominating the political scenario for the past two and a half centuries faced a transition into a new
model of various power centers and structures. Issues like ethnic identity, federalism, social justice and inclusion
which were ignored hitherto by the mainstream politics have now come into prominence and are currently the
major issues of policy debates. Along with these issues, economic models to be followed by the new Nepal and
the structure of the Nepalese economy are also under public debate.
The constitution assembly has proposed a mixed economic model involving state, cooperatives and the private
sector as the major pillars of the economy. The concept has met with criticisms from experts, media and civil
society alike. Majority of the criticism is directed toward the vagueness of the model and lack of clarity of the
vision.
Rather than being based on certain political ideologies or guided by populist ideas, Nepal could learn a lot
from countries that have gone through similar phases and form a more practical and efficient economic model.
Although, Nepal’s political debates are dominated by the left leaning ideologies and central planning, capitalism
and free markets is gaining prominence around the world, especially after the fall of Berlin Wall and Soviet
Union. With the breakthrough developments in communication technologies and transportation as well as the
information technology, trends of globalization and free trade are spreading rapidly and becoming the norm of
life around the world. In this context, the paper examines various economic systems that could be relevant to
Nepal’s growth based on its previous experience as well as international examples.
Rationale
Nepal’s political history has been a very dynamic one since its first taste of freedom in 1951 when the autocratic
Rana regime was overthrown. Over the years, many more struggles have taken place to attain a democracy that
delivered. In its recent political history, after the People’s Movement in April 2006, century old Monarchy was
overthrown to form a Federal Democratic Republic which promised better Nepal for everyone, especially the
poor. People’s expectation from the new political changes has grown and everyone is counting on the new system
to bring prosperity. Hence, in this context, there is a serious need for the leaders to develop a vision for the
economic growth for Nepal. This paper stresses on the need of such vision and also provides perspectives that
need to be considered in order to build a solid growth vision for Nepal.
The paper builds an analysis on Nepal’s performance in the economic arena in the past from various perspectives,
especially the policy component, in order to learn from both the achievements and failures of the previous
practices. It also presents examples and brief case studies of countries that have faced comparable, if not similar
political and economic situations and have managed to maintain impressive growth.
Therefore, as the new constitution is being written, this paper is one of the attempts to build discourse on the
economicgrowthofNepal.Thisisverycrucialashistoryhasshownthatifpoliticalchangesarenotcomplimented
by economic growth, conflict is inevitable.
Status Updates
Nepal remains one of the poorest nations in the world with more than one-quarter of its citizens living below the
poverty line. The gross domestic product is estimated to be $35.813 billion (IMF, 2010 est.) which makes it the

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102ndlargesteconomyintheworld.Similarly,thepercapitaincomeisabout$1,270(IMF,2010)whichisamong
the lowest in the world. Due to continuous political instability, lack of clear economic vision and infrastructure
constraints, the economic growth rate has always hovered around 3 – 5 percent. The growth rate for 2010 was
estimated to be around 3.5 percent of the GDP (The World Bank, 2010)
Agriculture is the most dominant sector of the economy employing more than 70% of the workforce and
generating about 33% of the total GDP whereas industries and services account for 15% and 52% of the GDP
respectively. Without a significant industrial base and majority of the population dependent on subsistence
farming, Nepal’s economy can be categorized as ‘pre-capitalist era economy (CIA, 2003)
Among the total workforce of about 18 million, about 46% are unemployed or marginally employed. Severe lack
of skilled labor is a major impediment to productivity growth. (CIA,2003) According to the latest Nepal Living
Standard Survey, 13 % of the population is still living below the absolute poverty line.
Nepal’s economic model so far has been guided by the mixed economic model which as per its proponents
combines the best of both worlds i.e. capitalism and communism. However, both Nepal and its neighbor India’s
experiments with the mixed economic model for the past half century have failed to deliver the expected growth
and development. One of the primary problems inherent in the system as observed in both Nepal and India is
the high levels of corruption it invited due to the heavy reliance on politicians and bureaucrats within the system.
