structural transformation proces of nepalese...
TRANSCRIPT
Master program in Economic History
STRUCTURAL TRANSFORMATION PROCES OF NEPALESE ECONOMY
KRISHNA PRASAD POUDEL
Abstracts: Nepal is still an underdeveloped country; have only from 1950 entered into modern
political and economic system. The economic development state speed is not remained
satisfactorily; therefore it is effort to analysis about fifty years development process of Nepalese
economic with the perspective of structural transformation process. The structural transformation
could be reflecting to economic transformation and socio-economic development of the country. In
this study found that the structural transformation process seems relatively slow and weakly
associated to other economic factors. There needs to further research for more proper
investigation of Nepalese economy.
Key words: Economic Growth and Development, Structural transformation, Structural shift share of
GDP and Labor force or employment, Gross domestic production (GDP), per capita GDP
EKHR13
Master thesis (30 credits ECTS)
November 2010
Supervisor: Anders Nilsson
Examiner: Jonas Ljungberg
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
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Acknowledgement:
This study is undertaken for master program of economic history, in economic history department,
Lund University’s School of Economics and Management. In this context, I would like to express my
sincere gratitude and heartily thanks to my thesis supervisor pro.Anders Nilsson for his invaluable
guidance, inspiration and supervision. I would like to thanks special to my program director
pro.Jonas Ljungberg for his valuable suggestion and inspiration. Thanks to staffs and colleagues the
economic history department and program for the supports and sharing knowledge and
experience.
This study is dedicated to my beloved children, thanks them for being the great source of
inspiration to conduct the study and thanks to my dear better-half Laxmi for patient sacrifice to
provide the environment of the study. I would like to extend my special gratitude to my parents.
Finally, I would like to thanks to all friends and best wishers who have supported directly and
indirectly to me for this job.
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
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Table of Contents
Titles page no.
Title pages I
Abstracts I
Acknowledgement II
Table of contents III
List of Tables VI
List of graph-figures VI
Abbreviations VII
Flag and Map of Nepal IX
Chapter -1 Introduction 1
1.1 Back ground 1
1.2 A glance on the study area 2
1.3 Review of previous study 4
1.4 Statement of problem 16
1.5 Research questions 17
1.6 Theoretical framework 17
1.7 Hypothesis 24
1.8 Research methodology 25
1.8.1 Research design 25
1.8.2 Data sources 25
1.8.3 Analytical approach 25
1.8.4 Variables 25
1.8.5 Model specification 26
1.9 Delimitation of the study 27
1.10 Structure of this paper 27
Chapter -2 Comparative Analysis of Nepalese economy 28
2.1 Population 28
2.2 Population growth 29
2.3 Life expectancy 31
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
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2.4 GDP growth 32
2.5 Per capita growth 34
2.6 Gross capital formation 36
2.7 Exports of goods and services 37
2.8 Imports of goods and services 39
2.9Summery 40
Chapter -3 Macroeconomic performance of Nepal 41
3.1 Population features 42
3.1.1 Size of population 42
3.1.2 Population growth rate 43
3.1.3 Fertility rate 44
3.1.4 Life expectancy 44
3.2 Economic outputs 45
3.2.1 Gross domestic growth level 45
3.2.2 GDP growth rate 46
3.2.3 GDP per capita level 47
3.2.4 GDP per capita growth rate 47
3.3 Industrial performance 48
3.3.1 Sector wise production 48
3.3.2 Agriculture and forestry 49
3.3.3 Manufacturing industry 50
3.3.4 Construction industry 51
3.3.5 Service sectors 51
3.4 Structural pattern of Nepalese economy 52
3.4.1 Urbanization 53
3.4.2 Sector wise share in GDP 54
3.4.3Agriculture value added ratio 55
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3.4.4Industrial value added ratio 56
3.4.5 Service sector value added ratio 56
3.4.6 Employment share 57
3.4.7 Sector wise productivity 58
3.4.8 Gross capital formation 60
3.4.8 Foreign trade 61
3.5 fiscal public expenditure 62
3.6 infrastructure 63
3.6.1 Electricity 63
3.6.2 Road 64
3.6.3 Telephone 65
3.7 summery 65
Chapter-4 Empirical analysis of the economic factors 68
4.1 variables 68
4.2 correlation matrix 69
4.3 effect on GDP per capita 69
4.4 impact on shift share of GDP 71
4.5 influence on employment shift share 71
4.6 effect on life expectancy 72
Chapter-5 Concluding remarks 75
References 79
Appendix 81
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List of Tables
Titles page no.
2.1 comparative figure of total population 29
2.2 average population growth rate 30
2.3 life expectancy 31
2.4 average GDP growth rate 32
2.5 average GDP per capita rate 35
2.6 Average gross capital formation ratio 36
2.7 average exports ratio 38
2.8 average imports ratio 39
3 comparative figures of Nepal between historical time points 41
List of Graph-figures
Titles page no.
2.1 comparative population growth rates 30
2.2 comp. life expectancy 32
2.3 comp. GDP growth 34
2.4 comp. GDP per capita level 35
2.5 comp. gross capital formation ratio 37
2.6 comp. exports ratio 38
2.7 comp. imports ratio 39
3.1 total population of Nepal 43
3.2 population growth rate in Nepal 43
3.3 total fertility rate in Nepal 44
3.4 life expectancy in Nepal 44
3.5 GDP level 45
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
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3.6 GDP growth rate 46
3.7 GDP per capita level 47
3.8 GDP per capita growth rate 48
3.9 sector wise GDP growth 49
3.10 Agriculture, hunting ……..growth 50
3.11 manufacturing growth 50
3.12 construction sector growth 51
3.13 services sector growth 52
3.14 ratio of rural and urban population 53
3.15 sector wise share in GDP 54
3.16 agriculture value added ratio 55
3.17 industrial value added ratio 56
3.18 services sector vale added ratio 57
3.19 employment share in non-agricultural sector 58
3.20 sector wise productivity 59
3.21 gross capital formation ratio 60
3.22 foreign trade ratios 61
3.23 fiscal public expenditure 62
3.24 ration of development and regular public expenditure 63
3.25 electric power consumption 64
3.26 road extension 64
3.27 telephone line extension 65
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Abbreviations
ADB - Asian Development Bank
BDG – Bangladesh
CBS – Central Bureau of Statistics
FDI – Foreign Direct Investment
FY – Fiscal Years
GDP – Gross Domestic Production
GNI – Gross National Income
ICOR – Investment Capital Output Ratio
IMF – International Monetary Fund
IS – Investment and Savings
KM – Kilometers
KWH – kilowatt/Hours
LKA – Sri Lanka
MW – Megawatts
MYS – Malaysia
R&D – Research and Development
RIDA – Research Institutes of development Assistance
TFP – Total Factor Productivity
THA - Thailand
UNDP – United Nation Development program
US$ - Currency of United State America (US Dollars)
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
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National flag of Nepal
Map of Nepal
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
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Structural Transformation Process of Nepalese Economy
CHAPTER-1
Introduction
1.1. Background
Economic development’s speed and process to the context of developing countries is a hot issue in
global political and economic phenomena. There is big debate in terms of theory and strategies for
the question of how to pick up them from poverty trap and economic backward conditions. There
are various hypothesis and experience on about success and failure of historical development
process for specially African and South Asian countries: which are still remained very least
developed state, facing several kinds of socio economic crisis and problems. Nepal, a south Asian
nation is an example of a least developed country; wandering in development process; suffering
from sequential problem and crisis, despite internal efforts and heavy external supports for
economic enhancement. It has completed 10th five development planning terms; however, there
are still more than half population dependants on traditional subsistence type agricultural sector.
Average per capita is remained at very low level and economic growth rate is relatively slow. Now
youth and educated manpower’s unemployment problem is being serious; which is a main reason
for huge number of out migration for foreign job and study. Though, there was modern
development process started only from 1950, after then also it is suffering from political instability,
autocracy and arm conflict over the period. Nepal is, perhaps, newest republican nation in the
world up to now. And new constitution still is in forming process. It means politically Nepal yet to
settle. The economic version problems of Nepal are as: almost externally dependency, growing
trade deficit, surpasses regular cost to capital cost of government budget. Inflation and corruption
are as ordinary characteristic and high poverty and growing economic disparity are common
problem as least developed countries such as in Nepal. In other word, there is a bunch of problem
in Nepal; those could be categorized political, social, and economic and so on. There require
scientific analysis of Nepalese economy. Therefore the main aim of the study is analyze the state of
economic structure and causing factors, which are most influencing on that. It is an effort to
explain the structural transformation process of Nepalese economy with light of theory of modern
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
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economic growth and other relevant theories to the context of least developed countries. This is
particularly focused in historical trend of economic transformation; structural shift, in terms of
labor force and GDP share sector wise; with categorizing agriculture and non-agricultural sectors,
to examine effects on structural shift of other related variable and to assess the major obstacles of
economic progress in Nepal.
This study depends on officially recorded data of Nepalese economy which are available in website
of national and international data base agency. Qualitative and quantitative both approaches are
applied to analyze and describe the findings. This introduction part begin with background follow
short identification of study area, statement of problem, declaration of research question,
discussion on theoretical framework, literature review of previous study on the selected field,
Research methods, delimitation and structure of paper.
1.2. A glance on the study area
Nepal is a small country, in terms of geographical size with total area 147,181 square km, located in
south Asia, between giant nations India and China. It is a land locked countries, three sides: east,
west and south surrounded by India and in northern side bordered by china. Geographically it is
divided into three regions: mountain region (15 percent), hilly region (68 percent) and Tarai region
(17 percent). The Himalayan mountain range stretches east to west. There contain eight peaks
having more than 8000 meter height, including Mount Everest. The hill and Tarai (plane land)
region also expanded east to west likely parallel. The country is assumed rich in water resources,
with more than 6000 permanent flowing rivers, carrying potentiality more than 83,000 MW hydro
electricity productions, whereas, current generation is only 650MW.(CBS, Nepal in figure 2008)
Total population is recorded around 23 million, according to national census report of 2001 and es-
timation for 2008 is about 29 million. Main races of the inhabitant are indo-Aryan/Caucasoid and
Tibeto-Burman/magnoliad. By religiously: Hindus are 80percent, Buddhist 10 percent, Islam 4 and
rest others. Languages are speaking mainly of Indo-European family, Tibeto-Burman family and in
tiny number found Munds and Dravidian family too. Official language is Nepalese, have mother
tongue of about half of the population and common contact language of almost Nepalese of more
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than 60 language speakers. Numbers of ethnicity and cast system are another identity of Nepalese
society. (CBS, Nepal in figure 2008)
Present territory of Nepal was founded by national integration, initiated by king of shah dynasty,
Prithvi Narayan shah, in 18th century. The latest shape of area was fixed by Sugauli treaty between
British India and Nepal after Anglo- Nepal war; consequence, lost one third parts of existing
territory of Nepal to British India. After then, Nepal sank into internal disputes among ruling elite
rank, that situation became the main cause for establishment of autocratic Rana’s family regime
lasted 104 years up to 1950. During the period, Nepal stagnant into medieval types closed socio-
economic system and harsh political dictatorship of Rana’s family. It was isolated state from rest of
the world. People were deprived from educational right along with other modern development
facilities. The country was remained, like prison of the rulers. In 1950, after demise of Rana regime;
there was established political system of constitution monarchy and multi-party democracy. In
1959, first parliamentary election conducted and first elected government formed in Nepal’s
political history. But within a short time, then king took over the state power, suspended
government and parliament and started Party-less Panchayati regime with active monarchy. There
was banned on activities of political parties and democratic activities of peoples since 1960. That
panchayati system lasted up to 1990; the people’s movement of 1990 restored the multi-party
democracy and the constitutional monarchy. Unfortunately, since 1996 Maoist arm insurgency
emerged into country and intense the violent conflict over the country. In this context, royal took
over again occurred in 2005, with sidelining main stream political parties. That incident made
alliance between rebellion Maoist and parliamentary parties against king’s political step.
Ultimately, king compels to bow to peaceful people’s movement of April 2006 and gave up the
power to political parties. The rebellion Maoist party also came into peace process and signed in
peace agreement. Election of constitution assembly conducted in April 2008 and the elected
assemble abolished the monarchy system and declared federal republican Nepal in first of June
2008. The new constitution forming work is under the process into constitutional assembly. In this
way Nepal witnessed political upheaval even after modern history from 1950 too.(Basnet,2009)
Only after 1950, in Nepal introduced modern economic development process as well as began of
modern political history. At that time there were available very limited modern infrastructural
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facilities: 335 telephone lines, 376 km motor able road (only in capital city) and 3 MW electricity,
those were only comfort for ruling family. The first public budget was announced in 1952, five years
development planning system implemented since 1956 and central bank also established in same
year.(Devkota, 2007). In 1985 IMF provided loan to Nepal and implemented of an economic
stabilization policy. From 1987, there started of the first structural adjustment policy and
introduced new industrial enterprising act. In 1989, ruptured the trade and transit agreement
negotiation with India then India started the economic blacked. That blacked was removed after
restoration of multiparty democracy in Nepal. In 1991 the Nepalese rupees devaluated by 17
percent against US$ trade and transit agreement with India signed. In 1992, was introduced the
second structural adjustment policy and promulgation of the industrial enterprise act and
technology and foreign investment and technology act. 1996 started of the agricultural perspective
plan (1996-2015)(RIDA,1997).
1.3. Review of previous studies
On the development process of Nepalese economy, scholarly studies and analysis are conducted by
individuals and institutional level. Some of them might be relevant to grasp the key reflections in
the context of this study. In 1988, the paper was published by Sukhdev Shah; on the topic of
‘Nepal’s economic development; problems and prospects’. Shah examined with this work; the
probable causes of Nepal's low economic growth rate period of the 1965 to 1985 along with that
he evaluated the country's economic prospects for the rest of the century. In 1985, Nepal’s
government had targeted development goal that raising the Nepalese people’s living standard to
the average of Asian standard by the year2000. On the government’s goal, the paper pointed out
that the goal would be difficult to achieve without an improvement of efficiency in the use of
resources and further commented as; Nepal presents a classic case of country caught in the
poverty gap. The concluding remark of the paper is; in Nepal beginning in the mid 1970’s an
increasing larger proportion of the greatly enhance level of total investment has come to be
invested in productive sector of the economy; however, no comparable shift in the economy’s
growth performance seems to have occurred. In this way apparent lack of association between
input supply and output growth suggests that inefficiency in the use of resources rather than their
actual shortage has emerged as the major constraint to improving living conditions in Nepal (Shah,
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1988). Shah has explored that inefficiency to economic resources has been serious problem in
development process for Nepalese economy.
A paper has made by Kishor Sharma, published in 1997on the issue of liberalization, which policy
was fully adopted in Nepal, with the title of ‘economic liberalization and manufacturing
productivity’. The paper tried to explain the impact of trade orientation policy on manufacturing
productivity. Sharma mentioned the hypothesis that has confirmed by the study of higher income
nations that ‘outward oriented economy grows faster than inward oriented economies because
there could be utilized resources more efficiently’. However the experiences of higher income
countries cannot be generalized to lower income countries due to the level of human capital, state
of physical infrastructure, and level of R&D are substantially lower in those developing countries.
Nepal adopted an outward oriented strategy from mid 1980. There has been calculated the
comparative state Total factor productivity of manufacturing sector between the two policy regime
periods, before and after the liberalization, to observe the influence of liberalization on the
manufacturing sector. According to the paper Nepal’s overall manufacturing TFP declined both
before and after the economic reform of the mid 1980s, the smaller decline in the latter period
that fact provides some support for the claim that liberalization may lead to higher TFP. The
continued falling of TFP rate show that liberalization is not a sufficient condition for rapid
productivity growth in the developing economies. Therefore the reforms have had little impact on
the macroeconomic front in the context of Nepal. The appropriate investment policies to improve
human capital and infrastructure appear to be essential if the potential benefits of the
liberalization are to be fully achieved (Sharma, 1997). The Sharma’s findings on the study is weak
aspect of total factor productivity that also justify the conclusion of former shah’s paper
inefficiency is the major problem of Nepalese economic performance, because TFP also reflect the
efficiency aspect of economic performance. As that the manufacturing sector could be benefited
from liberalization opportunity due to lack of sufficient efficiency.
