Development Economics in Nepal Grade 12 - case study

1. Overview of Nepal

Nepal is a small country situated north of India in the Himalayas, in the region where, about 40 to 50 million years ago, the Indian subcontinent has crashed into Asia. Therefore, It has some of the world's highest mountains including Mt. Everest, 8848m, which it shares with Tibet.

Information

  • Capital: Kathmandu (pop 1.5 million);
  • Population: 27.8 million;
  • Area: 147,181 km² (56,826 sq.mi.) - Tarai or flat river plain of the Ganges in south, central hill region, rugged Himalayas in north;
  • Natural resources: water, timber, hydropower, scenic beauty, small deposits of lignite, copper, cobalt and iron ore;
  • Agriculture products: Rice, corn, wheat, sugarcane, root crops, milk and water buffalo meat;
  • Main Industries: Tourism, garment, food/beverages, metal manufactures and herbs.

2. Comparing Development

It is possible to observe that since 1940s, life expectancy remains increasing in Nepal. Also, we can see that in 1918, there was a huge drop on this rate, since the country was harshly affected by the Avian Influenza. Furthermore, we can observe that at first, change in GDP/capita did not result in changes on life expectancy. However, GDP/capita has increased since the beginning of data collection.

On the graph above we are comparing the literacy of youth with the Literacy of adults in Nepal (LDC) and Argentina (MDC). It is possible to observe that both variables have increased since the end of the 20th Century. However, this increase seems to be much higher in Nepal. The main reason, as expected, is that overall, literacy rate was extremely lower when compared to MDCs, such as Argentina. It is also possible to conclude that Literacy of youth is strongly correlated to literacy of adults, as visible in the graph.

In the graph above, it is possible to observe that the increase in literacy rate, a result of local efforts in improving the educacional system, was followed by increase in the GNI/capita.

The two graphs above show two components of the Human Development Index (HDI) - Child Mortality Rate and Life Expectancy in Nepal and in two other developed country (Germany and Spain). It is possible to observe that both variables have increased in the three countries. It is possible to observe that at the beginning of data collection, early 1800s, Nepal did not face a huge disparity when compared to any of the two MDC. However, it starts to change along the 1800s century. Germany and Spain Began to improve while Nepal remained the same, until start changing at the end of the 1800s century and beginning of the 1900s century.

3. Domestic factors leading to Economic Development

Improvement of the educational system

According to Hugh Wood, prior to 1951, education in Nepal was practically nonexistent. There were six high schools, four of which were in the central Kathmandu valley. There was one small college in the capital. It is estimated that there may have been about 100 primary schools, but many of these were little more than tutoring classes. Education was discouraged, even prohibited except for sons of the government officials. However, it started changing in 1954, when the Minister of Education appointed a 46-man National Education Planning Commission in order to further improve the educational system in the country.

In 1951, Nepal only had 9,000 students in primary school, 1,700 in secondary school and about one hundred in two undergraduate colleges. From 1971 to 2001, primary school numbers grew from 400,000 to 3.9 million, secondary school increased from 120,000 to 1.5 million and post-secondary level increased from 17,000 to 210,000. Literacy rates improved greatly, from 23 percent in 1981 to 54 percent in 2001. It the graph above, it is possible to observe that the increase in literacy rate, a result of local efforts in improving the educacional system, was followed by increase in the GNI/capita.

Access to New Technologies

According to Bhuju "Nepal has been a late starter in modem science and technology. In pursuance of self- reliance, it developed technological capabilities in some specific areas such as agriculture, civil engineering, architecture, metallurgy, water management, medicine, textile and paper manufacture, dyeing and food technology."

One of the main reasons behind Nepalese technological delay is the fact that it was isolated for over a century, coinciding with the Industrial Revolution in Europe and the colonial incursion in India, being deprived from advancement.

After the consolidation of Democracy in 1950, Nepal embarked on the path of modernisation. Some important changes were:

  • Initiation in S& T activities, along with the inception of a development plan, in 1956;
  • Nepal's new constitution, promulgated in 1990, has emphasised the importance of S&T explicitly by including a Directive Principle to promote its advancement;
  • Major S&T organisations, including a science academy, the Ministry for Science and Technology, and several research centres and institutions for higher education in science have evolved during last five decades.

Access to microfinance

The microfinance sector was served by cooperatives (1950-1960s) and normal banks (1970-1980s) until 1980, when a number of pilot projects and initiatives were implemented to introduce the financial and banking services to help poor and women. However, these projects were not able to fulfil the needs of a large parcel of population.

1990s - 2000s, the government strengthen the Microfinance Institutions, with the formation of five Regional Development Banks (RDBs) in each Development region. The system was based according to the Grameen model. Eventually, these Regional Development Banks were transformed to Microfinance Development Banks (MFDBs) after being privatised and licensed as class 'D' financial Institutions.

