Structural economic transformation in Nepal: A diagnostic study submitted to DFID Nepal

Research reports and studies
June 2014
Yurendra Basnett, Giles Henley, John Howell, Harry Jones, Alberto Lemma and Posh Raj Pandey

Economic growth in Nepal remains low and erratic. Low levels of productivity have inhibited meaningful structural economic transformation – where labour moves from low productivity activities to those with higher productivity and returns. With the manufacturing sector in stagnation, and with limited absorption capacity within the services sector, many Nepalis exit the national labour market to find employment abroad. Moreover, Nepal continues to lag behind comparable countries in foreign investment, industrial growth and investments in productive assets.

The high cost of transport and energy, coupled with an adverse business environment, discourages productive enterprises, saps growth and hinders development potential. While these constraints are not new, they remain unaddressed due to pervasive coordination failures. Lessons from countries that have successfully transformed their economies point to the important role of the government in managing economic transformation, and tackling market failures. Moreover, weak public administration, aid fragmentation, and the shallow productive enterprise base in Nepal hold back the transformation process.

This report examines the root causes for these constraints by deepening the analysis at the sectoral level. It studies five sectors, given their overwhelming importance to the economy: energy, transport, tourism, labour migration and remittance, and agriculture. Constraints to growth in the energy and transport sectors, plus high costs associated with both, adversely impacts the economy - including growth in agriculture and tourism. Labour migration and remittance has contributed to economic growth, and remittance in particular has helped keep Nepal’s economy afloat. Moreover, out-migration has implications on the functioning of the labour market (for example, labour supply, wages, industrial relations) and on the economy (such as labour availability, competitiveness.) at large. The impact on both the national labour market and its links to the rest of the economy remains under analysed.

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