Nepal’s economic problems are structural

The ongoing political debate in Nepal, centered around a choice between a republic and a monarchy, has escalated over time. While discussions are confined to the political sphere, such debates have gained momentum as Nepal’s democracy fails to deliver meaningful economic results. Nepal’s economic performance is bleak, and a deep sense of injustice and powerlessness has prevailed among its citizens. When distrust erodes people’s faith in democratic institutions, demagogues are likely to surf on the wave of political and economic populism. Compounding these factors, the government’s procrastination in taking concrete steps to find long-term solutions to fix the underlying causes has only exacerbated the crisis.

The challenges enumerated above are consequences of a more profound force that has led to a presently dysfunctional system - a manifestation of the country’s pseudo-democracy. In Nepal, the conceptualization of democracy seems confined predominantly to its intrinsic value. However, the other instrumental facet of democracy, which serves as an effective means of socio-economic and political transformation, is inadequately realized. Consequently, a nuanced and timely discourse on this matter becomes imperative, as it can only positively impact people’s lives and eventually disperse crowds of illusions.

Short-termism of the financial sector

The pervasive short-termism in Nepal’s financial sector has diverted more finance into unproductive assets such as real estate and the stock market. An increasing emphasis on quarterly returns has crowded out long-term capital investment, and economic research and development. This narrow-minded approach not only impedes innovation, productivity, competitiveness, and job creation but also exacerbates the brain drain of youth, pushing them to seek opportunities abroad.

Who, then, is responsible for the wrongdoing? The nasty form of corporate governance has continuously tempered the economy, forgoing shadow alliances with corrupt politicians and bureaucrats who, in turn, share in illicit revenue. Such extractive institutional nexus has ruptured the interlinkage between the productive sector, job creation, and overall economic progress. The resultant frustration and anxiety among the general public are tangible, contributing to the prevailing discontent and fueling political and economic unrest in the nation. To foster genuine and sustainable growth, a shift toward responsible corporate governance and a recalibration of private sector priorities is imperative.

Slow or absent government

So far, the government’s action has been ‘too little, too late’, reflecting a reactive approach to addressing economic problems, often with detrimental consequences. Nepal’s economic problems are structural and, thus, need structural overhaul rather than short-term ‘jugaad’. For instance, the government needs to be reflective of the private sector's disinterest in long-term capital investment and its preference for trading rather than bolstering its manufacturing and service base. Why do investors continuously yell that the current economic structure demoralizes long-term capital investment and lament the government’s commitment to fixing it? The role of government transcends beyond merely revenue collection, market regulation, and correcting market failures. It must demonstrate a significant investment pledge in research and development and foster an environment where the private sector can operate with confidence and a sense of long-term commitment. This calls for a paradigm shift in how economic organizations are governed, how their relationships are structured, and how economic actors interconnect.

Low level of premature deindustrialization

With globalization, developing countries, including Nepal, witnessed a rapid shift from agriculture to the service sector, bypassing industry-led economic growth much earlier than the historical average. In his 2016 study, economist Dani Rodrik argued that premature deindustrialization could negatively impact economic growth through job loss and lower comparative advantage due to poor technology. An analysis of Nepal’s economic data (1975-2016) indicates that the manufacturing sector has shrunk, and there is a need to increase the share of manufacturing in national output and create jobs. Unemployment and economic frustration could trigger political instability and illiberal politics. Most importantly, only manufacturing can fill the vacuum of Nepal’s market gap of labor demand vs skill mismatch. It is especially true for the semi-skilled and unskilled labor force who outgrew agriculture but are ill-equipped for high-tech jobs. Reindustrialization is not an unavoidable fate and is essential for a change in the present economic structure to increase employment and bolster the production base. The question is how to design tools that help achieve this directionality with a purpose.

Democracy must deliver

The public’s desire for change resonates with their expectations for increased job opportunities, enhanced livelihood, and better public services. This collective aspiration has historically fueled the political call for democracy in Nepal. Over time, if democracy fails to deliver tangible economic progress, questions naturally arise on its appropriateness, leading people to explore alternative paths. While the intrinsic values inherent in democracy are significant, they alone are insufficient for sustenance. A democratic system must also demonstrate economic efficacy, delivering concrete economic results to win over citizens for more extensive support and credibility.

This means rethinking corporate governance where both government and the private sector adopt a mission-oriented approach for overcoming structural economic challenges. Only the government, with its unparalleled authority, holds the key to steering transformative change on a scale that can redefine the dynamics of economic progress and societal interaction. But, at present, the government itself requires reawakening. The current status quo is failing too many people; therefore, a delivery-centered democratic reorientation is only a long-term solution to public dissent.

 

The author is a public policy candidate at Willy Brandt School in Germany. He has served as a research officer at the Office of the Investment Board Nepal. He can be reached for comments at [email protected]