Despite high hopes and aspirations of the general public and the politicians alike at initial phases, the individual
politicians and bureaucrats quickly lost their ability to see the difference between serving their interests and
those of the state, as they themselves were the state. This hegemony of the bureaucracy, due to its extensive and
invasive rules and regulations, discouraged entrepreneurs from engaging with the state.
However, with the people’s movement of 1990, Nepal saw a reemergence of democracy which was later followed
by a limited economic liberalization. With the fall of the Berlin Wall and collapse of USSR, the dominating trend
of the 1990s was free markets and liberalization. Most of the goods and services traditionally handled by public
enterprises are being performed by the private sector now. Privatized enterprises such as Nepal Telecom have
seen a huge boost in their performance and service provided after the privatization.
Legal Framework Overview
Economic growth and models to achieve a certain level of economic prosperity became a national concern
only after the overthrow of the century long autocratic family regime of the Ranas in Nepal. From then on, the
development of legal framework for economic growth has been directly connected to the political regimes and
the orientation of those particular regimes towards economic growth. Through the analysis of acts that guided
economic growth in Nepal, it could be said that until the early nineties, Nepal’s economic policies have been
inward looking and protectionist. After that, Nepal’s economy became more open and liberal with the legal
frameworks created by various policies and acts such as the Industrial Policy 2049 (1992), Foreign Investment
and Technology Transfer Act 2049 (1992), Companies Act 2063 (2006) and others.
Nepal’s private sector took its first steps in 1951 with the implementation of Companies Act for private limited
companies and by mid 1960s over ninety private companies had been established but they remained ineffective
in scaling up due to a heavy reliance on the import of resources and too many restrictions on business. The
patronizing attitude taken by the Panchayat system towards business and other entrepreneurial activities further
degraded the situation of private sector. The state’s dominating attitude resulted in wide spread nepotism and
favoritism in awarding business licenses and other government facilities. An evidence of this is that most of the

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large investments during the era were done by Royal family members or people with close links with the Royal
family. Added to this was the state’s intervention in other private ventures as well.
The scenario improved a little after King Birendra came into power and instituted a number of reforms including
the Industrial Enterprise Act of 1974, which shifted the government’s emphasis from the public to the private
sector as the primary medium for economic growth. Despite these positive changes, King Birendra’s regime also
continued to carry the traditional approach to private sector and private sector continued to languish.
After the restoration of democracy in 1990, the frameworks for economic reform centered on creating private
sectorfriendlyinvestmentalongwithinvitingforeigndirectinvestment.TheForeignInvestmentandTechnology
Transfer Act 1992 & Industrial Enterprises Act 1992 provided the necessary policy and legal framework for the
promotion of industrial activities in Nepal. The Industrial Enterprises Act was an attempt to encourage industrial
production and productivity. The act entailed provisions to allow for subsides to certain priority industries
which inculdes tax reductions and excise duty rebates of up to 35% for industries established undeveloped and
underdeveloped areas, as well as for export oriented products.
The Foreign Investment and Technology Transfer Act 1992 was an attempt to increase Foreign Investment by
establishing a conducive environment for the investors to invest. According to the provisions in the act, foreign
investors were treated equally as local investors along with ensuring smooth visa provisions where foreign
nationals would be granted 6 months non-tourist visa if they wanted to conduct some survey, study or research
with the objective of making investment in Nepal. If an investment of a hundred thousand dollar is made at once,
such investor along with his dependant family is granted with residential visa until their investments are retained.
In practice however, there has been lack of smooth coordination between the Department of Industries and the
Immigration Department in executing this policy. According to Rana & Pradhan (2000), Foreign Investment &
Technology Transfer Act and Industrial Enterprises Act, provide some fiscal incentives including income tax relief in
certain cases. But the amended Revenue Act and New Income Tax Act have withdrawn all such incentives, which is
highly controversial. Similarly, Rana & Pradhan (2000) also mention another setback in the implementation of
the provision mentioned in the Foreign Investment & Technology Transfer Act saying there is duty draw back
facility to those who export their products, but they have to face many difficulties in getting such facility in one hand and
even if they get, they get after long gap of time. Some time they are given Government bond instead of cash which may
be of no value to the foreign investors. Hence, well intended policies have failed to deliver projected result due to
various weaknesses, co-ordination between line ministries being one of them.