A Journal article by Kishor Sharma entitled liberalization and structural change evidence from
Nepalese manufacturing: examined the consequence of liberalization and structural change in
Nepalese economy. This article pointed out that liberalization may not solve the problems of low
income developing countries strong due mainly to low supplied elasticity and early stage of
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industrialization. The result suggests that some structural change in manufacturing output and
trade oriented, however no significant improvement was recorded in the overall productivity
growth and spatial distribution of manufacturing, which appear to be due mainly to the lack of
basic infrastructure and shortage of skilled manpower. This appropriate investment policies to
improve human capital and infrastructure appear to be essential if the potential benefits of
liberalization are to be fully achieved.(Sharma,2000)
A research paper from (RIDA) Japan, in the title of Future challenge of Nepalese economy explain
the Macroeconomic indicators, those have been favorable after liberalization, the GDP has been on
expanding trend in the 1990 which was supported by growth of the industrial and services sector.
This paper points out problem of the market system, which has been introduce in Nepal, however
the system does not function effectively, one reason is that Nepal still on the process of forming of
unified market. There has many structural problem of economic development such as dependency
on Indian economy and numbers of constraints in macro economy. Therefore, Marginal propensity
of import to GDP is extremely high at 66 percent due to weakness of domestic industries much of
domestic demand has leaked to overseas. The paper suggests: Nepal should make efforts to
improve the economic infrastructure that is essential for industrialization and it also should expand
gradually its domestic market and develop domestic enterprise through development of agriculture
and tourism goods that plays the role of supplying investment funds. At the second stage it should
aim at export oriented industry by introducing FDI. Nepal should overcome various bottlenecks to
follow the path above mentioned. It will particularly be necessary to resolve problem relating to
low level of developmental management capacity in the government and efficiency of the financial
system. (RIDA, 1997).
The paper has divided the Nepalese economic development history into three periods after 1950
and evaluated comparatively macro economic performance between the periods. According the
paper the three periods are as: the low economic growth was in first period under the active
monarch until 1984; the second was transitional period from partial liberalization in 1985 to 1990
and the third period in which the government carried out economic liberalization policies on a full
scale after 1991. The first period has remained under the semi- feudal system, the economic
growth seems slow despite continuous implementation of economic plans, the growth rate of real
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annual GDP per capita was around 1 percent and the pace of industrialization was slow . As a
result, the gap of both fiscal and trade balances had been deteriorating. Facing the crisis of the
balance of international payments, Nepal tired to find a way out through partial implementation of
economic liberalization after 1985. The implemented policies were the stabilization policies mainly
consisting of improving the trade balance supported by the IMF and the World Bank. In 1987 Nepal
started the first structural adjustment program with implementing financial reform, reform of
public enterprises and trade liberalization. In 1992 Nepal implemented the second structural
adjustment program consisting tax system reform designed to expand tax revenue sources, trade
liberalization including reduction of customs duties and abolition of quantitative restriction of
import, reform of public enterprise through privatization development of the capital market and
deregulation on foreign direct investment. As the government of Nepal rapidly promoted these
reforms the market economy system has been gradually introduced in the country.(RIDA,1997)
GDP has been on an expanding trend in the 1990s, supported by the growth of industrial and
services sectors. The real GDP annual growth rate per capita, 2.9 during the 10 years between 1985
and 1994 was much higher performance as compared to -1.1 percent for the average of other low
income countries. The export volume has been expanding by 11 percent annually during the same
period. However following structure problems still remains, on the industrial structure the ratio of
primary industry to GDP still remained 42percent with no major changes in the economic structure
in which the agriculture sector produces the major portion of GDP. Nepal as a land locked country
has historically been heavily influence on Indian economy and its neighboring country, India, its
border with India has become an open border permitting small lots smuggling and capital transfer.
However for a trade policy a more complex policy is necessary aiming at strengthening
competitiveness to export to the third countries taking into account the fact that trade with India
has comparably decreased in the recent years (RIDA, 1997).
The article of John Cockburn on the issue of impacts of liberalization on poverty reduction ,
computable general equilibrium micro micro-simulation Analysis focus on the impacts on income
distribution and poverty of macroeconomic policies such as first reform and trade liberalization .
The writer’s findings are that trade liberalization has quite complex poverty and distributional
impacts, which can only be properly understood in this type of fully disaggregated model. Urban
households are the big winners as initial tariffs were highest in agricultural sectors. Poverty falls in
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urban areas and increases in rural areas, particularly among the moderately poor. The strength of
the impacts increases with the level of income and especially strong, mostly positive, effects are
observed in the highest income levels. This may explain the apparent increase in income inequality
in the urban and rural hills and mountains region. Poverty falls in urban areas and appears to
increase in rural areas, particularly among the moderately poor as opposed to the very poorest.
The absolute impact of trade liberalization whether it is positive (in the urban areas) or negative (in
the rural areas), generally increases the level of income. Indeed, there appear to be very strong,
mostly positive, impacts on the very richest individuals. This may explain our finding of increased
income inequality in the urban and hills/mountains regions.(Cockburn,2001)
Nepal: country study Report (Khatiwada and Sharma, 2002): reviewed the overall performance of
Nepalese economy. This study has examined the sources of growth in Nepal and explores the
empirical relationship between economic growth, capital accumulation, labor force and total factor
productivity. Major findings of the study on economic growth and nature are as: Nepal has
historically low growth country with average growth rate less than 4 percent during the three
decades and half, growth constraint by low agricultural productivity, land locked with limited
natural resources and poor human resources, have further slowed the pace of economic growth.
The paper Major problem identified as: high population growth rate low saving rate, less than 15
percent of GDP, private sector shaving not satisfactory due to more people remained in poor state
and public sector saving seems negative and very slow. This growth rate has been very erratic and
investment ratio has more than saving. Investment saving gap level seems high 11.4 in the latter
half of the 1990. The Nepalese economy is relatively open with the trade-GDP ratio at more than
40 percent; Nepal has been facing a trade deficit which rose to as high as 20 percent of GDP toward
the second half of the 1990; despite that the country maintained a balance of payment surplus for
most of years (Khatiwada and Sharma, 2002). The study pointed out on public finance that
government expenditure growth has seemed sluggish even with the budget deficit due to very low
level revenue mobilization. The study found that growth of output in Nepal is contributed basically
from accumulation on capital; whereas, the total factor productivity does not contribute much to
the countries growth process. There was manifested in the negative value of the change has to
productivity for this sample period as a whole. According to the study, Nepal could not gain the
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return of structural adjustment policy, so quickly, due to absence of stable political environment.
new investment has remained in sluggish notion and the pervasive weakness in fiscal and financial
sector has persuaded and backdrop for frustrated economic growth. The report pointed out on
economic environments of country as that: repeated threats to business and industrial community
and growing industrial insecurity have added uncertainty to long terms investment in the country.
On about the fiscal sector it is strategically vulnerable owing to low level of revenue mobilization
for finance government activities, high dependency of development budget on foreign financing
and continued deficit in the budget. The performance of budget implementation aspect, it has
remained a permanent feature with less than 80 percent of targeted budget being spent. Similarly,
the foreign aid utilization also seems problematic with aid disbursement remain for below than
commitment. The consequence of Low development spending also translated upon poor growth
performance of the economy. Nepal’s external sector is basically weak with perpetually increasing
trade deficit.( Khatiwada and Sharma,2002)
To the evaluation of structural aspect the economic growth of the country is contingent upon
performance of agricultural sector which affected by weather condition. The overall growth rate of
the economy during the past three decades averaged 4.3 percent suppressed by the growth rate in
agriculture which stood at less than 3 percent averages. On accounting the major sources of
growth is basically the capital accumulation process however the total factor productivity therefore
does not contribute much. The paper suggests to the growth process promotion of high economic
growth is possible through enhancing factor productivity in country, in the East Asia also that was
experienced by factor productivity. Nepal also need achieves its level of education facility and skill
development activities for Reaping the benefits of information technology revolution is equally
necessary to enhance total factor productivity in the economic growth process. .( Khatiwada and
Sharma,2002)
Maoist insurgency in Nepal dates back to February 1996 when the “people’s war” was first
launched in the hills of mid-western Nepal by the underground Communist Party of Nepal–Maoist
(CPNM), which rejects the fundamental premises of Nepal’s constitutional monarchy and
parliamentary system. The insurgency sharply escalated in 2001 and has adversely affected
economic performance since then. Economic growth slowed to an average of 1.9percent over the
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fiscal year (FY) 2002–FY2004 period compared to 4.9percent in the decade preceding that.
Economic performance has been affected through different channels. More than 12,000 lives have
been lost and physical infrastructures worth at least $250 million have been destroyed. Conflict
related disruptions, such as strikes, security checks; blockades, shutdowns, and extortion have
increased the costs of economic activity and contributed to an economic slowdown. The conflict
has caused internal and external displacement of people. Nearly 400,000 rural families have been
internally displaced while thousands of others have crossed over to India in search of work. The
private investment rate has declined from 15.4percent in 1996 to 12.6percent in 2004, as private
investors have desisted from making investments and foreign investors have stayed away the
economic costs of conflict, focusing particularly on the impact of continued decline in development
expenditures on gross domestic product (GDP) growth. The Nepal Macro econometric Model is
used to estimate GDP growth under different conflict and no-conflict scenarios of development
expenditures. Scenario analysis indicates that if development expenditures decline at the current
rate (4.2percent), the total GDP growth loss is 8.3percent for the period between the fiscal years
2005 and 2009, an average loss of 1.7percent of growth per annum. If the conflict intensifies and
development expenditures decline at twice the current rate (8.4percent), total GDP growth lost is
10.3percent, an average loss of 2.1percent of growth per annum. If the FY2001–FY2004 patterns of
growth are assumed for the FY2005–FY2009 period, the simulations show that up to 57percent of
the loss in economic growth could be due to the decline in development expenditures. It is
observed that the annual costs increase with each successive year of conflict. This is because the
effects of decline in development expenditures accumulate each year, affecting GDP growth more
as the conflict lengthens (Ra& Singh, 2005)
A study on Nepal Macro econometric Model was undertaken by Sung sup Ra and Chang Yong Rhee
on the behalf of ADB this paper describes a medium-sized Keynesian income expenditure model of
the Nepalese economy. The forecasting results show that political stability and the inflow of foreign
borrowings are very important Factors in determining the long run growth prospects for the
Nepalese economy.(Ra and Rhee,2005)
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The study paper by Kundan Majagaiya focuses on the linkage between FDI and economic growth in
case of Nepal. The study employs with the relationship between foreign direct investments and
economic growth using annual data for the period 1980- 2006. The empirical analysis on basis of
ordinary least square method suggests that there is positive but small relationship even considered
negligible where as unit root test suggested that variables that used in this are non-stationary in
their levels, the Johansen co-integration test suggests that there is remained long-run equilibrium
relationship among the variables and the Granger Causality test shows that casual effects of
Foreign Direct Investment on the Gross Domestic Product seems after four year. There seems no
direct association between FDI and GDP in Nepal. Therefore, the Nepalese Gross Domestic Product
is not influenced significantly by FDI. (Majagaiya, 2007)
A study conducted by Surendra Raj Devekota (2007) with the topic: socio economic development
in Nepal past mistakes and future possibilities. This paper pointed out that, past five decades Nepal
has witnessed the growth of rent seeking elites and increased income inequality in spite of huge
national and international expenditure. Devkota remarks that historical process as socio economic
development of Nepal as; the second half of the fifty which of the period of a reform but this was
interrupted by king Mahindra’s unfortunate political coup of 1960. The economic growth in the
period of 1961 to 1990 was very sluggish and that progress after 1990 seems encouraging but real
achievement has been over-shadowed by the weakness of the politico-economic characters of
ruling classes. In spite of few positive incidence of economic growth development in general has
yet to satisfy the large mass of people who are struggling with stagnant agricultural yields
increasing number of hungry people and widening income disparity. That paper concluded as Nepal
needs a holistic structural change in its socio-political and economic system (Devkota, 2007). This
paper evaluated the Nepalese economy with the perspective of political and institutional economy
pointing that unfavorable political system contributes to hindrance on economic progress and
weakness of the political –economic characteristics of ruling elite also is the constraint even the
political system is democratic and open which was witnessed after 1990 in Nepal and the realized
that in needs holistic structural change in socio political and economic system. It means that the
main problem of Nepalese economy is insisted in overall structure of socio-economic and political
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
12
structure. Which is main source of inefficiency of Nepalese economic performance that also
indicated by former articles.
A paper on Inclusive Growth in Nepal by Magnus Halfback Nepal has had a good economic growth
since the mid 1980s and throughout the 1990s. This has led to increased inequality, but in general
the poor have also benefited economically. The exception is some ethnic groups of the central and
eastern hills, where labor migration has been more limited. Poverty was still high in 2003 in
particular within the Tamang and Rai communities. Poverty has declined among hill Dalits, and
probably also among terai Dalits, which can be explained by labor migration to India. However,
poverty rates are still high among the Dalits. The main pathways out of poverty from 1995 to 2003
have been landless farm workers who became subsistence farmers, construction or manufacturing
workers, and subsistence farmers who value added to their income by working in the same trades
of construction and manufacturing industries, or as migrants to India. A number of policy
interventions may support an inclusive growth process. Education and training programs leads to
improved human capital. Subsidized health services insure people against major risks, which, in
turn, allow them to make profitable investments rather than investments that make them able to
handle different types of risk. Investments in physical capital, like transmission lines, roads and
irrigation is necessary for economic growth, and a broad-based tax system is necessary to finance
these and other costs. Finally, some targeted programs may be beneficiary, such as land
redistribution to landless Dalits in remote villages of terai, and experiments with a rural
employment guarantee in the same areas (Hatlebakk, 2008)
A work on Geography, Poverty and Conflict in Nepal by Quy-Toan Do, Lakshmi Iyer, and This paper
conducts an empirical analysis of the geographic, economic and social factors that contributed to
the spread of civil war in Nepal over the period 1996-2006. This within-country analysis
complements existing cross-country studies on the same subject. Using a detailed dataset to track
civil war casualties across space and over time, several patterns are documented. Conflict-related
deaths are significantly higher in poorer districts, and in geographical locations that favor
insurgents, such as mountains and forests; a 10 percentage point increase in poverty is associated
with 25-27 additional conflict related deaths. This result is similar to that documented in cross-
country studies. In addition, the relationship with poverty and geography is similar for deaths
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
13
caused by the insurgents and deaths caused by the state. Furthermore, poorer districts are likely to
be drawn into the insurgency earlier, consistent with the theory that a lower cost of recruiting
rebels is an important factor in starting conflict (Do &Lyer, 2009).
