Protecting Nepal’s hydropower from the Dutch disease

Nepal, with its abundant water resources and favorable landscape, is actively pursuing hydropower development to meet the surging energy demands and catalyze economic growth. However, concerns have arisen regarding the potential negative impacts on other sectors, prompting comparisons to the infamous “Dutch disease.” Is hydropower evolving into the “Dutch disease” of the country’s economy?

The Dutch disease

The term “Dutch disease” originated in the Netherlands in the 1970s when the country discovered and profited from natural gas resources. Several characteristics define the “Dutch disease” and its potential impact on an economy. One primary characteristic is economic imbalance, where the emphasis on the resource sector leads to the negligence of other sectors and industries, resulting in an economic imbalance. Another aspect is the decline in non-resource sectors resulting in reduced investment, job losses and a diminished capacity for economic diversification. Income inequality is a major concern as the benefits of the resource boom may not be distributed evenly across the population, leading to a risk that the wealth is concentrated in the hands of a few. Another concern is susceptibility to economic volatility as the economy becomes heavily dependent on the performance of the resource sector. Currency appreciation is another problem, which may seem beneficial, but it can have adverse effects on non-resource sectors making them less competitive.

Pros and cons of hydro development

Nepal’s ‘colossal’ hydropower potential has attracted substantial private sector involvement, acting as a catalyst for economic development and a solution to the nation's persistent energy shortages. Hydropower projects create jobs, stimulate economic activity, attract foreign investment, and foster international partnerships and technology transfer.

However, the surge in private investments in the hydropower sector has raised concerns as well. Many investments appear haphazard, ineffective, and, at times, unethical. Unsystematic and dubious investments are causing a lack of transparency and efficiency, fostering unfair practices without considering potential negative effects. Unethical practices, including financial manipulation, speculation, and corruption, are additional issues that contribute to the undermining of the sector’s integrity, eroding public trust and foreign investment. Furthermore, inadequate due diligence by investors has resulted in poorly functioning projects with technical, financial, or operational challenges and failures. Some investors prioritize short-term financial gains over long-term sustainability of projects. A growing concern is the concentration of hydropower projects in the hands of a few major players, creating an oligopoly.

‘Dutch disease’ in Nepal

The looming ‘Dutch disease’ in Nepal’s economy signifies the potential risks associated with the intense focus of investors on the hydropower sector. This heightened emphasis might inadvertently divert attention and resources away from the growth and advancement of other vital sectors. The consequences of such a single focus could be profound, primarily due to the over-reliance on energy exports, a factor that poses a considerable threat to the diversification and independence of the country's economy.

Despite the fact that energy exports can be a crucial component of Nepal’s economic development, the significant risk associated with an overemphasis on exports is the vulnerability it creates in the country's economy, especially given its reliance on importing nations. When a country heavily depends on energy exports as a primary revenue source, it becomes intricately tied to the demands of its importing partners. This level of dependence can be a precarious situation for several reasons. Firstly, the country becomes highly susceptible to fluctuations in energy markets. Changes in demand, geopolitical events or shifts in the energy policies of importing nations can result in sudden and unpredictable changes in exports and associated revenue. Secondly, the overemphasis on energy exports can lead to a lack of economic diversification. A diversified economy is more resilient in the face of external shocks because it isn’t solely reliant on a single sector. Additionally, a heavy reliance on importing nations for energy exports means that the country’s economic fate is interconnected with the policies and economic health of those nations. Economic downturns or policy changes in importing countries may result in reduced demand or changes in trading conditions, potentially leading to adverse consequences.

Furthermore, an imbalanced focus on the hydropower sector may divert attention and resources away from the development of other vital sectors like manufacturing, agriculture, tourism and other services, hindering the overall resilience of the economy. Even though large-scale hydropower projects undoubtedly contribute to energy exports and revenue generation, they may fall short in providing substantial job opportunities compared to sectors that are more labor-intensive, such as manufacturing, agriculture, tourism and other services, which offer broader employment prospects. Moreover, the concentration of hydropower projects in specific regions further compounds this issue, potentially leading to economic disparities among different regions of the country, inadvertently leaving them neglected or underserved.

A holistic approach

To mitigate potential “Dutch disease” effects, the country should adopt a comprehensive approach encompassing strategies for diversified economic growth and meticulous impact management.

Promoting diversification and multipurpose project development: Actively encouraging multipurpose projects and investing in non-hydropower sectors like agriculture, tourism, manufacturing, services and technology are crucial steps to fortify economic resilience. Investing in the development of multipurpose projects can support various sectors and regions, fostering inclusive growth and mitigating regional disparities.

Policy interventions, integrated planning and sustainable practices: Developing policies that incentivize and promote domestic consumption of hydropower is essential by fostering a competitive energy market and ensuring a stable supply for households, industries and other consumption needs. Integrated national development plans should consider the interconnectivity of various sectors, ensuring hydropower development aligns with broader economic and social objectives to reduce vulnerability to economic shocks. Emphasizing efficient and sustainable development practices involves thoroughly addressing social and environmental concerns.

Education, research and skills development: Prioritizing education and skills development is crucial to cultivating a resourceful and skilled workforce. Investing in research and innovations is crucial for the development of new technologies and sustainable practices. This initiative enhances the potential for job creation, reduces brain-drain, and may motivate the return of the workforce from foreign countries to contribute to the nation’s development.

Monitoring and evaluation: Establishing a robust monitoring and evaluation system is necessary. This system should persistently assess the economic, social, and environmental impacts of hydropower development, allowing for timely adjustments in policies. Conducting a comprehensive evaluation of the performance of existing hydropower projects in contrast to their intended targets and benefits, along with assessing their impacts, is crucial for future endeavors.

In conclusion, Nepal faces a critical juncture in balancing its hydropower surge with potential risks of the “Dutch disease.” Safeguarding against adverse effects demands a comprehensive approach, emphasizing diversification, integrated planning and sustainable practices. This ensures that the benefits of the country’s resources extend across various sectors and reach ordinary citizens, paving the way for a resilient, inclusive and sustainable economic development.

The author is a specialist in river basin and water infrastructure, currently employed at the international organization Royal HaskoningDHV, headquartered in the Netherlands. With over 27 years of professional experience, he actively contributes to dam and reservoir projects globally. He can be reached via [email protected]