With the implementation of such free, liberal and market oriented policies in the 90’s, a very encouraging growth
had been achieved for a certain number of years. Nepal achieved the record GDP growth rate of 7.9 percent
during the years 1993-1994. During this period, the most dominant sector of the economy, agriculture also
registered a growth rate of 7.6 percent. Industries like banking, carpets and tourism flourished providing a boost
to the economy. According to ILO (2003), the average annual growth rate of GDP increased from 4.8 percent to 5.2
during 1985-1996. Employment and value-addition in the manufacturing sector also grew. Manufacturing employment
rose 36 percent in the first few years after the reforms, and the growth rate of manufacturing value added increased from
5.3 percent to 13 percent. Gross national savings improved from around eleven percent to over 16 percent during the
decade.
However, the growth could not be maintained owing the lack of strong structures to institutionalize the growth
and the fact that Nepal was going through the Maoist insurgency. Political instability and uncertainty started
with the toppling down of Nepali Congress’s government due to conflict within the party. The temporary
tenure of the subsequent governments made them disoriented and weak which in turn promoted corruption,

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profiteering, racketing, nepotism and favoritism. The decade long civil war worsened the situation by compelling
the government to focus on the insurgency and lose their focus on the economy. Eventually, politics overtook the
economy. In analyzing Nepal’s economic trends, it is also important to take into account Nepal’s trading relations
with India. According to Rana & Pradhan (2000), the Nepal-India Trade treaty of 1996 also played a major role
in attracting joint venture or FDI (specially Indian Investment) in Nepal as it provided free access of Nepalese
manufactured products to India without any duty or restrictions. But the revision of treaty in 2000 as put several
restrictions along with India fixing the quota to some of the items which had restricted in the volume of export.
Quotas fixed to some of the items were very low compared to the capacity installed by the industries.
Hence,duetoseveralconstraints,theencouraginggrowthtrendsshowninearlyninetiescouldnotbemaintained.
According to ILO (2003), GDP recorded a negative growth of 0.63 percent in the year 2001/02 and manufacturing
employment declined about 19 percent.
IntherecentturnofeventsinNepal,withtheoverthrowoftheMonarchyandthedraftingofthenewconstitution,
Nepal is currently guided by the Interim Constitution, 2063. The constitution that is being drafted currently will
be laying down the basic structure of Nepal as a federal nation and hence, it is necessary for the vision for the
model of the economy to be clear. Major portion of policy level debate is focused on the political agendas and
serious discussion on Nepal’s economic model is limited. Recent news point out that the government is inclined
to adopt a mixed economy system introducing cooperatives as the third economic pillar after the public and
private sectors. However, there is no detailed plan for economic growth on the policy level yet.
Government initiative and its impact
Since 1956, Nepal has so far implemented ten five –year plans with disappointing results. Five-Year Plans
of Nepal generally strove to increase output and employment; develop the infrastructure; attain economic
stability; promote industry, commerce, and international trade; establish administrative and public service
institutions to support economic development; and introduce labor-intensive production techniques to alleviate
underemployment. The social goals of the plans were improving health and education as well as encouraging
equitable income distribution. Although each plan had different development priorities, the allocation of
resources did not always reflect these priorities. The first four plans concentrated on infrastructure—to make it
possible to facilitate the movement of goods and services—and to increase the size of the market. Each of the
five-year plans depended heavily on foreign assistance in the forms of grants and loans.
These plans were based on top down approach and most of the plans of local bodies were guided or influenced by
the national level bodies. As observed around the world, centrally planned economies or government programs
fail invariably.