Sager Raj Sharma on Role of Private Sector in Nepal's Transformation, The purpose of this paper is
to initiate a debate of the role of private sector and foreign direct investment in conflict
transformation. Development in Nepal has miserably failed so far because of various factors, such
as over dependence on foreign aid, failure of donors to ensure the proper use of their funds and
effective coordination of their activities, centralization in Kathmandu of both government and
private structures, widespread corruption and abuse of authority by bureaucrats and politicians,
and the exclusion of large sections of the population from a role in devising policy and program
development, to name a few. This paper argues that instead of continuing to rely heavily on foreign
aid, Nepal should now focus on the roles private sector actors can play in transforming this country
and mitigating possibilities of future conflicts. It argues that effective and positive roles for the
private sector can be learned from the experience of countries like Sri Lanka. The paper thus argues
that private sector actors in Nepal should also ensure that their activities are consonant with
sustainable peace, which has not always been the case. They should concentrate on finding ways to
support efforts to develop suitable conflict prevention policies and practices, recognizing the
interrelationships between conflict and social, political, economic and cultural factors. The debate
on this topic has got to a stage at which there is a degree of consensus that business has a role to
play in a sphere of activity that remains dominated by civil society and government actors. Private
companies are both part of the problem and also potentially part of the solution
The previous study of Nepalese economy which are mentioned above, conducted with various
perspective on economic development. Shah evaluated the performance of Nepalese economy
with perspective of capital investment and resource utilizations. He pointed out that inefficiency in
utilization of resource is main problem of Nepalese economy rather than the shortages of the
resources. According to the diagnosis of shah only increase in investment in Nepalese economy is
not sufficient. Mobilization of resource does not give optimum output without improvement in
efficiency. Some studies are conducted with perspective of economic liberalization and
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
14
reformation. Nepalese economy had started partially liberalization from1985 and after 1991, there
was fully liberalized. Sharma has tried to assess the impact of the liberalization policy in Nepal. His
conclusion is that there is on relevancy of the hypothesis that outward oriented economy growth
faster than inward oriented economy. He agrees with the argument that the hypothesis cannot be
generalized to lower income country like Nepal. Therefore Nepal being a lower income country, it
has not been benefited by the outward oriented economic policy despite highly liberalized on
international trade in reformation of internal economic policy. According to the study the impact of
liberalization on manufacturing industry seems that over all manufacturing TFP declined both
before and after the economic reform. Therefore it is experienced that liberalization may not
sufficient condition for rapid productivity growth despite little positive impact on Nepalese
economy. Improvement in human capital and infrastructure seems most necessary for proper
economic growth in Nepal. Jhon Cockburne’s study was on impacts of economic liberalization on
income distribution and poverty reduction. According to that poverty had decreased in urban area
but increased in rural area. There was apparent increase in income inequality in urban and rural
both areas. A Khatiwada and Sharm’s finding is historical low growth in Nepal. There is assessed
major constraint of Nepalese economy such as: low agricultural growth, land locked situation of
the country, limit natural resources, poor human capital state, sluggish public expenditure growth,
increase trade deficit, output growth depend on only contribution of capital accumulation, security
problem due to Maoist insurgency, low level of revenue mobilization, foreign aid disbursement far
below than commitment, weather dependant agriculture. There are some analyses of problems of
Nepalese economy by political economic perspective. Autocratic rule and political instability
indentified as hindrance of economic progress of Nepal. In later period Maoist insurgency seems
main cause of disturbance for economic environment in the country.
Therefore the literatures are found related to explain the Nepalese economy with perspective of
capital investment, economic liberalization and reformation, political economy. On the issue of
economic growth performance of Nepal: Shah examined the hypothesis that investment is key
factor for the economic growth. The study result could not support the hypothesis and he suggests
that efficiency for resource utilization should have improved. Sharma discussed on implication of
liberalization policy which would have strong positive influence on economic growth and
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
15
productivity. It has justified that liberalization is not sufficient condition for development in Nepal
and human capital and infrastructural development must. Khatiwada et al’s experience shows that
the structural adjustment policy could not provide quick return for economic output. There are
pointed out numbers of problem and obstacles in Nepalese economy such as: low agricultural
productivity, lack of natural resource, deficiency of human resources, inadequate investment level,
political instability, low ratio of revenue collection, weak performance in public budget and
program implementation, growing trade deficit. There is suggested the development strategy for
Nepal as to focus on education and catch up the information technology properly. Ra & Singh has
observed the Nepalese economic development process with insight of political environment as
determining factor for economic transformation. The economic development process of Nepal
seems adversely affected by Bad political environment of Nepal such as instability of government
and Maoist insurgency. Political stability and foreign borrowing are suggested as best strategies for
Nepalese economic development. Majgaiya has examined foreign direct investment (FDI)’s role for
economic growth of Nepalese. The study result did not show the desirable effect of FDI on
economic growth of Nepal. Devekota has evaluated the Nepalese economy with perspective of
political regime and democratic system seems best for economic development in Nepal. Jhon
Cockburne has studied the poverty and inequality issue in Nepal with relating to liberalization and
the result has found that the economic liberalization in Nepal has not supported to reduce the
existing poverty and inequality. According to study of Hatlebakk, employment opportunity for
lower income or socio-economically exclusive social groups, created by manufacturing sector and
construction projects has benefited nicely. Foreign employment also is contributing to economic
enhancement of lower income class people. The poor groups and regions are base of political
rebellions such as Maoist rebellion in Nepal; it is findings of Do & Iyer’s study. By the review of
above literature it can be concluded that hypothesis that investment, economic liberalization and
foreign direct investment factors can play decisive role for rapid economic growth; the studies have
not justified the hypothesis in the context of Nepalese economy. The hypothesis that political
stability and democratic regime can provides positive environment for economic prosperity in a
country; which has been supported by the study results. In this way it is justified that poverty is
main reason for social conflict and violence. The Previous studies show that some major
economic development hypothesis such as investment, liberalization and external supports are not
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
16
seem so more relevant to analyze the economic problem of Nepal. There may have yet to
investigate and diagnosis proper problems of the economy, for that it is need to further studies
with various dimensions and angles. There seems lack of that wide ranges study in this field for
Nepal as well as structure transformation perspective. It is important to study the historical
structural pattern of Nepalese economy due to economic development outcome of economic
transformation; the economic transformation is reflection of structural transformation. Therefore
this paper is attempted to study the Nepalese economy with the hypothesis of structural
transformation process is the almost reflection of economic development.
1.4. Statement of problem
Nepal still remained as one of least developed county in terms of social economic indicators GDP
per capita ranked at 175th Out of 185($427,world bank,2009), Gini-coefficient at 32th out of
130,(47.17,2004), human development index 137th out of 178(UNDP,2006). There are several
constraints to economic progress; still major parts of population depend on agricultural primary
sector, lack of industrialization, burden of trade deficit, low development expenditure high regular
expenditure, growing unemployment, underemployment political instability, growing inequality,
insecurity, corruption and growing disparity inflation. Such kinds of crisis are deepening further. To
Identify Root causes of the crisis for slow pace of economic growth and find out the way to
overcome from the vicious cycle of crisis, need to analysis of related factors of problems. The
proper identification of effective causes of problem can be helpful to find out the remedy of those.
There are different approaches for analysis of different aspect of the economy. The fundamental
aspect of economy ,is structural shift process, in terms of population economically dependence
share out of total population and GDP share out of total GDP of the country transferring from
agriculture sector to non- agricultural sector. For the desirable speed of economic growth there
should have a proper speed of structural shift process of labor forces from traditional agricultural
sector to modern non-agricultural sector such as manufacturing and services. In Nepal agriculture
sector share about 33 percent of GDP (Economics survey, 2010) and according to 2001th national
census 67 percent population is dependent on the agricultural sector (CBS). The agriculture sector
prevail zero marginal productivity of labor and consist hidden unemployment or underemployment
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
17
condition. This is the evidence of underdevelopment nature of the nation. To gain prosperity of
economy there should be structural transform from agro base to non- agro base sector. This
structural transformation process is still incomplete and running with slow pace. Therefore, the
causes of slow economic growth of Nepalese economy should be identified by investigation in this
aspect of the economy
1.5. Research question
To address the afore mentioned problem in the study is directed by following research question
1) how is speed of structural transformation process of Nepalese economy
2) what are the most effective factors for the process
3) which are the obstacles to the process
1.6. Theoretical framework
There are several theoretical insights to analyze economic phenomenon of the developing nations.
There are re-statements of some economic growth and development theory related structural
transformation aspect of economic system
Economic growth is regarded as a steady increase in national income and per capita income of the
society over time and the terms of economic development give more wide sense of economic
progress. There is big distinction between the two. Economic growth refers to the increase in an
economy’s real gross domestic product (GDP) and income over time. Real GDP is the economy’s
total output of goods and services usually measured over of one year. The amount of achievable
economic growth would depend on the human resource acquisition of the economy technological
improvement, amount of capital investment, natural resource endowment and degree of its
exploitation and the managerial know how in the economy(Potter, 2008). Economic growth is
defined in terms of increase in per capita real output or per capita income. To reflect economic
development, Development encompasses the process through which societies or nations or
regions raise their per capita output and income by improvements and growth in productivity and
how these translate into per capita economic well-being in the society(Kuznet,1973).
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
18
Economic growth is regarded as outcome of structural transformation in economy due to economic
development. For development, not only the economic growth is important but sufficient
structural changes require in economy for translating the growth in to development. Those
countries with lower middle and upper middle incomes has per capita gross national income (GNI)
between 756$US to $US 9266 has characterized as the ‘developing countries’. The concept of the
developing countries is not confined only to per capita national income but other considerations
are also very important such as; level of education, health facilities, human resource development
and human rights status in countries. For the specifying the level of the development various
components have been given for portrayal of structural diversity of developing nations. These
components are very important considering the socio economic development and culture of a
country. the following component are considered important in the context of the economic
development such size of the country, its historical and colonial background, physical human
resource endowments, ethnic and religious composition, the relative importance of its public and
private sectors, the nature of its industrial structure, its degree of dependence on external
economic and political forces and the distribution of power and the institutional political structure
with in the nation. In the present day world the development of a country is determined by the
UNDP Human Development Index (HDI).
Economic growth is a positive change in the level of production and services over a certain period
of time. Nominal growth is defined as economic growth including inflation while real growth is
nominal growth minus inflation. Economic growth is usually brought by technological innovations,
human resources and positive external forces; the most accepted definition of economic growth is
given by Simon Kuznets. According to Simon Kuznets, modern economic growth is: a country’s
growth may be defined as a long term rise in capacity to supply increasingly diverse economic
goods to its population. This growing capacity based on advancing technology, institutional and
ideological adjustment that is demand. Advance technology is to the promising sources of
economic growth. It is necessary conditions, if technology is to be employed efficient and widely
institutional and ideological adjustment must be made to affect the proper use of innovation
generated by advancing stock of human knowledge. he mentioned the six characteristic of modern
economic growth : first – high rates of growth of per capita product , second rise in productivity
rate of factors; third high rate of structural transformation, fourth ideological change such as
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
19
urbanization and secularization, five technology change such as means of transportation and
communication, Sixth internationalization of domestic economy.(Kuznet,1973)
Simon Kuznets warned the possible problems emerge in the process of structural change and
society and suggested the responsibility of modern state to resolve the problems without
unnecessary cost. He defined the structural change and pointed out the probable conflicts into
society and risk of break out severe internal civil war if not have managed conflicts which produce
in the structural transformation process. The Structural change is that it represents shifts in the
relative shares in the economy of the specific population groups attached to particular production
sectors. Since economic engagement represents a dominant influence in the life of people, the shift
in the share of a specific sector. Economic growth perforce brings about a decline in the relative
position of one group after another-of farmers, of small scale producers, of landowners change not
easily accepted. The continuous disturbance of preexisting relative position of the several
economic groups is pregnant with conflict-despite the rises in absolute income or product common
to all groups. In some cases, these conflicts did break out into overt civil war. Only if such conflicts
are resolved without excessive costs, and certainly without a long-term weakening of the political
fabric of the society, is modern economic growth possible. The modern national state-plays a
crucial role in peacefully resolving such growth-induced conflicts this is not the only economic
function of the state; it can also stimulate growth and structural change. (Kuznets, 1973)
The economic growth naturally triggers development reflected in macro-economic indicators,
growth and development are mutually inclusive and natural bed fellows. The term economic
development though refers to some economic structure changes such as change in industrial
production change in occupational structure change in foreign trade, technological progress along
with change in national income and GDP. Economic development is the basic factor of keeping the
pace of economic growth. the objective of economic development is to raise GNP, poverty
reduction, greater employment opportunities, equal distribution of income, better health facility
etc. in strictly economic terns the traditional development was considered to be the capacity of
national economy whose initial economic condition has been more or less static for a long time to
generate and sustain an annual increase in its gross national product of GDP at rate of 5 to 7
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
20
percent or more. Economic development now also includes and redefines in terms of reduction or
eliminating of poverty, inequality and unemployment within the context of a growing economy.
The rostow’s concept of economic development is called five stage theory of the stage of the
economic steps of modernization. According to the theory the first stage of economic society is
traditional agricultural system. It is the pre- industrialized feudalism society, second stage: pre-
condition of take- off; happen initiation of dynamic development efforts with high rate of
investment expansion of industrialization and lobar force transforming from primary sector to
secondary and tertiary sector, third is: take off stage; characterized by self-sustain growth when
no needs of exogenous inputs , fourth stage is: drive to maturity; occurred continue investment
by 40 to 60 percent of GDP; economic and technical progress dominants this stage and last stage
is: age of mass consumption. According to the theory underdevelopment with its poverty are the
effects of dualism, between strategies and socio- economic structure. It is result of endogenous
factors to development that has to be taken initiation from outside (Potter, 2008). According to the
theory those stages are not merely a way of generalizing certain factual observation about the
sequence s of development of modern societies. They have an inner logic and continuity. The
advanced economies had all passed the stages of take-off in to self sustaining growth but the
underdeveloped countries were still either in the traditional society or followed a certain set of rule
of development. Therefore, he suggested that as a principle and precondition for takeoff the
mobilization of domestic and foreign saving in order to generate sufficient investment to accelerate
economic growth is necessary(Todaro,2003). The economic mechanism that more investment leads
to more growth described by Harrod-Domar Growth Model ,which suggested that every economy
must save a certain proportion of its national income, however in order to grow it needs a new
investment representing net additions to the capital stock. These stages- of-growth strategies had
its inherent constraints for the attaining the sustainable growth. As per analysis of the Todaro a
country which can save 15 percent to 20 percent of GNP could develop at much faster pace as
compared to that country which saves less. So in this model development revolved around the
saving and investment ratio. New independent countries having low capital formation and want to
grow for instance 7 percent year should generate 21 percent saving investment ratio of national
income and who could save only up to 15 percent. This 6 percent gap has to be managed through
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
21
aid or private investment. In this way massive capital and technical assistance was transferred from
developed to developing countries.
The Lewis model of Structural transformation concentrated on mechanism by which developing
economies convert their domestic economic structure to a modern economy as most of the
developing economies were agro based. This model argued for development that transformation of
feudal society into industrial can bring development. As per the model the over populated rural
sector is characterized as underdevelopment sector because it has zero marginal labor productivity,
it has the surplus labor which cannot be utilized in agriculture as well as modern urban industrial
sector. The transfer of labor from the underdeveloped sector of agriculture to the modern sector is
the focus in this model. The velocity of the labor transformation is determined by the industrial
investment and capital accumulation in the modern sector. Therefore the modern sector is
considered a key to the self sustaining growth and employment expansion from the traditional
sector to modern is assumed to continue till all the surplus rural labor is absorbed in the modern
industrial sector. The traditional sector in agriculture can also be withdrawn but on high cost
because now the marginal product of the rural labor is no longer zero. Therefore the structural
transformation for the economy will keep the balance of economic activity while shifting from one
traditional sector to the modern sector
There are critics to the structural transformation model whether it is sufficient to explain present
context of underdevelopment countries’ economic transformation. Though historical growth and
development of Europe manifested the success of two sector model but generally there are strong
concerns of the contemporary developing countries on its key assumption that it does not fit in the
institutional and economic realities. for instance the model assumes that the rate of labor transfer
and employment generation in the modern sector is determined by the capital formation but if the
capital is reinvested in the labor saving capital equipment rather than duplicating the existing
capital as implied by this model the total would raise but it will do little improvement I aggregate
social welfare measured. The second assumption in the model which also found to be divergent to
reality is that there is surplus labor in rural area and full employment in the urban areas. Economist
based on the empirical research found that there is little surplus in rural location. One can conclude
that this model needs modification keeping in view the labor saving bias of most modern
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
22
technological transfer, non-existence of rural surplus gowning prevalence of urban surplus labor.
However, this model was exemplary on a conceptual description of the development process.
(Todaro, 2003)
According to the neocolonial dependence theory certain elite groups in developing countries such
as landlords, military elite groups and bureaucrats enjoy the benefits due to perpetuations of
international capital system of inequality. The multi –national corporation and Aid agencies like the
World Bank or the international monetary Fund which always emphasized for the continuation of
capitalist system through introduction of reforms do not serve the wider population but their
beneficiaries are the selected persons of the elite classes. Resultantly general reforms efforts are
not made and new colonial view of underdevelopment attributes a large part of developing world
to continue worsening poverty to the policies of the industrialist capitalist countries. These types of
policy they achieve through their extension in the form of the small but powerful groups (Todaro,
2003).
In this context, false –paradigm model is attributed to the international dependence approach. As
per this model the adviser /experts from developed countries offers sophisticated concepts
theoretical structure and complex econometric models of development which lead development
countries to an incorrect economic policies (Todaro, 2003).