Later on, other Microfinance Development Banks, Chhimek Bikas Bank Ltd. (CBB), Deprosc Bikas Bank (DBB) and Nerude Microfinance Development Bank Ltd. (NMDB), were formed.

4. International Trade and Economic Development

Historically, international trade before the 1950s was mainly with Tibet and India. Exports have consisted of primary agricultural products, while everything not produced locally has been imported. These imports have included industrial inputs, fertilisers, and petroleum. Since the 1970s, the balance of trade has been negative.

ACTUAL DATA

Exports - In 2015 Nepal exported $909M, making it the 150th largest exporter in the world. During the last five years the exports of Nepal have decreased at an annual rate of -1.7%, from $970M in 2010 to $909M in 2015. The most recent exports are led by Flavored Water which represent 9.1% of the total exports of Nepal, followed by Knotted Carpets, which account for 8.19%.

Imports - In 2015 Nepal imported $6.61B, making it the 114th largest importer in the world. During the last five years the imports of Nepal have increased at an annual rate of 5.5%, from $5.01B in 2010 to $6.61B in 2015. The most recent imports are led by Refined Petroleum which represent 8.72% of the total imports of Nepal, followed by Silver, which account for 4.33%.

It is possible to observe that Nepal is to a large extent dependent on the export of primary and secondary products. These goods present extremely volatile prices, often resulting in economic struggles to the country. This is a result of the population lack of skills, which delay its development.

Therefore, due to Nepalese dependency on imported goods and its struggle on improving human capital, the country continues facing a negative Balance of Payment (BOP).

It is possible to observe above that in 2015 Nepal had a negative trade balance of $5.7B in net imports. As compared to their trade balance in 1995 when they still had a negative trade balance of $262M in net imports.

Another issue faced my Nepal when related to international trade, is its geography. It is a country with extremely difficult access due its altitude and lack of infrastructure. This issue increases the total Cost of Production from Nepalese goods, due logistics. As a result, Nepalese goods are less attractive to foreigner consumers. Furthermore, Nepal is located in the middle of India and Tibet, not being exposed to any litoral area. Tibet is an area where political conflicts are constant and its resources are to some extent similar to Nepal - Making trade more difficult. India is a huge exporter and is known for its protectionist policies, making trade more difficult.

RTAs which Nepal is a member of:

India - Nepal

South Asian Free Trade Agreement (SAFTA)

South Asian Free Trade Agreement (SAFTA) - Accession of Afghanistan

South Asian Preferential Trade Arrangement (SAPTA)

5.Growth and Development Strategies aimed at Increasing Trade

Bilateral and regional preferential trade agreements

Nepal is locked in the middle of the two largest economies of South Asia - India and China. As a result, its economic competitiveness is extremely low. Therefore, I do believe that instead of trying to compete against them, Nepal would be much more benefited if a trade agreement was signed among them. Nepalese goods could enter the Indian and Chinese markets, and its exports would have a larger consumer market. However, it is important to consider that both, China and India have strong protectionist policies, complicating future agreements. Furthermore, more than trade of goods, the country could also think about trades regarding free movement of labour. One of the main issues is the fact that Nepal experiences job shortage. As a result, the population does not have access to income, remaining in poverty. Identifying a country with low population growth and firming free movement of labours , such as Norway, Australia or Canada, would probably result in economic growth, since those people are likely to send some income home in order to support their families. Anyhow, it is necessary for Nepal to identify a possible way it can provide benefits to those countries. Furthermore, this agreement would also help the development of certain areas of the country, such as infrastructure and technology, since the main issue in the country is a shortage in human capital.

The role of the WTO

The Kingdom of Nepal, on 23 April 2004, became the 147th Member of the World Trade Organization. Currently, the country is being supported by the organisation in order to further improve its economic development.

Furthermore, through the WTO Nepal achieve many Preferential Trade Arrangements with countries, such as Australia, Canada, Japan, Norway and India.

These arrangements include trade benefits, such as Duty-free, preferential tariffs and trade preference systems. As a result, these benefits turn Nepalese goods more competitive in the foreigner market, increasing its exports.

The Nepalese government with the support and advise of the WTO can further research about a certain product which can be produced in Nepal and exported, and still remain interesting in foreigner market. This product must have a high market price, since it has to cover all the production cost, including the cost of transportation. The main reason is the fact that transporting goods out from Nepal can be highly costly, due to its geographic location. As a result, exports might have high prices since they include the cost of transportation.

6. Aid, Trade & FDI

Aid, Trade or FDI

7. Impact of Debt on Economic Development

Explain why the servicing of international debt causes balance of payments problems and has an opportunity cost in terms of foregone spending on development objectives.

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