Panchayat Era (1961-1990)
The panchayat system which was introduced in Nepal in 1961after the democractically elected government
was thrown off by a royal coup lasted for about three decades. The economic policy regime during this period
is characterized by a protectionist industrial investment scenario which was regulated by means of a rigorous
licensing system. Only large business houses and people with connection to the royal family were awarded
licenses.
In Nepal, the Company Act of 1936 and the Industrial Policy of 1957 both were inward looking and focused
on import substitution and self-reliance. Thus in Nepalese history of industrialization the three decades, from

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1960 to 1980, marks the supremacy of public sector’s supremacy. Economic activities were protected by license
system, protection was given to public entities, foreign investment were restricted and government shouldered
the responsibility of providing goods and services to its citizens like shoes, cement, drinking water, electricity,
roads, medical care and so on. Therefore, a huge number of State Owned Enterprises were established during
that time with the objective of promoting industrialization, creating employment opportunities and generating
revenue for the government. However, the fulfillment of all the three objectives can be questioned. The financial
burden on the government had been increasing and the state owned enterprises (SOEs) were not performing
well to promote growth in the country.
Even today, more than half of the 36 public enterprises that we have now are operating under losses and the
amount of accumulated loss is alarming. Except for a few of them, public enterprises are epitome of corruption,
inefficiency and financial disasters. More than 30 percent of the government’s initial investment of 86 billion
rupees has already been lost. In the fiscal year 065/066 alone, only 4 of the public enterprises paid dividend of
Rs. 3 billion and 470 millions to the government which is just about 4.3 percent return on the investment. Some
of the public enterprises have even negative net worth owing to the continuous losses over a long period of time.
(MoF, 2011)
Liberalization Era (Mid 1980s to Late 1990s)
Since mid-1980s The Nepalese government, with the help from multilateral agencies like the IMF and the
World Bank, embarked on the path of liberalization and privatization. However, due to the various structural
constraints the government could not successfully implement privatization policy during the Seventh Five-Year
Plan (1985- 1990). The government that came into the power after the people’s movement in 1990 initiated the
implementation by publishing a white paper on privatization in 1991.
Despite frequent changes in the government and major slow down of the process at certain times, the privatization
process of Nepal has continued. By 2008, Nepal had privatized 30 public enterprises and 36 more are still being owned
and run by the government. (MoF, 2011) Privatization Act of 1994 has stated the following in its preamble:
Whereas, in order to increase the productivity through enhancement of efficiency of the state owned enterprises of the
Kingdom of Nepal, and thereby, mitigate the financial administrative burden to the Government, and to usher in all
round economic development of the country by broadening the participation of private sector in the operation of such
enterprises, it is expedient in the national interest to privatize such enterprises and to make arrangements therefore.
By the same act, the government has also formed a Privatization Cell at the Ministry of Finance which is
responsible for organizing the privatization process. The government has also made exchange rates market-
responsive and commercial banks are allowed to set their own interest rates. The government’s thrust in this
period had been towards a new trend of liberalized economy giving major roles to the private sectors in the
industrial as well as service sector.
Following the liberalization measures of the government, manufacturing industry in Nepal has pursued an
outward oriented liberal development strategy since mid-1980s. Ensuing structural changes and competition
resulted in increased share of output share of export-oriented industries from 13% in mid 1980s to 28% in 1993/94
while the output share of import substitution industries fell from 87% to 72% in the same period. (Sharma K, 2000)
Nepali Congress which had won a comprehensive victory in the 1991 election instituted some sweeping reforms.
It set forth the Industrial Policy 1992 as a program statement and passed the Foreign Investment and One-
Window Policy, the Industrial Act 1992, and the Foreign Investment and Technology Transfer Act 1992. These

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Acts were initiated with the objective of making it easier to do business in Nepal by removing hurdles to starting
businesses and encouraging investment by both foreign and local investors.
Other sectors such as taxation, foreign currency controls, and import restrictions were also reformed to
accommodate private sector better. The limited liberalization had its most visible effect on the financial sector
of the economy. Numerous commercial banks have been running their operations and the competition can be
described as no less than cut throat. Latest banking technologies and services at competitive prices are now
available to Nepalese citizens although these financial institutions are yet to reach the rural and less accessible
areas of the country.