The neo-classical counter –revolution theory focuses on frees markets and dismantling public
ownerships and government regulations of economic activities .this theory is supported by world
bank and international monitory fund .for success of this theory they quote example of south
Korea, Taiwan and Singapore and failures in African and Latin America where the theory was not
adopted . Free market approach says that market is alone efficient which signals for investment in
new activity ultimately leading to upward growth. The neo liberal theory is an extension of the
market policy of he developed countries where the products of the developing and under
developing countries cannot compete in the international markets and thus indigenous industry is
crippled. It is considered another policy of the developed countries for the continuation imperialist.
(Todaro, 2003)
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
23
It is summarization of above discussed theoretical issues and argument. The term of ‘economic
growth’ is major concern in modern economy and developed world. However to explain the
economic progress of underdeveloped country the concept of ‘economic growth’ is not sufficient.
In this context the term ‘economic development’ is used in which consist more wide concept than
the ‘economic growth’. According to the economic growth concept ; the major determining factors
of economic growth are: technological improvement, human resources, amount of capital
investment, natural resources endowment, and degree of its exploitation ,managerial know how
for that. The per capita GDP is the main indicator of economic growth. The economic growth is
assumed the outcome of structural transformation due to development. According to Simon
Kuznets the characteristics of modern economic growth are: high rate of per capita product, high
productivity of factors, high rate of structural transformation, urbanizations and secularization,
internationalization. According to Todaro for sustain growth need to GDP growth of 5 to 7 percent
annual. The concept of economic development embraces sense more than economic growth. The
important components of economic development are; public and private sector, the nature of
industrial structure, degree of dependency on external economy, institutional and political
structure. The economic development refers that the some structural change such are industrial
production change, occupational structural change. The objectives of the development are taken as
growth with equality, social justice and welfare, common approach to education and health care
etc. According to Rostow to upgrade the underdevelopment country to developed state has to
reach on takeoff stages. The transitional stage of developing stages to developed stages is defined
as pre-condition of take off. The major characteristics of pre-condition to take off are; initiation of
dynamic development efforts with high rate of investment, expansion of industrialization, and
labor force transformation from primary sector to secondary and tertiary sector. For that have to
mobilize the domestic and foreign saving and has to generate sufficient investment to accelerate
the economic growth. The domestic saving should have 15 to 20 percent of GDP. The structural
shift model explain that the development state measure by transformation state from agro-base
feudal society into industrial modern society. The labor transfer to modern sector from tradition
agricultural sector is the transformation process. The velocity of the labor transformation is
determined by the investment and capital accumulation. Neo-colonial theory says that the
prescription of international development agencies and export may not relevant to proper
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
24
development of underdevelopment country and the support of those might be benefited mostly
elite group than grass root people. The neo-classical free market theory refers dismantling public
ownership and regulation of government on economic activities. Its assumption is that market is
alone efficient with signals for investment in new activities, ultimately leading to upward growth.
There is criticism of liberalization in the context of underdeveloped country that products of
developing and underdeveloped countries cannot compete the international markets and thus
indigenous industry are victimized to be crippled. Simon Kuznets has emphasized the role of state
to resolve and manage the internal conflict peacefully and efficiently which can emerge due to
relative position change of social groups in the structural transformation process and stimulate
development adopting suitable policy measures.
1.7. Hypothesis
On the basis of afore mentioned research question theoretical frameworks, there can be
formulated following hypothesis to examine empirical facts.
1. Shifting rate of labor force share towards non-agricultural modern economic sector has
positive impact on GDP per-capita growth rate.
2. Capital investment has positive impact on structural shift of labor force towards modern
sector.
3. Pace of Infrastructural development such as Road, electricity and communication is
positively correlated to the structural transformation speed.
4. Sector wise growth rate also is positively related to economic transformation
5. The structural transformation has positive impact on living standard which is indicated by
average expectancy.
6. Political factor heavily influence on economic performance.
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
25
1.8. Research methodology
1.8.1. Research design
This Research designed for case study of structural transformation process of Nepalese economy. It
aims to explore nature and characteristics of the transformation process. Qualitative and
quantitative both approaches are applied in the analytical description in the study
1.8.2. Data sources
The data and factual information is collected from online version data base of national and
international level agency. Main sources of electronic version data base are as: central bureau of
statistics, Nepal; Ministry of finance, Nepal; central bank of Nepal; United Nation statistical division;
World Bank; other web sites: Nation Master .com, Almost data are available from 1970 to 2008.
Basically for comparative study and historical review are done on the basis of latest version of the
world data base. The time series economic data of Nepal almost variables from 1961 to 2008 were
obtained from the World Bank data base. The time series data of national account and GDP shares
years from 1971 to 2008 are taken from the united state statistical division’s data base. Web pages
are visited of finance ministry of Nepal, central statistical bureau of Nepal, central bank Nepal to
collect relevant data and information. The data of sector employment share not available in yearly
basis those yearly data are compiled from ten yearly based data collected from various sources and
literature.
1.8.3. Analytical approach
The data and factual information are described with use of tabulation and graphical observation.
For quantitative analysis and empirical test of the hypothesis correlation and simple least square
regression model are applied.
1.8.4. Variables
Symbols Variables Description of variables
X1 1stdlnGDPC logged first different Real GDP per capita level (in US$),
X2 1stdlnNn-agri.empl logged first different Employment share in non agricultural sector(percentof
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
26
total)
X3 1stdlnElectricconspc logged first different Electric consumption per capita (in KWH)
X4 1stdlnRoad logged first different Road extension(in K.M.)
X5 1stdgcapi.form. logged first different Gross capital formation ratio (inpercent of GDP)
X6 1stdnnagrigdp
logged first different on Agriculture share in total GDP(in percent of
gdp)
X7 1stlnlifeexp. logged first different Life Expectancy at birth(in years)
X8 1stdlnforaid logged first different Foreign Aid receipt ,million US$(in current price)
X9 1stdlngcapi.expense
logged first different Development expenditure of government
(in ten million rupees)
1.8.5. Model specification
For regression analysis models are specified as following way
Model. I
The following model is specified to examine the effect the employment share shift to non-
agriculture sector and GDP share shift change to non-agriculture sector on GDP per capita
�� = � + ��� + ��� +
In the models positive effects of independent variables on dependant are expected
Model. II
The following model is specified to examine the effect of electricity and Road extension and
Gross capital formation, foreign aid, capital expenditure of government on GDP share shift
change to non-agricultural sector.
�� = � + �� + ��� + ��� + �� + ��� +
In the model positive effects of independent variables are expected on dependant variable
Model.III
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
27
The following model is specified to examine the effect of electricity, Road extension, Gross
capital formation, foreign aid, capital expenditure of government on employment share
shift to non-agricultural sector from agricultural sector.
�� = � + �� + ��� + ��� + �� + ��� +
In the model positive effects of independent variables are expected on dependant variable
Model .IV
The following models are specified to examine the effect of GDP share shift to non-
agricultural sector, GDP per capita, employment share shift to non-agricultural sector on life
expectancy
�� = � + ��� + ��� +
In the model positive effects of independent variables are expected on dependant variable
1.9. Delimitation of the study
This is limited by time and resource, and content of subject matter. This study is focused mainly on
structural transformation process and its some related factors which are mentioned in the text. The
result and conclusion are made on the basis of applied data sets. The technological and
institutional factors are skipped in the study even being influence of the factors on the economic
growth.
1.10 structure of this paper
This paper starts with introduction chapter including study back ground, review of previous studies,
and theoretical framework, and research question, statement of problem and research
methodology. The second chapter is related to comparative study of Nepalese economy with other
four Asian developing countries, the third chapter is on about macroeconomic performance of
Nepal, in fourth chapter empirical study of Nepalese economy and fifth, the last concluding
remarks.
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
28
CHAPTER-2
Comparative analysis of Nepalese economy
In this paper, the pre-assumption has that Nepal is still is in underdeveloped condition, economic
development speed and structural transformation process has remained in sluggish nature. Even
after the initiation of modern and planned development effort the macro economic performance
of Nepal seems inefficient and weaker. How and what extent Nepalese economic development
performance has been remaining relatively behind and slow that could justify from comparative
analysis with some neighboring country. To understand relative change in Nepalese economy there
are selected comparative figures of other four Asian neighboring countries along with Nepal. They
are two countries from South Asia such as Sri Lanka and Bangladesh and two from south East Asia
such as Thailand and Malaysia those were emerge after 2nd world war and progress late 20th
century, modern economic history started similar time as Nepal. The comparative analysis has
done on the basis of some major variable which can represent key aspect of the economy of
respective country. Those variables are GDP growth rate, GDP per capita growth, life expectancy,
population growth, ratio of gross capital formation out of GDP, export-import growth. The data set
for the study was extracted from World Bank online database. The World Bank database is highly
trusted source in international economic analysis. To comparative study is conducted on the basis
normal exchange rate US$ terms, however for the comparative study PPP may have more relevant,
but the PPP (purchasing power parity) form data could not find of the required period for this study
in the World Bank data base and other accessible sources. There are selected few major indicators
selected in this comparative analysis which can represent overall picture of the respective
economy. Those indicators and variables are related to population demography, economic growth
and GDP per capita, gross capital formation and internationally openness.
2.1 Total population
The total volume of the population indicates the size of the economy but it is not fixed as
geographical size. It is changing to growing trend generally. Population is very important
component of the nations. It is the ends and means of economic development. Population stability
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
29
is taken as favorable conditions to development in modern economy. The high density and growth
of the population size are further problems of the economy
Therefore, it is important to analysis comparative population pattern as well as economic aspects.
The following table presents comparative figures of the five countries on different time points.
Following table presents size of the population volume in different time points.
Table 2.1
Population
Population, total in million
Country/years 1961 1971 1981 1991 2001 2008 Change %1961-
2008
Bangladesh 55 71 93 118 143 160 189
Malaysia 8 11 14 19 24 27 222
Nepal 10 12 15 20 25 29 192
Sri Lanka 10 13 15 17 19 20 103
Thailand 29 38 48 57 63 67 136
Data source: World Bank, 2010
By the above table it is informed that Bangladesh is largest in terms of population size with 160
million populations on 2008 and Thailand seems second position since 67 million in 2008. Other
three countries: Nepal, Malaysia and Sri Lanka are in similar rank in terms of population size ranged
20 to 29 million in 2008. In 1961 this was ranged 8 to 10 million. During the period of 1961 to 2008,
the population size change in percentages form seems highest that of Malaysia by 222 percent and
Nepal stand in second place with 192 percent change and the Sri Land seems least change only by
103 percent
2.2 Population growth
Following table provides comparative figure of population average annual growth rate in different
period of these countries.
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
30
Table2.2
Population growth rate
Average Population growth (annual average %)
Country/periods 1961-70 1971-80 1981-90 1991-2000 2001-08 1961-2008
Bangladesh 2.45 2.68 2.46 1.97 1.60 2.26
Malaysia 2.88 2.38 2.74 2.51 1.86 2.50
Nepal 2.05 2.36 2.38 2.46 2.06 2.27
Sri Lanka 2.41 1.91 1.36 0.89 0.93 1.52
Thailand 2.97 2.40 1.82 0.95 0.97 1.86
Data source: World Bank, 2010
The population growth rate indicates the level of demographic transition of the nations. The
demographic transition state also is an important indicator of social change. Low level of the
population growth rate is positive symptom of advance society. The average population growth
rate of Nepal remained high, with similar level of Malaysia and Bangladesh. By the table we know
that the annual average growth rate of Nepal , Bangladesh , Malaysia , Thailand and Sri Lanka are
2.27 percent, 2.26 percent, 2.5 percent , 1.86 percent , 1.52 percent respectively in the whole
period. By the different periods wise annual average population growth rate, in initial period Nepal
was at lowest level in the group of the countries, the growth rate was gradual decreased in
succeeding periods in case of Malaysia, Sri Lanka and Thailand however in case of Nepal that was
slightly increasing up to 1990s decade.
Line graph 2.1
Data source: World Bank, 2010
0
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Population growth (annual %)
BGD
MYS
NPL
LKA
THA
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
31
The line graph indicates the comparative demographic transition pattern. By the trend lines
population growth rate of Nepal was relatively lowest in 1961 that position has changed and come
in last in 2008. The rate was gradually increasing until mid 1990s after then started to decline. The
declining rate no so fast; so that contribute to hold at first position in relatively highest point
despite the falling absolute term. That unique shape of the trend of the Nepal explains that
demographic transition process was started only in the 90th period and still yet to complete.
Growth rate decline is remarkable of Thailand and Sri Lanka. That is seen similar pattern of
transition of Nepal and Bangladesh by the indicator Nepal is remained behind also in terms of
demographic transition
2.3 Life expectancy
These indicators, life expectancy at birth level, reflect over all living standard and health care
condition of the countries.
Table 2.3
Life expectancy at birth, (years)
Country/years 1961 1971 1981 1991 2001 2008 Changed
(1961-2008)
Bangladesh 41 44 48 55 62 66 25
Malaysia 55 62 67 70 73 74 20
Nepal 39 43 49 55 62 67 28
Sri Lanka 58 63 68 70 72 74 16
Thailand 55 60 67 69 68 69 14
Data source: World Bank, 2010
The table, it seem that, Nepal is in low position in term of life expectancy among the observe
nations along with Bangladesh in each point of time. In 1961 Nepal’s life expectancy was only 39
year that is stand at 67 in 2008. Nepal has surpassed only to Bangladesh by one year in the last year
of the period. However progress of Nepal in this aspect remains highest by 28 years from 1961 to
2008, whereas Bangladesh by 25 years, Malaysia by 20 years Sri Lanka by 16 and Thailand by 14
years.
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
32
Line graph 2.2
Data source: World Bank, 2010
The trend lines of life expectancy are rising over time period , that demonstrate ; there was big
differences of the level up to mid 1980, however in latest period the trend lines are coming to
closer distance on higher level . Life expectancy is rapidly converging in Asia. It is very positive
aspect of Nepalese society in case of this indicator than other socio economic indicator among the
observe nations.
2.4 GDP growth
The following table presents comparative figure of real average annual GDP growth rate in
different periods wise.
Table 2.4
Average GDP growth (period wise average %)
1961-70 1971-80 1981-90 1991-2000 2001-008 1961-2008
Bangladesh 4.06 1.04 3.73 4.80 5.80 3.81
Malaysia 6.49 7.87 6.03 7.23 5.07 6.60
Nepal 2.52 2.11 4.79 5.00 3.64 3.61
Sri Lanka 4.58 4.43 4.20 5.22 5.06 4.68
Thailand 8.17 6.89 7.89 4.63 4.76 6.54
Data source: World Bank, 2010
30
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Life expectancy at birth, total (years)
BGD
MYS
NPL
LKA
THA
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
33
The above table shows GDP annual growth rate in period wise average form about ten years
periods from 1961 to 2008 and overall average of the whole observed period. The GDP annual
average growth rate in initial period has remained in lowest at 2.52 percent average, in second
period lowest after Bangladesh but lower than previous period of Nepal itself only at 2.11 percent
annual average, in 80’s decade the rate has remained higher than Bangladesh and Sri Lanka and
even higher than previous periods own average growth rate at 4.79 percent. In the period of 1991-
2000, the rate was still higher than Bangladesh and slightly below than Sri Lanka at 5 percent
average , this rate is highest of Nepal the among all observed periods, that can take as golden age
period of Nepalese economy for ever . In the latest period the average rate downed sharply to
lowest in the group of the country at only 3.64 percent level. The overall average annual growth
rate seems lowest in the group at 3.61 percent in average. These facts indicate that Nepal had
very low level economic growth speed than rest of the countries since least average growth rate
only 3.61 percent annual during period of 1961 to 2008, whereas the rate of Malaysia and Thailand
are more than 6.5 percent annual and 4.68 percent of the Sri Lanka. Nepal has behind by 0.20
percentage point annual to the Bangladesh. The set backed of growth in latest period is caused of
violence conflict due to Maoist insurgency in Nepal. However every country has suffered from
some kinds of abnormal political and economic situation such as Sri Lank bitterly victimized from
Tamil’s separatist war for 3 decades, the Bangladesh also experience freedom war from Pakistan in
1970s decade and suffering from political instability and army coup. Thailand and Malaysia also
were not free from any political and economic disturbance in the period. Therefore, the Maoist
arm conflict was not wholly responsible for whole period’s economic stagnation time in domestic
economy of Nepal.
