Determinants of Growth Rate of per Capita Income and Manufacturing Output in Process of Economic Development in Nepal

Article excerpt

Introduction

Industrialisation is crucial for the development of high value-added economic sectors, to alleviate widespread poverty in developing countries. The historical evidence from Western developed countries demonstrates that industrialisation is a prerequisite for development and growth. Agriculture and other service sectors are also promoted by the process of industrialisation. In this context, economic development and industrialisation are viewed synonymously. Motivated by this belief, many countries around the world have pursued an industrialization policy.

Nepal is a landlocked Himalayan country geographically sandwiched between two emerging global economic powers, China in the north and India in the east, west and south. India and Nepal by special economic treaty virtually have an open border policy. With most of the land of Nepal being mountainous, the construction of physical infrastructures including roads, bridges and other structures has been very difficult--financially, environmentally, and spatially. The factor endowment of the country is remarkably poor, with no significant strategic raw material or mineral reserves. Only a small part of total land area is cultivable. The pressures of the population on the limited land have been growing over the years.

At present the biggest challenge faced by the policy makers in Nepal is the alleviation of poverty. Much effort, time and money have been spent on different sectors of the economy to reduce poverty and inequality. During the last decade, aggregate poverty declined, however, the decline was uneven across geographical regions. This resulted in a sharp increase in regional inequality. The level of poverty is high in rural areas, particularly in the agriculture sector. Despite the huge investments that have been made in agriculture in the past, growth in food production has not kept pace with the rate of population growth.

Given the current state of the amount of cultivable land available for further distribution, and the constraints of development in Nepal, all the evidence suggests that land cannot be the only intervention employed to ease the problems of poverty and inequality. To significantly alleviate rural poverty, rural development strategies including the strengthening of linkages between the urban and rural sectors may be crucial. Economic development through the non-agricultural sector, particularly manufacturing, can be an important strategy in this respect. It can be an important instrument in overcoming the problems of low income, unemployment and the deterioration in the terms of trade, and hence foreign exchange shortages for the import of capital goods which are essential for economic growth. Against this background, based on time series data, this paper attempts to empirically explore trade and industrialisation as potential effective strategies for Nepal in their attempts to reduce poverty and inequality by structural transformation of the economy.

The paper is organised as follows. The trade and industrialisation situation is outlined in Section 2 with the theoretical background in Section 3, Indo-Nepal relationship in Section 4 and the empirical analysis in Section 5. Section 6 provides policy implications with some concluding remarks.

The Trade and Industrialisation Situation in Nepal

Nepal's foreign trade deficit is growing significantly due to a higher rate of growth of imports compared to exports. For the last few years, the total volume of trade with India has increased sharply, while it has been declining with other countries. During the first eight months of current FY (2009/10), total exports with India decreased by 2.9%, but total imports rose by 12.1 percent in the same period of the previous year. Consequently, the total trade deficit reached Rs. 111.44 billion with increase of 15.6% (MOF, 2010). Nepal's trade dependency on India is also increasing sharply. In 1991/92, the India's share of Nepal's total foreign trade was 28% with other countries making up 72%, but in 2009/10 the shares of India and other countries were 55. …