The years 1993-1994 remain the most glorious days of Nepalese economy. Nepal achieved a GDP growth rate of
7.9 that year. Agriculture, the most dominant sector of the economy also registered a growth rate of 7.6 that year.
Industries like banking, carpets and tourism flourished providing a boost to the economy.
However, political instability and uncertainty started with the toppling down of Nepali Congress’s government
due to infighting within the party. The temporary tenure of the subsequent governments made them disoriented
and weak which in turn promoted corruption, profiteering, racketing, nepotism and favoritism. The decade long
civil war worsened the situation by compelling the government to focus on the insurgency and lose their focus on
the economy. Eventually, politics overtook the economy and Nepal is back into the stagnant and even worsening
economic situation.
Despite this, the absolute poverty rates of Nepal have gone down significantly. The absolute poverty rates which
had been 42% in FY95/96 has declined to 13% in FY 11/12 as indicated by the Nepal Living Standard Survey.
Following table shows the GDP of Nepal from 1960s to 2000:
$12 B
$10 B
$8 B
$6 B
$4 B
$2 B
$0
19651960 1970 1975 1980 1985 1990 1995 2000 2005 2009
Nepal
$12.531 Billion
2009
Source: Data- World Bank Chart: Google Maps
International Experiences
India
After its independence from Britain in 1947, India adhered to a highly regulated mixed economic model until
1990s. The then Prime Minister of India, Jawaharlal Nehru’s impression of Soviet styled central planning
prompted Jawaharlal Nehru to structure the Indian economy in similar way to that of USSR. Domestic policy
tended towards protectionism, with a strong emphasis on import substitution industrialization, economic

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interventionism, a large public sector, business regulation, and central planning. They expected favorable
outcomes from their strategy, involving the rapid development of heavy industry by both public and private
sectors, and based on direct and indirect state intervention, rather than the more extreme Soviet-style central
command system. However, the four decades of this economic model gave India a mere average growth rate of
3.5%whichwassarcasticallycalled“theHindurateofgrowth”. TheIndianeconomywassoheavilyregulatedthat
Rajagopalachari, one of the prominent leaders of the Indian Independence Movement called the era “License-
permit-raid raaj”. By the end of four decades of this regulated economy, India was almost bankrupt and a home to
millions of people living under abject poverty.
This state of affairs along with pressure from international agencies like World Bank and International Monetary
Fund forced India to revisit its economic model. Minister Narasimha Rao, along with his finance minister
Manmohan Singh, initiated the economic reforms of 1991. The reforms did away with the License Raj, reduced
tariffs and interest rates and ended many public monopolies, allowing automatic approval of foreign direct
investment in many sectors. Since then, the overall thrust of liberalization has remained the same, although no
government has tried to take on powerful lobbies such as trade unions and farmers, on contentious issues such
as reforming labor laws and reducing agricultural subsidies.
Bytheturnofthe20thcentury,Indiahadprogressedtowardsafree-marketeconomy,withasubstantialreduction
in state control of the economy and increased financial liberalization. This has been accompanied by increases in
life expectancy, literacy rates and food security, although the beneficiaries have largely been urban residents. Last
year, Indian economy grew by 8.20 percent making it one of the fastest growing economies in the world.
Following figure shows the growth of India’s Gross Domestic Product from 1950s to 2010:
Source: Wikipedia Chart based on publicly available data
China
Since the political upheavals of 1949, China followed a centrally planned heavy industry development strategy
akin to United Soviet Socialist Republics during 1920s and 1930s. Consumption was reduced while rapid
industrialization was given high priority. The government took control of a large part of the economy and
redirected resources into building new factories.
India-Gross Domestic Product
GDP(inMillionsofindianrupees)
80,000,000
70,000,000
60,000,000
50,000,000
40,000,000
30,000,000
20,000,000
10,000,000
0
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

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Entirelynewindustrieswerecreatedbythegovernment.Economicgrowthjump-startedbuttheeconomylargely
stagnated and was disrupted by the Great Leap Forward famine which killed between 30 and 40 million people.