The following line graph presents whole period state of GDP annual growth trend of the countries.
The graph shows the gaps between lines are relatively higher in earlier stages and those seem
slightly converging in latest period. The growth rate lines are highly fluctuating likely stable trend
before 1990. By the trend line growth rate of Nepal seems that frequently touching and crossing
the zero level growth rates before 1990. That indicate Nepal has so many economic crisis and
stagnation during the period even politically normal situation. After 1990 Nepal experience rather
stable growth in moderate level despite around 2001.
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
34
Line graph 2.3
Data source: World Bank, 2010
By observation GDP growth rate figure Nepal has remained in weakest in terms of average growth
and moderate in growth rate level in special in later period. The moderate growth rate after 1990
was not enough to break the vicious cycle of Nepalese economy further more it become victim of
arm insurgency and security emergency during the moderate growth period around 2001, still yet
to overcome from severe the consequence of the shock.
2.5 Per capita growth
GDP per capita is a major indicator of economic well being state of any country. It is average
income of a citizen in the country at a particular time period. By the indicator there can measure
main economic development level and comparable economic state between nations and between
time periods in a country. To raise the GDP per capita is being the main target point of the
economic development effort of the nations. The following table presents comparative figures of
real GDP per capita level at constant price of 2000 in US$.
-15.00
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GDP growth (annual %)
Bangladesh Malaysia Nepal Sri Lanka Thailand
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
35
Table 2.5
Average GDP per capita (constant 2000 US$)
1961-70 1971-80 1981-90 1991-2000 2001-08 1961-2008
Bangladesh 258.96 222.56 239.63 292.12 397.23 277.30
Malaysia 992.83 1536.25 2230.95 3523.93 4542.26 2482.87
Nepal 143.57 143.22 160.05 203.12 237.30 174.96
Sri Lanka 305.49 375.73 515.03 722.82 1005.48 567.39
Thailand 407.43 645.77 1017.81 1849.22 2333.45 1205.62
Data source: World Bank, 2010
The above table provide the information us the state and change of real GDP per capita annual
average level periods wise in US$ term at price of 2000. By the table, that comes to know that,
Nepal has remained at least rank in terms of average annual real per capita GDP out of the observe
country in each time periods. It has very low level of the GDP per capita since beginning to the
latest periods. The per capita is very disappointing level in both absolute and relative terms. The
relative difference also has widened highly between the first and last years of the study period. In
191960s decade the average GDP per capita of Malaysia was about six times, Thailand and Sri
Lanka were around two times higher than of Nepal. Where as in latest period (2000-08) , the
Malaysia about 20 times , Thailand nearly 10 times and Sri Lanka about 4 times higher than the
level of Nepal.
Line graph 2.4
Data source: World Bank, 2010
0
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GDP per capita (constant 2000 US$)
BGD
MYS
NPL
LKA
THA
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
36
The above line graph depicts the variation of the per capita GDP growth trend of the observed
countries group. When we look line graph, the gap the level is smaller at initial period but those
differences increase continuously in subsequent years. The trend lines are running farther away
from zero level base line of Malaysia , Thailand even the Sri Lanka but in case of Nepal that trend
line running likely parallel to the base line. The GDP per capita levels are highly divergent among
Asia and south Asian countries too. Nepal is lagging behind more and more to the Asian neighbor.
2.6 Gross capital formation ratio to GDP
Growth rate of the economy depend on investment and capital formation of the economy, high
investment lead economy to higher level of growth. If there is expectation of high growth rate in
GDP there should have higher ratio in capital formation to GDP. The following table provides the
facts of gross capital formation rates out of GDP of respective countries along with Nepal
Table 2.6
Gross capital formation
Gross capital formation (% of GDP annual average)
Country/periods 1961-70 1971-80 1981-90 1991-2000 2001-08 1961-2008
Bangladesh 11.08 9.38 16.75 19.72 23.94 15.85
Malaysia 17.90 23.66 28.26 35.76 22.55 25.28
Nepal 5.46 13.11 19.90 23.33 25.44 16.66
Sri Lanka 16.03 18.97 25.08 25.46 24.79 20.61
Thailand 21.54 26.17 30.66 34.44 26.83 27.98
Data source: World Bank, 2010
The above table shows the comparative figure of gross capital formation rate out of GDP ,
according to that In initial stage Nepal has very low level of average annual capital formation rate
at only 5.46 percent, that seems increasing trend in succeeding periods: 13.11 percent,19.90
percent ,23.33 percent and 25.44 percent in 1970s ,1980s, , 90th decades and latest period
respectively. The average whole period average has remained at 16.66 percent level. Whereas,
Thailand, Malaysia and Sri Lanka have witnessed 27.98 percent, 25.28 and 20.61 percent annual
average in total period. In this aspect Nepal remained least after Bangladesh. However Nepal has
stood highest position at 25.44 after Thailand percent out of the GDP which is slightly above than
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
37
others. There find differences of capital formation rate as differences of economic growth. That can
be justified that the slow economic growth was contributed by low level of capital formation’
Line graph 2.5
Data source: World Bank, 2010
The above line graphs presents trend lines of capital formation ratio shows that before 1998 there
was remarkable high capital formation rate occurred in Malaysia and Thailand; up to mid 1980, Sri
Lanka has experienced high capital formation ratio. However Bangladesh and Nepal remain of
similar pattern trend gradual increase. In this case Nepal remains higher than Bangladesh in overall
trend. The tendency of the ratio is converging in later period especially after 1999.
2.7 Exports of goods & services (percent of GDP)
Export is an important indicator of economic performance in external sector. The following table
present level of exports out of respective nation’s GDP. Exports of goods and services indicate
productive and competitive capacity of the economy. Exports are a major source of economic
strengthening by earning foreign currency and various aspects. The table informs us that
comparative higher ratio of export volume of the economy to GDP as in percentages
0
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Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
38
Table 2.7
Exports of goods and services (% of GDP)
Country/periods 1961-70 1971-80 1981-90 1991-2000 2001-08 1961-2008
Bangladesh 9.56 5.40 5.31 10.67 16.88 9.26
Malaysia 41.68 45.66 59.03 95.77 112.20 66.81
Nepal 6.51 8.85 11.34 20.80 15.70 11.97
Sri Lanka 23.89 28.88 27.14 34.60 32.34 29.24
Thailand 16.24 19.95 26.86 46.28 70.36 34.50
Data source: World Bank, 2010
The above table provides period wise annual average percentages of export to GDP of respective
countries. According to the information the ratio of export is remained at lowest level after
Bangladesh almost period, even in the latest period that is lower than that of the Bangladesh. The
whole average figure also seems lowest after Bangladesh at 11.97 percent. The best annual
average performance in export seems in the period of 1991-2000 at 20.80 among the periods. It
find that economically speedily growing country have high ratio on exports out of GDP such as
Malaysia and Thailand. Malaysia evidences export dependency, has exported 112 percentages in
annual average of GDP in the latest period and the Thailand also exported about 70 percentage
annual averages in the periods. Sri Lanka also exports far higher than Nepal in term of percentage
of GDP. Therefore Nepal has very poor performance in export sector in terms of percentage of
GDP.
Line graph 2.6
Data source: World Bank, 2010
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Exports of goods &services (% of GDP)
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Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
39
The line graph shows trend of exports of the countries over the period. The trend line of the export
performance has remained nearly stable level up to 1991. After that there was improvement from
1991, however from 1998 that was turned to downward direction continuously up to the end.
According to the graph exports performance of Malaysia and followed by Thailand was remained in
sky rocketing path in terms of ratio of GDP. In conclusion the exports trend of other country is
growing more and less but Nepal could not maintain the increasing trend later time that seems
falling in the export.
2.8 Imports of goods and services
Table 2.8
Imports of goods and services (% of GDP)
Country/periods 1961-70 1971-80 1981-90 1991-2000 2001-08 1961-2008
Bangladesh 12.27 13.39 13.55 16.28 23.14 15.42
Malaysia 37.89 41.66 56.57 89.71 92.19 60.49
Nepal 9.28 13.00 20.67 31.30 30.33 19.75
Sri Lanka 26.34 34.66 38.96 43.75 41.25 36.81
Thailand 18.41 23.68 29.96 45.70 65.66 35.47
Data source: World Bank, 2010
By the table we know that imports ratio of Nepal seem lower than Malaysia, Thailand and Sri Lanka
but it is always higher than own export ratio.
Line graph 2.7
Data source: World Bank, 2010
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Imports of goods &services (% of GDP)
BGD
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Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
40
The line graph show that imports ratio trend of the countries is found as similar pattern to export.
High export oriented country has high in imports. That is evidences highly openness of economy.
Highly opened country has more export capacity and benefited by positive trade balance. Nepal is
seemed least in trade internationalization and highly suffered from growing negative foreign trade
balance.
2.9 Summery
In summing up, Average GDP growth of Nepal from 1961 to 2008 is 3.61 percent; it is the least out
of the five observed countries. The GDP growth rate has improved from 1985 as a slight reflection
of liberalization. It has been declined in the political crisis event. Real per capita GDP of Nepal has
changed only by 81 percent from 1961 to 2008 with 1.61 percent annual; it is also least among the
countries. Nepal is remained far behind from many Asian neighboring nation and economic
disparities are growing among the countries. In term of life expectancy, Nepal is not more behind
than, differences are narrowing. Nepal has improved highest by 28 years of average life expectancy
during the period of 1961 to 2008. Population growth is still highest among the countries at 1.83
percent annual in 2008, but in 1961 it was lowest in similar rate. The rate was increased in middle
in the period and in later time it has declined gradually. The total population stand bout 29 million
in 2008, the number was only 10 million 48 years ago. The gross capital formation was historically
low rate than others; however it is highest at 28 percent of GDP in 2008. The export ratio to the
GDP seems historically weak, even declining later period. Imports also is comparatively low after
Bangladesh, it is very high than export portion. Nepal bear highest ratio trade deficit among the
observe nations. Nepal seems far behind in internationalization of economy, however, an import is
increasing continuously in later time.
By the comparative study the Nepalese economy along with the four Asian countries that seems at
least state in development level and slowest in speed of almost aspect of social economic progress.
Therefore that required further investigation to identify root causes which are affecting to stagnant
the Nepalese economy over the modern historical period.
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
41
CHAPTER-3
Macro economic performance of Nepal
Comparatively Nepalese economic transformation speed was slow and development level seems
low. This is the conclusion of the previous chapter ‘the comparative analysis of Nepalese
economic’. The comparison was with the least developed to developed South Asian and south East
Asian countries. In this chapter, it is going to be observed more detail aspect of Nepalese economy.
This is historical overview of economic growth factors, structural pattern, determining factors of
economic growth level and structure, sector wise performance and some major demographic figure
and the observation of changing trend and rate of the variable over the periods. Following table
provides a glimpse of major comparative macroeconomic indicators on historical point.
Table 3
Comparative figure of socio economic indicators between historical time points
Source: Devkota,2007
Note: n.a. - not available
The above table presents comparative figure of socioeconomic indicators of historical time points.
The indicators of 1950/51’s and 1960/61’s show the economic picture of Nepalese economy of
beginning stages of modern development initiation. The 2003/04 represents latest period’s state of
Indicators Unit 1950–51 1960–61 2003–04
Population ( in million) 8.23 9.4 23.15
Population growth rate(in Percentages) 2.3 1.65 2.24
GDP Million Rupees (current prices) 3950 5081 533, 54
Per capita GDP (in Rupees ) 480 540 21,091
Urban population Per cent of total n. a. 3.1 16.1
Agriculture dependent population Per cent n.a. 97.1 65
Roads (in Kilometer ) 376 1193 15,458
Telephones(Number of lines ) 335 1120 275,558
Power (Hydro,in Megawatts ) 3 4.8 556.8
Yield (Food crops) Tons/ hectare 1.786 1.8 2.3
Export (Million Rupees ) 10 210 313,92
Import (Million Rupees ) n.a. 0.4 751,77
Literacy rate (Percentage) 2 4 54
(35percentwomen)
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
42
Nepalese economy. The 1950 is historical event, when Nepal entered in modern multi-party
democratic political system with demise of the autocratic Rana’s regime. The 1960 is another
turning point of Nepalese political history starting of the Party-less Panchayati rule with active
command of absolute by royal takeover on 10 years old multiparty democracy and beginning stage
of economic development initiation in Nepal. By the historical comparative socio-economic Nepal
witness very low level of economic foundation in beginning of modern economy. There was
accounted only 3950 million Nepalese Rupees total nominal GDP in 1950-51 and 5091 million
rupees in 1960-61. That stands in 2009-10, 1183 billion rupees. In terms of GDP per capita nominal
were only 480 and 540 rupees in 1950-51 and 1960-61, in 2010 that accounted 41,851 rupees in
current prices. The urban population was only 3.1 percent of total in 1960-61 and agricultural
dependency of population was 97.1 percent in 1960-61. Total export was 10 million rupees in 1950-
51 and 210 million in 1960-61 but import was negligible at that time. The literacy was 2 and 4
percent in 1950-51 and 1960-61. The current level of development depends on changing trend of
economic activity along with initial foundation. Now there are some variables to observe the trend
of the progress of Nepalese economy
3.1 Population features
Population is both means and ends of economic development. Therefore, it is relevant to overview
in beginning on major demographic features of the study area. There are historical time series
figures presented by line graph of total population, annual population growth rate, ratio of urban
population, total fertility and life expectancy.
31.1 Size of population
The following line graph presents total population growth trend of Nepal.
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
43
Line graph 3.1
Data source: World Bank, 2010
3.1.2 Population growth
The line graph shows the total population in Nepal from 1961 to 2008. The growth trend is steady
state. The number population was only 10 million in 1961 that stood at 27 million in 2008.
Line Graph 3.2
Data source: World Bank, 2010
The above graphs show the annual growth rate of population. We can see on the graph in first half
of 1960 the growth rate was under 2 percent and the line is running over the time period with
slightly increasing trend up to first half of 1990 which stood at 2.5 percent level from the second
half of 1990 the rate started to decline gradually. Therefore demographic transition still is under
process in Nepal.
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Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
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3.1.3 Fertility rate
Graph 3.3
Data source: World Bank, 2010
The line graph shows the state of total fertility rate per woman from 1961 to 2008. By the graph we
know that the TFR was remained more than 6 births per woman up to first half of 1970. From
second half the decades the TFR started to decline gradually. At the latest year that stood at below
than three births per woman. The fertility transition started since late twentieth and sill is high than
developed nations.
3.1.4 Life expectancy
Line Graph 3.4
Data source: World Bank, 2010
01234567
Fertility rate, total (births per woman)
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Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
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The above line graph represents the level of the life expectancy at birth in Nepal from 1961 to
2008. The line is growing in steadily upward over the period. There seems well progress in the
aspect of life expectancy than other economic and demographic factor
3.2 economic outputs
3.2.1 GDP level
The time series data of the annual GDP level inform that historical sequence of economic growth. It
is deficiency of Nepalese economic analysis there are available only short periods economic data.
Now we have the data set of GDP level from 1960 in World Bank data base. Therefore it is difficult
to long term historical analysis of Nepalese economy with quantitative approach. The following
graph presents the historical series of real GDP level in US$ terms of 2000th price and nominal GDP
level in current price in US$ terms.
Line graph 3.5
Gross domestic production
Data source: World Bank, 2010
Above line graphs presents trends of total GDP growth volume from 1960 to 2008. The graph
presents real and nominal GDP level in US$ terms. On the graph we can see that the real GDP
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Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
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growth remain very slow speed up to mid 1980s after that raise rather fast than before. The mid
1980 was a turning point of the economy adopted partially liberalization policy. The economic
liberalization is reflected slightly on total GDP growth speed.
3.2.2 GDP growth rate
The following line graph presents annual real GDP growth rate in Nepal.
