The World Bank’s recently released Global Economic Prospects has made a growth forecast of 4.6 percent for Nepal in 2017-18, which is the lowest barring Afghanistan. Further, the economic growth projection for Nepal for 2018-19 is 4.5 percent. While neighbouring India and China are expected to grow 7.3 and 6.2 percent respectively in the same year, Bangladesh and Bhutan also have an intriguing prospect of 6.7 and 6.9 percent growth respectively. The estimated growth for Nepal in the current fiscal year is almost 3 percentage points lower than for last year. The 7.5 percent growth in 2016-17 was supported by a base effect along with an expansion in agricultural output and normalisation of border disruptions.

Historically, Nepal has been a low growth economy with an average of 4.3 percent growth in the past 41 years. After a number of ups and downs in the political spectrum in the past, it is currently aspiring for a better future. Rapid growth fundamentally depends on the consolidation of federalism, rule of law, accumulation of human capital and promotion of a development culture.

A beacon for competitive growth

The local, provincial and parliamentary elections held in 2017 have paved the way for effective implementation of federalism. The idea of federalism or decentralisation is to spur economic development. According to the model developed by US economist Charles Tiebout, decentralisation is the beacon of competitive development for local bodies. The idea is based on the assumption that competitive provision of public goods by local bodies provides an option to citizens to live in a particular state or migrate to others. Thus, the essence of federalism is to promote competitive provision of public goods by assuring the highest quality services.

In Nepal, the goal of the forthcoming provincial governments should be to create an environment whereby public goods such as education, health, transportation, communication and utilities of the highest standard are provided. Provincial governments should compete in attracting investment to provide these services. Attracting investment also means attracting informed citizens and broadening the tax base.

Another important factor in achieving higher growth is guaranteeing the rule of law. Nepal does not have the luxury of going through the stages of development as propounded by US economist Walt Whitman Rostow where a country basically migrates from an agricultural economy to an industrial one and finally to tertiary development. With the two giant neighbouring economies competing in industrial products, Nepal’s scope is largely limited to service sector development. Developing highways, railroads,

hydropower and cable cars will provide Nepal an opportunity to capitalise on its tourism potential. These capital intensive projects require substantial outlays which the country cannot afford on its own. Therefore, it needs to develop a conducive environment for investment. Rational selection of foreign investment, which requires smart institutions, is crucial for Nepal’s infrastructure development.

When a country loses its grip on ensuring the fundamental rights of its citizens and combating corruption, it will attract international sanctions. For example, the European Union last year withheld aid and the International Monetary Fund halted loan disbursements to Ukraine citing lack of efforts in controlling corruption. Nobel laureate Douglass North has written that institutions are the combination of written or unwritten rules which are required to reduce uncertainty and promote stability. Nepal’s growth momentum will largely depend on the institutional quality of the executive, legislative and judiciary.

Utilising the demographic dividend

Accumulation of human capital is another important factor that Nepal needs to prioritise for faster growth. Human capital accumulation refers to investment in education, health, research and development. The 2011 census shows that 57 percent of the population is 15-59 years old and 35 percent is below 15. The data suggests a demographic dividend that Nepal has been enjoying. Nevertheless, the important thing is to impart quality education and health services to these groups of people who will be an integral part of the growth equation.

Nepal’s upcoming challenge in the area of health and education is promoting equitable access. There is an ongoing debate on how the middle and lower middle classes will be served in an age of high commercialisation of basic services such as health and education. In fact, cultural reproduction has become predominant in Nepali society where the higher social classes are trying to reproduce their leadership and privileges through education and health.

Finally, Nepal’s challenge is to promote a development culture and preserve social capital. The social capital that has guided Nepali society is on the verge of collapse. Social capital played a pivotal role in promoting fraternity, which was instrumental in maintaining harmony despite the diversity in Nepali society. The racial, geographical and political fragmentation that Nepali society has been seeing for the last two decades will be a major roadblock to the development effort. Also increased politicisation of civil service institutions is undermining meritocracy, integrity and the foundation of social capital. Thus, one of the major priorities of the forthcoming federal and provincial governments should be narrowing down the fragmentation being observed in various walks of Nepali society.

Bhatta is the director of the research department of Nepal Rastra Bank