The purges of the Cultural Revolution further disrupted the economy. Urban Chinese citizens experienced
virtually no increase in living standards from 1957 onwards, and rural Chinese had no better living standards
in the 1970s than the 1930s. The economic performance of China was poor in comparison with other East
Asian countries, such as Japan, South Korea, and even Taiwan. Chinese economy in this period was full of huge
inefficiencies and mal investments. With Mao’s death, the Communist Party of China (CPC) leadership turned
to market-oriented reforms to save the failing economy. Deng Xiao Peng, who came into power after Mao guided
and directed significant economic reforms in China.
Since 1978, China began to make major reforms to its economy. A decision was made to permit foreign direct
investment in several small “special economic zones” along the coast. The reforms decentralized the state
economy by replacing central planning with market forces, breaking down the collective farms and getting rid
of state-run enterprises. One of the most successful reforms—the “within” and “without” production plans—
allowed businesses to pursue their own aims after the met their state-set quotas. Enterprises and factories were
allowed to keep profits, use merit pay and offer bonuses and other incentives, which greatly boosted productivity.
There was a shift from central planning and reliance on heavy industry to consumer-oriented industries and
reliance on foreign trade and investment. The 1978 reforms included efforts to boost foreign trade through the
establishment of 12 state companies to control imports and exports and the creation of Special Economic Zones
(SEZs) along China’s southern coastline. In 1982, communes began to be dismantled and peasants were allowed
to grow and sell products. In 1985, tariffs were cut from 56 percent to 43 percent beginning the long, gradual
reduction of import barriers. (Park, 1997)
Following chart shows the GDP growth of People’s Republic of China between 1952 to 2005:
Source: Wikipedia Chart based on publicly available data
Currently China is the world’s second largest economy after the United States. It is the world’s fastest-growing
major economy, with average growth rates of 10% for the past 30 years. China is also the largest exporter and
People’s Republic of China’s Nominal Gross Domestic Product (GDP)
Between 1952 to 2005
FDP(inbillionsofRMByuan)
20000
18000
16000
14000
12000
10000
8000
6000
4000
2000
0
1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004
Korean war Great Leap Forward Cultural Revolution Market-based economic reforms since 1978
18232.1 billion in 2005
Year
Shenzhen SEZ
1997 Asian Financial Crisis
Shanghai SEZ WTO entry
Farm Privatization
67.9 billion in 1952

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second largest importer of goods in the world. China became the world’s top manufacturer in 2011, surpassing
the United States. The per capita GDP of China currently is $7,518 (PPP) which makes it 93rd country with
highest per capita GDP in the world. (Right to Say, 2011). Despite the huge economic growth, poverty is still
prevalent in the rural areas of China.
East European Countries
East European countries which split from Russia after the collapse of communism in 1989 provide a good
example of economic transitions. Between1989 and 1991 the collapse of communism in Soviet bloc brought
down the similar political systems in its constituent countries. With the rapid decline of the communist party’s power
throughout the region, and particularly following the collapse of the Soviet Union, it proved impossible to maintain
an economic system based on hierarchical subordination, predominant state ownership, and a command-rationing
allocation previously communist-controlled countries therefore inherited both an economic system that no longer
functioned properly and a political struggle for power. (Aslund, A, 1996)
Thesecountrieschosedifferentmodelstostructuretheirneweconomy.Somecountriesoptedfordemocratization,
and initially had liberal governments which opted for radical stabilization and liberalization. Countries opting for
this were Poland, Czechoslovakia , Estonia , Latvia , and Albania . Each of these countries saw a peak in inflation
in the first year of reforms which was brought down to under 50 percent in the ensuing years.
The second group of countries had democratic regimes and initially non-socialist governments but chose, or
ended up with, slower or less radical reform. Hungary, Lithuania, Bulgaria, Russia, and the Kyrgyz Republic
were in this group. This group of countries made the reforms very gradual and in some cases postponed them.