Line graph 3.6
Data source: World Bank, 2010
The GDP level growth depends on the annual growth rate of the GDP. The line graph presents
trends annual growth of GDP in Nepal. The pattern of growth rate line is fluctuating at like stable
trend. Up to mid 1980 that is highly fluctuating at lower level average these seems 6 times the rate
was fell down below in the minus level. After the mid 1980s the line is normally fluctuating at
higher level average than before. In this period only in 2002 set back the line at touched the zero
level line. The five year average line has shifted slightly above from the mid 1980s. The higher GDP
growth rate contributed the higher total GDP growth in later period. The growth rate average
seems slightly down after 2000 due to intensive of arm conflict and political turmoil in this period in
Nepal. That is evidence of the internal conflict and political instability adversely affects in smooth
economic progress.
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Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
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3.2.3 GDP per capita
GDP per capita level indicate average living standard of the population. The following line graph
presents GDP per capita level of both real and nominal in US$ terms.
Line graph 3.7
GDP per capita level
Data source: World Bank, 2010
The above line graphs present GDP per capita level growth of Nepal, from 1961 to 2008 time span.
The graph depict real and nominal per capita level over the period real and nominal GDP per capita
level in US $ term. The trend line pattern of GDP seem similar to GDP level slightly more stable due
to population growth rate reduce the per capita growth level to catch up the GDP growth level. The
per capita growth also slightly improved after mid 1980s
3.2.4 GDP per capita growth
The following graphs presents the real GDP per capita growth rate of Nepal.
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Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
48
Line graph 3.8
Data source: World Bank, 2010
The lines graphs is present annual percentage growth rate of GDP per capita of Nepal of the study
period. On the graph we can see that before the mid 1980s the line is fluctuating highly around
zero level average. After the mid 1980s the line is moderately fluctuating at higher level average
than before. That was set backed in 2002 which fell down below the minus level the average level
also slightly downed after that. The five years average was below the minus level in first half of the
1970s. After second half of the 1980s that shifted above than before and slightly downed after
2002 and at latest time that is rising to upward. The per capita GDP trend also reflect the historical
economic and effect to political situation of the country.
3.3 Industrial development
3.3.1 Sector wise production
Gross domestic production is comprises of sector wise production in an economy, similarly total
growth rate of an economy depend on sector wise growth performance. Industrial development is
driving force to economic development. To analysis an economy has to observe sector wise
contribution and performance of the economy. The following line graph presents sector wise
contribution and growth over the period of 1970 to 2008 of the Nepalese economy in constant
price of 1990 in US$ terms
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Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
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Line graph 3.9
Data source: United Nation, Statistical Division,2010
The line graph presents picture of sector wise real economic growth trend in US $ term of Nepalese
economy from 1970 to 2008. The over all sectors growth trend is likely stable in 1970s after that
growing gradually. The growth volume seems higher rate of agriculture sector and others services
sector. Manufacturing and construction sectors growth is slow and low level and the transport and
communication sector’s growth seem slightly faster growth in later period. In case of trades and
hotel-restaurant sector, it was growing along with other sector up to 1999 but after then the
growth stagnate up to now. the decreasing of tourism due to arm conflict and security problem
contribute the downed and stagnate the hotel/restaurant and transport sector which is yet to
overcome the former trend.
3.3.2 Growth rate of Agriculture & forestry
The agriculture sector has been remained largest contributor to Nepalese economy. Growth
performance of this sector heavily influence on overall growth performance of the economy.
Following line graph presents growth rate of the sector over the period.
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Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
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Line graph 3.10
Data source: United Nation, Statistical Division, 2010
The above line graph shows trend of agricultural sectors value added annual growth rate from 1971
to 2008. The value added growth trends seem very erratic up to 1993 with stable average higher
level than later. After that the trend line fluctuating moderate to down ward trend. There is
decreasing in industrial value added growth in later period gradually.
3.3.3 Manufacturing industry
Manufacturing sector is very important aspect of economic transformation of a country. Following
line graph presents growth rate trend of manufacturing industry in Nepalese economy.
Line graph 3.11
Data source: United Nation, Statistical Division, 2010
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Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
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The line graph shows the trend of manufacturing value added growth. That is also highly fluctuating
up to 90th in latest period that falling sharply. Therefore industrial and manufacturing growth
hindrances and set back seem major defect in Nepalese economic development process. The
economic liberalization did not support the industrial development in Nepal even hampered due to
lack of efficiency and competitiveness to foreign industry. The falling trend of manufacturing
growth is main factor to contribute increasing foreign trade deficit of the country.
3.3.4 Construction industry
The construction activities indicate building trend of infrastructure and physical structure in a
nation. Speed of construction means that speed of expansion physical capital in the country which
fundamental component of economic acceleration. The following line graph presents trend of
construction sector growth rate in Nepalese economy
Line graph 3.12
Data source: United Nation, Statistical Division, 2010
3.3.5 Services sector
The services sector of in an economy is indicate modernization. Increasing trend of this sector is
latest form of structural transformation of economy. In Nepal services sector stand as the largest
share contributor to GDP in latest period, more than 50 percent this sector contributes. Therefore,
it is important to observe growth rate of service sector of the economy. The following line graph
-20.00
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Construction growth (in annual %)
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
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presents annual growth rate of the services sector over the period. From only mid 1980s this
sector’s information available in further break down form in to trade , restaurants and hotels ,
transport and communication , and other activities. On the graph we can see that this sector
growth has remained normal not as need for developing country should have more than that
Line graph 3.13
Data source: United Nation, Statistical Division, 2010
The above line graph show growth trend of the service in Nepalese economy. Around 1984 this
had downed to negative magnitude and from 2000, trade restaurants and hotels sector’s growth
rate seems bitterly disturbed. This time was peak of arm conflict in Nepal, which was reason for
nearly collapse of tourism industry due to highly unsecure situation of the country.
3.4 Structural pattern of Nepalese economy
The economic structure is particular composition of economy it has various dimension. Category of
economic structure could be characterized by domination of particular type of sector in economy.
The structure of economy can be measured by different perspectives. GDP source, employment
engagement, residential location pattern are some of them which are mentioned in this paper.
Major share in GDP, major share in employment of the agricultural or primary sector, majority
share of rural population in total population characterize the economic structure traditional,
underdeveloped and backward economy. Contrary of that: major share in GDP and employment of
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service sectors annual growth in %
Trade, restaurants and hotels Transport and communication Other Activities
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
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industry and services or modern sector and urban population majority ratio indicate modern,
developed and forward economic structure. Therefore transformation from traditional sector and
area’s domination to modern sector domination or majority is called structural transformation of
economy. Modern structure of economy is taken as developed state of economy and country.
Structure transformation theory explains the development process with perspective of structural
shift process from traditional to modern sector. Nepal is a developing country; it is on the way of
structural transformation process traditional to modernization in every aspect of socio-economic
life the country. This paper also is an attempt to study of Nepalese economic development process
with the perspective of structure transformation. Structural transformation can understand as
sense of economic transformation. There are selected three dimension of structure shift process of
Nepalese economy such as sector wise contribution share to GDP, employment share to the
sectors and level of urbanization of population.
3.4.1 Urbanization
Urbanization means ratio of urban residential population in total population. it is an important
dimension of socio-economic structure. Following line graph presents ratio of urban and rural
population over the period.
Graph 3.14
Source: World Bank, 2010
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Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
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The above graph shows that rural/urban population ratio and changing trend of the ratio over the
period. According to the graph there was negligible portion people (3.5%) lived in urban area in
1960 and the decades. Increment trend of urban population ratio in Nepal seems very slow. In
2008 that the ratio is only 17 percent of total population, it means more than 80 percent Nepalese
people are still living in rural area. Therefore, Nepal has remained far behind from modernization in
the aspect of urbanization.
3.4.2 Sector wise share in GDP
The structural pattern as the contributing source of the GDP is an important aspect to analyze the
economic status of a country. The higher Share to GDP of non-agriculture sector is assumed to
desirable condition of modern economy. The shifting share of GDP from agriculture sector to non
agricultural sector such as industry and service sector is called structural transformation of the
economy. The speed of the structural transformation determined the speed of economic growth
the economy.
Graph 3.15
Data source: World Bank, 2010
The above area graph shows shifting trend of structural pattern of the Nepalese economy in term
of GDP share. By the graph we know that the GDP share of agriculture sector is around 70 percent
in 1970 that scenario seems likely opposite in 2008 with nearly 30 percent share of the sector. In
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Agriculture,
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added (% of
GDP)
Industry, value
added (% of
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Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
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the graph the area of agriculture is decreasing and non agricultural sectors increasing gradually
over the period. In the non-agricultural sector, the ratio of manufacturing and construction sector
increasing slightly and the trade and other services sector‘s ratio is increasing more rapidly. There is
evidence of less contribute of industrial manufacturing sector in increment of the GDP ratio of non-
agricultural sector. There is still remarkable share of agriculture sector in Nepalese economy.
3.4.3 Agricultural value added
Following line graph presents changing share ratio in percentage of agricultural sector in Nepalese
economy.
Line graph 3.16
Data source: World Bank, 2010
The above line graph shows that share of agricultural added to GDP decreasing gradually over the
period. The ratio of agriculture value to the GDP seem nearly constant up to mid 1970s decades
around 70 percent level ,from that started to fall against non-agricultural sector and at 2008 the
share of agriculture value added stands about 34 percent of the GDP. Therefore contribution of
the primary sector to the GDP is decreasing continuously, however, it is yet to come to the
developed countries level.
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Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
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3.4.3 Industrial sector share
Industrial sector represent modern sector of economy. The following graph present share shift
trend of Nepalese industry.
Line graph 3.17
Data source: World Bank, 2010
The above line graph shows the industrial value share ratio over the period. According to that, up
to mid 1970s decade, industrial value added share to GDP was remained at only about 10 percents.
In first half of 1990s that was stood around 25 percent, now days that industrial sector downed to
17 percent of GDP.
3.4.4 Services sector value added share
Services sector domination is main characteristic of modern economy. Share of GDP and
employment shift from agriculture to industry is taken as first stage of structural transformation
and shift from industry to services sector is called second stage of the transformation. Therefore a
services sector activity is important to modern economy. The following table presents service
sector share in GDP and shifting the share ratio over the period.
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Industry, value added (% of GDP)
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
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Line graph 3.18
Data source: World Bank, 2010
The above table shows that contribution share of service sector to GDP and changing trend of the
share from 1965 to 2008. On the graph it can be seen from mid 1960s to mid 1970s share of service
sector was around 20 percent of the GDP, after the mid 70 the share of the sector has been shifting
higher level gradually and in 2008 that the service sector share stood around 50 percent to the
GDP. Services sector seems flourishing and viable to Nepalese economy.
3.4.5 Employment share in Nepalese economy
Composition of employment share is another dimension to evaluate of Structural pattern in the
economy. Labor force transfer to modern sector such industry and service is an important indicator
of economic transformation or development. therefore it seems very important explain the
structural transformation process of Nepalese economy with the perspective of sector wise labor
force share and shifting nature from agriculture sector to non-agriculture sector. However, there
found problem of historical time series data of sector wise labor force engagement in Nepalese
economy, that is not available in officially recorded form. Therefore the time series data of
employment share was extracted from compiling different time point’s data and collected from
second hand articles. There was available ten yearly interval’s information of employment and that
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Services,value added (% of GDP)
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
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was modified yearly time series form with average distribution in the gaping years. The following
line graph presents employment share in non-agricultural sector.
Line graph 3.19
Data source: Basnet-2009, Devekota-2007
The above line graph depicts the portion increment of employment to non-agricultural sector. The
employment share seems less than GDP share of the non-agricultural sector and the structural shift
from agriculture to non-agricultural sector in terms of employment is slow than in term of GDP
shared. The share of employment in non-agriculture sector only 3 percent of the total that stand in
2008 at 46 percent. The traditional agriculture sector contributes to GDP only about 33 percent
which still provide employment for 54 percent of total employee. That is major characteristics of
Nepalese economy the agriculture sector produce less but bear high dependency of employment
share. Therefore, labor productivity is low in the agriculture sector and remains relatively higher in
non-agriculture sector
3.4.6 Sector wise productivity shift
Following line graph presents relative productivity shift due to labor force share shift in Nepalese
economy.
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Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
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Line graph 3.20
Data source: World Bank, 2010
The above table presents average productivity of per one percent employment to the percent
share of GDP in both agriculture and non-agriculture sector. There is trend of structural shifting
process from agriculture to non-agriculture in term of GDP share and employment share. The
shifting process of former term seems faster than later. The non-agriculture sector contribute
about 68 percent share in GDP but it provide only 44 percent shares in total employment in 2008.
In this way per one percent employment who engages in non agriculture sector more than 1
percent of the GDP in 2008. But in the contest of 1965 there engage only about 3 percent of total
employment in non-agriculture sector where as they produce about 30 percent parts of the GDP in
this way the productivity of per one percent employee who engage in non agricultural sector they
produce about 10 percent part of the GDP in 1965. The line graph shows that decreasing average
productivity of per one percent employee more in non agricultural and nearly stable in agriculture.
Average productivity is less than 1 percent in agriculture sector and more than 1 percent in non-
agriculture sector that difference is the space which can still provide incentive to transfer labor
force to non agricultural sector.
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gdp productivity of per-percent emloyment innnagri
gdp productivity of per-percent emloyment in-agri
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
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3.4.7 Gross capital formation ratio to GDP
Overall economic growth rate of Nepalese economy seems poor than expectation and required. A
major determining factor of growth acceleration of economy is capacity and real performance of
investment or capital formation in the economy. The gross capital formation ratio to GDP indicates
the investment trend and nature of the economy. The following line graph provides the historical
trend of gross capital formation ratio to GDP in Nepal.
Line graph 3.21
Data source: World Bank, 2010
The gross capital formation ratio to GDP is a determining factor of economic growth. The line graph
shows the trend of gross capital formation ratio of Nepal over the period. The ratio is very low
before the 1970s. In 1970s decades there seem steeply rising in the ratio of the gross capital
formation and 1980s decades the increment remained in moderate growth trend that was set back
in around 1990 that was time of trading problem with India and people’s movement that
consequences to end of partyless Panchayati system of active monarch and established multiparty
democracy and constitutional monarchy. Despite slight decrease at 1990, in this decade the ratio
was rising faster and at the end of the decades again the ratio downed due to intense arm conflict
and political dispute in Nepal and the latest period that seem again raising trend to upward.
Despite the raising trend of the gross capital formation ratio to the GDP level that was no sufficient
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Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
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to break the stagnate rate of economic growth that was very far below than East Asian miracle
economy.
3.4.8 Foreign trade
Volume and ratio of international trade in the economy indicate openness and internationalization
of the economy. Open economy is assumed favorable to development of country. It is important
dimension to measure economic modernization. The following line graph presents foreign trade
ratio to GDP along with export and import break down.
Line graph 3.22
Data source: World Bank, 2010
The line graphs show the scenario of foreign trade portion to GDP of Nepal over the period. That
portion is increasing up to 1997. At that time the ratio was picked up to more than 64 percent of
GDP but after then gradually falling the percent of foreign trade of Nepal. The trend line is
combined volume of export and imports both. Up to 1997 there is gradual increment both export
and import factor after that export is falling gradually and import portion raising slightly that was
downed in 1999. Another characteristic of foreign trade of Nepal is that import portion always
remains higher than export. The gap of export-import is increasing generally over the period that
seem slightly narrowing around 1999 but after 2000 the gap widening rapidly due to continuously
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95
19
97
19
99
20
01
20
03
20
05
20
07
Foreign Trade (%of GDP)
Imports of goods and
services (% of GDP)
Exports of goods and
services (% of GDP)
Trade (% of GDP)
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
62
falling trend of export and raising trend of imports. Therefore increasing trade foreign trade deficit
is being very severe problem of Nepalese economy in latest time period.
3.5 Fiscal public expenditure
Government is taken as the main agent for the economic growth in specially developing country
like Nepal. A major contribution government to the development is the policy and plan of fiscal
expenditure by public budget. Governments can create incentive and favorable environment by
investing in infrastructure and other developing work. Therefore the part of development
expenditure of government is a determining factor of economic development.
Line graph 3.23
Source: Finance ministry of Nepal, economic survey, 2010
The line graphs presents amount of total public expenditure along with regular and development
expenditure. The graph shows the volume of nominal public expenditure raise steeply from
2004/2005. The regular expenditure has surpassed the development expenditure from 1997/1998.