The economic growth in this group of countries has been slower as compared to the previous group. One of
the reasons for this was the incomplete reforms which resulted in backlash against the new government and
economic sustem.
Challenges and Opportunities for Nepal
With the population exceeding 30 million and ever-present low economic growth rates, Nepal faces a number
of challenges in its attempt to achieve prosperity and higher living standards for its citizens. Political instability
and confusion, economy’s increasing dependence on remittance incomes, low investment rates and investment
unfriendly environment, closure of major industries, energy crisis are some of the major obstacles in the road
of Nepal’s economic growth. Presence of cartels and syndicates in almost every sector of the economy and
domination of economic activities by a few large business houses present additional major obstacles to growth
and implementation of a growth friendly economic model. Lack of equal liberalization among the different
sectors of the economy has undermined the benefits of the liberalization measures taken by the government in
early 1990s.
Yet, Nepal also has numerous opportunities especially with its abundant natural resources and potential for
hydro power, tourism industry and inexpensive human resources. Its geographic position as a “transit economy”
between India and China, two of the fastest growing and most populous economies in the world provides Nepal
with immense opportunities if it can utilize them. As India and China are growing at extremely high rates and
have been forecasted to grow at the similar rates for a extended period of time, even the spillover effects from
these countries could create thousands of jobs for Nepalese citizens and encourage growth in Nepal. Besides
this, with the newly created affluence the number of Chinese and Indian tourists visiting foreign countries is also
increasing rapidly. Nepal could have its tourism industry boosted by bringing in these tourists.

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NepalisalsoamongthefewLDCswhoaremembersofWorldTradeOrganization.Nepalgotthemembershipon
23 April 2004 through the negotiation process. Membership of WTO could be a boon or a curse based on how
Nepal handles the new avenues opened up by the membership. Being a LDC member, Nepal has a substantial
advantageintheagriculturesector.Hugedomesticandexportsubsidiesinthedevelopedcountrieshavedistorted
international trade in agriculture. However, WTO member organizations have agreed to the parallel elimination
of all forms of export subsidies in agriculture and disciplines on all export measures by the end of 2013.
This provides a huge opportunity for agricultural countries like Nepal to get better value for their products
and increase their exports. Nepalese exports of agriculture products are concentrated in few products and also in few
countries. The major market for vegetable fats, wheat, lentils, cardamom, oil seeds is India whereas the major market for
sugar is Europe. (Department of Customs 2003)
Nepal could also benefit from numerous opportunities brought about by globalization. With the rapid spread of
globalization and decrease in communication and transportation costs, labor intensive as well as IT related jobs
are being transferred to developing and least developed countries. India’s IT revolution is one of such examples.
Nepal with right policies and infrastructures could benefit from outsourcing and off-shoring jobs too.
Issues to be resolved
Nepal is currently struggling to define development model under the federal governance structure and to find
out the correlation between the political instability and growth. Nepal’s past experience of shifting from one
economic model to another economic model hasn’t been without obstacles. Broader acceptance of the economic
model is necessary if the model is to sustain and deliver economic growth. The liberalization attempts of early
1990s failed to garner broader acceptance from public, civil society and political parties themselves although
liberalization is the prevailing trend around the world. The then government’s inability to communicate the
importance and rationale of the measures taken by it, lack of institutional support required for a liberal economic
model such as efficient and impartial justice administration, equal access of population to economic activities
of all the major sectors, secure and strong property rights, easy access to credit undermined the importance of
liberalization which resulted in backlash against the economic model. While determining the new economic
model for the country, the issue of its broader acceptance and support from all the concerned stakeholders
should be resolved beforehand.
Political instability and ideological differences have been observed as major obstacles to sustainability of an
economic model in Nepal. Formulating an agreed upon economic model by all the concerned parties and
detaching economic plans and policies from the influence of ruling political parties is another issue that needs to
be thought of thoroughly.