The following graph shows ratio of development of regular expenditure of government of Nepal
from 1974/75 to 2009/10. The ratio of development or capital expenditure seems higher than
regular expenditure up to 1993/94 share of development expenditure stood more than 60 percent
out of total expenditure but the scenario become opposite after 1998 . The share of development
0
5000
10000
15000
20000
25000
Trend of Fiscal public expenditure (in current NRs ten million)
Total
Expenditure
Regular
Development
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
63
expenditure falls down rapidly. From 2001 to 2006 the regular expenditure share remained more
than 70 percent of the total expenditure. After 2006 there seem slightly improve in development
expense share.
Line graph 3.24
Source: Finance ministry of Nepal, economic survey, 2010
The reason of raising regular expenditure than capital expenditure was the intensifying Maoist
insurgency in Nepal after 1998 especially by heavy increase in security expenditure and shrinking
developing expenditure.
3.6 Infrastructural development
Economic developments depend on infrastructural development. The power, transport and
communication are basic infrastructure of in the society. Electricity, road and telephone are main
modern means of power, transport and communication in the context of Nepal.
3.6.1 Electricity
The following line graph present progress the electric power consumption in KWH per capita over
the time period in Nepal. There is very low level the per capita electric power consumption up to
1970s decades. From 1980s decades there seems starting the progress in this sector. The growth is
steadily up war up to 2004, after that the levels remain constant. The reason of stable level in latest
period is due to unstable the political situation and security threat stopped the implement the new
01020304050607080
Perecent share between development ®ular expenditure out of
total public expense
Development
Regular
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
64
large scale hydro electricity project in former year so the nation could not added the electricity
power more in this period.
Line graph 3.25
Data source: World Bank, 2010
3.6.2 Road
The following graph shows the motor able road expansion trend during the period of 1975 to 2008.
The progress in road expansion remained high in the 1990s decade after that seems stagnates in
the expansion. This sector also seems disturbed by political disturbance of the country.
Line graph 3.25
Source: Finance ministry of Nepal, economic survey, 2010
0
20
40
60
80
100
1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
Electric power consumption (kWh per capita)
0
5,000
10,000
15,000
20,000
25,000
1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
Road extenson in KM
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
65
3.6.3 Telephone
Line graph 3.27
Data source: World Bank, 2010
By the graph we know that , the expansion of telephone took speed from second half of the 1990
that was steeply raise from 2005. The steeply raising is the contribution of mass level mass service
introduction in specially city by Telecom Company in latest period. Therefore this sector is
progressing speedily despite political turmoil in the country.
3.7 Summery
In summarization, the real GDP level growth seems gradual it is 7305 million US$ in 2008, at
constant price of 2000. The nominal GDP stands at 12612 million US$ in 22008 The GDP growth
rate was remained low average before 1985 after that it was improved in average. It was highly
volatile in the Panchayati era, six times declined below into minus rate but after 1990 only in 2002
the growth was declined close to zero. The growth in per capita GDP was some time in minus in
191970s, that was improved after liberalization and democracy. The gross capital formation ratio
also was increased in later period, despite some decline in 1990 and 2002. The ratio of foreign
trade was gradually increasing up to 1998, after that slightly declining. It was above than 60
percent of GDP in around 1998 but in 2008 just above only 40 percent of the GDP. Both export and
import ratio declined after 1998, the export declined more than import. The export ratio is
continuously declined where as import again started to rise. The increasing trend in imports and
0
500000
1000000
1500000
2000000
2500000
3000000
3500000
4000000
4500000
1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
telephone line extenson
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
66
decreasing trend in export that has contributed sharply increasing in trade deficit in latest period,
that is around 20 percent of the GDP. The agricultural growth rate was highly fluctuating over the
period, the growth rate of this sector is heavily influenced by natural climate situation, and good
harvest is depended on mercy of nature. The manufacturing sector growth rate seems also
irregular fluctuating, very volatile it is also heavily influenced by political climate of the nation. The
construction sector growth rate is also highly fluctuated in the past, some time it up to 50 percent
and sometime downed to 15 percent annual growth. After the 1990, it is likely stable with around
5 percent annual growth. The service sector growth rates after 1990 seem more than 5 percent. In
the pick time of the Maoist insurgency, the trade and hotel-restaurant business bitterly set backed
up to minus more than 10 percent. After the peace process from 2006, it seems improving trend.
The structural pattern of the Nepalese economy, it is informed by sector wise share of GDP. The
share GDP gradually shifting to modern non-agriculture sector from traditional agricultural sector
during period of 1961 to 2008. In the latest stage largest share is from service sector about 50
percent, the agricultural sectors remain in second position with around 32 percent and the
industrial sector covers rest part the share. The share of agricultural sector was about 70 percent
up to mid 191970s decade. The value share of GDP in industry was increasing steadily from mid
1970s but in the second half of the 1990s its’ ratio became stable, after that it is declining by
remarkable ratio, this decline share trend is continuous in later period. The service sector share
was started to increase gradually from the second half of the 191970s decade. It is increasing
steadily in average up to current period. The sector wise real GDP level growth is normally upward
growing with slight variation. In case of trade and hotel-restaurant it has diverted to down ward
direction after 1998, it was due security crisis in this period prevailed in Nepal. The employment
share to non agricultural is increasing steadily specially from 191980s; in 2008 it stood
approximately 46 percent, where as in 1961 it was only less than 4 percent. The sector wise
productivity of one percent employment seems high in non agriculture than agricultural sector.
But average rate of productivity is gradual declining of the non agriculture sector still is above than
unite. The public sector, the ratio of development or capital expenditure is remained below than
regular expenditure after 1999. The ratio of urban population is increasing gradually; in 2008 it
seems about 16 percent. Total fertility rate and population of growth is declining in later period.
The life expectancy is increasing gradually over the timed. The per capita electric consumption
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
67
increased up to 2005, after that it became stable. The road extension increased gradually up to
2001 after that the extension nearly stopped after 2006, it is again started to rise. The telephone
expansion was vertically rising after 2006; it was mass expansion of mobile phone. It was increase
by 3.5 million within the 3 years.
In conclusion, overall macro economic factors were comparatively favorable after liberalization and
democratization, in rather than authoritarian political regime. But unfortunately due to intensified
violence conflicts and political disputes in at around 2002 adversely affected economic progress in
every walk of economic life. The share of GDP and lobar force from agriculture sector to non
agricultural sector is continuing gradually over the period. Therefore, the structural transformation
process in Nepalese economy is still running, the acceleration of the process is slightly growing in
later years.
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
68
CHAPTER-4
Empirical analysis of the economic factors
This chapter is related to statistical relationship among the selected economic variables. It is an
effort of verifying the hypothesis by statistical evidence. Condition and structural state of economy
should have own historical back ground and causing factors. The factors and their nature of effect
can be assessing from the empirical calculation with appropriate statistical tools. In the context of
Nepal in former chapter, it has been overviewed the historical growth trend of Nepalese economy
and its’ important major component. In this chapter it is going to calculate empirical relationship
between following variable by which can be examined the theoretical hypothesis of cause and
effect sequence in the context of Nepalese economy. The impact of structural shift on GDP pc and
life expectancy and leg year effect of economic input variable such as infrastructure, capital
formation, foreign aid and government’s contribution on structural shift in terms of employment
share and GDP share to modern sector.
4.1 Variables
Following variables are used to the empirical analysis of economic transformation process.
Symbols Variables Description of variables
X1 1stdlnGDPC logged first different Real GDP per capita level (in US$),
X2 1stdlnNn-agri.empl logged first different Employment share in non agricultural sector(percent of total)
X3 1stdlnElectricconspc logged first different Electric consumption per capita (in KWH)
X4 1stdlnRoad Logged first different Road extension (in K.M.)
X5 1stdgcapi.form. logged first different Gross capital formation ratio (in percent of GDP)
X6 1stdnnagrigdp
logged first different on non-Agriculture share in total GDP(in percent of
gdp)
X7 1stlnlifeexp. logged first different Life Expectancy at birth(in years)
X8 1stdlnforaid logged first different Foreign Aid receipt ,million US$(in current price)
X9 1stdlngcapi.expense
logged first different Development expenditure of government
(in ten million rupees)
Respective historical data from 1976 to 2007 are used for the calculation. Those data also has
presented on graph and described in previous chapter the historical macro economic performance
of Nepal. Due to missing data of some variables before 1975 and 2008, there could not include the
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
69
whole time span data which have displayed in graphical and tabulation presentation. The time
series time has modified by logged then taking first difference. Following table presents correlation
coefficient of the afore mentioned variables which are going to use in empirical analysis
2.4 Correlation matrix
X1 X2 X3 X4 X5 X6 X7 X8 X9
1stdlnGDPC X1 1.00
1stdlnNn-agri.empl X2 0.03 1.00
1stdlnElectricconspc X3 0.01 0.14 1.00
1stdlnRoad X4 0.13 -0.04 0.30 1.00
1stdgcapi.form. X5 -0.08 0.03 -0.07 -0.40 1.00
1stdnnagrigdp X6 -0.08 0.00 0.15 -0.02 0.52 1.00
1stlnlifeexp. X7 0.04 0.21 0.09 0.19 -0.08 -0.03 1.00
1stdlnforaid X8 -0.04 -0.18 0.07 -0.07 0.00 0.22 -0.23 1.00
1stdlngcapi.expense X9 0.07 0.09 0.12 0.16 0.08 0.05 -0.35 0.22 1.00
By the correlation matrix it is known that almost pair of the variables has weak and unexpected
negative correlation coefficient. Therefore the table show that the major variables are poorly
associated each other the hypothesis of strong and positive correlation between economic input-
output factors and structural transformation of Nepalese economy is not supported by the
correlation parameters. However, there are regression model which could be considerable
economically.
4.3 Effect on GDP per capita
The GDP per capita is the main indicators of economic prosperity. The state of living standard is
compared with indicator in comparative analysis of the international economy. The low level of the
GDP per capita of Nepal indicates that low economic development. Therefore one of major aim of
the development effort remains to raise the GDP per capita. For that there can be observed the
empirical relationship between GDP per capita and structural shift process in terms of employment
share and GDP share to non-agricultural or modern sector.
It is taken the GDP per capita as dependant variable in simple regression model. That is the
hypothesis that structural shift agricultural sector to non agricultural sector is positive way of
economic progress. The speeds of development depend on the velocity of structural shift. The
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
70
structural pattern of economy measure mainly in terms of GDP share ratio and employment share
ratio the GDP per capita level variable represent economic progress and GDP share and
Employments share shift are represents structural shift variable
This model for examine of employment share and GDP share shift on per capita GDP
�̂� = 0.0156 + 0.0437�� − 0.0394��
1stdlnGDPC
Coefficients
Standard
Error t Stat P-value R Square Observations
Intercept 0.015641 0.015432 1.013586 0.319163 0.007242 32
1stdlnNn-agri.empl 0.043671 0.251342 0.17375 0.863269
1stdnnagrigdp -0.03936 0.092528 -0.42542 0.673672
By the result of the regression calculation with excel; since positive beta coefficient of employment
share shift to non-agricultural sector indicates the positive effect on GDP per capita change the
dependant variable. It supports the hypothesis positive influence of the employment share shift to
non-agriculture on economic growth on per capita GDP growth. However, since insignificant p
value and weak R square it seems that no significant relationship between the variable.
Hence , negative beta coefficient p value insignificant at 5 percent, of the independent variable
indicate that shift share of GDP to modern-non agriculture sector has insignificant weak negative
effect on GDP per capita. It is unexpected sign the coefficient instead the normal hypothesis that
positive influence of structural shift to modern sector on economic. This result does not support
the hypothesis however since insignificant p value and very weak R square value it can conclude
that there is no more association between the variable. This result tells us economic growth of
Nepal has not been contributed by the structural shift
By the evidence of the above model explain that the structural transformation process has no
reflected on economic growth.
4.4 Impact on shift share of GDP
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
71
Higher share of non-agricultural sectors on GDP indicate in level of modernization of the economy.
The modernization process of Nepalese economy is yet to complete. Therefore, the following
model is specified to examine contribution of infrastructural development, gross capital
formation, foreign aid and government’s development efforts of on the transformation process.
�̂���� = 0.0552 + 0.0519�� + 0.3734��� − 0.04544��� + 0.0135� � + 0.0278���
1stdnnagrigdp
Coefficients
Standard
Error t Stat P-value R Square Observations
Intercept 0.055203 0.006333 8.716374 4.75E-09
0.217209 31
1stdlnElectricconspc 0.051894 0.119977 0.432534 0.669062
1stdlnRoad 0.37335 0.209996 1.777892 0.087589
1stdgcapi.form. -0.04544 0.09532 -0.4767 0.637717
1stdlnforaid 0.013471 0.055231 0.24391 0.809291
1stdlngcapi.expense 0.027765 0.076408 0.363377 0.719378
This model is specified on the basis of one year leg effect of the independent variables on the
dependent variables. There are five independent variables but not conducted validity test of model
specification due to some technical limitation. The regression calculation result shows that the beta
coefficients are not statistically significant since higher p value normal confident level. However
sign of coefficients is positive except gross capital formation. Therefore it is hard to conclude that
the empirical test strongly support the hypothesis of economic investment in different forms
positively contribute to the modernization the economy in the context of Nepalese economy. The
road expansion factor seems better effective than other aspects of input activities. The total capital
formation ratio factor seem opposite than expectation.
4.5 Influence on Employment share shift
Employment structure is another aspect of economy, higher share of employment in non-
agricultural sector or modern is taken as favorable situation for economic prosperity. In Nepal
majority portion of people are still involving in traditional agricultural primary sector. The
transformation on employment share seem slow, there is more space remained to be as level of
developed country. Therefore, it is needed to examine the more influencing factor to speed up the
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
72
process. The following model is formulated to test the factors with assumption of positive effect.
The independent variables are same as previous model for GDP share shift transformation test.
This Model is specified on the basis of least squared regression calculation for Effect on
employment share shift to non-agricultural sector
�̂̂���� = 0.055203 + 0.039�� − 0.0679��� − 0.015��� − 0.0258� � + 0.0558���
1stdlnNn-agri.empl
Coefficients
Standard
Error t Stat P-value R Square Observations
Intercept 0.055203 0.006333 8.716374 4.75E-09
1stdlnElectricconspc 0.039 0.046 0.846597 0.405251
0.172938 31
1stdlnRoad -0.0679 0.0806 -0.84295 0.407251
1stdgcapi.form. -0.015 0.0366 -0.41088 0.68466
1stdlnforaid -0.0258 0.0212 -1.21742 0.234813
1stdlngcapi.expense 0.0558 0.0293 1.90305 0.06861
The specified model for estimation of employment share shift process on the basis of one year
lagged effect, seems different from expectation. Beta coefficient’s sign of three variables out of five
obtained negative which is opposite from expectation, only two variables: electric consumption
and government’s capital expenditures show positive impact. The development expenditure seems
better effect on the model since smallest p value than other independent variables. The
preciousness of the model seems similar as previous model almost variables insignificant p values
in normal confidence level. The model misspecification test also has skipped therefore the
estimation model not well support to the hypothesis, positive association of the dependent and
independent variable in case of the model.
4.6 Effect on life expectancy
The models with dependant variable as the life expectancy is a purpose of examine the effect of
economic variable to social variable. The life expectancy represents the social demographic variable
which is assumed to be closely relative to economic variable. The following model to estimate and
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
73
test of impact of structural transformation level in terms of employment share and GDP share to
modern sector on life expectancy according empirical fact of Nepal.
Effect structural shift to non-agricultural sector on life expectancy
�̂� = 0.011 + 0.017�� − 0.001��
1stlnlifeexp.
Coefficients
Standard
Error t Stat P-value R Square Observations
Intercept 0.010907 0.0009176 11.88637 1.14E-12
0.044505 32
1stdlnNn-
agri.empl 0.017145 0.0149453 1.147198 0.260677
1stdnnagrigdp -0.00101 0.0055019 -0.1834 0.855762
The result shows the positive influence of non agriculture employment share on the life expectancy
however the parameters seems statistically insignificant at 5 percent level and the model seem
very weak since very low R square value and there seems unexpected negative sign of coefficient of
GDP share shift variable. Since insignificant coefficient and weak model, there seem no evidence of
the directly relationship between the variables .Despite the expected sign of employment share
shift variable’s the coefficient, the model seems statistically insignificant.