Issue To Be Further Discussed
While people from all sections of the society, along with leaders from different political groups agree on the
need for economic growth, agreement on a growth vision has been an elusive quest so far. Economic growth
requires a prudent growth vision, realistic plans and disciplined implementation. As presented in this report, the
first few years of liberalization of the markets had been really promising for Nepal when it had achieved record
growth rates. However, the liberalization process was not followed by proper institutional support and hence
the growth could not be sustained. Therefore, one of the primary issues that needs a lot of discussion is creating

15
those efficient institutional structures which support the growth and expansion of markets. For e.g. the Foreign
Direct Investment and Technology Transfer Act, 1992 was an attempt to encourage foreign direct investment in
Nepal. However, without efficient legal system for contract enforcement, maintaining a competitive market and
other provisions that are necessary for the free flow of markets, the intentions cannot materialize. Hence, these
issues have to discussed in detail.
Similarly, many countries as explained in the international example on this paper had chosen different models
to structure their new economy. Countries like Poland, Czechoslovakia, Estonia, Latvia, and Albania brought
about radical reforms and stabilized their economy slowly. These countries saw a peak in inflation in the first year
of reforms. Radical reforms bring about such radical results for a while including unemployment. However, it is
also important to note that due to those very radical reforms, the countries were able to prosper despite facing
initial years of slump. On the other hand, the second group of countries opted for slower or less radical reform.
Countries like Hungary, Lithuania, Bulgaria, Russia, and the Kyrgyz Republic made gradual reforms and hence,
their growth has been slower as compared to those countries which chose radical reforms. Hence, the issue of
which way to choose is a crucial one for Nepal. Choosing the former might requires provisions for safety nets and
other precautionary measures whereas choosing the latter requires a long term vision for growth.
No matter what economic model is opted, one of the very important aspects of economic growth for a country
is that the growth model must have support from the stakeholders. Without popular support, the desired growth
cannot be achieved and the international examples also demonstrate that fact. Hence, strategies to receive such
support from a range of stakeholders are some issues of further discussion.

16
References
1. Aslund, A., Boone, P., Johnson, S.Fischer, S.,Ickes, B. (1996). How to Stabilize: Lessons from Post-Communist
Countries . Brookings Papers on Economic Activity , Vol. 1996, No. 1. pp. 217-313.
2. ILO (2003, September). A Report on Micro and Small Enterprise Policy Review in Nepal.
Retrieved from http://www.ilo.org/wcmsp5/groups/public/@asia/@ro-bangkok/@ilo-kathmandu/documents/
publication/wcms_116688.pdf
3. Rana, M., Pradhan, S. (2005, August). Economic Policy Network Policy Paper 1, Implementation Evaluation
Of Foreign Direct Investment Policy In Nepal. Retrieved from http://www.mof.gov.np/economic_policy/pdf/
Implementation_Evaluation.pdf
4. IMF(2010, April). Report for Selected countries and subjects. Retrieved from http://www.imf.org/external/pubs/
ft/weo/2011/01/weodata/weorept.aspx?sy=2008&ey=2011&scsm=1&ssd=1&sort=country&ds=.&br=1&c=558
&s=NGDPD%2CNGDPDPC%2CPPPGDP%2CPPPPC%2CLP&grp=0&a=&pr.x=28&pr.y=15
5. Park, Jung-Dong (1997). The Special Economic Zones of China and Their Impact on Its Economic Development.
Greenwood Press.
6. The Worls Bank(2010). 2010 Nepal Economic Update. Retrieved from http://www.imf.org/external/pubs/ft/
weo/2011/01/weodata/weorept.aspx?sy=2008&ey=2011&scsm=1&ssd=1&sort=country&ds=.&br=1&c=558&s
=NGDPD%2CNGDPDPC%2CPPPGDP%2CPPPPC%2CLP&grp=0&a=&pr.x=28&pr.y=15
7. Ministry of Finance(2011). Privatization Cell. Retrieved from http://www.privat.gov.np/public_ent.htm
8. Right to Say(2011, April 30). Top 10 nations with the highest per capita income. Retrieved from http://righttosay.
com/top-10-nations-with-the-highest-per-capita-income

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