4.7 Summery
In summing up, according the results of simple regression analysis of the variables which are listed
above, those represents major indicators in economic life of Nepal respective parameters almost
are not statistically significant even one year leg. Very weak R square coefficient and in some case
opposite sign of beta coefficient than expected as the theoretical hypothesis and assumptions. This
failure result to estimate the casualties of those economic variables might have improper approach
of calculation. The time serious analysis may be suitable for that due to various limitation here
could not apply other approach of quantitative analysis of the economic tendency. Even though the
statistically insignificant parameters which are unable to explain corresponding independent
variable for the dependant variable in quantities way, however, the results are economically
considerable. The very weak and negative correlation association between economic variables tells
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
74
that economic stimulating factors such as gross capital formation, infrastructures, and foreign aid
have not produced sensitive effect or are not utilized properly those resources. Structure
transformation process is not enough reflected on economic growth. In conclusion, the influence
of determining factors for economic growth and structural transformation like investment,
infrastructural development and international supports seems very weak effective and inefficient
and statistically insignificant.
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
75
CHAPTER-5
Concluding remarks
The economic transformation of Nepalese economy is found relatively sluggish by the evidence of
growth rate. The trend of the GDP growth rate seems historically slows. It has remained below than
the growth rate condition that according to Todaro; to sustain growth of the economy which is
required 5 to 7 percent annual growth. The structural aspect of Nepalese economy still is not
transformed to modern state. More than 55 percent population economically depended on
traditional agricultural sector and this sector still provides about one third part to GDP. The speed
of the transformation of economic structure, agriculture domination to modern sector domination,
in term of GDP share and employment share, is found relatively slow.However; the existing speed
of the transformation is not seen the reflection on economic growth, on the basis of the
transformation should have more high GDP growth than present level. Without high productivity in
both agricultural sector and modern sector the transformation could not provide the expected
economic growth, due to structural transformation. The empirical evidence tells that the structural
share shift to non agricultural sector is not sufficient condition for high economic growth in the
context of Nepalese economy
The most effective factors for the economic transformation are performance of production sector
such as agriculture and manufacturing industry those seem very volatile. The agricultural
production depend on natural climate mostly, and the manufacturing production heavily affected
by political environment of the country. The effect of economic liberalization seems hampering the
domestic manufacturing of Nepal. Manufacturing growth rate and its GDP share ratio is declining
after 1990. Due to low productivity and weak competitiveness of the domestic industry which
could not sustain in open market economy are adversely affected by liberalization and openness.
The trade and hotel-restaurant sector nearly crashed in the time of intensive violent conflict due to
climax of Maoist insurgency. Therefore lack of favorable security situation was nearly collapsed the
tourism industry in Nepal that is why the hotel-restaurant sector victimized in the conflict situation.
The gross capital formation seems higher than theoretically refers which is at least 21 percent of
GDP. In later period, it has been about 28 percent of the GDP. The empirical evidence show that it
has positive influence on structural shift share of GDP to modern sector but not strongly correlated
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
76
to GDP per capita growth. The productivity of capital investment seems very low as mentioned in
previous studies. The infrastructures development impact has not seemed effective on structural
shift and economic growth, it is seems same nature of foreign aid investment, so there is question
of productive utilization of the infrastructure and the foreign resources.
By the overview of historical trend of macroeconomic performance of Nepal the political situation
seems strong determining factor of economic transformation of Nepal. The authoritarian political
regime such like Party-less Panchayati system, direct rule of king and violence conflict such as
Maoist insurgency in Nepal, are bad luck for Nepalese economy. It is justified the relevancy of state
should plays role to manage the social conflict peacefully, preventing those from to break out into
violence war and stimulating development. In the context of Nepal the state, political institution
and the leadership has failed to play the roles properly. It can accept the assumption by the
evidence of the Maoist insurgency was the outcome of the management failure of the state which
is contributing heavily paralyzed the economic development of Nepal. The conflict which can
emerge in the process of structural transformation due to change in relative position of social
group that should have success in resolution in peaceful way without heavy cost is the function
and efficiency of the state. The political instability and inefficiency seems a major obstacle of
Nepalese economy. Lack of productivity and efficiency in production sector seems serious
drawbacks of Nepalese economy. The lack of efficiency in managerial capacity Nepal could not
utilized the resources properly and could not capture the advantage of internationalization and
open market. The lacks of the competitiveness of Nepalese industrial sector reflect on declining
export and sharp raising the trade deficit.
It can conclude by the study that the scientific investigation of problems and prospective of the
Nepalese economy and proper diagnosis of the root causes of economic problems; the structural
transformation perspective also seems inadequate since insignificantly weak association between
economic variables and structural shift rate. The problem is not only in uncompleted structural
transformation for expected development of the economy. There is so much complexity of
Nepalese economy and contemporary socio-economic environment in the world. It is clear that
Historical weak economic growth performance is remained major characteristics of Nepalese
economy. The almost results of previous study are supported by results of this study. According to
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
77
that lack of capital investment, lack of economic reformation or liberalization and lack foreign aid
and investment are not major reason for the slow transformation pace of Nepalese economy. The
political environment aspect seems decisive factor of Nepalese economy. The non-democratic
political regime, political instable sate and violence conflict situation seems major obstacles for
smooth economic development in Nepal. The findings of this study have not contradicted to
previous study. Since the structural transformation hypothesis also not significantly reflected on
economic growth in this study. Therefore it is important to consider on the suggestion and
recommendation in the previous research; such as low agricultural productivity, lack of human
resources, lack of suitable political environment, weak public sector performance, growing trade
deficit and inefficiency to utilize economic resources seem major causes for economic development
problem which should have solved. Nepal is a least developed country; therefore numbers of
economic problems remains interconnected and sequential form. The economic problems derived
from social and political problems. The vicious cycle situation prevails in the underdevelopment
countries like Nepal. The cause effect sequence of problems seems deepening in to spiral way.
Therefore proper diagnosis and find out the possible remedy of the depth problems need wide and
depth research which is out from the limitation of this course thesis paper. The previous studies in
some extent have tried to investigate of the chronic economic problems with social and political
prospective. There found an example of cause and effects sequential chain problems such as;
poverty and inequality fueled the violence conflict, the conflict create security problems and
discouraged economic activities and hampered on developmental problems, which contribute to
economic stagnation, that economic stagnation and negative growth creates unemployment,
further poverty and inequality. The deepening security problem creates political instability and the
political instability resulted economic stagnation and negative growth in some important sectors.
In this situation difficult to identify the main and derived problems and same difficult to find out
the best way of the solution .There are some important recommendations that improvement in the
efficiency and capability to utilize resource, development of human capital, and maintain the
political stability, proper utilization of information technology. This study also re-enforce on the
suggestion and recommendations to Nepalese economy. Out of them the concept ‘efficiency’ can
be assumed as key measure for Nepalese context. The relative level of efficient quality and
capability is inevitable to the every walk of social life such in economy, politics and management. In
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
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lack of proper efficiency contribute to wastage resource and time. The political and bureaucratic
corruption and inefficiency misuse and underuse the available resources. That further discourage
to receive external and internal supports which make deficiency to manage the necessary fund for
infrastructure and human capital development and lack of infrastructure and human resources
could not gain the expected economic growth and development despite the investment and other
efforts. The inefficiency is root causes for less association between investment supply and output in
Nepalese economy. On the basis of this study and along with the above mentioned literature there
could be raised the crucial question that why not Nepalese society could not gain yet the required
efficiency to settle the political problems and proper economic management. To look the answer of
the question there need further research for Nepalese economy with implication other hypothesis,
perspective and approaches. Specially institutional and political economic theory may have more
relevant to analyze the Nepalese economy.
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
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Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
81
Appendix
The data set used in empirical analysis
years
1stdlnG
DPC
1stdln
Nn-
agri.e
mpl
1stdlnElectri
cconspc
1stdln
Road
1stdgcapi.
form.
1stdnnag
rigdp
1stlnlife
exp.
1stdlnf
oraid
1stdlngcapi.e
xpense
1976 0.02 0.05 0.33 0.18 0.04 0.08 0.01 0.13 0.19
1977 0.01 0.04 0.09 0.11 0.06 0.16 0.01 0.45 0.19
1978 0.02 0.04 0.09 0.02 0.13 0.02 0.01 -0.02 0.09
1979 0.00 0.04 0.04 0.05 -0.14 -0.04 0.01 0.57 0.15
1980 -0.05 0.04 0.07 0.02 0.14 0.07 0.01 0.18 0.17
1981 0.06 0.04 0.13 0.05 -0.04 0.02 0.01 0.11 0.31
1982 0.01 0.11 0.21 0.05 -0.03 0.00 0.01 0.10 0.29
1983 -0.05 0.10 0.06 0.03 0.14 0.02 0.01 0.01 0.04
1984 0.07 0.09 0.07 0.04 -0.05 -0.02 0.01 -0.02 0.06
1985 0.04 0.08 0.10 0.02 0.19 0.21 0.01 0.17 0.12
1986 0.02 0.08 0.22 0.04 -0.11 0.00 0.01 0.25 0.17
1987 -0.01 0.07 0.10 0.05 0.04 0.02 0.01 0.17 0.25
1988 0.05 0.07 -0.12 0.00 0.05 0.00 0.01 0.15 0.27
1989 0.02 0.06 0.18 0.01 -0.04 0.01 0.01 0.20 0.05
1990 0.02 0.06 0.07 0.22 -0.17 -0.03 0.01 -0.16 0.21
1991 0.04 0.05 0.06 0.06 0.11 0.09 0.01 0.06 0.03
1992 0.02 0.08 0.00 0.05 0.02 0.04 0.01 -0.04 0.16
1993 0.01 0.07 0.04 0.04 0.09 0.05 0.01 -0.18 0.09
1994 0.05 0.07 0.07 0.10 -0.01 -0.01 0.01 0.21 -0.07
1995 0.01 0.06 0.06 0.05 0.12 0.02 0.01 -0.04 0.23
1996 0.03 0.06 0.10 0.04 0.08 0.00 0.01 -0.10 0.06
1997 0.02 0.06 -0.03 0.12 -0.07 0.00 0.01 0.03 0.09
1998 0.01 0.05 0.03 0.04 -0.02 0.03 0.01 0.00 -0.23
1999 0.02 0.05 0.11 0.11 -0.19 -0.02 0.01 -0.14 0.10
2000 0.04 0.05 0.06 0.03 0.17 0.01 0.01 0.11 0.11
2001 0.02 0.05 0.09 0.07 -0.01 0.02 0.01 0.02 -0.13
2002 -0.02 0.04 0.04 0.01 -0.18 0.02 0.01 -0.08 -0.10
2003 0.02 0.04 0.04 0.01 0.06 0.02 0.01 0.26 0.00
2004 0.02 0.04 0.12 0.01 0.14 0.01 0.01 -0.09 0.03
2005 0.01 0.04 0.04 0.01 0.08 0.01 0.01 0.00 0.17
2006 0.02 0.04 0.01 0.02 0.02 0.03 0.01 0.19 0.08
2007 0.01 0.04 0.01 0.07 0.05 0.02 0.01 0.16 0.29
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
82
Foreign Trade in Ratio of GDP
years
Trade (% of
GDP)
Imports of goods
and services (% of
GDP)
Exports of goods
and services (% of
GDP)
Trade dificit
%of GDP
1965 21.69 13.92 7.77 6.16
1966 14.40 8.76 5.64 3.11
1967 13.83 6.95 6.87 0.08
1968 14.35 7.50 6.85 0.66
1969 17.23 10.22 7.01 3.21
1970 13.21 8.30 4.90 3.40
1971 14.53 9.13 5.40 3.73
1972 13.58 7.92 5.66 2.26
1973 16.98 10.37 6.61 3.76
1974 16.00 10.55 5.45 5.10
1975 22.27 13.37 8.90 4.47
1976 24.95 14.18 10.77 3.40
1977 26.11 14.32 11.79 2.53
1978 26.04 15.47 10.57 4.90
1979 27.75 15.97 11.78 4.18
1980 30.27 18.73 11.54 7.19
1981 32.52 19.62 12.90 6.72
1982 30.40 18.81 11.59 7.22
1983 31.55 21.32 10.23 11.08
1984 30.10 19.45 10.65 8.80
1985 31.53 20.00 11.53 8.47
1986 31.97 20.30 11.66 8.64
1987 32.72 20.91 11.81 9.09
1988 33.83 22.38 11.45 10.93
1989 33.35 22.28 11.07 11.22
1990 32.19 21.66 10.53 11.13
1991 34.68 23.18 11.49 11.69
1992 41.70 25.74 15.96 9.78
1993 47.19 28.76 18.43 10.32
1994 50.43 31.44 18.99 12.44
1995 59.49 34.52 24.97 9.54
1996 58.46 35.64 22.82 12.82
1997 64.04 37.71 26.33 11.38
1998 56.71 33.89 22.82 11.07
1999 52.57 29.72 22.85 6.87
2000 55.71 32.43 23.28 9.14
2001 53.72 31.39 22.33 9.07
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
83
2002 46.23 28.49 17.74 10.76
2003 44.25 28.55 15.70 12.85
2004 46.15 29.46 16.68 12.78
2005 44.06 29.48 14.58 14.90
2006 44.76 31.32 13.45 17.87
2007 44.34 31.30 13.04 18.25
2008 44.74 32.66 12.08 20.58
GDP, remittance and Foreign aid
years
GDP (constant
2000 US$)in
million
GDP (current
US$)in
million
GDP (constant
LCU)in million
GDP (current
LCU)in million
Foreign
Aid(in
current
US$)in
million
remittance
(current
US$)
1960 1355 516 103879 3873 8.62 -
1961 1381 532 105861 4053 10.73 -
1962 1407 574 107883 4374 9.04 -
1963 1434 606 109928 4616 16.22 -
1964 1542 659 118208 5023 19.49 -
1965 1523 735 116786 5602 17.88 -
1966 1630 907 125008 6909 15.18 -
1967 1605 842 123044 6415 13.97 -
1968 1615 772 123875 7173 10.90 -
1969 1688 789 129404 7985 10.84 -
1970 1731 866 132737 8768 23.43 -
1971 1710 883 131151 8938 23.84 -
1972 1764 1024 135240 10369 30.13 -
1973 1755 972 134595 9969 35.20 -
1974 1866 1218 143120 12808 32.02 -
1975 1894 1576 145205 16571 43.66 -
1976 1977 1453 151591 17394 49.63 -
1977 2037 1382 156165 17280 77.48 -
1978 2126 1604 163045 19732 75.79 -
1979 2177 1851 166907 22215 133.76 -
1980 2126 1946 163036 23351 159.99 -
1981 2304 2276 176637 27307 178.22 -
1982 2391 2395 183312 30988 196.79 -
1983 2319 2447 177854 33760 197.87 -
Structural Transformation Process of Nepalese Economy by Krishna Prasad Poudel, Lund University
84
1984 2544 2581 195073 39390 193.93 -
1985 2700 2620 207060 46586 230.62 -
1986 2824 2851 216513 55724 295.01 -
1987 2871 2957 220185 63864 349.95 -
1988 3093 3487 237132 76906 408.35 -
1989 3226 3525 247399 89269 497.89 -
1990 3376 3628 258866 103416 422.84 -
1991 3591 3921 275351 123801 448.76 -
1992 3738 3401 286658 152714 430.11 -
1993 3882 3660 297694 175682 360.84 54825100
1994 4201 4067 322152 199272 445.82 50118520
1995 4347 4401 333326 219175 428.59 56822670
1996 4579 4522 351087 248913 388.42 44160130
1997 4810 4919 368812 280513 401.88 49458060
1998 4955 4856 379936 300845 400.76 67504910
1999 5173 5034 396701 342036 348.39 83462780
2000 5494 5494 421297 379488 387.23 111498200
2001 5758 5596 441519 411275 393.09 146985200
2002 5765 6051 442048 459443 361.52 678485900
2003 5992 6330 459488 492231 466.58 771072100
2004 6273 7274 481004 536749 425.09 822608900
2005 6469 8130 496026 589412 424.13 1211823000
2006 6709 9074 514460 654055 510.59 1453231000
2007 6934 10283 531682 728178 602.10 1733859000
2008 7305 12615 560124 818401 716.31 2727141000